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, 1997
Commission File Number: 0-25064
HEALTH FITNESS CORPORATION
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1580506
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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) Name of Exchange on Which
of the Act: Registered:
Common Stock, $.01 par value Nasdaq SmallCap Market
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.[ ]
State issuer's revenues for its most recent fiscal year: $33,670,724
As of March 31, 1998, 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 $18,338,111.
As of March 31, 1998, 11,674,116 shares of the issuer's common stock, $.01
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of
the Registrant's definitive Proxy Statement for its 1998 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 Corporation and its wholly-owned direct and indirect
subsidiaries (collectively, the "Company") is engaged in two principal lines of
business (segments): (i) preventive health care and (ii) rehabilitative health
care. The Company's preventive health care business includes developing,
marketing and managing corporate and hospital-based fitness centers and selling
and servicing fitness and exercise equipment. The Company's rehabilitative
health care business includes owning and operating physical therapy clinics;
providing consulting, group buying, administrative, and marketing services to
independent physical therapy clinics; selling written materials to independent
physical therapy clinics; and providing occupational health consulting services
to employers, insurers and others.
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, to Health Fitness Physical
Therapy, Inc. in August 1994, and back to Health Fitness Corporation in June
1997.
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 were
approximately $8 million.
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 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 also recently began to
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., 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., and entered into employment
agreements with Dennis and Susan Isernhagen. The Isernhagen business is engaged
in providing comprehensive occupational health, work injury prevention, and
rehabilitation programs and services.
<PAGE>
Since February 1997, the Company has acquired four additional physical
therapy businesses located in Iowa and Nebraska.
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.
Preventive Health Care Business
Corporate and hospital-based fitness centers are emerging as important
components of the preventive 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 129 corporate and 10
hospital fitness centers located in 27 states, including Arkansas, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky,
Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, New
Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania,
Tennessee, Texas, Virginia, Wisconsin and Washington D.C. The Company maintains
fitness center management regional offices in California, Colorado, Connecticut,
Delaware, Illinois, North Dakota, and Virginia.
The Company's Pro Source equipment and soft-goods business complements the
Company's fitness center management business by providing fitness equipment
sales and service to fitness centers managed by the Company, and also
complements the Company's physical therapy business by providing physical
rehabilitation equipment used in physical therapy clinics owned and operated by
the Company or belonging to the Company's network of independently owned
physical therapy clinics. 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 Health Care Business
The Company's rehabilitative health care business owns and operates
physical therapy clinics; provides consulting, group buying and marketing
services to a network of independent physical therapy clinics; authors and sells
written materials to independent physical therapy clinics; and provides
occupational health consulting services to employers, insurers and others.
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,
exercise and aquatic 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 or leases 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 15 physical therapy clinics located in Iowa, Nebraska and Minnesota, and
also provides "on-site" physical therapy services at 12 fitness centers and work
sites in California, Georgia and Kentucky.
The Company's subsidiary, The Preferred Companies, negotiates managed care
and other third-party payor contracts for a nationwide network of over 825
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 Company's Isernhagen business is internationally recognized 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 an agreement with Practice Management Consultants, Inc.
("PMC") pursuant to which PMC has designed and implemented information systems
for the Company's rehabilitative health care business. The Company reimbursed
PMC's expenses on a monthly basis through June 1997, 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. Effective July 1,
1997, the PMC employees performing such systems design and implementation
services became employees of the Company. Thomas H. Coplin, a one-half owner of
PMC, serves as President of the Company's Rehabilitation division and Health
Fitness Rehab, Inc. subsidiary.
<PAGE>
The Company also has an arrangement with PMC and its principals pursuant to
which PMC and its principals 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. The Company reimbursed PMC's expenses in connection therewith
through June 1997, and since such date the Company has incurred such expenses
directly. In addition, the Company pays one of the principals of PMC a three
percent fee upon closing of such acquisitions. Finally, the Company's
arrangement with PMC provides that Mr. Coplin and the other principal of PMC
will each receive stock options and/or warrants to purchase Company common
stock, the amount and/or value of which may be linked to the earnings of the
Company's rehabilitative health care business or a portion thereof, but the
amount of which have not been finally determined.
Competition
The preventive health care 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 health care 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 and National Rehab Centers) have 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
Except for certain copyrighted publications acquired by the Company in its
acquisition of the Isernhagen business, 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
preventive health care business or rehabilitative health care 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.
<PAGE>
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 its
businesses, 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.
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. 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.
<PAGE>
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 and cash flow resulting from the prepayment of
the capitated monthly fees. 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. 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.
The Company currently does not provide any physical therapy services under
capitated contracts. In order to effectively manage capitated contracts, the
Company would need to acquire additional operational and information systems.
The Company does not have any previous experience in managing capitated
contracts and there can be no assurance that the Company could successfully
negotiate and implement capitated contracts or that such contracts would be
profitable.
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. 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 generally 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 compensation arrangement with, the clinic. This law also
regulates financial relationships between referring physicians and providers of
physical therapy and imposes substantial penalties for violations. From time to
time proposals are made to 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, operations or cash flows.
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 Social Security Act 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 10%) 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, 1997, the Company had 552 full-time and 1,048 part-time
employees. Of the full-time employees, 64 were engaged in general management and
sales, 8 were Regional Managers and 480 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 6,826, 2,003 and 1,138 square feet of
commercial office space in suites 130, 50 and 35, respectively, at 3500 W. 80th
Street, Bloomington, Minnesota 55431, under leases expiring July 31, 2001. The
Company's monthly base rental expense for these office spaces is approximately
$10,581, plus taxes, insurance and other related operating costs. All of the
Company's other locations are leased for terms of one to five years with an
aggregate monthly base rent of approximately $55,736. The Company believes that
its facilities are adequate for its foreseeable needs.
<PAGE>
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.
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, 1997.
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 "HFIT." 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.
Calendar Year 1997: Low High
--- ----
Fourth quarter $1.50 $3.50
Third quarter 2.31 3.88
Second quarter 2.00 2.88
First quarter 2.38 3.13
Calendar Year 1996:
Fourth quarter $2.00 $3.13
Third quarter 2.00 3.13
Second quarter 2.50 3.25
First quarter 2.38 3.75
At March 31, 1998, the published high and low bid prices for the Company's
common stock were $1.88 and $1.88 per share respectively. At March 31, 1998,
there were issued and outstanding 11,674,116 shares of common stock of the
Company held by 409 shareholders of record. Record ownership includes ownership
by nominees who may hold for multiple owners.
<PAGE>
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 credit facility prohibits the payment of dividends.
During the quarter ended December 31, 1997, the Company sold the following
shares of Common Stock without registration under the Securities Act:
<TABLE>
<CAPTION>
Price per Exemption Relied
Date Amount Purchaser(s) Share Upon
---- ------ ----------- --------- ----------------
<S> <C> <C> <C> <C>
10/2/97 39,094 Convertible note holder - stock issued upon $2.73 Sections 3(a)(9); 4(2)
conversion
</TABLE>
During the quarter ended December 31, 1997, the Company issued the
following options, warrants, or other equity securities in consideration of
services rendered or to be rendered without registration under the Securities
Act:
<TABLE>
<CAPTION>
Exercise Price per Exemption Relied
Date Amount Type Purchaser(s) Share Upon
---- ------ ---- ------------ ----- ----
<S> <C> <C> <C> <C> <C>
10/14/97 25,000 Option Employee $3.00 Section 4(2)
</TABLE>
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements.
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996
---- ----
($ In 000's)
<S> <C> <C> <C> <C>
REVENUE:
Preventive Health Care $ 24,917 74.0% $ 21,790 76.4%
Rehabilitative Health Care 8,754 26.0% 6,724 23.6%
------------ ------- ------------ -------
Total Revenues 33,671 100.0% 28,514 100.0%
COST OF REVENUES 26,968 80.1% 22,814 80.0%
----------- ------- ----------- -------
GROSS PROFIT 6,703 19.9% 5,700 20.0%
OPERATING EXPENSES 7,122 21.1% 4,347 15.3%
------------ ------- ------------ -------
OPERATING (LOSS) INCOME:
Preventive Health Care 2,594 2,590
Rehabilitative Health Care 215 608
Corporate (3,228) (1,845)
------------ ------- ------------ -------
Total Operating (Loss) Income (419) (1.2%) 1,353 4.7%
INTEREST EXPENSE (650) (1.9%) (292) (1.0%)
OTHER INCOME (EXPENSE) 22 0.0% (55) (0.2%)
------------- ------- -------------- -------
NET (LOSS) INCOME $ (1,047) (3.1%) $ 1,006 3.5%
=========== ======== =========== ========
</TABLE>
General. The Company is engaged in two principal lines of business: (i)
preventive health care and (ii) rehabilitative health care. Preventive health
care includes the development, marketing and management of corporate and
hospital-based fitness centers and the sale and servicing of fitness equipment.
Rehabilitative health care includes operating physical therapy clinics that
provide a full range of rehabilitative services, performing occupational health
services (injury prevention and work-injury management consulting) and
maintaining a network of independent physical therapy clinics.
<PAGE>
The Company's preventive health care revenues come from fitness center
management and consulting contracts and the sales and service of fitness
equipment. The management and consulting contracts provide for specific
management, consulting, and program fees and contain provisions for
modification, termination, and non-renewal.
The Company's rehabilitation revenues come from physical therapy services
provided to patients at Company owned locations and at hospital and corporate
locations, annual fees paid by independent physical therapy clinic network
members for consulting and group buying services, and program and consulting
fees paid by employees, insurers and others for occupational health services.
Net revenues provided to patients at Company owned and worksite locations are a
function of the number of patients treated, the payor mix and the average net
charge per treatment. Consequently, two patients provided substantially similar
treatments may result in different net revenues because of differing
reimbursement environments.
The Company incurs costs at three levels: (i) revenue generating sites;
(ii) regional sites that work closely with the revenue generating sites; and
(iii) general corporate costs. Management views the operational expenses of the
regional sites to be an integral component of the revenue generating sites.
Therefore, the discussion that follows is of revenues and operating income
(loss).
Years Ended December 31, 1997 and 1996
Revenues. Revenues increased $5,157,000, or 18%, to $33,671,000 in 1997
from $28,514,000 in 1996.
Preventive health care revenues increased $3,127,000, or 14%, from 1996 to
1997. The increase was primarily due to the annualized effect of adding a net of
10 corporate fitness center management contracts, 3 hospital fitness center
management contracts and the increase in sales of fitness equipment and service
of $767,000, or 13%.
Rehabilitative health care revenues increased by $2,030,000, or 30%, from
1996 to 1997. The increase was primarily due to the acquisition of The Preferred
Companies in December 1996, the Isernhagen Companies in February 1997, K.A.M. in
April 1997, Duffy & Associates in May 1997 and Medlink in August 1997, and the
increase in the number of patient visits at several clinics, partially offset by
the sale of four under-performing clinics in January 1997 and seven
under-performing clinics in May 1997. The eleven clinics sold had revenues of
$1,253,000 and $4,148,000 in 1997 and 1996, respectively. The newly acquired
clinics and clinic networks had revenues of $3,857,000 in 1997.
<PAGE>
Operating (Loss) Income. Operating income decreased from $1,353,000 in 1996
to a loss of $419,000 in 1997. The decrease in operating income was due to a
decrease in operating income for rehabilitative health care of $393,000 and an
increase in corporate costs of $1,383,000.
The decrease in rehabilitative health care operating income in 1997 was due
to costs incurred for infrastructure development of $297,000 and an increase in
regional salaries and support of $364,000, offset by the net gain on disposition
of clinic assets of $268,000.
The increase in corporate costs was due to the Company's growth strategy
that required expanded services and support, increased personnel and expanded
operational and financial systems. Also included in the increase was
professional and consulting fees of $566,000 incurred to assist the Company in
preparing its plan for future growth.
Interest Expense. Interest expense increased from $292,000 in 1996 to
$650,000 in 1997. The increase in interest expense was due to the higher average
borrowings and interest rates in 1997 when compared to 1996.
Net (Loss) Income. The Company's net income decreased $2,053,000 to a loss
of $1,047,000 or $.13 diluted net loss per share for 1997 from income of
$1,006,000 or $0.13 diluted net income per share for 1996.
Years Ended December 31, 1996 and 1995
Revenues. Total revenues increased $10,608,000 or 59.2% to $28,514,000 for
1996 from $17,906,000 for 1995. The increase in preventive health care revenues
of $9,654,000 was primarily due to the addition of several fitness center
management contracts, the increase in consulting revenue, and the acquisition of
a fitness equipment dealer in January 1996. The increase in rehabilitative
health care 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 in the
fourth quarter of 1996.
Operating Income. Operating income increased $928,000 or 269.8% to
$1,272,000 for 1996 from $344,000 for 1995. The increase in operating income was
due to an increase of $930,000 in preventive health care and $390,000 in
rehabilitative health care, partially offset by an increase of $392,000 in
corporate operating costs.
The increase in operating income in preventive health care was primarily
due to the acquisition of a fitness equipment dealer on January 11, 1996, the
addition of several fitness center management contracts and an increase in
consulting revenue. Operating income in preventive health care 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 preventive health care remained relatively consistent with that of
the same period in 1995 due to increased consulting revenue being offset by
lower margins in equipment sales.
The increase in operating income in the rehabilitative health care segment
was 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 was the result of operational efficiencies at the clinics.
<PAGE>
The increase in corporate operating costs in 1996 was directly related to
the acquisition of an operator of corporate fitness centers in April 1995 and a
fitness equipment dealer in January 1996, and the resulting increase in
depreciation and amortization as a result of these acquisitions.
Interest Expense. Interest expense decreased from $563,000 in 1995 to
$292,000 in 1996. The decrease was due to lower average borrowing in 1996 when
compared to 1995.
Net Income (Loss). The Company's net income increased $1,218,000 to
$1,006,000 in 1996 from a loss of $212,000 in 1995.
Liquidity and Capital Resources
The Company had positive working capital of $161,000 as of December 31,
1997 and a working capital deficit of $2,086,000 as of December 31, 1996. The
change was primarily due to the increases in accounts receivable and inventory
and the refinancing of the revolving line of credit (see Note 4 to the
consolidated financial statements), partially offset by the increase in all
other current liabilities. The Company's principal sources of liquidity at
December 31, 1997 included trade accounts and notes receivable of $6,503,000
(see next page for 1998 financing activities).
In February 1997, the Company entered into a Second Amended and Restated
Credit and Security Agreement which provided for a line of credit of up to
$1,500,000 at the prime rate plus 2% and a $2,500,000 term loan at the prime
rate plus 6%. The amount of the term loan was increased to $2,850,000 in May
1997, and further increased to $3,275,000 in August 1997. To assist in the
funding of operations through the remainder of 1997, management successfully
negotiated new payment terms on these obligations.
In February 1997, the Company paid $1,000,000 of cash and issued $250,000
of subordinated convertible promissory notes in connection with the Company's
acquisition of the Isernhagen Companies. The cash for such acquisitions was
provided by the Company's bank term loan.
In April 1997, the Company paid $200,000 of cash and issued 78,911 shares
of the Company's common stock in connection with the Company's acquisition of
K.A.M. The cash for such acquisition was provided by the Company's bank term
loan.
In May 1997, the Company paid $300,000 of cash and issued 50,000 shares of
the Company's common stock in connection with the Company's acquisition of Duffy
and Associates. The cash for such acquisition was provided by the Company's bank
term loan.
In August 1997, the Company paid $304,500 of cash and issued 25,000 shares
of the Company's common stock in connection with the Company's acquisition of
Medlink. The cash for such acquisition was provided by the Company's bank term
loan.
<PAGE>
On August 26, 1997, the Company borrowed $500,000 from Brightbridge Fund I,
L.P. ("Brightbridge"), a limited partnership of which Brightstone Capital
Limited LLC ("Brightstone") is the general partner and a 20% limited partner.
Brightstone is owned 50% by Jim Bernards and 50% by George Kline, each a
director of the Company. The loan, which was repaid in February 1998, bore
interest at 12% per annum. Brightbridge received five-year warrants to purchase
20,000 shares of Company common stock at an exercise price of $3.00 per share
and, because the loan was not repaid when due, became entitled to receive an
additional 5,000 warrants exercisable at $3.00 per share. The number of warrant
shares and exercise price are subject to adjustment, and the parties have
appointed a third party to make a binding determination with respect thereto.
(See Note 4 to the consolidated financial statements).
In February 1998, the Company entered into a $12,500,000 revolving credit
facility with Madeleine L.L.C., an affiliate of Cerberus Partners, L.P. (the
"Lender"). The credit facility is secured by all of the Company's assets,
including its accounts receivable, inventory, equipment, and general intangibles
and is guaranteed in part by the Company's President and Chief Executive
Officer. The Company's ability to draw down on the facility is tied to a formula
based upon the Company's EBITDA (defined as earnings before interest, taxes,
depreciation and amortization), revenues, or collections, whichever is less. The
Company paid the Lender a commitment fee equal to 1.5% of the total credit
facility, and a closing fee equal to 1.0% of the total credit facility. The
Company also issued to the Lender 312,497 shares of common stock. The Company
pays the Lender a loan servicing fee of $5,000 per month. The advances under the
credit facility accrue interest at a total rate of interest equal to 7.0% in
excess of Chase Manhattan's prime rate (but in no event less than 8.5%).
Interest accruing at the rate of such prime rate plus 4.5% is payable monthly.
Interest accruing at the rate of 2.5% is added to the principal balance of the
facility, and will accrue interest until paid. The credit facility has an 18
month term. The credit facility is subject to various affirmative and negative
covenants customary in transactions of this type, including a requirement to
maintain certain financial ratios and limitations on the Company's ability to
incur additional indebtedness, to make acquisitions outside of certain
established parameters, or to make dividend distributions.
In February 1998, the Company also completed the private sale of 3,000,000
Units at an aggregate offering price of $3,300,000. Each Unit consisted of one
share of common stock and a warrant to purchase one-fourth (.25) of one share of
common stock at $2.25 per whole share. The Company has agreed to register the
shares for resale and the warrant shares under the Securities Act as soon as
practicable.
Sources of capital to meet future obligations in 1998 are anticipated to be
cash provided by operations and the Company's revolving credit facility. In
order to conserve capital resources, the Company's policy is to lease its
physical facilities. The Company does not believe that inflation has had a
significant impact on the results of its operations.
<PAGE>
Outlook
The Company's strategy is to continue to expand its operations through
acquisitions and same site growth.
In its rehabilitative health care operations, the Company's strategy is to
continue to expand through acquisitions and improve the profitability of the
physical therapy clinics acquired through the consolidation of the clinics'
operating expenses. The Company intends to focus its acquisitions on physical
therapy clinics primarily located in secondary markets in the central 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 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 arrangements. It
is anticipated that funds required for future acquisitions and the integration
of acquired businesses with the Company will be provided from operating cash
flow, the Company's revolving credit facility and the proceeds from potential
future equity financings. Future equity financings, if any, may result in
dilution to holders of the Company's common stock. However, there can be no
assurance that suitable acquisition candidates will be identified by the Company
in the future, that suitable financing for any such acquisitions can be obtained
by the Company, or that any such acquisitions will occur.
Rehabilitative health care revenues are expected to increase as a result of
introducing additional physical therapy work sites at additional corporate
fitness centers, increasing the number of physical therapists at existing
clinics, and potential acquisitions of free-standing physical therapy clinics.
In January and May 1997, the Company sold eight physical therapy clinics located
in California and three clinics located in Delaware. These clinics accounted for
revenues of $1,253,000 and $4,148,000 in 1997 and 1996, respectively. See
"Liquidity and Capital Resources." The Company anticipated that this loss of
revenue would be offset by the Company's acquisition of The Preferred Companies
in December 1996, the Isernhagen Companies in February 1997, K.A.M. in April
1997, Duffy & Associates in May 1997, Medlink in July 1997 and other planned
physical therapy acquisitions in the fourth quarter of 1997; however, delays in
closing the Company's revolving credit facility caused the Company to fall short
of its schedule of acquisitions. The Company expects to resume its schedule of
acquisitions in 1998. Rehabilitative health care operating income as a
percentage of revenues is expected to increase as a result of the Company's
investment in operating systems that centralize and streamline the billing and
collection functions of the companies acquired to date. However, the Company has
experienced a time lag in successfully implementing these systems at some of the
acquired clinic locations. The Company also expects to control its site
operating costs while improving site revenue performance resulting in operating
income gains.
In its preventive health care operations, the Company's strategy is to
expand through the addition of new management contracts and selective
acquisitions.
Preventive health care operating income, as a percentage of revenues, is
expected to increase compared with that experienced for the year ended December
31, 1997 as the Company expects to control site costs.
Corporate expenses, as a percentage of revenues, are anticipated to be
consistent with 1997 levels.
Year 2000 Compliance
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" problem, and is developing
an implementation plan to resolve the issues identified. The Company believes,
with some vendor upgrades to existing operations software and converting to new
accounting software, the Year 2000 problem will not pose any significant
operational concerns and is not anticipated to be material to the Company's
financial position or results of operations in any given year
<PAGE>
Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. The Company
anticipates the adoption of SFAS No. 131 will result in an increase in the
number of reportable segments. The Company will be required to adopt SFAS in
1998.
Portions of the Form 10-KSB, including Management's Discussion and Analysis
of Financial Condition and Results of Operations, contain numerous
forward-looking statements that involve a number of risks and uncertainties.
Factors that could cause actual results to differ materially from such
forward-looking statements include but are not limited to the following:
Sufficiency of working capital:
The Company's ability to fund its working capital requirements in the
future is materially dependent upon its ability to generate cash flow from its
existing and future management contracts, equipment sales, consulting fees, fees
generated from its work site and free-standing physical therapy operations and
future debt and/or equity financings. Future potential acquisitions, and the
costs associated with the successful integration of such acquisitions, could
adversely affect Company cash flows from operating activities. In addition, the
Company materially relies on third party reimbursement for its physical therapy
services. If such third party payors defer or delay payment for any reason, the
Company's cash flows would be materially adversely affected. Historically, the
Company has experienced excessive account receivable aging from certain of its
physical therapy clinics. The Company attributes the majority of such
receivables to be the result of the poor performance of the clinics it sold in
1997. If the Company's existing operations would require more capital than
currently anticipated, or if revenues or expenses are greater than what are
currently anticipated, the Company may need additional financing in order to
maintain its operations and implement its physical therapy acquisition strategy.
Such sources of additional financing could include, but may not be limited to,
sales of the Company's debt or equity securities. No assurance can be given that
the Company will be able to secure any such financing when needed, or that such
financing, if obtained, would be on terms favorable or acceptable to the
Company.
Dependence upon successful execution of acquisition strategy; risks associated
with integration of free-standing physical therapy clinics:
A major element of the Company's business strategy is to acquire
free-standing outpatient physical therapy clinics primarily in secondary markets
throughout the central United States. Acquisitions have constituted, and the
Company expects them to constitute in the future, a significant portion of the
Company's growth. Since December 1991 to March 31, 1998, the Company has grown
from owning and operating one physical therapy clinic to owning and operating 15
free-standing clinics and 12 worksite physical therapy clinics. No assurance can
be given as to whether, when or on what terms, any possible acquisitions of
free-standing clinics may be completed, if at all.
The Company believes that competition for acquisitions will increase as
consolidation of the outpatient rehabilitation industry continues. Many of the
companies actively seeking such acquisitions are well established and have
substantially greater resources than the Company. Such interest may lead to
increased competition for attractive acquisition candidates. Accordingly, there
can be no assurance that existing outpatient rehabilitation clinics will
continue to be available to the Company in the secondary markets in the central
United States on terms and conditions favorable or acceptable to the Company, or
at all. The failure of the Company to be able to successfully locate, negotiate,
close and integrate such free-standing physical therapy acquisitions would
adversely affect the Company's future growth potential. In addition, the
<PAGE>
Company's ability to secure the necessary financing to acquire such physical
therapy clinics on terms and conditions favorable to the Company will impact the
Company's ability to successfully execute its acquisition strategy. Federal and
state laws may prohibit or restrict the use by the Company of its securities as
consideration for the acquisition of clinics from referral sources or otherwise
prohibit or restrict the Company's ability to make acquisitions. Such
prohibitions and restrictions could restrict the Company's ability to make
acquisitions, which would adversely affect the Company's growth potential,
financial condition, results of operations and cash flows.
Potential Impairment of Acquired Assets:
The Company periodically reviews the operating results of its acquired
free-standing clinics to determine if any impairment charges for underperforming
assets and/or clinic closing are necessary. It is reasonable to expect that such
actions will be required from time to time in the future as the Company
continues to grow through acquisitions. No assurance can be given that assets
acquired will never incur impairment charges or clinics acquired will not be
closed.
Risks associated with expansion and rapid growth:
The Company's growth strategy will require increased personnel throughout
the Company, expanded operational and financial systems and the implementation
of new and additional control procedures. There can be no assurance that the
Company will be able to manage expanded or newly integrated operations
effectively. The failure to implement such operational and financial systems
could have a material adverse affect on the Company's results of operations,
financial condition and cash flows.
Material dependence on referrals:
Although not the Company's primary strategy, the Company has acquired in
the past (and may acquire in the future) certain clinics from health care
professionals (such as physicians) who are the primary patient referral source
for such clinics. Under current and proposed federal and state legislation,
depending on the type of consideration paid by the Company and the nature of any
other financial relationships between the sellers, the seller and other referral
sources may be prohibited from referring patients to the clinic. In connection
with the acquisition of clinics from physicians in particular, the Company
typically enters into noncompetition agreements with the sellers for
approximately 60 months (although such sellers are not restricted from referring
patients to other clinics). There can be no assurance, however, that such
contracts would be enforced according to their terms and conditions and that the
sellers would not begin competing with the Company.
Potential adverse effects of existing and future government regulation:
The Company's physical therapy business is subject to extensive and rapidly
changing federal, state and local regulation governing licensure, conduct of
operations, payment of referral fees, purchase or leasing of facilities and
employment of therapists and other professionals by business corporations.
Virtually all states in which the Company operates have enacted laws and
adopted regulations that restrict 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. The Company also believes that, if it is subsequently determined that
the Company's operations do not comply with such laws or regulations, it could
restructure its operations to comply with such laws and regulations. There can
be no assurance, however, that the Company would be able to restructure its
operations. In addition, there can be no assurance that the states in which the
Company currently operates, or may operate in the future, will not enact similar
or more restrictive laws and that the Company will be able to operate or
restructure its operations to comply with such new legislation or regulations or
interpretations of existing or new legislation and regulations.
<PAGE>
Additional federal restrictions became effective in 1995 for certain
designated health services (including physical therapy) that require notice to
governmental agencies of ownership on the part of physicians and members of
their families of debt or equity interests in providers of physical therapy,
such as the Company. Payment will not be made for services provided to Medicare
or Medicaid beneficiaries as a result of referrals from such physicians. This
law also regulates a wide variety of other relationships between referring
physicians and providers and imposes substantial penalties for violations of its
provisions. From time to time proposals are made to extend these restrictions to
all services provided, regardless of whether this source of payment is the
Medicare or Medicaid programs or some other public or private source of payment.
In the event such legislation at the state or national level were enacted, the
Company may be required to restructure its relationships with certain of its
referring physicians. There can be no assurance that the Company would be able
to do so without an adverse effect on its financial condition, operations or
cash flows.
Possible limitations on third-party reimbursement:
The health care industry has experienced a material trend toward cost
containment as private and governmental payors seek to respond to, and control,
rapidly escalating health care costs. One response has been to place limitations
on reimbursement rates by capping or lowering fees and restricting the number of
treatments which will be reimbursed for any given condition. All states in which
the Company currently conducts business have fee schedules which limit the
reimbursement rates under workers' compensation programs. The Company expects
that legislation limiting the reimbursement of fees for various outpatient
services (including physical therapy and other related services) will become
more prevalent. Reimbursement for the Company's services may also be limited by
third party payors. Such payors often limit the amount of fees per visit,
regardless of the number or type of therapy applied to the patient, or otherwise
limit, by the terms of the managed care contract, the amount of fees that may be
charged. One method of governmental and third party payors has been to institute
what are known as "capitated" programs. Under capitated programs, payors
contract with providers for specific physical therapy services in return for set
prepaid fees per individual enrollee ("capitated" monthly fees). If the provider
has accurately analyzed and negotiated its capitated monthly fees, and the costs
in providing services are less than the demand for treatment, the provider
benefits from positive margins in cash flow resulting from the prepayment of the
capitated monthly fees. However, to the extent that the actuarial analysis
underlying such capitated fees is inaccurate and enrollees require more
treatment than is anticipated, aggregate capitated fees may be insufficient to
cover the costs of providing enrollees with the services required. Although the
Company could seek to negotiate stop-loss reinsurance to contractually shift the
risk of financial exposure beyond certain limits to an insurance carrier in the
event the Company determined to participate in such a capitated program, there
can be no assurance that the Company would be able to obtain such reinsurance.
In addition, the Company could be required to obtain licenses from certain
governmental authorities in order to participate in such capitated programs. The
Company does not currently have a license from any governmental authority to
offer such programs, and there can be no assurance that the Company would be
able to secure any such licenses when and if sought by the Company. Moreover, in
order to effectively manage such capitated contracts, the Company may need to
acquire and implement additional operational and informational systems.
<PAGE>
The Company expects the trend toward third party payors limiting
reimbursement levels for various out-patient services, including outpatient
rehabilitation services, to continue. As a consequence, there can be no
assurance that reimbursement for the Company's rehabilitation services will
remain at current or anticipated levels. Any reduction or limits on
reimbursement levels for the Company's services would adversely affect the
profitability of, or demand for, the Company's services and could have a
material adverse effect on the Company's financial condition, results of
operations and liquidity. In addition, such payors are expected to continue to
develop programs designed to control and reduce the cost of health care services
that may adversely affect the profitability of, or demand for, the Company's
services.
State limitations imposed upon the corporate practice of medicine:
Certain states have legislation or regulations, or have interpreted
existing physical therapy licensing laws, to prohibit or restrict business
corporations, such as the Company, from practicing physical therapy through the
direct employment of physical therapists. In other states, the courts or state
officials have issued rulings or opinions stating or suggesting that health care
professionals may not lawfully provide services as employees of business
corporations such as the Company. For example, in Texas, an opinion of the
Attorney General suggests that unlicensed corporate entities may not engage in
the practice of physical therapy, although the Company believes that other Texas
regulators disagree with this conclusion and that this opinion has generally not
been followed, or enforced, in Texas. Similarly however, in California, the
Attorney General has opined that physical therapists may not be employed by
corporate employers, such as the Company. The Physical Therapy Examining
Committee of the California Board of Medical Quality Assurance, however, has
concluded that there is no such prescription under California law, and to the
best of the Company's knowledge, the Attorney General's opinion has not been
enforced to date. There can be no assurance that regulators, or others in Texas,
California and other states, will not seek to enforce, or adopt, this type of
restriction, or that other states in which the Company operates, or may operate
in the future, will not enact or enforce similar, or more restrictive,
legislation or regulations or that the Company can adapt its operations to
comply with such legislation and regulations.
Material dependence upon existing management and physical therapy clinic
personnel:
The success of the Company is highly dependent on the services of Mr. Loren
S. Brink, its President and Chief Executive Officer, and upon Mr. Thomas Coplin,
President of Health Fitness Rehab. The loss of either Mr. Brink's or Mr.
Coplin's services would have a material adverse effect on the Company's
business. In January 1997, the Company entered into an "evergreen" three year
employment agreement with Mr. Brink. The Company is currently negotiating a long
term employment agreement with Mr. Coplin. No assurance can be given that such
long term employment agreement will be entered into between the Company and Mr.
Coplin or on terms, and conditions, acceptable to the Company. The failure by
the Company to enter into such long term employment agreement would have an
adverse effect on the Company's business. The Company owns and maintains a
key-man life insurance policy on Mr. Brink's life in the amount of $3.5 million.
<PAGE>
The Company's operations are also dependent upon attracting and retaining
highly-qualified physical therapists. Although, to date, the Company has not
experienced significant difficulty in attracting and retaining qualified
physical therapists, it is generally accepted that the demand for physical
therapists exceeds the available supply. As the Company's operations expand, the
Company could experience difficulty recruiting and maintaining adequate staff.
Most of the Company's competitors are larger and have greater financial
resources, which may provide such competitors with an advantage in attracting
and retaining physical therapists. In addition, the Company's ability to attract
and retain physical therapists may be limited as the Company's ability to
increase its fees to cover such additional costs is restricted by the cost
containment pressures on health care providers. The inability to attract
therapists without substantially increasing their compensation could interfere
with the Company's business plans and adversely affect its results of operations
and cash flows.
Possible quarterly volatility in Company financial results:
The Company may experience, as other companies in the business of owning
and operating physical therapy clinics have experienced, a decrease in revenue
and income from operations in the third and fourth quarters of each year as
patient visits historically tend to decline during the summer and holiday
months. In addition, the timing, number and integration of the Company's
potential free-standing physical therapy acquisitions may cause financial
results of operations to vary on a quarterly basis. No assurance can be given
that the timing or integration of possible future acquisitions will not
materially adversely affect the Company's financial position, results of
operations and cash flows on a quarterly or annual basis.
Likely material changes in workers' compensation laws:
Workers' compensation coverage is a creation of state law, and thus, is
subject to material change by state legislatures and is materially influenced by
the political process in each state. Several states have mandated that employers
receive coverage only from funds operated by the state. New laws affecting the
workers' compensation system in Minnesota and any other state where the Company
may do business in the future (including laws that require all employers to
participate in state-sponsored funds or that mandate premium reductions) would
have a material adverse effect on the Company and its financial position,
results of operations and cash flows. Several bills to modify Minnesota's
workers' compensation laws have been introduced in the State legislature in the
past. The Company is not able, at this point in time, to predict the likelihood
that any of these bills will be enacted or the potential effect these bills
could have on the Company and its operations, if enacted into law.
Possible risk in converting physical therapy "independent practices" to
"rehabilitation agency" status:
Under current Medicare standards, a facility certified as an "independent
practice" is subject to a $900 per capita limit in connection with the provision
of physical therapy services. In contrast, physical therapy sites or facilities
certified as "rehabilitation agencies" are not subject to such $900 per capita
reimbursement limitation. As a result, management views the change in
certification from an "independent practice" to a "rehabilitation agency" as an
important factor, despite the fact that only approximately 8% of the Company's
rehabilitation revenues are derived from Medicare or Medicaid. Management
believes a certain non-quantifiable stigma may apply to those "independent
practices" that have not yet, or do not in the future, convert to such
"rehabilitation agencies." As of March 31, 1998, ten of the Company's 15
free-standing physical therapy clinics had been certified as "rehabilitation
agencies." For four of the Company's free-standing physical therapy sites,
"rehabilitation agency" status is not applicable due to the nature of their
hospital contract business and the remaining site is currently in the
certification process. No assurance can be given that all or any portion to the
Company's future free-standing physical therapy clinics can or will be converted
to such "rehabilitation agency" status, nor can any assurance be given that the
failure to achieve such status will not have a material adverse effect on the
Company's rehabilitation business.
<PAGE>
Competition:
There are a significant number of companies currently existing in, as well
as entering, the physical therapy market. The Company competes for physical
therapy business with other significantly larger physical therapy companies.
Most physical therapy companies that compete with the Company have greater
capital and financial resources, operational experience, marketing capabilities
and name recognition than the Company. The health fitness business is also very
competitive. The Company competes for management contracts for corporate and
hospital-based fitness centers with other health and fitness management
companies. There can be no assurance that the Company will be able to compete
successfully with these management and physical therapy companies.
Enhanced Nasdaq SmallCap Market(TM)("SmallCap Market") Maintenance Requirements:
In August 1997, the Securities and Exchange Commission ("SEC") approved
enhanced listing and maintenance requirements for companies listing their
securities on the Nasdaq SmallCap Market(TM) and the Nasdaq National Market(R).
The enhanced maintenance requirements for listing the Company's securities on
the SmallCap Market include a requirement that the Company have either (1) net
tangible assets of at least $2 million, (2) $500,000 of net income in the most
recent fiscal year or in two of the last three fiscal years, or (3) a market
capitalization of at least $35 million. Existing SmallCap Market companies were
given until February 23, 1998 to comply with such standards. The Company
believes that, as a result of the Company's private placement completed on
February 19, 1998, the Company is in compliance with the enhanced maintenance
requirements. If, however, the Company's net tangible assets fall below $2
million, the Company will fail to meet such requirements and the Company's
securities could be de-listed from the SmallCap Market. In such event, trading,
if any, in the Company's common stock would thereafter be conducted in the
over-the-counter markets or in the so called "pink sheets" or the Nasdaq's
electronic bulletin board. Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought or sold, but also through delays and timing of transactions,
reductions in security analysts' and the news media's coverage of the Company,
and possibly, lower prices for the Company's securities than might otherwise be
attained.
Possible dilution and depressive effect on price of the Company's common stock
from common stock issued in connection with acquisitions:
In connection with the Company's strategy of aggressive growth through
acquisitions, the Company intends to issue shares of its common stock, as well
as grant certain earn-out provisions that may include the future issuance of the
Company's common stock. Although the aggregate number of such shares to be
issued in connection with existing and future acquisitions is not currently
ascertainable by the Company, such issuances may be material in the aggregate.
Such issuances of the Company's common stock in connection with acquisitions may
be dilutive to existing shareholders of the Company and sales of such securities
into the public market could have a depressive effect on the price of the
Company's common stock. No assurance can be given that such future issuances of
the Company's securities in connection with future acquisitions will not have a
materially dilutive effect on existing Company shareholders, nor that sales of
shares issued in such acquisitions will not materially adversely affect the
price of the Company's common stock.
<PAGE>
Risk of litigation and insufficiency of liability insurance:
Although the Company has had no history of material legal claims, the
Company may be subject to claims and lawsuits from time to time arising from the
operation of its business, including claims arising from accidents or from the
negligent provision of physical therapy services. Damages resulting from and the
costs of defending any such actions could be substantial. In the opinion of
management, the Company is adequately insured against personal injury claims,
professional liability claims and other business-related claims including, but
not limited to, claims related to the negligent provision of physical therapy
services. Nevertheless, there can be no assurance the Company will be able to
maintain such coverage, or that it will be adequate.
Restrictions and affirmative and negative covenants imposed by senior credit
facility:
Certain of the affirmative and negative covenants imposed upon the Company
by its senior secured lending facility restrict the Company's ability to incur
additional senior and subordinated debt. Furthermore, upon certain events of
default, such senior secured lender is entitled to demand immediate repayment of
their outstanding loans. In such circumstances, the Company may not be able to
access other sources of capital, on a timely basis, or on terms and conditions
favorable to the Company, or at all, with sufficient speed or sufficient size to
avoid the Company's senior secured lender from taking material adverse action
against the Company and its collateral.
Lack of proprietary protection; lack of barriers to entry:
Although the Company holds certain trademarks, tradenames and intellectual
property associated with its operations, the Company is primarily a health care
service business where patents or other intellectual property are not
applicable, or if applicable, do not provide material barriers to entry for
third parties or competitors to enter the Company's existing preventive and
rehabilitative lines of business and compete with the Company. Therefore, no
assurance can be given that other existing competitors, or health care companies
seeking to gain access to the Company's market or limit the Company's market
share, may not devote resources to effectively compete with the Company in the
future. No assurance can be given that if such competition occurs in the future
that the Company's financial position, results of operations or cash flows will
not be materially adversely affected.
Potential depressive effect on price of common stock arising from exercise and
sale of existing convertible securities:
At December 31, 1997, the Company had outstanding stock options and
warrants (not including the shares issuable under any contingent grants,
earn-out agreements or any future acquisition) to purchase an aggregate
2,586,063 shares of common stock. The exercise and sale of such outstanding
stock options and stock purchase warrants and sale of stock acquired thereby may
have a material adverse effect on the price of the Company's common stock. In
addition, the exercise and sale of such Company's common stock could occur at a
time when the Company would otherwise be able to obtain additional equity
capital on terms and conditions more favorable to the Company.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Health Fitness
Corporation and Subsidiaries (the Company) as of December 31, 1997 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 Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 8, 1998
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS (Note 4)
CURRENT ASSETS:
Cash and cash equivalents $ 81,639
Trade accounts and notes receivable, less allowance for doubtful
accounts of $225,000 and $245,000, respectively 6,502,963 $ 4,656,876
Inventories 810,805 454,254
Prepaid expenses and other 533,321 433,413
----------- -----------
Total current assets 7,928,728 5,544,543
PROPERTY, net (Note 3) 3,598,188 2,185,335
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,276,287 and $961,424,
respectively (Notes 1 and 2) 8,989,848 9,376,367
Noncompete agreements, less accumulated amortization of $279,639
and $84,874 (Notes 1 and 2) 932,211 346,976
Copyrights, less accumulated amortization of $40,944 at December 31, 1997
(Notes 1 and 2) 629,056
Trade names, less accumulated amortization of $13,667 at December 31, 1997
(Notes 1 and 2) 246,333
Contracts, less accumulated amortization of $48,194 at December 31, 1997
(Notes 1 and 2) 171,806
Trade accounts and notes receivable, less allowance for doubtful accounts
of $650,000 and $240,000, respectively 679,376 640,000
Other 556,736 85,676
----------- -----------
$23,732,282 $18,178,897
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 94,643
Notes payable (Note 4) 2,090,000
Trade accounts payable $ 1,873,472 1,662,077
Accrued salaries, wages, and payroll taxes 1,779,200 1,302,770
Accrued earn-out 533,444 367,496
Other accrued liabilities 1,233,538 254,686
Current portion of long-term debt (Note 4) 503,540 281,278
Deferred revenue 1,844,460 1,577,186
----------- -----------
Total current liabilities 7,767,654 7,630,136
LONG-TERM DEBT, less current portion (Note 4) 5,785,018 576,490
DEFERRED LEASE OBLIGATION 31,170 80,183
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $.01 par value; authorized 5,000,000 shares, none issued or
outstanding Common stock, $.01 par value; 25,000,000 shares authorized;
8,136,828 and 7,193,293 shares
issued and outstanding, respectively 81,368 71,933
Additional paid-in capital 12,976,680 11,693,417
Accumulated deficit (2,842,379) (1,795,689)
----------- -----------
10,215,669 9,969,661
Stockholder note and interest receivable (67,229) (77,573)
----------- -----------
10,148,440 9,892,088
----------- -----------
$23,732,282 $18,178,897
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES:
Preventive health care $ 24,916,837 $ 21,789,983
Rehabilitative health care 8,753,887 6,724,361
-------------- ---------------
33,670,724 28,514,344
COSTS OF REVENUES:
Salaries 19,151,162 15,686,183
Equipment 4,839,962 4,414,273
Support 1,970,192 1,386,472
Occupancy 1,006,738 1,326,961
-------------- ---------------
26,968,054 22,813,889
-------------- ---------------
GROSS PROFIT 6,702,670 5,700,455
OPERATING EXPENSES:
Salaries 2,680,506 1,749,498
Selling, general, and administrative 4,708,571 2,598,434
Net gain on disposition of clinic assets (267,806)
-------------- ---------------
7,121,271 4,347,932
-------------- ---------------
OPERATING (LOSS) INCOME (418,601) 1,352,523
INTEREST EXPENSE (650,347) (292,421)
OTHER INCOME (EXPENSE) 22,258 (54,521)
-------------- ---------------
NET (LOSS) INCOME $ (1,046,690) $ 1,005,581
============== ===============
NET (LOSS) INCOME PER SHARE:
Basic $ (.13) $ .15
============= ==============
Diluted $ (.13) $ .13
============= ==============
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 7,884,088 6,894,022
============== ===============
Diluted 7,884,088 7,581,844
============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION 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, 1995 6,457,429 $ 64,574 $10,200,033 $(2,801,270) $ (64,403) $ 7,398,934
Issuance of common stock in
connection with 1996 acquisition 40,000 400 221,914 222,314
Issuance of common stock
purchase warrants 40,000 40,000
Conversion of convertible notes and
interest 456,955 4,570 1,049,875 1,054,445
Warrants exercised 86,592 866 52,662 53,528
Stock options exercised 135,000 1,350 88,080 89,430
Issuance of common stock
in connection with a software
license agreement 10,000 100 26,150 26,250
Issuance of common stock through
Employee Stock Purchase Plan 7,317 73 14,703 14,776
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 7,193,293 71,933 11,693,417 (1,795,689) (77,573) 9,892,088
Issuance of common stock in
connection with 1995 acquisition 292,829 2,928 (2,928)
Issuance of common stock in
connection with 1997 acquisitions 153,911 1,539 414,086 415,625
Issuance of common stock
purchase warrants 92,431 92,431
Issuance of note payable with
conversion option 44,118 44,118
Conversion of convertible notes
and interest 130,358 1,304 313,452 314,756
Warrants exercised 86,800 868 129,882 130,750
Stock options exercised 223,000 2,230 158,520 160,750
Issuance of common stock
for services 35,500 355 83,239 83,594
Issuance of common stock through
Employee Stock Purchase Plan 21,137 211 50,463 50,674
Advances on notes receivable (9,656) (9,656)
Payments received on notes receivable 20,000 20,000
Net loss (1,046,690) (1,046,690)
--------- ---------- ----------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 1997 8,136,828 $ 81,368 $12,976,680 $(2,842,379) $ (67,229) $10,148,440
========= ========== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 8)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,046,690) $ 1,005,581
Adjustment to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Net gain on disposition of clinic assets (267,806)
Common stock issued for services 134,268 14,776
Depreciation and amortization 1,312,096 1,073,645
Deferred revenue 267,274 36,200
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (1,543,877) (863,950)
Inventories (356,551) (86,353)
Prepaid expenses and other (119,536) (46,984)
Other assets (184,280) (15,934)
Trade accounts payable 112,764 534,087
Accrued liabilities and other 854,363 (456,286)
------------ ------------
Net cash (used in) provided by operating activities (837,975) 1,194,782
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (1,978,497) (1,183,001)
Payments for acquisitions, net of liabilities assumed
and cash acquired (1,795,908) (582,016)
Payments in connection with earn-out provisions (485,115) (124,924)
Proceeds from sale of physical therapy clinics, net 1,220,600
Collection of notes receivable 220,008
------------ ------------
Net cash used in investing activities (2,818,912) (1,889,941)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in checks written in excess of bank balances (94,643) 94,643
Borrowings under line of credit 2,957,500 4,700,938
Repayments of line of credit (2,197,500) (3,225,938)
Proceeds from notes payable 478,000 600,000
Repayments of notes payable (1,686,942)
Proceeds from long-term debt 2,712,128 113,000
Repayments of long-term debt (440,803) (662,683)
Proceeds from issuance of common stock 291,500 268,659
Proceeds from issuance of warrants to purchase common stock 22,000
Advances on notes receivable (9,656) (17,970)
Payments received on notes receivable 20,000 4,800
------------ ------------
Net cash provided by financing activities 3,738,526 188,507
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 81,639 (506,652)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 506,652
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 81,639 $ -
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and subsidiaries (the Company) is
engaged in two principal lines of business (segments): (i) preventive
health care and (ii) rehabilitative health care. Preventive health care
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 health care relates to the operation of physical
therapy clinics that provide a full range of rehabilitation services,
the operation of a national network of independent physical therapy
clinics, the authorship and sale of written materials to independent
physical therapy clinics, and the provision of occupational health
consulting services to employers, insurers, and others. The Company
provides management and consulting contract services in 27 states,
conducts fitness equipment sales from two locations in Minnesota,
provides physical therapy services from clinics in Iowa and Minnesota,
and conducts the operation, in Arizona, of a network of independent
physical therapy clinics. In June 1997, the Company changed its name
from Health Fitness Physical Therapy, Inc. to Health Fitness
Corporation.
Consolidation - The consolidated financial statements include the
accounts of Health Fitness Corporation and its subsidiaries, Sports and
Orthopedic Physical Therapy, Inc., Health Fitness Rehab, Inc., Health
Fitness Rehab of Iowa, Inc., Fitness Centers of America dba Fitness
Systems, The Preferred Companies, Inc. dba Preferred Therapy Providers
of America, Duffy and Associates Physical Therapy Corp., Medlink
Management Services, Inc., and Medlink Corporation. 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 and Notes Receivable - Trade accounts and notes
receivable relating to preventive health care represent amounts due from
companies and individuals for services or products shipped. The notes
receivable are typically due in 60 monthly installments and have
interest rates from 14.8% to 16.0%. Trade accounts receivable relating
to rehabilitative health care 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.
<PAGE>
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.
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 health care acquisitions is primarily
being amortized on a straight-line basis over 15 years. Goodwill relating
to preventive health care 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.
Noncompete Agreements - The Company has entered into a noncompete and
separation agreement with a former regional vice president and has entered
into noncompete agreements with certain of the former owners of companies
acquired. The noncompete and separation agreements cover periods of five to
seven years and prohibit the individuals from directly or indirectly
competing with the Company. The payments associated with these agreements
are amortized over the term of the noncompete agreement.
Other Intangible Assets - The Company's other intangible assets consist of
copyrights, trade names, and contracts. Contracts consist of agreements to
provide rehabilitative services on behalf of other health care providers
for terms of two to three years. The values assigned by the Company to
these intangible assets are based on an independent appraisal. The values
assigned to copyrights, trade names, and contracts are amortized on a
straight-line basis over 15 years, 15 years, and 2 or 3 years,
respectively.
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, which is considered to be the
continuing operations of an entity acquired. The long-lived assets relating
to the operations of an entity acquired are 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 are deemed to be impaired, the loss
<PAGE>
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 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.
Net (Loss) Income Per Common Share - Effective December 15, 1997, the
Company adopted SFAS No. 128, Earnings per Share. Net income per share
amounts presented for 1996 have been restated for the adoption of SFAS
No. 128. Basic net (loss) income per share are computed by dividing net
(loss) income by the weighted average number of common shares
outstanding and contingently issuable shares. Diluted net income per
share assumes conversion of convertible subordinated notes as of the
beginning of the year, issuance of contingently issuable shares, and
exercise of stock options and warrants using the treasury stock method,
if dilutive. Diluted net loss per share in 1997 is the same as basic
loss per share due to the antidilutive effect of the assumed
conversions. The following is a reconciliation of the numerators and
denominators used to calculate net (loss) income per share:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Basic Net (Loss) Income Per Share Computation -
Net (loss) income $ (1,046,690) $ 1,005,581
Weighted average common shares outstanding 7,860,020 6,883,421
Contingently issuable shares 24,068 10,601
------------- ------------
Average shares used in basic computation 7,884,088 6,894,022
------------- ------------
Basic net (loss) income per share $ (.13) $ .15
============= ============
Diluted Net (Loss) Income Per Share Computation -
Net (loss) income $ (1,046,690) $ 1,005,581
Weighted average common shares outstanding 7,860,020 6,883,421
Contingently issuable shares 24,068 302,541
Dilutive effect of stock options and warrants 395,882
------------- ------------
Average shares used in diluted computation 7,884,088 7,581,844
------------- ------------
Diluted net (loss) income per share $ (.13) $ .13
============= ============
</TABLE>
<PAGE>
Average shares used in the 1997 diluted computation excludes certain
contingently issuable shares of common stock with a value of $500,000
on February 7, 1999, the dilutive effect of stock options and warrants
to purchase 2,586,063 shares of common stock, and assumed conversion
of convertible subordinated notes into 159,522 shares of common stock
due to their antidilutive effect.
Average shares used in the 1996 diluted computation excludes the
dilutive effect of stock options and warrants to purchase 1,248,428
shares of common stock and the assumed conversion of convertible
subordinated notes into 189,487 shares of common stock due to their
antidilutive effect.
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.
Reclassifications - Certain reclassifications have been made to the
December 31, 1996 financial statements to conform to the presentation
adopted in the December 31, 1997 financial statements. The
reclassifications had no effect on stockholders' equity or net income
as previously reported.
2. ACQUISITIONS
1997 Acquisitions - In August 1997 the Company completed the
acquisition, effective as of July 31, 1997, of all the issued and
outstanding stock of Medlink Management Services, Inc. and Medlink
Corporation (collectively Medlink), two closely held and related
rehabilitation services companies based in Iowa.
On May 16, 1997, the Company acquired all of the issued and
outstanding stock of closely held Duffy and Associates Physical
Therapy Corp. (Duffy) of Des Moines, Iowa. Duffy provides outpatient
physical therapy, sports medicine, and occupational health services at
two clinics in Iowa. It also contracts with area hospitals and
corporations and provides services to a high school's athletic teams.
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.
On February 7, 1997, the Company completed the acquisition of certain
of the assets and assumed the liabilities of two related and closely
held companies: Isernhagen & Associates, Inc. and Isernhagen, Ltd.
(collectively Isernhagen). Isernhagen, Minnesota-based companies,
provide comprehensive programs and services to professionals who work
in industrial rehabilitation and work injury services.
<PAGE>
In connection with the acquisitions, assets purchased and liabilities
assumed, notes issued, common stock issued, and cash consideration paid
were as follows:
<TABLE>
<CAPTION>
Medlink Duffy K.A.M. Isernhagen
<S> <C> <C> <C> <C>
Assets acquired:
Cash $ 5,417 $ 3,175
Accounts receivable 300,776 $ 184,572 24,965 $ 108,900
Other current assets 23,282 2,280 13,492
Property 94,518 168,500 30,110 9,159
Noncompete agreements 80,000 120,000 160,000 420,000
Copyrights 670,000
Trade names 30,000 50,000 40,000 140,000
Contracts 50,000 170,000
Excess of purchase price
over net assets acquired 86,998 110,070 80,760 100,990
----------- ----------- ------------ ------------
670,991 635,422 509,010 1,462,541
Liabilities assumed:
Accounts payable 96,123 97,341 92,407 118,760
Accrued expenses 113,887 24,331 16,603 75,681
Deferred revenue 18,100
Debt 84,606 70,000
----------- ----------- ------------ ------------
294,616 191,672 109,010 212,541
Notes issued 250,000
Common stock issued 71,875 143,750 200,000
----------- ----------- ------------ ------------
Cash consideration paid $ 304,500 $ 300,000 $ 200,000 $ 1,000,000
=========== =========== ============ ============
</TABLE>
The purchase agreements contained noncompete provisions that cover a
period of five years and prohibit the former owners from directly or
indirectly competing with the Company.
In connection with the Isernhagen acquisition, the Company 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.
<PAGE>
The Isernhagen 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 through 2002.
The other purchase agreements require the Company to make annual
payments up to 39% of net income from operations, as defined, for each
of the five fiscal years through 2002. The annual payment, if any, is
due in cash or a combination of cash and 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 or the average closing bid price of the Company's
common stock for ten trading days, as defined.
The purchase agreements also required the Company to enter into
employment agreements with certain key employees for a term of five
years. These agreements provide for minimum aggregate annual salaries of
$524,000. The Company also granted stock options to purchase up to
114,999 shares of the Company's common stock at an average per share
price of $3.93 in connection with the employment agreements.
These acquisitions have been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired
are being amortized over 15 years using the straight-line method. The
consolidated statements of operations include the results operations of
the acquired companies since their respective acquisition dates.
1997 Disposals - In January 1997, the Company sold four physical therapy
clinics. In May 1997, the Company sold seven additional clinics. The
Company received $1,222,500 and notes receivable totaling $450,000. The
notes receivable have interest rates of 6% to 7% and require annual or
quarterly principal payments. The notes receivable are recorded in Other
Assets, except for the current portion of such notes, which are included
in Prepaid Expenses and Other. One of the acquiring companies also
assumed the Company's non-interest bearing note payable requiring total
future payments of $330,000. The gain on sale of the clinics, $545,433,
has been subsequently reduced by an increase in bad debt expense of
$277,627 relating to the sold clinics' accounts receivable retained by
the Company, resulting in a net gain of $267,806. At December 31, 1997,
the Company had accounts receivable relating to the sold clinics of
approximately $690,000 and had reserved approximately $650,000 as
potential bad debts. Any future changes in the estimated reserve will be
recorded as an increase or decrease in Selling, General, and
Administrative Expenses.
1996 Acquisitions - 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.
On July 2, 1996, the Company acquired the assets of Physical Therapy of
Red Wing (Red Wing), a general partnership engaged in the operation of
an outpatient physical therapy clinic.
On April 1, 1996, the Company acquired the assets of Christopher
Breuleux (Breuleux), a sole proprietor engaged in the business of
providing preventive health care development consulting services.
<PAGE>
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.
In connection with the acquisitions, assets purchased and liabilities
assumed, notes issued, and cash consideration paid were as follows:
<TABLE>
<CAPTION>
Preferred Red Wing Breuleux Pro Source
<S> <C> <C> <C> <C>
Assets acquired:
Cash $ 5,121 $ 9,648
Accounts receivable 10,928 285,666
Inventories 367,901
Prepaid expenses and other 2,040 37,676
Property 5,122 237,745
Noncompete 20,000 $ 25,000
Excess of purchase price
over net assets acquired 998,261 25,000 $ 87,511 135,369
------------ ----------- ------------ --------------
1,041,472 50,000 87,511 1,074,005
Liabilities assumed:
Accounts payable 1,295 497,862
Accrued expenses and other 21,458 116,795
Deferred revenue 342,041
Debt 15,000 361,752
------------ --------------
379,794 976,409
Notes issued 300,000
------------ ----------- ------------ --------------
Cash consideration paid $ 361,678 $ 50,000 $ 87,511 $ 97,596
============ =========== ============ ==============
</TABLE>
The purchase agreements contained noncompete provisions that cover a
period of five years and prohibit the former owners from directly or
indirectly competing with the Company.
The notes issued were convertible, subordinated promissory notes, with
an interest rate of 8%, and were due December 1, 1998, unless converted
earlier. The convertible, subordinated promissory notes and accrued
interest were 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. During 1997, the convertible,
subordinated promissory notes and accrued interest were converted into
130,358 shares of the Company's common stock.
The Preferred 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.
<PAGE>
The Pro Source 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. The
Company incurred costs relating to the earn-out provisions of $108,714
and $101,429 for 1997 and 1996, respectively.
The purchase agreements also required the Company to enter into
employment agreements with certain key employees for a term of two to
five years. These agreements provide for minimum aggregate annual
salaries of $485,000. The Company also granted stock options to purchase
up to 187,000 shares of the Company's common stock at an average per
share price of $3.47 in connection with the employment agreements.
These acquisitions have been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired
are being amortized over three to 15 years using the straight-line
method. The consolidated statements of operations include the results
operations of the acquired companies since their respective acquisition
dates.
Unaudited Pro Forma Information - The following unaudited pro forma
revenues of the combined operations of the Company, the 1997
acquisitions, the 1997 disposals, and the 1996 acquisitions, as if the
acquisitions had occurred at the beginning of 1996. (Other pro forma
information relating to the acquisitions and disposals discussed above
are not included due to the impact of the acquired companies being
insignificant.) The unaudited pro forma revenues may not necessarily
reflect the actual operations of the Company which would have resulted
had the acquisitions occurred as of the date presented. The unaudited
pro forma information is not necessarily indicative of future revenues
for the combined companies.
1997 1996
Revenues $ 33,869,000 $ 28,801,000
3. PROPERTY
Property at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Leasehold improvements $ 314,600 $ 370,554
Office equipment 1,269,787 645,361
Software 1,706,373 1,014,506
Preventive and rehabilitative health care equipment 1,149,549 934,951
------------- --------------
4,440,309 2,965,372
Less accumulated depreciation and amortization 842,121 780,037
------------- --------------
$ 3,598,188 $ 2,185,335
============= ==============
</TABLE>
Included in preventive and rehabilitative health care equipment is
equipment under capital leases at cost of $229,954 and accumulated
amortization of $28,814 as of December 31, 1997.
4. FINANCING
On February 17, 1998, the Company entered into a credit agreement (the
Credit Agreement) that provides for maximum borrowings of $12.5 million.
Interest on outstanding borrowings is computed at the prime rate plus
7.0% with a minimum rate of 15.5%. The Company is required to pay
monthly interest payments on outstanding borrowings at the prime rate
plus 4.5% with a minimum rate of 13.0%. The remaining interest is added
to the outstanding borrowings as of the first of the current month. The
Company is also required to pay a monthly servicing fee of $5,000 per
month. The Credit Agreement is due on July 17, 1999.
<PAGE>
The Company's borrowings under the Credit Agreement are limited to the
lesser of i) $12.5 million, ii) earnings before interest, taxes,
depreciation, and amortization, as defined, for the immediately
preceding 12-month period multiplied by 375%, decreasing to 350% by June
30, 1998, iii) 90% of revenue, as defined, for the immediately preceding
13-week period, or iv) 90% of accounts receivable collections, as
defined, for the immediately preceding 17-week period.
Borrowings under the Credit Agreement are secured by substantially all
of the Company's assets and partially guaranteed by the Company's
president. The Credit Agreement contains various restrictive covenants
relating to changes in accumulated deficit, maintenance of fixed charge
coverage ratio, minimum working capital requirements, prohibits dividend
payments, and other matters.
The Credit Agreement required the Company to pay a closing fee of
$317,500, pay $212,991 of the lender's expenses and issue 312,497 shares
(the Shares) of the Company's common stock to the lender. The Shares'
value, $343,747, was determined based on the market value of the
Company's common stock. In addition to the costs above, the Company
incurred incremental direct costs of $513,590 relating to the Credit
Agreement. These costs will be capitalized as deferred financing costs
and amortized using the effective interest method over the life of the
Credit Agreement.
The Credit Agreement also requires the Company to register the Shares
with the Securities and Exchange Commission by June 30, 1998. If the
registration statement does not become effective on or before September
15, 1998, the interest rate increases by 1.0%.
The Credit Agreement required a portion of the initial borrowings to be
used to repay the Company's revolving line of credit, term note, and a
portion of a related party note. The remaining portion of the related
party note was paid on February 20, 1998 with proceeds from the equity
offering on February 18 and 19, 1998 (the Equity Offering) (see Note 6).
As a result of the Company repaying existing debt with a portion of the
Credit Agreement, its expectation that future operating results will
provide for available borrowings of at least equal to the debt repaid,
and Equity Offering proceeds, the revolving line of credit, $400,000 of
the term note balance, and the related party note that would have been
classified as current liabilities have been classified as noncurrent at
December 31, 1997.
Notes Payable - Notes payable at December 31, 1996 consist of the
following:
Revolving line of credit $ 1,475,000
Term loan 600,000
Note payable under unsecured revolving line of credit 15,000
--------------
$ 2,090,000
==============
<PAGE>
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.
During 1997, the Agreement was amended and restated (the Amended
Agreement) increasing the $600,000 term note to $3.275 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 term note was due
in eight quarterly installments of $100,000, beginning January 31, 1998,
and with a final payment of $2.475 million on January 31, 2000. Interest
on outstanding term loan borrowings was payable monthly and was computed
at the prime rate plus 6%. Revolving line of credit borrowings were
limited based on eligible borrowings, as defined. Interest on
outstanding revolving line of credit borrowings was payable monthly and
was computed at the prime rate plus 2%. Borrowings under the Amended
Agreement were secured by substantially all the Company's assets and
personally guaranteed by the Company's president. The Amended Agreement
contained 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.
At December 31, 1996, the Company also had an unsecured revolving line
of credit providing up to $50,000 in financing of which $15,000 was
outstanding at December 31, 1996. Interest on outstanding borrowings
under the line of credit was at 2.60% over the prime rate. The unsecured
revolving line of credit was terminated in 1997.
On February 1, 1996, the Company entered into an agreement with the
holder of a 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 another convertible
note 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.
<PAGE>
Long-Term Debt - Long-term debt at December 31 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Term loan (i) $ 3,275,000
Revolving line of credit (i) 1,500,000
Note payable - related party (ii) 500,000
Convertible, subordinated promissory notes 250,000
Note payable, secured by various property and inventory,
interest at 10.50%, due in monthly installments of
$11,594 through 1999, personally guaranteed by the
Company's president 211,877
Present value of capital lease obligations, ($687,448 less
interest of $203,511) interest from 12.77% to 21.00%
due through 2001, secured by various property and inventory 483,937
Noninterest bearing notes payable, discounted using discount
rates between 8.75% and 9.25%, with final payment in 1998 37,371 $ 470,964
Convertible, subordinated promissory notes, converted in 1997 300,000
Note payable, secured by inventory, interest at 9.90%, due in
monthly installments of $5,209 through 1998 30,373 86,804
------------- --------------
6,288,558 857,768
Less current portion 503,540 281,278
------------- --------------
$ 5,785,018 $ 576,490
============= ==============
</TABLE>
(i) Paid in February 1998 with Credit Agreement proceeds.
(ii)Paid in February 1998 with Credit Agreement and Equity Offering
proceeds.
On August 26, 1997, the Company entered into a $500,000 subordinated
note payable with a related party. The note had an interest rate of 12%
and was originally due November 24, 1997. The Company also issued a
five-year warrant to purchase 20,000 shares of common stock at $3.00 per
share in connection with the note. At the Company's option, the Company
elected not to repay the note upon maturity and should have issued
additional warrants to purchase 5,000 shares of common stock at $3.00
per share. The number of warrant shares and exercise price were also
subject to adjustment to equal any more favorable warrant terms that may
be granted to an unsecured subordinated lender in a future private
placement debt-offering. The Company and the related party are currently
negotiating the equity consideration the Company will grant to the
related party. The Company expects the equity consideration to be issued
will approximate $22,000 and has recorded the amount as an increase in
additional paid-in capital and interest expense at December 31, 1997. If
the actual equity consideration is significantly different than the
Company's estimate, the difference will be recorded in 1998.
The convertible, subordinated promissory notes outstanding at December
31, 1997 bear interest at 8% and are due May 7, 1998, unless converted
earlier. The convertible, subordinated notes and accrued interest are
convertible at the option of the holders after August 6, 1997 at a
conversion price of the lesser of 85% of the average bid price per share
of the Company's common stock over the immediately preceding ten days or
$4.00 per share. A value of $44,118 has been assigned to the conversion
feature, based on the value of the Company's common stock, which has
been credited to additional paid-in capital, resulting in a similar
amount of original issue discount.
<PAGE>
Maturities of long-term debt at December 31, 1997 are as follows:
Years ending December 31:
1998 $ 503,540
1999 5,490,137
2000 207,633
2001 87,248
--------------
$ 6,288,558
==============
The fair value of the Company's financing is estimated at its carrying
value based on the rates currently available to the Company.
5. 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 leases are recorded as rent expense and
aggregated approximately $937,000 and $1,338,000 for the years ended
December 31, 1997 and 1996, respectively.
The minimum lease payments due under operating leases at December 31,
1997 are as follows:
Years ending December 31:
1998 $ 720,040
1999 534,219
2000 347,116
2001 263,127
2002 103,256
--------------
$ 1,967,758
==============
Employment Agreements - The Company has entered into employment
agreements with certain key employees (including those who were
previously employed by the entities the Company acquired) for terms of
one to five years. The agreements provide for minimum aggregate annual
salaries of approximately $2,469,000 and also provide for incentive
awards based on performance.
During 1997, the Company expensed $236,426 for services provided by an
independent contractor who assumed the functions of its Chief Financial
Officer. The independent contractor is an executive officer of the
Company and a member of the Company's Board of Directors.
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
preventive health care 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. The site licenses are included in
property, except for the value of options to be granted in the future
which will be determined on the grant date. 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 $313,000 in 1997.
In 1996, the Company entered into agreements 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 health care
operations. Effective July 1, 1997, the Company hired the staff of the
consulting company working on the system. From January 1 to June 30,
1997, the Company incurred system costs and consulting costs of
$564,500 and $87,500, respectively. The Company also incurred system
costs and consulting costs of $513,000 and $124,000, respectively, in
1996. In 1996, the Company issued a warrant to purchase 70,431 shares
of common stock at an exercise price of $4.00 in connection with the
agreement. The warrant expires in October 2003. The fair market value
of the warrant was $70,341.
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 health care 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 purchased 100 site licenses for $50,000
in September 1997. The Company has agreed to purchase 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 a defined contribution plan 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 $106,000 and
$67,000 during the years ended December 31, 1997 and 1996,
respectively.
<PAGE>
Legal Proceedings - The Company is 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. The Company believes that their outcome will not
have a material adverse effect on its financial condition, results of
operation, or cash flows.
Guarantee - The Company has received minority interests in two related
limited liability companies (LLCs) in exchange for $1,782,
guaranteeing a $38,724 obligation for one LLC, and entering into an
equipment lease, as lessor, with the other LLC. The Company has
deferred the profit on the leased equipment and will recognize the
profit ratably over the lease term. The Company has also entered into
a management contract with the one of the LLC's to manage the LLC's
hospital based fitness center.
6. EQUITY TRANSACTIONS
Issuance of Common Stock - In February 1998, the Company obtained
gross proceeds of $3,300,000 of equity financing through a private
placement of 3,000,000 units, with each unit consisting of one share
of common stock and a detachable warrant to purchase one-fourth of a
share of common stock at $2.25 per share (the Equity Offering). The
warrants are currently exercisable and expire four years from the date
of issuance.
In connection with the private placement, the Company also issued
warrants to purchase 300,000 shares of common stock to the selling
agents. The selling agents' warrants are exercisable from February 18,
1999 through February 18, 2003 at $1.65 per share and contain a net
value exercise provision allowing for the issuance of a lesser number
of shares than provided in the warrant without payment of the cash
exercise price.
The Company incurred issuance costs of $515,382 and will incur
additional costs in the future as the Company is required to register
the shares and warrants with the Securities and Exchange Commission by
May 20, 1998.
Assuming the Equity Offering had taken place on January 1, 1997, the
Company's basic and diluted loss per share would have been $.10 for
the year ended December 31, 1997.
During 1997 the Company issued 130,358 shares of common stock to
holders of three convertible, subordinated promissory notes electing
to convert their notes with face values of $300,000 and accrued
interest of $14,756 into common stock.
During 1997 the Company also issued 35,500 shares of common stock in
return for services provided. The value of the common stock issued,
$83,594, was based on the market value of the Company's common stock.
On January 30, 1997, the Company issued 292,829 shares of common stock
in connection with the 1995 purchase of a California-based operator of
corporate fitness centers. The 1995 purchase agreement provided that
if the average closing sale price of the Company's common stock during
the fourth quarter of 1996 did not reach at least $6.00 per share, the
Company would issue sufficient additional shares so that the aggregate
value of the stock consideration received by the sellers equaled
$1,200,000 based on the same three month average price calculation.
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.
<PAGE>
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 Plans 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 Plans 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 which reserved 1,000,000
shares for issuance thereunder. In June 1997, the number of shares
reserved under the 1995 Stock Option Plan was increased to 2,000,000.
The Company has also issued options outside of the plans.
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.
A summary of the status of the Company's stock options are presented
below:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 899,699 $ 2.39 725,212 $ 1.56
Granted 762,000 3.14 359,235 3.24
Exercised (223,000) .72 (135,000) .66
Terminated (49,748) 1.09
------------ ------------
Outstanding at end of year 1,438,699 $ 3.05 899,699 $ 2.39
============ ======= ============ =======
Options exercisable at year-end 611,151 $ 2.80 510,835 $ 1.80
============ ======= ============ =======
Options available under plans for future grants 660,101 422,101
============ ============
</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 to employees
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 1997
and 1996, consistent with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net (loss) income would have
changed to the pro forma amounts indicated below:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net (loss) income, as reported $ (1,046,690) $ 1,005,581
Net (loss) income, pro forma (1,510,236) 822,306
Basic net (loss) income per common share, as reported $ (.13) $ .15
Basic net (loss) income per common share, pro forma (.19) .12
Diluted net (loss) income per common share, as reported $ (.13) $ .13
Diluted net (loss) income per common share, pro forma (.19) .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:
1997 1996
Dividend yield None None
Expected volatility 55.62% 53.67%
Expected life of option 5 or 10 years 5 or 10 years
Risk-free interest rate 6.56% 6.23%
Fair value of options on grant date $1.64 $1.49
The following table summarizes information about stock options at
December 31, 1997:
<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>
$1.25 - $2.50 100,000 .84 $1.73 90,600 $1.68
3.00 - 3.50 1,151,699 4.70 3.01 520,551 3.00
4.00 187,000 9.07 4.00
---------- ----------
1,438,699 5.00 $3.05 611,151 $2.80
========= ==== ======= ========== =======
</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 1997 and 1996, the Company issued 21,137 and 7,317
shares, respectively, 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:
<PAGE>
<TABLE>
<CAPTION>
Exercise
Number of Price
Shares Exercisable Per Share
<S> <C> <C> <C>
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 447,400 2.63 - 4.00
Terminated (250,000) 4.00
------------ ----------
Balances at December 31, 1996 1,214,964 1,144,533 1.25 - 4.00
Granted 20,800 3.00
Exercised (86,800) (86,800) 1.50 - 2.19
Became exercisable 91,231 1.50 - 4.00
Terminated (1,600) (1,600) 3.16
------------ ----------
Balances at December 31, 1997 1,147,364 1,147,364 $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.
7. INCOME TAXES
The benefit for income taxes has been offset by a valuation allowance
for the year ended December 31, 1997, because the Company's net
operating losses could not be carried back and future realization of the
net operating loss carryforwards is uncertain. Income tax expense for
the year ended December 31, 1996, has been offset by a reduction in the
valuation allowance for deferred taxes.
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>
1997 1996
<S> <C> <C>
Tax benefit (expense) computed at statutory rates $ 370,000 $ (350,000)
State taxes, net of federal effect 60,000 (50,000)
Nondeductible goodwill amortization (170,000) (120,000)
Other (50,000) (10,000)
Change in valuation allowance (210,000) 530,000
------------- ------------
$ - $ -
============= ============
</TABLE>
At December 31, 1997, the Company had $1,000,000 of federal and state
operating loss carryforwards. The carryforwards expire from 2004 to
2011.
<PAGE>
The tax effect of the temporary differences, tax carryforwards, and
valuation allowances at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current:
Accounts and notes receivable $ 240,000 $ 150,000
Accrued employee benefits 230,000 170,000
Accrual to cash basis adjustment (100,000) (100,000)
Other (10,000)
Valuation allowance (370,000) (210,000)
------------ -----------
$ - $ -
============ ===========
Noncurrent:
Accounts and notes receivable $ 330,000 $ 140,000
Accrual to cash basis adjustment (380,000) (600,000)
Difference between tax and book depreciation
and amortization (200,000) (90,000)
Other 30,000
Tax loss carryforwards 330,000 610,000
Valuation allowance (110,000) (60,000)
------------ -----------
$ - $ -
============ ===========
</TABLE>
<PAGE>
8. 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>
1997 1996
<S> <C> <C>
Cash paid for interest (net of capitalized interest of
$129,440 in 1997) $ 526,306 $ 225,434
Conversion of notes payable and accrued interest to equity 314,756 1,054,445
Issuance of notes payable in connection with acquisitions 250,000 300,000
Issuance of common stock in connection with acquisitions 415,625 222,314
Issuance of stock warrant in connection with the design and
implementation of management information and control system
agreement 70,431
Line of credit borrowings refinanced with long-term debt 750,000
Notes payable refinanced with long-term debt 600,000
Debt assumed by company acquiring clinics 315,492
Issuance of common stock in connection with a software license
agreement 26,250
</TABLE>
<PAGE>
9. SEGMENT INFORMATION
Specific financial information by business segment is included in the
following summary:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues:
Preventive health care $ 24,917,000 $ 21,790,000
Rehabilitative health care 8,754,000 6,724,000
-------------- ---------------
$ 33,671,000 $ 28,514,000
============== ===============
Operating income (loss):
Preventive health care $ 2,594,000 $ 2,590,000
Rehabilitative health care 215,000 608,000
Corporate (3,228,000) (1,845,000)
-------------- ---------------
$ (419,000) $ 1,353,000
============== ===============
Identifiable assets:
Preventive health care $ 14,104,000 $ 12,518,000
Rehabilitative health care 8,407,000 5,313,000
Corporate 1,221,000 348,000
-------------- ---------------
$ 23,732,000 $ 18,179,000
============== ===============
Depreciation and amortization:
Preventive health care $ 532,000 $ 632,000
Rehabilitative health care 645,000 342,000
Corporate 135,000 100,000
-------------- ---------------
$ 1,312,000 $ 1,074,000
============== ===============
Additions to property:
Preventive health care $ 574,000 $ 819,000
Rehabilitative health care 1,248,000 239,000
Corporate 337,000 120,000
-------------- ---------------
$ 2,159,000 $ 1,178,000
============== ===============
</TABLE>
10. SUBSEQUENT EVENT
On February 27, 1998, the Company completed the acquisition of all the
issued and outstanding stock of closely held Midlands Physical Therapy,
Inc. (Midlands), a Nebraska-based provider of rehabilitative services.
The purchase agreement contained a noncompete provision 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 Midlands, the Company issued 200,000 shares of common
stock valued at $362,500 and cash consideration of $650,000.
The purchase agreement requires the Company to make annual payments up
to 35% of net income from operations, as defined, for each of the five
fiscal years ending February 28, 1999 through 2003. The annual payment,
if any, is due in a combination of 50% in cash and 50% in the Company's
common stock. The number of shares issued in connection with the annual
payment is calculated by dividing the portion of the annual payment
payable in common stock by $3.00. The purchase agreement also requires
the Company to make an annual payment of $25,000 for each of the three
fiscal years ending February 28, 1999 to 2001 if net income from
operations, as defined, exceeds 20%.
<PAGE>
The purchase agreement also required the Company to enter into
employment agreements with certain key employees for a term of five
years. These agreements provide for minimum aggregate annual salaries of
$200,000. The Company also granted stock options to purchase up to
50,000 shares of the Company's common stock at $4.00 per share price in
connection with the employment agreements.
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:
<TABLE>
<CAPTION>
Name Age Position with Company
<S> <C> <C>
Loren S. Brink 42 Chairman; President and Chief Executive Officer
Charles E. Bidwell 52 Chief Financial Officer; Treasurer; Director
Charles J. Pappas 47 President , Health & Fitness Services Division
Thomas H. Coplin 53 President, Health Fitness Rehab, Inc.
Patrick D. Regan 40 President, Pro Source Fitness Division
Dennis L. Colacino 57 Executive Vice President, Research and Development
Michael P. Wise 40 Vice President and Corporate Controller
</TABLE>
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.
Charles E. Bidwell has been a Director of the Company since 1988 and has
served as a consultant to the Company in the position of Chief Financial Officer
since July 1997. Mr. Bidwell is a venture capitalist and has served as a
consultant to various companies. From 1981 through April 1994, Mr. Bidwell was
the Chief Financial Officer of Red Owl Stores, Inc., a Minneapolis-based food
retailer. He has a 25-year history of starting and managing new businesses, as
well as significant corporate experience with Tonka, Inc. and Red Owl Stores,
Inc. He holds an MBA in Marketing and Finance from Carnegie-Mellon University in
Pittsburgh, Pennsylvania.
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.
<PAGE>
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, a horse
breeding operation. 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.
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.
Dennis L. Colacino has served as Executive Vice President, Research and
Development since April 1997. Prior to joining the Company, from 1995 to June
1997 Mr. Colacino served as Vice President, Marketing and Sales of Scientific
Stretching, LTD, a privately held, Canadian manufacturer of proprietary
flexibility machines for the international therapeutic and fitness markets. From
1986 to 1995, Mr. Colacino was President of Colacino Group, a consulting firm
specializing in the areas of health, preventive medicine, cardiac and orthopedic
rehabilitation and fitness. He holds a Ph.D. in Cardiovascular Physiology from
the University of Wisconsin and a Masters in Facility Design and Administration
from the University of New Mexico.
Michael P. Wise has served as Vice President and Corporate Controller since
December 1997. Prior to joining the Company, from April 1994 through October
1997 Mr. Wise served as a consultant, and Chief Financial Officer, Treasurer and
Secretary of The Sled Dogs Company, a publicly held, Minneapolis-based
manufacturer, marketer and distributor of snow skates. On November 5, 1997, The
Sled Dogs Company filed a voluntary petition under Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court, District of Minnesota (Case No.
97-4761-RJK). Mr. Wise filed a claim with the Bankruptcy Court for approximately
$50,000 related to wages and severance pursuant to his employment agreement. No
plan of reorganization has been confirmed. From April 1986 to March 1994 Mr.
Wise was employed by National Computer Systems, Inc., a developer and marketer
of information systems and services for education, serving in various financial
and sales/marketing management positions. He holds an MBA from the University of
St. Thomas, St. Paul, MN and a CPA from the State of Iowa.
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 1998 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 1998 Annual Meeting of Shareholders.
<PAGE>
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 1998 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 1998 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
No reports on Form 8-K were filed during (or with respect to events
occurring in) the last fiscal quarter of the Registrant's 1997 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 14, 1998 HEALTH FITNESS CORPORATION
By /s/ Loren S. Brink
Loren S. Brink
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Charles E. Bidwell
Charles E. Bidwell
Secretary, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Michael P. Wise
Michael P. Wise
Vice President and Corporate Controller
(Principal Accounting Officer)
<PAGE>
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 Charles E. Bidwell,
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.
<TABLE>
<CAPTION>
Signature Date
--------- ----
<S> <C> <C>
/s/ Loren S. Brink
Loren S. Brink Director April 14, 1998
/s/ Charles E. Bidwell
Charles E. Bidwell Director April 14, 1998
/s/ James A. Bernards
James A. Bernards Director April 14, 1998
/s/ George E. Kline
George E. Kline Director April 14, 1998
/s/ William T. Simonet, M.D.
William T. Simonet, M.D. Director April 14, 1998
/s/ Robert K. Spinner
Robert K. Spinner Director April 14, 1998
</TABLE>
<PAGE>
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-KSB
Exhibit No. Description
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997
3.2 Restated By-Laws of the Company -- incorporated by reference
to the Company's Registration Statement on Form SB-2
No. 33-83784C
4.1 Specimen of Common Stock Certificate -- incorporated by
reference to the Company's Registration Statement on Form
SB-2 No. 33-83784C
10.1 Purchase and Sale Agreement dated April 13, 1994 between the
Company and Mark W. Siewert and Sports and Orthopedic Physical
Therapy, Inc. -- incorporated by reference to the Company's
Registration Statement on Form SB-2 No. 33-83784C
*10.2 Executive Employment Agreement dated May 22, 1997 between
the Company and Loren S. Brink - incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997
10.3 Standard Office Lease Agreement (Net) dated as of June 13,
1995 covering a portion of the Company's headquarters -
incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996
10.4 Standard Office Lease Agreement (Net) dated as of September 3,
1997 covering a portion of the Company's headquarters
*10.5 Company's 1995 Stock Option Plan - incorporated by
reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995
*10.6 Amendment to Company's 1995 Stock Option Plan -
incorporated by reference to Part II, Item 4 of the
Company's Form 10-QSB for the quarter ended June 30, 1997
10.7 Stock Purchase Agreement dated March 27, 1995 between the
Company, William Horton and William Horton as Trustee -
incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995
10.8 Agreement of Purchase and Sale dated December 23, 1996 by
and among The Preferred Companies, Inc., its shareholders,
and Health Fitness Rehab, Inc. incorporated by reference
to the Company's Current Report on Form 8-K filed on
January 7, 1997
10.9 Agreement of Purchase and Sale dated February 7, 1997 by and
between Isernhagen & Associates, Inc. and Health Fitness Rehab,
Inc. - incorporated by reference to the Company's Current Report
on Form 8-K filed on February 21, 1997
<PAGE>
10.10 Agreement of Purchase and Sale dated February 7, 1997 by and
between Isernhagen Ltd. and Health Fitness Rehab, Inc. -
incorporated by reference to the Company's Current Report on
Form 8-K filed on February 21, 1997
10.11 Systems Design and Implementation Agreement dated October
15, 1996 between Practice Management Consultants, Inc. and
the Company - incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December
31, 1996
10.12 Bridge Loan Agreement dated August 26, 1997 between the
Company and Brightbridge Fund I, L.P. - incorporated by
reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997
10.13 Subordinated Unsecured Promissory Note dated August 26,
1997 by the Company to Brightbridge Fund I, L.P. -
incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30,
1997
10.14 Warrant dated August 26, 1997 issued by the Company to
Brightbridge Fund I, L.P. - incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1997
10.15 Loan and Security Agreement dated February 17, 1998 between
the Company and Madeleine L.L.C.
21.1 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on Signature Page)
27.1 Financial Data Schedule for year ended December 31, 1997
(in electronic version only)
27.2 Financial Data Schedule for 3-month period ended March 31, 1997
(in electronic version only)
27.3 Financial Data Schedule for year ended December 31, 1996 (in
electronic version only)
27.4 Financial Data Schedule for 9-month period ended September 30,
1996 (in electronic version only)
27.5 Financial Data Schedule for 6-month period ended June 30, 1996
(in electronic version only)
- -------------------------
*Indicates management contract or compensatory plan or arrangement.
STANDARD OFFICE LEASE AGREEMENT (NET)
THIS LEASE AGREEMENT (hereinafter called the "Lease Agreement") made as of
the 3rd day of September, 1997 by and between NORTHLAND CENTER LIMITED
PARTNERSHIP, a Minnesota limited partnership having offices at Suite 100, 3500
West 80th Street, Bloomington, Minnesota, 55431 (hereinafter called the
"Landlord"), and HEALTH FITNESS CORPORATION, a Minnesota corporation
(hereinafter called the "Tenant").
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 in red on Exhibit A-1 attached hereto, and by this
reference incorporated herein, and described as Suites 35 and 50, containing
approximately 3,141 square feet (hereinafter called the "Premises") at 3500 and
3600 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 46 months, commencing
October 1, 1997, and terminating July 31, 2001 (hereinafter called the "Term")
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.
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
Two Thousand Six Hundred Seventeen and 00/100 Dollars ($2,617.00) per monthly
installments to 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 1/30 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 1997 are $6.34 per square foot and estimated Real Estate Taxes
payable in 1997 are $4.49 per square foot.
<PAGE>
ARTICLE 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 Premises to
accommodate Tenant's intended use. Landlord shall be responsible for
constructing the improvements as shown on 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 Landlord
shall provide Tenant an allowance of up to $38,698 to be utilized toward the
cost of the Tenant Improvements (hereafter called the "T.I. Allowance"). The
T.I. Allowance shall be used only for the payment of costs relating to the
construction of the Tenant Improvements (including the cost of preparing the
Plans), which costs Landlord shall pay directly out of the T.I. Allowance, for
the credit of Tenant, and in no event shall any part of the T.I. Allowance be
paid to or payable to Tenant. Any costs of the Tenant Improvements which exceed
the T.I. Allowance shall be paid by Tenant to Landlord without demand within
fifteen (15) days of the day of submission by Landlord to Tenant of a statement
of said costs. 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.
ARTICLE 5 - POSSESSION
Except as otherwise provided, Landlord shall deliver possession of the
Premises 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 Premises 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 and shall extend the termination date by periods equal
to those which shall have elapsed between and including the date hereinabove
specified for commencement of the Term hereof and the date on which possession
of the Premises is delivered to the Tenant. The rentals herein reserved 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 Premises. Provided further, that if Landlord shall be delayed in delivery of
the Premises 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 in excess of the T.I.
Allowance, 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. Prior to the commencement of the Term, Landlord shall have
no responsibility or liability for loss of damage to fixtures, facilities or
equipment installed or left on the Premises. By occupying the Premises 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 Premises are in the condition required by this Lease
Agreement, except items which are not in compliance with Exhibit A-3 and for
<PAGE>
which Tenant has given Landlord a written "punch list" within thirty (30) days
of Tenant's first occupancy of the Premises. Should the commencement of the
rental obligations of Tenant under this Lease Agreement occur for any reason on
a day other than the first day of a calendar month, then in that event solely
for the purposes of computing the Term of this Lease Agreement, the commencement
date of the Term shall become and be the first day of the first full calendar
month following the date when Tenant's rental obligation commences, or the first
day of the first full calendar month following the commencement date set out in
Article 1 (if such is other than the first date of a calendar month), whichever
date is later, and the termination date shall be adjusted accordingly; provided,
however, that the termination date shall be the last day of a calendar month,
which date shall in no event be earlier than the termination date set out in
Article 1. Immediately after Tenant's occupancy of the Premises the Landlord and
Tenant shall execute a ratification agreement which shall set forth the final
commencement and termination dates for the Term and shall acknowledge the
Minimum Rental, the square footage of the Premises, and delivery of the Premises
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.
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.
<PAGE>
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 and expenses incurred by Landlord during negotiations for or
contests of the amount 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.
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.
<PAGE>
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. 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, repair, additions or improvements.
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.
<PAGE>
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.
<PAGE>
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.
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, word processing, 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 as
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 Lese Agreement shall be deemed prior to
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 certificate 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 any time and from time to time to designate one (1) additional party to
whom copies of any notice shall be sent.
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.
<PAGE>
ARTICLE 28 - SECURITY INTEREST
Tenant hereby grants to Landlord a security interest in all goods,
chattels, fixtures and personal property belonging to Tenant, which now 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 Lease 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
delivery 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.
Address for Notices, if other than the Premises:
TENANT: LANDLORD:
Health Fitness Corporation, NORTHLAND CENTER LIMITED
A Minnesota corporation PARTNERSHIP,
By: The Northland Company, its Managing
General Partner
By: /s/ Loren Brink By: /s/ Frank Dutke
Loren Brink Frank Dutke
Its: Chief Executive Officer Its: Assistant Secretary
By: By:
Its Its:
Date: Date: 09/11/97
[Execution]
LOAN AND SECURITY AGREEMENT
by and among
HEALTH FITNESS CORPORATION
as Borrower
HEALTH FITNESS REHAB, INC.
THE PREFERRED COMPANIES, INC.
HEALTH FITNESS REHAB OF IOWA, INC.
DUFFY & ASSOCIATES PHYSICAL THERAPY CORP.
MEDLINK CORPORATION
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
as Guarantors
and
MADELEINE L.L.C
as Lender
Dated: February 17, 1998
<PAGE>
TABLE OF CONTENTS
Page
RECITALS.......................................................................1
SECTION 1. DEFINITIONS......................................................1
SECTION 2. CREDIT FACILITY.................................................17
2.1 Loans.........................................................18
2.2 Procedure for Borrowing.......................................18
2.3 Registered Note...............................................18
SECTION 3. INTEREST AND FEES...............................................18
3.1 Interest......................................................18
3.2 Interest After Event of Default...............................19
3.3 Closing Fee...................................................19
3.4 Servicing Fee.................................................19
3.5 Calculations..................................................19
3.6 Maximum Rate..................................................19
3.7 Indemnification in Certain Events.............................20
SECTION 4. PAYMENTS AND ADMINISTRATION.....................................20
4.1 Collections; Management of Collateral.........................20
4.2 Payments......................................................22
4.3 Mandatory and Optional Prepayments............................25
4.4 Borrower's Loan Account.......................................26
4.5 Authorized Signatures.........................................26
4.6 Statements....................................................26
4.7 Right of Inspection; Access...................................26
4.8 Specific Powers...............................................27
4.9 Use of Proceeds...............................................27
SECTION 5. CONDITIONS PRECEDENT TO LOANS AND
OTHER FINANCIAL ACCOMMODATIONS ................................28
5.1 Conditions Precedent to Initial Loans. ......................28
5.2 Conditions Precedent to All Loans. ..........................32
SECTION 6. COLLATERAL......................................................32
SECTION 7. REPRESENTATIONS AND WARRANTIES..................................34
7.1 Organization and Qualification................................34
7.2 Corporate Power and Authority.................................35
7.3 Capitalization................................................35
i
<PAGE>
Page
7.4 Compliance with Other Agreements and Applicable Law.............36
7.5 Governmental Approval...........................................37
7.6 Chief Executive Office; Collateral Locations....................37
7.7 Priority of Liens/Title to Properties...........................37
7.8 Tax Returns.....................................................38
7.9 Litigation......................................................38
7.10 Intellectual Property...........................................38
7.11 Accounts........................................................39
7.12 Employee Benefits...............................................41
7.13 Environmental Compliance........................................42
7.14 Bank Accounts...................................................43
7.15 Investment Company..............................................43
7.16 Regulation G; Securities Exchange Act of 1934...................43
7.17 No Material Adverse Change......................................43
7.18 Financial Statements............................................44
7.19 Disclosure......................................................44
7.20 Labor Disputes..................................................44
7.21 Corporate Name; Prior Transactions..............................45
7.22 Restrictions on Subsidiaries....................................45
7.23 Material Contracts..............................................45
7.24 Payable Practices...............................................45
7.25 Interrelated Businesses. ......................................45
7.26 Compliance with Medicare and Medicaid...........................46
7.27 Health Care Practitioners Duly Licensed.........................47
SECTION 8. ADDITIONAL COVENANTS..............................................47
8.1 Tradenames......................................................47
8.2 Subsidiaries....................................................48
8.3 New Collateral Locations. .....................................48
8.4 Sale of Assets, Consolidation, Merger, Dissolution, Etc.........49
8.5 Encumbrances....................................................50
8.6 Indebtedness....................................................51
8.7 Loans, Investments, Guarantees, Etc.............................53
8.8 Dividends and Redemptions.......................................57
8.9 Transactions with Affiliates....................................57
8.10 Change in Retained Earnings. ...........................................58
8.11 Fixed Charge Coverage Ratio.....................................58
8.12 Consolidated Working Capital....................................59
8.13 Maintenance of Existence........................................59
8.14 Changes in Business.............................................59
8.15 Compliance with Laws, Regulations, Etc..........................59
8.16 Payment of Taxes and Claims.....................................60
8.17 Properties in Good Condition....................................60
8.18 Insurance.......................................................61
ii
<PAGE>
Page
8.19 Compliance with ERISA...........................................62
8.20 Additional Bank Accounts........................................63
8.21 Financial Statements and Other Information......................63
8.22 End of Fiscal Years; Fiscal Quarters............................67
8.23 Limitation on Restrictions Affecting Subsidiaries...............67
8.24 Additional Negative Pledges.....................................68
8.25 Compliance with Action Plan.....................................68
8.26 Further Assurances..............................................68
SECTION 9. EVENTS OF DEFAULT AND REMEDIES....................................69
9.1 Events of Default...............................................69
9.2 Remedies........................................................71
SECTION 10. EFFECTIVE DATE; TERMINATION; COSTS;
ASSIGNMENTS; AMENDMENTS; ETC...................................74
10.1 Term...........................................................74
10.2 Expenses and Additional Fees...................................74
10.3 Amendments and Waivers.........................................76
10.4 Independence of Representations, Warranties and Covenants......76
10.5 Partial Invalidity.............................................76
10.6 Headings.......................................................76
10.7 Counterparts...................................................76
10.8 Survival of Agreement..........................................76
10.9 No Waiver; Cumulative Remedies.................................76
10.10 Notices........................................................77
10.11 Successors.....................................................77
10.12 Entire Agreement...............................................78
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW ...............................78
11.1 Governing Law; Choice of Forum; Service of Process;
Jury Trial Waiver..............................................78
11.2 Waiver of Notices..............................................80
11.3 Waiver of Counterclaims........................................80
11.4 Indemnification................................................80
iii
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A Action Plan
Exhibit B Form of Borrowing Base Certificate
Exhibit C Form of Notice of Borrowing
Exhibit D Form of Certificate for Compliance with Financial
Covenants
Exhibit E Form of Registered Note
Schedule 1.69 Permitted Holders
Schedule 7.1(a) Jurisdictions of Qualification
Schedule 7.1(b) Subsidiaries
Schedule 7.4 Permits
Schedule 7.6 Chief Executive Office and Locations of Collateral
Schedule 7.7 Existing Liens
Schedule 7.8 Tax Returns
Schedule 7.9 Pending Litigation
Schedule 7.11 List of Account Debtors for Insurance Accounts and
Contract Accounts
Schedule 7.13 Environmental Matters
Schedule 7.14 Bank Accounts
Schedule 7.20 Collective Bargaining Agreements
Schedule 7.21 Corporate Name; Tradenames; Prior Transactions
Schedule 7.23 Material Contracts
Schedule 7.26 Medicare/Medicaid Compliance
Schedule 7.28 List of Federal Employer Identification Numbers
Schedule 8.6 Existing Indebtedness
Schedule 8.7 Existing Loans, Advances and Guarantees
<PAGE>
LOAN AND SECURITY AGREEMENT
AGREEMENT dated February 17, 1998 is entered into by and among Health
Fitness Corporation, a Minnesota corporation ("Borrower"), Health Fitness Rehab,
Inc., a Minnesota corporation ("HF Rehab"), The Preferred Companies, Inc., an
Arizona corporation ("TPC"), Health Fitness Rehab of Iowa, Inc., an Iowa
corporation ("HF Rehab Iowa"), Duffy & Associates Physical Therapy Corp., an
Iowa corporation ("Duffy"), Medlink Corporation, an Iowa corporation
("Medlink"), Medlink Services, Inc., an Iowa corporation ("Medlink Services"),
Fitness Centers of America, a California corporation ("Fitness Centers"), and
Sports & Orthopedic Physical Therapy, Inc., a Minnesota corporation ("Sports
Therapy", and together with HF Rehab, TPC, HF Rehab Iowa, Duffy, Medlink,
Medlink Services, and Fitness Centers, collectively, "Guarantors" and sometimes
referred to individually as a "Guarantor") and Madeleine L.L.C., a New York
limited liability company ("Lender").
W I T N E S S E T H:
WHEREAS, Borrower and Guarantors have requested that Lender enter into
certain financing arrangements with Borrower pursuant to which Lender may make
loans and advances to Borrower; and
WHEREAS, Lender is willing to agree to make loans and advances to Borrower
subject to the terms and conditions set forth herein and in the other Financing
Agreements (as hereinafter defined);
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
For purposes of this Agreement and the other Financing Agreements, the
following terms shall have the respective meanings given to them below:
1.1 "Account Debtor" shall mean each debtor or obligor in any way obligated
on or in connection with any Account.
1.2 "Accounts" shall mean all present and future rights of Borrower and
each Guarantor to payment for goods sold or leased or for services rendered,
whether or not evidenced by instruments or chattel paper and whether or not
earned by performance and including, without limitation, Contract Accounts,
Insurance Accounts, Medicare Accounts, Medicaid Accounts and any other
obligations or rights to payment or reimbursement under or from (a) Medicare,
Medicaid, Blue Cross/Blue Shield or any other Federal, State or local government
medical assistance or health care financing program, whether payable directly or
indirectly from a Federal, State or local agency, Fiscal Intermediary or other
Third Party Payor, including, without limitation, prospective payments pursuant
to the Periodic Interim Payment Program established under the Social Security
Act or retrospective reimbursement payments, (b) any insurance company,
including payments or the right to payments from an insurance company pursuant
to an assignment of benefits from a patient, directly or indirectly, payable to
Borrower or any Guarantor for services rendered or goods sold to such patient,
(c) any private individual, and (d) any hospital, nursing home or other health
care facility, whether government owned, non-profit, profit or otherwise.
1.3 "Action Plan" shall mean the plan prepared by Borrower set forth on
Exhibit A hereto to address certain matters relating to the cash management and
financial reporting systems of Borrower and Guarantors.
<PAGE>
1.4 "Affiliate" shall mean, with respect to a specified Person, a
partnership, corporation or any other person which directly or indirectly,
through one or more intermediaries, controls or is controlled by or is under
common control with such Person, and without limiting the generality of the
foregoing, includes (a) any Person which beneficially owns or holds five percent
(5%) or more of any class of voting securities of such Person or other equity
interests in such Person, (b) any Person of which such Person beneficially owns
or holds five percent (5%) or more of any class of voting securities or in which
such Person beneficially owns or holds five percent (5%) or more of the equity
interests and (c) any director, officer or employee of such Person. For the
purposes of this definition, the term "control" (including with correlative
meanings, the terms "controlled by" and "under common control with"), as used
with respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities or by contract or
otherwise.
1.5 "Allowable Costs" shall mean as of any date, with respect to any
period, the direct and indirect operating costs and expenses incurred by
Borrower and any Guarantor which is a Certified Medicare Provider related to
rendering health care services to eligible Medicare beneficiaries (as described
in 42 C.F.R. Section 413.9) which are: (a) within the cost limits for the types
of patient services rendered by Borrower or such Guarantor established from time
to time by the Health Care Financing Administration (or any other Governmental
Authority), recognized as reasonable in determining Medicare program payments,
including, but not limited to, the cost limits determined by the Health Care
Financing Administration as provided in 42 C.F.R. Section 413.30 and in any
event subject to the limitations of 42 C.F.R. Section 413.13 and including costs
and expenses incurred by Borrower or such Guarantor pursuant to the sale or
lease of medical equipment, medical supplies or other goods in connection with
the health care services provided by Borrower or such Guarantor to eligible
Medicare beneficiaries, (b) properly allocated to the types of patient services
so provided by Borrower or such Guarantor in accordance with the cost allocation
methodology permitted under the applicable Medicare regulations, including, but
not limited to 42 C.F.R. Section 413.50 et seq., and used by Borrower or such
Guarantor as of the date hereof, consistently applied and (c) determined by the
appropriate Fiscal Intermediary, the Health Care Financing Administration or
other Governmental Authority to be reimbursable under Medicare.
1.6 "Blue Cross/Blue Shield" shall mean the private health insurance
companies or other insurance companies licensed to use the Blue Cross/Blue
Shield name by the Blue Cross and Blue Shield Association.
1.7 "Borrower" shall mean Health Fitness Corporation, formerly known as
Health Fitness Physical Therapy, Inc., a Minnesota corporation, and its
successors and assigns.
1.8 "Borrowing Base" shall mean at any time: (a) the lesser of:
(i) $12,500,000, or
(ii) three hundred seventy-five percent (375%) (or such lesser
percentage as then in effect as provided below) multiplied by the EBITDA of
Borrower for the immediately preceding twelve (12) month period, calculated
as of the last day of each fiscal month of Borrower, commencing with
December 31, 1997, provided, that, such percentage shall reduce by five
percent (5%) as of the last day of every other month, with the first such
reduction on February 28, 1998, until such percentage is three hundred
fifty percent (350%) (including for this purpose, on a pro forma basis
actual EBITDA attributable to assets acquired by Borrower or any Guarantor
after the date hereof pursuant to the acquisition by Borrower or any
Guarantor of all or substantially all of the assets of any Person or all of
the Capital Stock of any Person from and after the effective date of such
acquisition, in each case to the extent such acquisition of assets or
Capital Stock is permitted hereunder and subject only to adjustments
thereto expressly approved by Lender in writing and in the case of the
acquisition of Capital Stock to the extent such Subsidiary is a Guarantor,
and excluding for this purpose on a pro forma basis, actual EBITDA of
Borrower or any Guarantor attributable to assets sold by Borrower or any
Guarantor pursuant to the sale of such assets of such Person or all of the
Capital Stock of such Person or Subsidiary of such Person, in each case to
the extent sold during such twelve (12) month period), or
<PAGE>
(iii) ninety percent (90%) of the aggregate amount of the actual
revenue of Borrower and Guarantors for the immediately preceding thirteen
(13) week period, calculated as of Saturday of each week (including for
this purpose, on a pro forma basis revenue attributable to assets acquired
by Borrower or any Guarantor after the date hereof pursuant to the
acquisition by Borrower or any Guarantor of all or substantially all of the
assets of any Person or all of the Capital Stock of any Person from and
after the effective date of such acquisition, in each case to the extent
such acquisition of assets or Capital Stock is permitted hereunder and
subject only to adjustments thereto expressly approved by Lender in writing
and in the case of the acquisition of Capital Stock to the extent such
Subsidiary is a Guarantor, and excluding for this purpose on a pro forma
basis, revenue of Borrower or any Guarantor attributable to assets sold by
Borrower or any Guarantor pursuant to the sale of such assets of such
Person or all of the Capital Stock of such Person or Subsidiary of such
Person, in each case to the extent sold during such thirteen (13) week
period) or
<PAGE>
(iv) ninety percent (90%) of the aggregate amount of the actual cash
receipts from payments on Accounts received by Borrower and Guarantors
during the immediately preceding seventeen (17) week period, calculated as
of Saturday of each week (including for this purpose, on a pro forma basis
cash receipts from payments on Accounts attributable to assets acquired by
Borrower or any Guarantor after the date hereof pursuant to the acquisition
by Borrower or any Guarantor of all or substantially all of the assets of
any Person or all of the Capital Stock of any Person from and after the
effective date of such acquisition, in each case to the extent such
acquisition of assets or Capital Stock is permitted hereunder and subject
only to adjustments thereto expressly approved by Lender in writing and in
the case of the acquisition of Capital Stock to the extent such Subsidiary
is a Guarantor, and excluding for this purpose on a pro forma basis, cash
receipts from payments on Accounts of Borrower or any Guarantor
attributable to assets sold by Borrower or any Guarantor pursuant to the
sale of such assets of such Person or all of the Capital Stock of such
Person or Subsidiary of such Person, in each case to the extent sold during
such seventeen (17) week period), minus
(b) all reserves (including, without limitation, reserves with respect to
security interests or liens of third parties permitted hereunder or in
connection with litigation) which Lender in its reasonable discretion deems
necessary or desirable to maintain, including, without limitation, reserves for
any amounts which Lender may need to pay in the future for the account or
benefit of Borrower or any Guarantor.
1.9 "Borrowing Base Certificate" shall mean a certification concerning the
Borrowing Base to be provided under Section 8.21 hereof, which certificate shall
be substantially in the form of Exhibit B, with such changes thereto as Lender
may, from time to time, in its reasonable discretion require.
1.10 "Brightbridge" shall mean Brightbridge Fund I, L.P., a Minnesota
limited partnership, and its successors and assigns.
1.11 "Brightbridge Agreements" shall mean collectively, the Bridge Loan
Agreement, dated as of August 26, 1997, by and between Borrower and
Brightbridge, as amended pursuant to the Amendment to Bridge Loan Agreement,
dated on or about the date hereof, the Subordinated Unsecured Promissory Note,
dated on or about the date hereof, issued by Borrower payable to Brightbridge in
the original principal amount of $250,000, and all agreements, documents and
instruments at any time executed and/or delivered by Borrower or any other
person to, with or in favor of Brightbridge in connection therewith or related
thereto.
1.12 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York, and a day on which Lender is open for the
transaction of business.
<PAGE>
1.13 "Capital Expenditures" shall mean all expenditures for any fixed or
capital assets or improvements, or for replacements, substitutions or additions
thereto, which have a useful life of more than one (1) year, including, but not
limited to, the direct or indirect acquisition of such assets by way of
increased product service charges, offset items or otherwise and shall include
payments in respect of Capitalized Lease Obligations.
1.14 "Capitalized Lease Obligations" shall mean any obligation to pay rent
or other amounts under a lease of (or other agreement conveying the right to
use) any property (whether real, personal or mixed) that is required to be
classified and accounted for as a capital lease obligation under GAAP, and, for
the purposes of this Agreement, the amount of such obligation at any date shall
be the capitalized amount thereof at such date, determined in accordance with
GAAP.
1.15 "Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock at any time outstanding, and any and all rights,
warrants or options exchangeable for or convertible into such capital stock (but
excluding any debt security that is exchangeable for or convertible into such
capital stock).
1.16 "Cash Equivalents" shall mean any of the following: (a) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof;
(b) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within one hundred eighty (180) days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000 (or
the foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Exchange Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor; (c) repurchase obligations with a term
of not more than thirty (30) days for underlying securities of the types
described in clause (a) above entered into with a bank meeting the
qualifications described in clause (b) above; (d) investments in commercial
paper, maturing not more than ninety (90) days after the date of acquisition,
issued by a corporation (other than an Affiliate of Borrower or any Guarantor)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's Investor Service, Inc. or "A-1" (or higher) according to Standard &
Poor's Ratings Group, a division of The McGraw Hill Companies, Inc.; and
(e) investments in securities with maturities of six (6) months or less from the
date of acquisition issued or fully guaranteed by any State of the United States
of America, or by any political subdivision or taxing authority thereof, and
rated at least "A" by Standard & Poor's Ratings Group, a division of The McGraw
Hill Companies, Inc. or "A" by Moody's Investor Service, Inc.
<PAGE>
1.17 "Certificate of Need" shall mean, as to any Person, a written
certificate issued by a State or local Governmental Authority in compliance with
the Social Security Act, as amended, and pursuant to the applicable State and
local Health Care Laws evidencing a need in a community for the establishment,
conversion, expansion or significant modification of a health care service,
hospice or other health care facility.
1.18 "Certified Medicaid Provider" shall mean a provider of services
properly certified to provide health care services to eligible Medicaid
beneficiaries and to be reimbursed therefor under Medicaid and the rules and
regulations thereunder.
1.19 "Certified Medicare Provider" shall mean a provider of services
properly certified to provide health care services to eligible Medicare
beneficiaries and to be reimbursed therefor under Medicare and the rules and
regulations thereunder.
1.20 "Change of Control" shall mean the occurrence of any of the following:
(a) all or substantially all of Borrower's assets are sold, in one or in a
series of transactions to any "Person" or "Group" (as such term is used in
Sections 13(d) and 14(d), respectively, of the Securities Exchange Act); (b) an
event or series of events (whether a stock purchase, amalgamation, merger,
consolidation or other business combination or otherwise) by which any Person or
Group (other than a Permitted Holder) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act), except that a Person
shall be deemed to have "beneficial ownership" of all shares that such Person
has the right to acquire, whether such right is exercisable immediately or only
after the passage of time, directly or indirectly of fifty percent (50%) or more
of the combined voting power of the then outstanding securities of Borrower
ordinarily (and apart from rights accruing under certain circumstances) having
the right to vote in election of directors; (c) during any period of two (2)
consecutive years, individuals who at the beginning of such period constituted
the board of directors of Borrower (together with any new directors whose
election to such board or whose nomination for election by the shareholders of
the Borrower, was approved by the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of such board of directors then in office; or (d) Borrower is
liquidated or dissolved or adopts a plan of liquidation or dissolution.
1.21 "Code" shall mean the Internal Revenue Code of 1986, as the same now
exists or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.22 "Collateral" shall have the meaning set forth in Section 6 hereof.
<PAGE>
1.23 "Collateral Access Agreement" shall mean an agreement in writing, in
form and substance satisfactory to Lender, from any lessor of premises to
Borrower, or any other person to whom any Inventory or Equipment is consigned or
who has custody, control or possession of any Inventory or Equipment or is
otherwise the owner or operator of any premises on which any Inventory or
Equipment is located pursuant to which such lessor, consignee or other person,
inter alia, acknowledges the first priority security interest of Lender in such
Inventory or Equipment, agrees to waive any and all claims such lessor,
consignee or other person may, at any time, have against such Inventory or
Equipment, whether for processing, storage or otherwise, and agrees to permit
Lender access to, and the right to remain on, the premises of such lessor,
consignee or other person so as to exercise Lender's rights and remedies and
otherwise deal with the Collateral.
1.24 "Collection Accounts" shall have the meaning set forth in Section 4.1
hereof.
1.25 "Consolidated Net Income" shall mean, with respect to any Person for
any period, the aggregate of the net income (loss) of such Person and its
Subsidiaries, on a consolidated basis, for such period (excluding to the extent
included therein any extraordinary gains) after deducting all charges which
should be deducted before arriving at the net income (loss) for such period and
after deducting the Provision for Taxes for such period, all as determined in
accordance with GAAP; provided, that, (a) the net income of any Person that is
not a wholly-owned Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid or payable to such Person or a wholly-owned Subsidiary of
such Person; (b) except to the extent included pursuant to the foregoing clause,
the net income of any Person accrued prior to the date it becomes a wholly-owned
Subsidiary of such Person or is merged into or consolidated with such Person or
any of its wholly-owned Subsidiaries or that Person's assets are acquired by
such person or by its wholly-owned Subsidiaries shall be excluded; (c) the
effect of any change in accounting principles adopted by such Person or its
Subsidiaries after the date hereof shall be excluded; and (d) the net income (if
positive) of any wholly-owned Subsidiary to the extent that the declaration or
payment of dividends or similar distributions by such wholly-owned Subsidiary to
such Person or to any other wholly-owned Subsidiary of such Person is not at the
time permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such wholly-owned Subsidiary shall be excluded. For the purposes
of this definition, (i) net income excludes any gain (but not loss) together
with any related Provision for Taxes for such gain (but not loss) realized upon
the sale or other disposition of any assets that are not sold in the ordinary
course of business (including, without limitation, dispositions pursuant to sale
and leaseback transactions) or of any Capital Stock of such Person or a
Subsidiary of such Person, and (ii) the term "Provision for Taxes" shall mean an
amount equal to all taxes imposed on or measured by net income, whether Federal,
State, Provincial, county or local, and whether foreign or domestic, that are
paid or payable by any Person in respect of any period in accordance with GAAP.
<PAGE>
1.26 "Consolidated Net Worth" shall mean, as to any Person at any time, in
accordance with GAAP, consistently applied, on a consolidated basis for such
Person and its Subsidiaries (if any), the amount equal to the difference
between: (a) the aggregate net book value of all assets of such Person and its
Subsidiaries, calculating the book value of inventory for this purpose on a
first-in-first-out basis, after deducting from such book value all appropriate
reserves in accordance with GAAP, consistently applied (including all reserves
for doubtful receivables, obsolescence, depreciation and amortization) and (b)
the total aggregate Indebtedness and other liabilities of such Person and its
Subsidiaries, including accruals for taxes, workmen's compensation liability and
other accruals (other than contingent liabilities which would not be included in
the balance sheet under GAAP) of such Person and its Subsidiaries.
1.27 "Consolidated Working Capital" shall mean as to any Person, at any
time, in accordance with GAAP, on a consolidated basis for such Person and its
Subsidiaries (if any), the amount equal to the difference between: (a) the
aggregate net book value of all current assets of such Person and its
Subsidiaries (as determined in accordance with GAAP), calculating the book value
of inventory for this purpose on a first-in-first-out basis, and (b) all current
liabilities of such Person and its Subsidiaries (as determined in accordance
with GAAP), provided, that, as to Borrower, for purposes of Section 8.12, the
liabilities of Borrower and its Subsidiaries to Lender under this Agreement
shall not be considered current liabilities (whether or not classified as
current liabilities in accordance with GAAP).
1.28 "Contract Account" shall mean any Accounts of Borrower or any
Guarantor arising pursuant to services rendered by Borrower or such Guarantor to
any person who is an eligible beneficiary under any agreement of Borrower or
such Guarantor with a public or private, profit or non-profit agency,
organization, partnership or other person that provides health care services to
its members or participants (including any health maintenance organization or
preferred provider organization).
1.29 "Depository Banks" shall mean the meaning set forth in Section 4.1
hereof.
1.30 "EBITDA" shall mean, as to any Person, with respect to any period, an
amount equal to: (a) the Consolidated Net Income of such Person and its
Subsidiaries for such period determined in accordance with GAAP, plus (b)
depreciation, amortization and other non-cash charges for such period (to the
extent deducted in the computation of Consolidated Net Income of such Person),
all in accordance with GAAP, plus (c) Interest Expense for such period (to the
extent deducted in the computation of Consolidated Net Income of such Person,
but in any event excluding any amortization of deferred financing fees included
in clause (b) above), plus (d) charges for Federal, State, local and foreign
income taxes for such period (to the extent deducted in the computation of
Consolidated Net Income of such Person), minus (e) all income (and plus all
charges, up to the amount of such income) attributable to any Subsidiary of such
Person, if and to the extent such income was not distributed to such Person in
cash.
<PAGE>
1.31 "Environmental Laws" shall mean all Federal, State and local laws,
rules, regulations, ordinances, and consent decrees relating to health, safety,
hazardous substances, pollution and environmental matters, as now or at any time
hereafter in effect, applicable to the business and facilities of Borrower and
Guarantors (whether or not owned by it or any of them), including laws relating
to emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes or
relating to or imposing liability or standards of conduct concerning mining or
reclamation of mined land. Such laws and regulations include, but are not
limited to, the Resource Conservation and Recovery Act of 1976, as amended; the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; the Superfund Amendments and Reauthorization Act; the Water Pollution
Control Act of 1972; the Solid Waste Disposal Act; the Insecticide, Fungicide
and Rodenticide Act; the Safe Drinking Water Act of 1974; the Toxic Substances
Control Act, as amended; the Clean Water Act, as amended; the Clean Air Act, as
amended; the Hazardous Materials Transportation Act, as amended; U.S. Department
of Transportation and Environmental Protection Agency regulations; and
applicable state counterparts to any of such laws and any common law or
equitable doctrine that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or exposure to any
Hazardous Materials.
1.32 "Equipment" shall mean all of Borrower's and each Guarantor's now
owned and hereafter acquired equipment and fixtures, of every kind and
description, wherever located, including, without limitation, any and all
machinery used in connection with the manufacture, sale, exchange or lease of
goods or rendition of services, machinery, tooling, tools, telephone equipment,
computers, computer hardware and related computer equipment and accessories
(including software and records), vehicles, dies, jigs, furniture, trade
fixtures and fixtures, all attachments, components, parts, accessions and
property now or hereafter affixed thereto, installed thereon or used in
connection therewith, and all additions to and substitutions and replacements
thereof and all existing and future leasehold interests in equipment and
fixtures, wherever located, whether now owned or hereafter acquired and all
licenses and other rights of Borrower or any Guarantor relating thereto, whether
in the possession and control of Borrower or such Guarantor or in the possession
and control of a third person for the account of Borrower or such Guarantor and
all claims to the proceeds of insurance thereon and all maintenance and warranty
records relating thereto.
1.33 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.34 "ERISA Affiliate" shall mean any (a) corporation which is a member of
the same controlled group of corporations (within the meaning of section 414(b)
of the Code) as Borrower or any Guarantor, (b) partnership or other trade or
business (whether or not incorporated) which is under common control (within the
meaning of Section 414(c) of the Code) with Borrower or any Guarantor, and (c)
member of the same affiliated service group (within the meaning of Section
414(m) of the Code) as Borrower or any Guarantor.
1.35 "Event of Default" shall have the meaning set forth in Section 9.1
hereof.
<PAGE>
1.36 "Excess Availability" shall mean the amount, as determined by Lender,
calculated at any time, equal to: (a) the Borrowing Base, minus (b) the sum of
(i) the amount of all then outstanding and unpaid Obligations, plus (ii) the
aggregate amount of all trade payables or other Indebtedness of Borrower and
Guarantors which is more than thirty (30) days past due as of such time, plus
(iii) the amount of checks issued by Borrower and Guarantors to pay trade
payables, but not yet sent and the book overdraft of Borrower and Guarantors.
1.37 "Existing Lender" shall mean Norwest Bank Minnesota, National
Association and its successors and assigns.
1.38 "Final Maturity Date" shall mean July 17, 1999.
1.39 "Financing Agreements" shall mean, collectively, this Agreement,
together with all other agreements, documents and instruments now or at any time
hereafter executed and/or delivered by Borrower, any Guarantor or any other
person, with, to or in favor of Lender in connection herewith or related hereto,
as this Agreement and such other agreements, documents or instruments now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.
1.40 "Fiscal Intermediary" shall mean any qualified insurance company or
other financial institution that has entered into an ongoing relationship with
any Governmental Authority to make payments to payees under Medicare, Medicaid
or any other Federal, State or local public health care or medical assistance
program pursuant to any other Health Care Laws.
1.41 "Fixed Charge Coverage Ratio" for any period shall mean the ratio of
(a) EBITDA of Borrower and its Subsidiaries for such period to (b) Fixed Charges
of Borrower and its Subsidiaries for such period.
1.42 "Fixed Charges" for any period shall mean the sum of, without
duplication, (a) all Interest Expense, (b) all scheduled (as determined at the
beginning of the respective period) mandatory principal payments of Indebtedness
(including payments with respect to all Capitalized Lease Obligations) made by
Borrower or its Subsidiaries during such period, and (c) all cash payments of
income taxes made by Borrower and its Subsidiaries during such period, including
any payments made pursuant to the tax sharing arrangements by and among Borrower
and its Subsidiaries.
1.43 "Funding Bank" shall have the meaning set forth in Section 3.7 hereof.
1.44 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination, subject to Section 1.85 hereof.
<PAGE>
1.45 "Governmental Authority" shall mean any nation or government, any
state, province, or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing (including, without limitation, the Health Care Financing
Administration of the U.S. Department of Health and Human Resources, the
Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"), the
Civilian Health and Medical Program of Veterans Affairs ("CHAMPVA") and the U.S.
Department of Veterans Affairs or any similar state or local agencies).
1.46 "Guarantors" shall mean, individually and collectively, jointly and
severally, each of the following and their respective successors and assigns:
(a) Health Fitness Rehab, Inc., a Minnesota corporation, (b) The Preferred
Companies, Inc., an Arizona corporation, (c) Health Fitness Rehab of Iowa, Inc.,
an Iowa corporation, (d) Duffy & Associates Physical Therapy Corp., an Iowa
corporation, (e) Medlink Corporation, an Iowa corporation, (f) Medlink Services,
Inc., an Iowa corporation, (g) Fitness Centers of America, a California
corporation, (h) Sports & Orthopedic Physical Therapy, Inc., a Minnesota
corporation and (i) any other Subsidiary of Borrower acquired or existing after
the date hereof.
1.47 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances or materials and wastes including without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyl, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials, or wastes
that are or became regulated under any Environmental Laws (including, without
limitation, any that are or become classified as hazardous or toxic under any
Environmental Laws.) In the event that any of the applicable Environmental Laws
are amended so as to broaden the meaning of any of the above-referenced terms,
such broader meaning shall apply subsequent to the effective date of such
amendment.
1.48 "Health Care Laws" shall mean all Federal, State and local laws,
rules, regulations, interpretations, guidelines, ordinances and decrees relating
to any health care provider, medical assistance and cost reimbursement program,
as now or at any time hereafter in effect, applicable to Borrower and
Guarantors, including, without limitation, the Social Security Act, the Social
Security Amendments of 1972, the Medicare-Medicaid Anti-Fraud and Abuse
Amendments of 1977, and the Medicare and Medicaid Patient and Program Protection
Act of 1987.
<PAGE>
1.49 "Health Care Practitioner" shall mean a registered nurse, physical
therapist, nurse or other health care or medical practitioner duly licensed in
the state in which such Person practices, who is employed by Borrower or any
Guarantor or under contract with Borrower or any Guarantor.
1.50 "Indebtedness" shall mean, with respect to any Person, any liability
(a) in respect of borrowed money (whether or not the recourse of the lender is
to the whole of the assets of such Person or only to a portion thereof) or
evidenced by bonds, notes, indentures or similar instruments; (b) representing
the balance deferred and unpaid of the purchase price of any property or
services (except any such balance that constitutes an account payable to a trade
supplier in the ordinary course of business of such Person in connection with
obtaining goods, materials or services, to the extent such balance is not more
than ninety (90) days past due); (c) all Capitalized Lease Obligations; (d) any
contractual obligations, contingent or otherwise, of such Person to pay or be
liable for the payment of any indebtedness described in this definition of
another Person, including, without limitation, any such indebtedness, directly
or indirectly guaranteed, endorsed (other than for collection or deposit in the
ordinary course of business), co-made or discounted or sold with recourse by
such Person, or in respect of which such Person is otherwise directly or
indirectly liable, including contractual obligations (contingent or otherwise)
arising through any agreement to purchase, repurchase, or otherwise acquire such
indebtedness, obligation or liability or any security therefor, or to provide
funds for the payment or discharge thereof (whether in the form of loans,
advances, stock purchases, capital contributions or otherwise), or to maintain
solvency, assets, level of income, or other financial condition, or to make
payment other than for value received; (e) all obligations with respect to
redeemable stock and redemption or repurchase obligations under any Capital
Stock or other equity securities issued by such Person; (f) all reimbursement
obligations and other liabilities, contingent or otherwise, of such Person with
respect to bonds, letters of credit, banker's acceptances or similar documents
or instruments issued for such Person's account; and (g) all indebtedness of
such Person in respect of indebtedness of another Person for borrowed money or
indebtedness of another Person otherwise described in this definition which is
secured by any security interest in, or mortgage or lien upon the interest in
any asset of such Person, whether or not such obligations, liabilities or
indebtedness are assumed by or are a personal liability of such Person, all as
of such time.
1.51 "Insurance Account" shall mean any Accounts of Borrower or any
Guarantor arising pursuant to services rendered by Borrower or such Guarantor to
a person eligible for reimbursement for such services under an agreement with a
private insurance company.
1.52 "Interest Expense" shall mean, for any period, as to any Person and
its Subsidiaries, all of the following as determined in accordance with GAAP:
(a) total interest expense, whether paid or accrued (including the interest
component of Capitalized Lease Obligations for such period), including, without
limitation, all bank fees, commissions, discounts and other fees and charges
owed with respect to letters of credit, banker's acceptances or similar
instruments, but excluding (i) amortization of discount and amortization of
deferred financing fees and closing costs paid in cash in connection with the
transactions contemplated hereby, (ii) interest paid in property other than cash
and (iii) any other interest expense not payable in cash, minus (b) any net
payments received during such period as interest income received in respect of
its investments in cash and Cash Equivalents.
<PAGE>
1.53 "Inventory" shall mean all of Borrower's and each Guarantor's now
owned and hereafter acquired inventory, wherever located, including, without
limitation, all raw materials, work-in-process and any other personal property
held for sale, exchange or lease or furnished or to be furnished or used or
consumed in the business or in connection with the manufacturing, packaging,
shipping, advertising, selling or furnishing or such goods, inventory,
merchandise and other personal property, and all names or marks affixed to or to
be affixed thereto for purposes of selling same by the seller, manufacturer,
lessor or licensor thereto and all right, title and interest therein and
thereto, wherever located, whether now owned or hereafter acquired.
1.54 "Lender" shall mean Madeleine L.L.C., a New York limited liability
company, and its successors and assigns.
1.55 "Loans" shall mean the loans made to or for the benefit of Borrower or
any Guarantor by Lender on a revolving basis pursuant to the terms hereof
(involving advances, repayments and readvances) as set forth in Section 2.1
hereof.
1.56 "Material Contract" shall mean any contract or other arrangements
(other than the Financing Agreements), whether written or oral, to which
Borrower or any Guarantor is a party as to which the breach, nonperformance,
cancellation or failure to renew by any party thereto would have a material
adverse effect on the business, assets, conditions (financial or otherwise) or
results of operations or prospects of Borrower and Guarantors taken as a whole.
1.57 "Maximum Credit" shall mean $12,500,000.
1.58 "Maximum Lawful Rate" shall mean, at any given time during which any
Obligations shall be outstanding hereunder, the maximum nonusurious interest
rate, if any, that at any time or from time to time may be contracted for,
taken, reserved, charged or received on the Obligations owing under this
Agreement, under the laws of the State of New York (or the law of any other
jurisdiction whose laws may be mandatorily applicable notwithstanding other
provisions of this Agreement and the other Financing Agreements), or under
applicable Federal laws which may presently or hereafter be in effect and which
allow a higher maximum nonusurious interest rate than under New York (or such
other jurisdiction's) law, in any case after taking into account, to the extent
permitted by applicable law, any and all relevant payments or charges under this
Agreement and any other Financing Agreements executed in connection herewith,
and any available exemptions, exceptions and exclusions.
1.59 "Medicaid" shall mean the health care financial assistance program
jointly financed and administered by the Federal and State governments under
Title XIX of the Social Security Act.
<PAGE>
1.60 "Medicaid Account" shall mean any Accounts of Borrower or any
Guarantor arising pursuant to services rendered by Borrower or such Guarantor to
eligible Medicaid beneficiaries to be paid by a Fiscal Intermediary or by any
Governmental Authority under Medicaid.
1.61 "Medicare" shall mean the health care financial assistance program
under Title XVIII of the Social Security Act.
1.62 "Medicare Account" shall mean any Accounts of Borrower or any
Guarantor arising pursuant to services rendered by Borrower or such Guarantor to
eligible Medicare beneficiaries to be paid by a Fiscal Intermediary or by any
Governmental Authority under Medicare.
1.63 "Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
1.64 "Notice of Borrowing" shall mean (a) a notice substantially in the
form of Exhibit C or (b) telephonic notice specifying the information set forth
in Exhibit C, promptly followed by a notice substantially in the form of Exhibit
C.
1.65 "Obligations" shall mean any and all Loans and all other obligations,
liabilities and indebtedness of every kind, nature and description owing by
Borrower and/or any Obligor to Lender and/or its Affiliates, including
principal, interest, charges, fees, costs and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, arising under or
in connection with this Agreement, any of the other Financing Agreements or by
operation of law in connection herewith or, whether now existing or hereafter
arising, whether arising before, during or after the initial or any renewal term
of this Agreement, after the commencement of any case with respect to Borrower
or any Obligor under the United States Bankruptcy Code or any similar statute
(including the payment of interest and other amounts which would accrue and
become due but for the commencement of such case, whether or not such amounts
are allowed or allowable in whole or in part in such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated or secured.
1.66 "Obligor" shall mean any guarantor, endorser, acceptor, surety, or
other person liable on or with respect to the Obligations (including, without
limitation, Guarantors) or who is the owner of any property which is security
for the Obligations, other than Borrower.
1.67 "Payment Account" shall have the meaning set forth in Section 4.1
hereof.
1.68 "Permits" shall have the meaning set forth in Section 7.4 hereof.
1.69 "Permitted Holders" shall mean the persons listed on Schedule 1.69
hereto.
<PAGE>
1.70 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including, without limitation, any corporation which
elects S corporation status under the Code), limited liability company, limited
liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.71 "Plan" shall mean any multiemployer or single-employer plan as defined
in Section 4001 of ERISA, which (a) is maintained or contributed to by (or to
which there is an obligation to contribute of) Borrower, any Guarantor or any of
their Subsidiaries or ERISA Affiliates, or (b) at any time during the five (5)
year period preceding (i) in the case of any Loan, the date of such Loan or
(ii) in the case of any event or condition described in Section 8.19 or 9.1(i),
the date thereof, was maintained or contributed to by (or to which there is or
was an obligation to contribute to) Borrower, any Guarantor or any of their
Subsidiaries or ERISA Affiliates.
1.72 "Receivables" shall mean: (a) all Accounts; (b) all amounts at any
time payable to Borrower or any Guarantor in respect of the sale by Borrower or
such Guarantor of any Account or other obligation for the payment of money;
(c) all interest, fees, late charges, penalties, collection fees and other
amounts due or to become due or otherwise payable in connection with any
Account; (d) all letters of credit, indemnities, guarantees, security or other
deposits and proceeds thereof issued payable to Borrower or any Guarantor or
otherwise in favor of or delivered to Borrower or any Guarantor in connection
with any Account; or (e) all other contract rights, chattel paper, instruments,
notes, general intangibles and other forms of obligations owing to Borrower or
any Guarantor, whether from the sale and lease of goods or other property,
rendition of services or from loans or advances by Borrower or any Guarantor to
or for the benefit of any third person (including loans or advances to any
Affiliates or Subsidiaries) or otherwise associated with any Accounts, Inventory
or general intangibles of Borrower or any Guarantor (including, without
limitation, choses in action, causes of action, tax refunds, tax refund claims,
any funds which may become payable to Borrower or any Guarantor in connection
with the termination of any Plan or other employee benefit plan).
1.73 "Records" shall mean all of Borrower's and each Guarantor's present
and future books of account of every kind or nature, purchase and sale
agreements, invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating to
the Collateral or any Account Debtor, together with the tapes, disks, diskettes
and other data and software storage media and devices, file cabinets or
containers in or on which the foregoing are stored (including any rights of
Borrower or any Guarantor with respect to the foregoing maintained with or by
any other person).
1.74 "Reference Rate" shall mean the greater of: (a) the rate from time to
time publicly announced by Chase Manhattan Bank, or its successors, at its
office in New York, New York, as its prime rate, whether or not such announced
rate is the best rate available at such bank and (b) eight and one-half percent
(8 1/2%).
1.75 "Register" shall have the meaning set forth in Section 10.11(b)
hereof.
1.76 "Registered Loans" shall have the meaning set forth in Section 2.3
hereof.
<PAGE>
1.77 "Registered Note" shall have the meaning set forth in Section 2.3
hereof.
1.78 "Securities Exchange Act" shall mean the Securities Act of 1933, as
the same now exists or may hereafter from time to time be amended, modified,
recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
1.79 "Social Security Act" shall mean the Social Security Act, 92 U.S.C.
Sections 1396, et seq., as the same now exists or may from time to time
hereafter be amended, modified, recodified or supplemented, together with all
rules, regulations and interpretations thereunder or related thereto.
1.80 "Subsidiary" or "subsidiary" shall mean, with respect to any person,
(a) a corporation a majority of whose Capital Stock with voting power, under
ordinary circumstances, to elect directors is at the time, directly or
indirectly, owned by such Person or by such Person and one or more Subsidiaries
of such Person or by one or more Subsidiaries of such Person, (b) any other
Person (other than a corporation) in which such Person, one or more Subsidiaries
of such Person, or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof, has at least a
majority ownership interest, or (c) a partnership in which such Person or a
Subsidiary of such Person is, at the time, a general partner and in which such
Person, directly or indirectly, at the date of determination thereof has at
least a majority ownership interest.
1.81 "Third Party Payor" shall mean any Person, such as, a Fiscal
Intermediary, Blue Cross/Blue Shield, a health maintenance organization,
preferred provider organization or private health insurance company, which is
obligated to reimburse or otherwise make payments to health care providers who
provide medical care or medical assistance for eligible patients under Medicare,
Medicaid or any private insurance contract.
1.82 "Tradename" shall have the meaning set forth in Section 8.1 hereof.
1.83 "Unfunded Current Liability" shall mean, as to any Plan, the amount,
if any, by which the actuarial present value of the accumulated plan benefits
under the Plan as of the close of its most recent plan year, exceeds the fair
market value of the assets allocable thereto, each determined in accordance with
Statement of Financial Accounting Standards No. 35, based upon the actuarial
assumptions used by the Plan's actuary in the most recent annual valuation of
the Plan.
1.84 "Value" or "value" shall mean, as determined by Lender, with respect
to the Inventory, the lower of (a) cost computed on a first-in-first-out basis
in accordance with GAAP or (b) market value, as determined by Lender, based on
such information provided by Borrower to Lender as Lender may require.
<PAGE>
1.85 Accounting Terms and Determinations. Unless otherwise defined or
specified herein all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the financial statements delivered to Lender on or before the date hereof.
All accounting determinations for purposes of determining compliance with the
financial covenants contained herein, and all defined terms as used herein,
shall be made consistent with practices in effect as of the date hereof and, if
applicable, in accordance with GAAP as in effect on the date hereof and applied
on a basis consistent in all material respects with the audited financial
statements delivered to Lender on or before the date hereof, except as otherwise
previously disclosed to Lender. The financial statements required to be
delivered hereunder from and after the date hereof, and all financial records,
shall be maintained in accordance with GAAP. If GAAP shall change from the basis
used in preparing the audited financial statements delivered to Lender on or
before the date hereof in a manner that affects the calculation of compliance
with the financial covenants contained herein, Borrower may by notice to Lender,
or Lender may by notice to Borrower, require that such covenant thereafter be
calculated in accordance with GAAP as in effect, and applied by Borrower,
immediately before such change in GAAP occurred. If such notice is given, the
compliance certificates delivered pursuant to Section 8.21 hereof after such
change occurs shall be accompanied by reconciliations of the difference between
the calculation set forth therein and a calculation made in accordance with GAAP
as in effect from time to time after such change occurs.
1.86 Other Defined Terms The words "hereof", "herein", "hereunder", "this
Agreement" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.87 Uniform Commercial Code Definitions. All terms used herein which are
not specifically defined herein which are defined or used in the Uniform
Commercial Code as in effect in the State of New York (the "UCC") shall have the
meanings as defined or used in the UCC.
1.88 Interpretation. For purposes of this Agreement, unless the context
otherwise requires, all other terms hereinbefore or hereinafter defined,
including but not limited to those terms defined in the recitals hereto, shall
have the meanings herein assigned to such terms. All references to Borrower,
Guarantors, Lender and any other Person pursuant to the definitions set forth in
the recitals hereto or otherwise herein shall include their respective
successors and assigns. All references to any term in the plural shall include
the singular and all references to any term in the singular shall include the
plural, unless the context otherwise requires. The word "including" when used in
this Agreement shall mean "including, without limitation". An Event of Default
shall exist and be continuing until such Event of Default is waived in writing
by Lender or cured in a manner satisfactory to Lender, if such Event of Default
is capable of being cured as determined by Lender in good faith.
<PAGE>
SECTION 2. CREDIT FACILITY
2.1 Loans. Subject to, and upon the terms and conditions contained herein,
Lender agrees to make Loans to Borrower from time to time in amounts requested
by Borrower in accordance with the terms hereof up to the amount equal to the
Borrowing Base. Except in Lender's discretion, no Loan shall be made if after
giving effect to such Loan, the aggregate amount of the then outstanding Loans
would exceed the Borrowing Base. All calculations of the Borrowing Base in
connection with the preparation of any Borrowing Base Certificate shall
originally be made by Borrower and certified to Lender; provided, that, Lender
shall have the right to review and adjust, in the exercise of its reasonable
credit judgment, any such calculation (a) to reflect its reasonable estimate of
declines in any of amounts described therein and (b) to the extent that such
calculation is not in accordance with this Agreement.
2.2 Procedure for Borrowing. Borrower shall give to Lender a Notice of
Borrowing no later than 1:00 p.m. New York City time three (3) Business Days
prior to the proposed date of the Loans requested pursuant to such Notice. No
more than one (1) Notice of Borrowing shall be given in any week. Any Notice of
Borrowing received by Lender shall be irrevocable and binding on Borrower. Each
Notice of Borrowing shall state whether the conditions for the requested Loans
are satisfied. Each Notice of Borrowing from Borrower for a Loan shall be given
on, and each Loan shall be made on, a Business Day.
2.3 Registered Note. Upon Lender's request, Borrower agrees to record the
Loans on the Register referred to in Section 10.11 hereof. Loans recorded on the
Register (the "Registered Loans") may not be evidenced by a promissory note
other than Registered Notes (as defined below) and upon the registration of the
Loans, any promissory note (other than a Registered Note) evidencing the same
shall be null and void and shall be returned to Borrower. Borrower agrees, at
the request of Lender, to execute and deliver to Lender a promissory note in
registered form to evidence such Registered Loans (i.e., containing registered
note language reasonably acceptable to Lender and in the form of Exhibit E
hereto) and registered as provided in Section 10.11 (a "Registered Note"), dated
the date hereof, payable to Lender and otherwise duly completed. Once recorded
on the Register, Loans evidenced by such Promissory Note may not be removed from
the Register so long as it remains outstanding, and a Registered Note may not be
exchanged for a promissory note that is not a Registered Note.
<PAGE>
SECTION 3. INTEREST AND FEES
3.1 Interest. Borrower shall pay to Lender interest on the unpaid daily
principal balance of the Loans at the close of each day at the rate equal to
seven percent (7%) per annum in excess of the Reference Rate, of which four and
one-half percent (4 1/2%) per annum in excess of the Reference Rate shall be
payable in cash or other immediately available funds monthly in arrears on the
first day of each calendar month (or earlier as hereinafter provided) and two
and one-half percent (2 1/2%) per annum shall be capitalized so as to constitute
the principal amount of a Loan deemed made monthly in arrears on the first day
of each month. Interest shall accrue on the principal amount of the Loan arising
pursuant to such capitalization of interest at the rates provided for in this
Section 3.1 (or Section 3.2 below, if applicable) in the same manner as the
principal on all other Loans from the date such principal amount arises. Each
change in the Reference Rate shall be reflected in the foregoing interest rate
as of the effective date of such change. All interest accrued and accruing on
and after an Event of Default shall be payable promptly upon demand by Lender.
3.2 Interest After Event of Default. If any Event of Default occurs, then
from the date of occurrence of such Event of Default until the earlier of
(a) the date all Obligations have been paid and satisfied in full or (b) the
date such Event of Default is duly waived in writing, Borrower shall pay to
Lender interest on the Loans calculated at rates per annum equal to the rates
from time to time then in effect under Sections 3.1 hereof plus, in each case,
three percent (3%). Such amounts shall be payable promptly upon demand by
Lender.
3.3 Closing Fee. Borrower shall pay to Lender as a closing fee the amount
of $312,500, which shall be fully earned as of and payable on the date hereof.
3.4 Servicing Fee. Borrower shall pay to Lender monthly a servicing fee in
an amount equal to $5,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable on the first day of each month hereafter.
3.5 Calculations. All calculations of interest and fees shall be made by
Lender, on the basis of a year of three hundred sixty (360) days for the actual
number of days elapsed (including the first day but excluding the last day,
assuming, in the case of such last day, that payment is actually received before
12:00 noon New York City time on such day, and if received later than such time
on such day, as if received on the next succeeding Business Day) occurring in
the period for which such interest or fees are payable. Each determination by
Lender of an interest rate, fees or other payments hereunder shall be conclusive
and binding for all purposes, absent manifest error.
<PAGE>
3.6 Maximum Rate. Notwithstanding anything to the contrary contained
elsewhere in this Agreement or in any of the other Financing Agreements,
Borrower, each Guarantor and Lender hereby agree that all agreements among them
under this Agreement and the other Financing Agreements, whether now existing or
hereafter arising and whether written or oral, are expressly limited so that in
no contingency or event whatsoever shall the amount paid, or agreed to be paid,
to Lender for the use, forbearance, or detention of the money loaned to Borrower
and evidenced hereby or thereby or for the performance or payment of any
covenant or obligation contained herein or therein, exceed the Maximum Lawful
Rate. If due to any circumstances whatsoever, fulfillment of any provisions of
this Agreement or any of the other Financing Agreements at the time performance
of such provision shall be due shall exceed the Maximum Lawful Rate, then,
automatically, the obligation to be fulfilled shall be modified or reduced to
the extent necessary to limit such interest to the Maximum Lawful Rate, and if
from any such circumstance Lender should ever receive anything of value deemed
interest by applicable law which would exceed the Maximum Lawful Rate, such
excessive interest shall be applied to the reduction of the principal amount
then outstanding hereunder or on account of any other then outstanding
Obligations and not to the payment of interest, or if such excessive interest
exceeds the principal unpaid balance then outstanding hereunder and such other
then outstanding Obligations, such excess shall be refunded to Borrower. All
sums paid or agreed to be paid to Lender for the use, forbearance, or detention
of the Obligations and other Indebtedness of Borrower to Lender shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such Indebtedness until payment in full so that the
actual rate of interest on account of all such Indebtedness does not exceed the
Maximum Lawful Rate throughout the entire term of such Indebtedness. The terms
and provisions of this Section shall control every other provision of this
Agreement and all agreements among the Borrower, Guarantors and Lender.
3.7 Indemnification in Certain Events. If after the date hereof, either (a)
any change in or in the interpretation of any law or regulation of general
applicability is introduced, including with respect to reserve requirements,
applicable to Lender or any other banking or financial institution from which
Lender borrows funds or obtains credit (a "Funding Bank"), (b) a Funding Bank or
Lender complies with any future guideline or request of general applicability
from any central bank or other Governmental Authority or (c) a Funding Bank or
Lender determines that the adoption of any generally applicable law, rule or
regulation regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof by any Governmental Authority,
central bank or comparable agency charged with the interpretation or
administration thereof, has or would have the effect described below, or a
Funding Bank or Lender complies with any request or directive of general
applicability regarding capital adequacy (whether or not having the force of
law) of any such authority, central bank or comparable agency, and in the case
of any event described in clauses (a), (b) or (c) of this Section 3.7, such
adoption, change or compliance has or would have the direct or indirect effect
of reducing the rate of return on capital of a Funding Bank or Lender as a
consequence of its obligations hereunder to a level below that which such
Funding Bank or Lender could have achieved but for such adoption, change or
compliance (taking into consideration such Funding Bank's or Lender's policies,
as the case may be, with respect to capital adequacy) by an amount deemed by
such Funding Bank or Lender to be material, then Borrower shall, upon demand by
Lender, pay to Lender, additional amounts sufficient to indemnify Lender or
Funding Bank against such increase in cost or reduction in amount receivable. A
certificate as to the amount of such increased cost and setting forth in
reasonable detail the basis for and calculation thereof (which calculation shall
be made in accordance with a reasonable method of allocation among similarly
situated borrowers) shall be submitted to Borrower by Lender or Funding Bank,
and shall be conclusive, absent manifest error.
<PAGE>
SECTION 4. PAYMENTS AND ADMINISTRATION
4.1 Collections; Management of Collateral.
(a) Borrower and Guarantors shall establish, and at all times maintain, at
their expense, not less than two (2) lockboxes and related deposit accounts (the
"Collection Accounts") with such banks as are acceptable to Lender (such banks
being referred to herein as "Depository Banks") as follows:
(i) Borrower and Guarantors shall promptly deposit, and Borrower and
Guarantors shall direct each Fiscal Intermediary or other Third Party Payor
in accordance with the applicable Medicare and Medicaid regulations to
directly remit all payments on Medicare Accounts and Medicaid Accounts to
one or more of such lockboxes and related deposit accounts, which shall
only be used for purposes of receiving payments on Medicare Accounts and
Medicaid Accounts and which deposit accounts shall be under the sole
control of Borrower; provided, that, (A) Borrower and Guarantors shall
authorize, direct and instruct the Depository Banks at which such deposit
accounts are maintained to remit by federal funds wire transfer all funds
received or deposited into such lockboxes and related deposit accounts on a
daily basis to the Payment Account, which instructions by Borrower or
Guarantors to such banks may only be changed after not less than five (5)
Business Days' prior written notice to such banks and Lender and (B) any
change in such instructions, without the prior written consent of Lender,
shall be an Event of Default hereunder, and
(ii) Borrower and Guarantors shall promptly deposit, and shall direct
all Third Party Payors and other Account Debtors to remit payments on all
Receivables other than Medicare Accounts and Medicaid Accounts to one or
more of such lockboxes and related deposit accounts which shall only be
used for purposes of receiving payments on Receivables other than Medicare
Accounts and Medicaid Accounts and as to which the Depository Banks shall
acknowledge and agree, in a manner and on terms satisfactory to Lender
that: (A) all payments made, and items received or deposited in such
lockboxes and related accounts shall be used to repay the Obligations,
(B) the Depository Banks have no lien on, or right of setoff against, such
deposit account, the items received for deposit therein, or the funds from
time to time on deposit therein and (C) the Depository Banks will wire, or
otherwise transfer, in immediately available funds, all funds received or
deposited into such lockbox and related deposit account on a daily basis to
such bank account of Lender as Lender may from time to time designate for
such purpose (such bank account of Lender being referred to herein as the
"Payment Account").
<PAGE>
(b) Borrower and Guarantors and all of their employees, agents and other
Affiliates shall, acting as trustee for Lender, receive, as the property of
Lender, any monies, checks, notes, drafts or any other payment relating to
and/or proceeds of Receivables or other Collateral which come into their
possession or under their control and immediately upon receipt thereof, shall
deposit or cause the same to be deposited in the Collection Accounts provided
for in Section 4.1(a) above, as appropriate, depending on whether the payment is
on a Medicare Account or Medicaid Account or any other Receivable, or remit the
same or cause the same to be remitted, in kind, to Lender. In no event shall the
same be commingled with Borrower's or any Guarantor's own funds. Borrower and
each Guarantor jointly and severally agrees to reimburse Lender on demand for
any amounts owed or paid to any Depository Bank at which any Collection Account
is established or any other bank or person involved in the transfer of funds to
or from the Collection Accounts arising out of Lender's payments to or
indemnification of such bank or person relating to the transfer of funds to or
from the Collection Accounts. The obligation of Borrower and Guarantors to
reimburse Lender for such amounts pursuant to this Section 4.1 shall survive the
payment of the Obligations and the termination of this Agreement.
4.2 Payments.
(a) All Obligations shall be payable to the Payment Account as designated
under Section 4.1 or such other place as Lender may designate from time to time.
The Obligations shall be payable upon the Final Maturity Date or any earlier
effective date of termination of the financing arrangements provided for herein,
or earlier upon an Event of Default, or otherwise as provided elsewhere herein
or in the other Financing Agreements. Lender shall apply payments received or
collected from Borrower or any Guarantor or for the account of Borrower or any
Guarantor (including, without limitation, the monetary proceeds of collections
or the monetary proceeds of realization upon any Collateral) to such of the
Obligations, whether or not then due, in such order and manner as Lender
determines, provided, that, all such payments shall be applied to Obligations
which are then due and payable before being applied to prepay any Obligations
which are not then due and payable. Upon the request of Lender, Borrower and
Guarantors shall execute and deliver to Lender one or more promissory notes, in
form and substance satisfactory to Lender, to evidence further the Loans, or any
portion thereof.
(b) If after receipt of any payment of, or proceeds applied to the payment
of, all or any part of the Obligations, Lender is for any reason required to
surrender such payment or proceeds to any Person, because such payment or
proceeds is invalidated, declared fraudulent, set aside, determined to be void
or voidable as a preference, or a diversion of trust funds, or for any other
reason, then the Obligations or any part thereof intended to be satisfied shall
be revived and continue and this Agreement shall continue in full force as if
such payment or proceeds had not been received by Lender and Borrower shall be
liable to pay to Lender, and hereby does indemnify Lender and hold it harmless
for the amount of such payment or proceeds surrendered. The provisions of this
Section 4.2(b) shall be and remain effective notwithstanding any contrary action
which may have been taken by Lender in reliance upon such payment or proceeds,
and any such contrary action so taken shall be without prejudice to the rights
of Lender under this Agreement and shall be deemed to have been conditioned upon
such payment or proceeds having become final and irrevocable.
(c) Lender may, at its option, charge directly to any account(s) of
Borrower maintained by Lender all principal, interest, fees, commissions, costs,
expenses, or other charges hereunder, under the other Financing Agreements or in
connection herewith or therewith, and any and all Loans.
<PAGE>
(d) Borrower and Guarantors shall make all payments of principal, interest,
fees and other amounts to be made pursuant to this Agreement or the other
Financing Agreements in respect of all or any part of the Obligations free and
clear of and without deduction or withholding for or on account of any and all
present and future taxes, levies, imposts, deductions, charges or withholding
applicable to Borrower or any Guarantor from or in respect of any amounts
payable by Borrower or any Guarantor to Lender pursuant to the terms hereof
(collectively, "Taxes"), excluding, taxes imposed on Lender's net income and
franchise taxes (that are imposed on or computed by reference to net income)
imposed on it by the jurisdiction under the laws of which Lender is organized or
any political subdivision therefor or in which its applicable lending office is
located (all such nonexcluded Taxes being hereinafter referred to as "Covered
Taxes" and all such excluded Taxes being hereinafter referred to as "Excluded
Taxes").
(i) If Borrower or any Obligor shall be required by law to deduct any
Covered Taxes from or in respect of any sum payable in respect of the
Obligations to or for the benefit of Lender, (A) the sum payable shall be
increased as may be necessary so that after making all required deductions
of Covered Taxes (including deductions of Covered Taxes applicable to
additional sums payable under this Section) Lender receives an amount equal
to the sum it would have received had no such deductions been made,
(B) Borrower or such other Obligor shall make such deductions and
(C) Borrower or such Obligor shall pay the full amount so deducted to the
relevant taxation authority or other authority in accordance with
applicable law. If any Excluded Taxes are payable in respect of Covered
Taxes pursuant to the preceding sentence, Borrower or such Obligor agrees
to reimburse Lender, within thirty (30) days of the date of the written
request of Lender, for such Excluded Taxes ("Second Tier Taxes"). The
written request referred to in the preceding sentence shall certify and set
forth in reasonable detail the calculation of the payment and specify the
type of such Second Tier Taxes. Any such certificate submitted in good
faith to Borrower or such Obligor shall, absent manifest error, be final,
conclusive and binding on all parties; provided, that, notwithstanding any
of the foregoing with respect to the above-referenced calculations, Lender
shall not be obligated to provide any information with respect to its
assets, income or operations other than assets, income or operations solely
attributable to this Agreement or any of the other Financing Agreements or
any Loan. Except as provided in the preceding sentence, Lender shall not be
obligated to disclose any information regarding its tax affairs or
computations to Borrower or any Obligor.
(ii) In addition, Borrower agrees to pay any present or future stamp,
documentary, excise, privilege, intangible or similar levies that arise at
any time or from time to time (A) from any payment made under any and all
Financing Agreements or (B) from the execution or delivery by Borrower of,
or from the filing or recording or maintenance of, or otherwise with
respect to the exercise by Lender of its rights (subject to the provisions
of this Section 4.2) under, any and all Financing Agreements (hereinafter
referred to as "Other Taxes").
<PAGE>
(iii) Borrower shall indemnify, to the extent not previously withheld
and paid to the relevant taxation authority or other authority in
accordance with applicable law, Lender for the full amount of (A) Covered
Taxes imposed on or with respect to amounts payable hereunder, (B) Other
Taxes, and (C) any Second Tier Taxes (other than Covered Taxes imposed by
any jurisdiction on amounts payable under this Section) paid by Lender and
any liability (including penalties, interest and expenses) arising solely
therefrom or with respect thereto. Payment of this indemnification shall be
made within thirty (30) days from the date Lender certifies such amounts to
Borrower, which certification shall set forth in reasonable detail the
calculation thereof as to the amount and type of such Taxes. Any such
certificate submitted by Lender in good faith to Borrower shall, absent
manifest error, be final, conclusive and binding on all parties; provided,
that, notwithstanding any of the foregoing with respect to the
above-referenced calculations, Lender shall not be obligated to provide any
information with respect to its assets, income or operations other than
assets, income or operations solely attributable to this Agreement or any
Loan.
(iv) Within thirty (30) days after having received a receipt of
Covered Taxes or Other Taxes, Borrower will furnish to Lender the original
or a certified copy of a receipt evidencing payment thereof.
(v) If any Taxes for which Borrower would be required to make payment
under this Section are imposed, Lender shall use reasonable efforts to
avoid or reduce such Taxes by taking appropriate action (including
assigning its rights hereunder to a related entity or a different office)
which would not in the good faith opinion of Lender otherwise be
disadvantageous to Lender.
(vi) If Borrower pays any additional amounts under this Section to
Lender and Lender determines in its good faith discretion that it has
actually received or realized in connection therewith any refund or any
reduction of, or credit against, its liabilities with respect to Taxes in
or with respect to the taxable year in which the additional amount is paid,
Lender shall pay to Borrower an amount that Lender shall, in its good faith
discretion, determine is equal to the net benefit, after tax, which was
obtained by Lender in such year as a consequence of such refund, reduction
or credit.
(e) In the event Lender shall assign the Obligations and its rights
hereunder to an assignee which is organized under the laws of a jurisdiction
outside the United States, such assignee of Lender shall provide Borrower with
an IRS Form 4224 or Form 1001 or other applicable form, certificate or document
prescribed by the Internal Revenue Service certifying as to such assignee's
entitlement to full exemption from United States withholding tax with respect to
all payments to be made to such assignee hereunder and under any of the other
Financing Agreements (unless such assignee of Lender is unable to do so by
reason of a change in law (including, without limitation, any statute, treaty,
ruling, determination or regulation) occurring subsequent to the effective date
of such assignment). Unless Borrower has received forms or other documents
reasonably satisfactory to it indicating that payments hereunder or under any of
the other Financing Agreements are not subject to United States of America
withholding tax, Borrower shall, in the case of payments to or for any assignee
of Lender organized under the laws of a jurisdiction outside the United States
(i) withhold taxes from such payments at the applicable statutory rate, or at a
rate reduced by an applicable tax treaty (provided that Borrower has received
forms or other documents satisfactory to it indicating that such reduced rate
applies) and (ii) pay such assignee such payment net of any taxes withheld.
<PAGE>
(f) Without prejudice to the survival of any other agreement of Borrower
hereunder, the agreements and obligations of Borrower contained in this Section
4.2 shall survive the payment in full of the Obligations and the termination of
this Agreement.
(g) If the due date of any payment under this Agreement or any of the other
Financing Agreements would otherwise fall on a day that is not a Business Day,
such date shall be extended to the next succeeding Business Day, and interest
shall be payable for any principal so extended for the period of such extension.
4.3 Mandatory and Optional Prepayments.
(a) In the event that the outstanding amount of the Loans exceed the
Borrowing Base or the aggregate amount of the Loans outstanding at any time
shall exceed the Maximum Credit, such event shall not limit, waive or otherwise
affect any rights of Lender in that circumstance or on any future occasions and,
subject to Section 4.3(b) below, Borrower shall, upon demand by Lender, which
may be made at any time or from time to time, immediately repay to Lender, the
entire amount of any such excess(es) for which payment is demanded.
(b) Immediately after the receipt by Borrower or any Guarantor of any cash
proceeds from the issuance or sale of Capital Stock, or from any other additions
to the equity of Borrower or any Guarantor or any contributions to capital of
Borrower or any guarantor (net of all reasonable costs associated therewith,
including, without limitation, all expenses paid for or reimbursed by Borrower
or any Guarantor, underwriting or similar fees, discounts and commissions and
other direct costs associated therewith), Borrower shall absolutely and
unconditionally, without notice or demand, pay to Lender as a mandatory
prepayment of the then outstanding principal amount of the Loans an amount equal
to one hundred percent (100%) of such proceeds, provided, that, since such
prepayment is only required to be made with cash proceeds from the issuance or
sale of Capital Stock, no such prepayment shall be required upon the issuance of
Capital Stock by Borrower as payment of a portion of the purchase price for the
acquisition by Borrower or any Guarantor of all or substantially all of the
assets of any Person or all of the Capital Stock of any Person to the extent
such acquisition of assets or Capital Stock is permitted hereunder.
(c) Borrower may prepay the Loans at any time and from time to time and may
terminate this Agreement in accordance with Section 10.1 hereof.
(d) All payments in respect of the Loans pursuant to this Section 4.3 shall
be without premium or penalty. All interest accrued on the principal amount of
the Loans paid pursuant to this Section 4.3 shall be paid, or may be charged by
Lender to the loan account(s) of Borrower, at Lender's option, on the date of
such payment.
<PAGE>
4.4 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans and other
Obligations, (b) all payments made by or on behalf of Borrower and (c) all other
appropriate debits and credits as provided in this Agreement, including, without
limitation, fees, charges, costs, expenses and interest. All entries in the loan
account(s) shall be made in accordance with Lender's customary practices as in
effect from time to time. All Collateral or other collateral security held by or
granted to Lender by Borrower, any Guarantor or any third persons shall be
security for the payment and performance of any and all Obligations of Borrower
to Lender (including, but not limited to, the Loans), notwithstanding the
maintenance of separate accounts for Borrower or third persons or the existence
of any notes.
4.5 Authorized Signatures. On or prior to the date hereof, Borrower shall
provide to Lender a list, with specimen signatures, of officers authorized to
request Loans. Lender is entitled to rely upon such list until it is replaced by
Borrower. Lender shall have no duty to verify the authenticity of the signature
appearing on any Notice of Borrowing or other request for Loans or other writing
delivered hereunder and, with respect to an oral request for Loans, Lender shall
have no duty to verify the identity of any individual representing himself as
one of the officers authorized to make such request on behalf of Borrower.
Lender shall not incur any liability to Borrower or any Obligor as a result of
acting upon any telephonic notice that Lender believes in good faith to have
been given by a duly authorized officer or other individual authorized to
request Loans on behalf of Borrower or for otherwise acting in good faith.
4.6 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in Borrower's loan account(s) maintained by Lender for
Borrower pursuant to the provisions of this Agreement. Each such statement shall
be subject to subsequent adjustment by Lender but shall, absent manifest errors
or omissions, be considered correct and deemed accepted by Borrower and
conclusively binding upon Borrower as an account stated except to the extent
that Lender receives a written notice from Borrower of any specific exceptions
of Borrower thereto within thirty (30) days after the date such statement has
been mailed by Lender. Until such time as Lender shall have rendered to Borrower
a written statement as provided above, the balance in Borrower's loan account(s)
shall be presumptive evidence of the amounts due and owing by Borrower to
Lender.
4.7 Right of Inspection; Access. Lender and its representatives shall, at
all reasonable times and upon reasonable advance notice prior to an Event of
Default and at any time and without notice at any time on or after an Event of
Default and for so long as the same is continuing, have free access to and right
of inspection of the Collateral and have full access to and the right to examine
and make copies of the books and records of Borrower and Guarantors to confirm
and verify all Receivables, to perform general audits and to do whatever else
Lender deems necessary to protect the interests of Lender. Lender may at any
time remove from the premises of Borrower or any Guarantor or require Borrower
or any Guarantor or any accountants and auditors employed by Borrower or any
Guarantor to deliver copies of any books and records.
<PAGE>
4.8 Specific Powers. Except in respect of Medicare Accounts and Medicaid
Accounts, Borrower and each Guarantor hereby constitutes Lender and its
designees, as Borrower's and such Guarantors attorney-in-fact, with power of
substitution, at the cost and expense of Borrower and Guarantors, to exercise at
any time all or any of the following powers which appointment, being coupled
with an interest, shall be irrevocable until all Obligations have been
indefeasibly paid in full: (a) to receive, take, endorse, assign, deliver,
accept and deposit, in the name of Lender or Borrower or any Guarantor, any and
all checks, notes, drafts, remittances and other instruments and documents or
chattel paper relating to the Collateral; (b) on or after the occurrence of an
Event of Default, or an act, condition or event which with notice, passage of
time or both would constitute an Event of Default, to receive, open and dispose
of all mail addressed to Borrower or any Guarantor and to notify postal
authorities to change the address for delivery thereof to such address as Lender
designates; (c) to transmit to Account Debtors notice of Lender's interest
therein and to request from such Account Debtors at any time, in the name of
Lender, Borrower or any Guarantor or that of Lender's designee, information
concerning the Collateral and the amounts owing thereon; (d) on or after the
occurrence of an Event of Default, or an act, condition or event which with
notice, passage of time or both would constitute an Event of Default, to notify
Account Debtors to make payment directly to Lender; (e) on or after the
occurrence of an Event of Default, or an act, condition or event which with
notice, passage of time or both would constitute an Event of Default, to take or
bring, in the name of Lender, Borrower or any Guarantor, all steps, actions,
suits or proceedings deemed by Lender necessary or desirable to effect
collection of the Collateral; and (f) to execute in Borrower's or any
Guarantor's name and on its behalf any UCC financing statements or amendments
thereto. Borrower and each Guarantor hereby releases Lender and its officers,
employees and designees, from any liability arising from any act or acts under
this Section 4.8 or in furtherance thereof, whether of omission or commission,
and whether based upon any error of judgment or mistake of law or fact, except
for acts of gross negligence or wilful misconduct of Lender as determined
pursuant to a final non-appealable order of a court of competent jurisdiction.
4.9 Use of Proceeds.
(a) Borrower shall use the initial proceeds of the Loans made by Lender to
Borrower hereunder on the day such Loans are made only for: (i) loans by
Borrower to each Guarantor in an amount equal to the then outstanding amount of
the Indebtedness of such Guarantor to Borrower arising from loans made by
Borrower to such Guarantor prior to the date of the initial Loans hereunder,
provided, that, (A) each Guarantor shall use the proceeds of the loans received
by such Guarantor from Borrower (which loans were made by Borrower to such
Guarantor with the proceeds of the Loans by Lender to Borrower) to repay
Indebtedness of such Guarantor to Borrower outstanding immediately prior to the
loans by Borrower to such Guarantor using the proceeds of the Loans made to
Borrower hereunder and (B) Borrower shall use the proceeds of all such
repayments from Guarantors of the loans previously made by Borrower to
Guarantors to repay all of the Indebtedness of Borrower to the Existing Lender
and (ii) costs, expenses and fees in connection with the preparation,
negotiation, execution and delivery of this Agreement and the other Financing
Agreements.
<PAGE>
(b) Borrower shall only use all other proceeds of Loans for its own general
operating, working capital or other proper corporate purposes not otherwise
prohibited by the terms hereof (and including, without limitation to make loans
to Guarantors which shall only be used for the benefit of, or in connection with
the business of, such Guarantor, in each case to the extent permitted
hereunder).
(c) All loans made by Borrower to any Guarantor, or in connection with the
business of, any Guarantor pursuant to the provisions hereof shall only be used
by such Guarantor for (i) general operating, working capital and other proper
corporate purposes of such Guarantor not otherwise prohibited by the terms
hereof and (ii) interest, costs, expenses, fees and other Obligations owed to
Lender in connection with this Agreement and the transactions contemplated in
connection herewith.
(d) None of the proceeds of the Loans or the loans by Borrower to any
Guarantor shall be used, directly or indirectly, for the purpose of purchasing
or carrying any margin security or for the purposes of reducing or retiring any
Indebtedness which was originally incurred to purchase or carry any margin
security or for any other purpose which might cause any of the Loans or such
intercompany loans to be considered a "purpose credit" within the meaning of
Regulation G of the Board of Governors of the Federal Reserve System, as
amended.
SECTION 5. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS
5.1 Conditions Precedent to Initial Loans. Each of the following is a
condition precedent to Lender making the initial Loans pursuant to this
Agreement and the other Financing Agreements, (any of which may be waived, in
whole or in part, only by Lender in writing):
(a) Lender shall have received, in form and substance satisfactory to
Lender, all releases, terminations and such other documents as Lender may
request to evidence and effectuate the termination and release by Existing
Lender of Borrower and Guarantors from obligations, liabilities and indebtedness
of Borrower to Existing Lender and the termination and release by Existing
Lender of any interest in and to any assets and properties of Borrower and
Guarantors, duly authorized, executed and delivered by it, including, but not
limited to, UCC termination statements for all UCC financing statements
previously filed by it as secured party and Borrower or any Guarantor, as
debtor;
<PAGE>
(b) Lender shall have received, in form and substance satisfactory to
Lender, (i) the unaudited December 31, 1997 consolidated pro-forma balance sheet
of Borrower and its Subsidiaries reflecting the initial transactions
contemplated hereunder, including, but not limited to, the Loans made and the
use of the proceeds of the Loans as provided herein, accompanied by a
certificate dated of even date herewith of the chief financial officer of
Borrower stating that such pro-forma balance sheet represents the reasonable,
good faith opinion of such officer as to the subject matter thereof as of the
date of such certificate and (ii) the monthly projections of the financial
condition and results of operations of Borrower and its Subsidiaries for the
fiscal year ending December 31, 1998;
(c) Lender shall have received, in form and substance satisfactory to
Lender, all other consents, waivers, acknowledgments, releases, terminations and
other agreements and documents from third persons which Lender may deem
necessary or desirable in order to permit, protect and perfect Lender's security
interests in and liens upon the Collateral or to effectuate the provisions or
purposes of this Agreement and the other Financing Agreements, including,
without limitation, (i) such Collateral Access Agreements as Lender may specify
and (ii) acknowledgments and consents to the security interests in, and liens
upon, and assignment as collateral of, Receivables arising under any agreements
of Borrower or any Guarantor with Third Party Payors, duly authorized, executed
and delivered by such Third Party Payors (including those listed on Schedule
7.11 hereto);
(d) Borrower shall have established the Collection Accounts;
(e) Lender shall have received evidence of insurance and loss payee
endorsements required under this Agreement and under the other Financing
Agreements, in form and substance satisfactory to Lender, and certificates of
insurance policies and/or endorsements naming Lender as loss payee, all at
Borrower's cost and expense;
(f) Lender shall have received evidence, in form and substance satisfactory
to Lender, that Lender has a valid perfected first priority security interest in
all of the Collateral;
(g) Lender shall have received and reviewed UCC search results for all
jurisdictions in which assets of Borrower and Guarantors are located, which
search results shall be in form and substance satisfactory to Lender;
(h) Lender shall have received a Borrowing Base Certificate setting forth
such Borrowing Base as is appropriate, in the Lender's discretion, for the
business and working capital requirements of Borrower and Guarantors, which
Borrowing Base Certificate as to the EBITDA of Borrower and its Subsidiaries
shall be as of the last day of the month immediately preceding the date hereof
and as to the revenues and cash receipts of Borrower and Guarantors shall be as
of the Saturday immediately preceding the date hereof;
(i) Lender shall have received, in form and substance satisfactory to
Lender, the results of a review of Borrower's and Guarantors' accounting,
collateral and other records by a firm acceptable to Lender, and the resulting
report shall be satisfactory in form, scope and substance to Lender;
(j) the Excess Availability as determined by Lender, as of the date hereof,
shall be not less than $1,000,000 after giving effect to the initial Loans made
in connection with the initial transactions hereunder;
<PAGE>
(k) Lender shall have received true, correct and complete copies of all
Material Contracts;
(l) all requisite corporate action and proceedings in connections with this
Agreement and the other Financing Agreements shall be satisfactory in form and
substance to Lender, and Lender shall have received all information and copies
of all documents, including, without limitation, records of requisite
corporation action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities;
(m) Lender shall have received share certificates in the name of Lender or
its designee representing the number of shares of common stock of Borrower equal
to three percent (3%) of all of the issued and outstanding shares of common
stock of Borrower as of the date hereof (after giving effect to the equity
issued in connection with the cash equity capital contribution provided for in
this Section 5.1 and the issuance of such shares to Lender);
(n) Lender shall have received, in form and substance satisfactory to
Lender, the Subscription and Registration Rights Agreement between Borrower and
Lender, duly authorized, executed and delivered by Borrower;
(o) Lender shall have received evidence, in form and substance satisfactory
to Lender, that all of the bank accounts of Borrower and each Guarantor have
been reconciled in a manner satisfactory to Lender or its agents or designees
for each month of 1997;
(p) Lender shall have received, in form and substance satisfactory to
Lender, (i) the limited guarantee by Loren S. Brink in favor of Lender (which
guarantee shall be limited to $1,000,000, plus interest from the date payment
thereunder is due and costs, expenses and other charges related to collection
thereunder) and (ii) the unlimited guarantees by each of the Subsidiaries of
Borrower in favor of Lender, in each case duly authorized, executed and
delivered by each of them;
(q) Lender shall have received, in form and substance reasonably
satisfactory to Lender, a stock pledge agreement, duly executed and delivered by
Borrower or the Guarantor which is the owner thereof (as the case may be)
pledging all of the Capital Stock of each Guarantor to Lender, together with the
original stock certificates representing such stock and stock powers duly
executed in blank with respect thereto;
(r) Lender shall have received evidence, in form and substance satisfactory
to Lender, that Borrower has received on the date hereof net cash proceeds from
a cash equity capital contribution of not less than $2,000,000 pursuant to a
private placement of the Capital Stock of Borrower and warrants for such stock
on terms and conditions acceptable to Lender and such proceeds are available to
be used by Borrower for working capital;
<PAGE>
(s) Lender shall have received, in form and substance satisfactory to
Lender, a subordination agreement by and between Brightbridge and Lender, as
acknowledged and agreed to by Borrower, duly authorized, executed and delivered
by Brightbridge and Borrower, providing for, inter alia, the subordination in
right of payment of Indebtedness of Borrower to Brightbridge to the prior
indefeasible payment and satisfaction in full of the Obligations;
(t) Lender shall have received, in form and substance satisfactory to
Lender, amendments to the Brightbridge Agreements to reflect the repayment of
$250,000 of the Indebtedness of Borrower to Brightbridge thereunder and that the
remaining principal balance is $250,000 payable in six (6) equal monthly
installments, duly authorized, executed and delivered by Borrower and
Brightbridge;
(u) Lender shall have received evidence, in form and substance satisfactory
to Lender, that all necessary governmental and third party approvals in
connection with the financing arrangements provided for herein shall have been
obtained and remain in effect, and no action shall have been taken by any
competent authority which restrains, prevents or imposes materially adverse
conditions upon the consummation of the financing arrangements provided for
herein;
(v) Lender shall have received, in form and substance satisfactory to
Lender, an opinion letter of counsel to Borrower and Guarantors with respect to
the Financing Agreements, and an opinion letter of special counsel to Borrower
and Guarantors with respect to certain health care issues and such other matters
as Lender or its counsel may request;
(w) there shall be no actions, suits or proceedings pending or threatened
(i) with respect to this Agreement or any of the other Financing Agreements or
(ii) which could be reasonably likely to have a material adverse effect on the
business, assets, condition (financial or otherwise) or results of operation or
prospects of Borrower or any Guarantor or the legality, validity,
enforceability, perfection or priority of the security interests and liens of
Lender upon the Collateral or the ability of Lender to enforce the Obligations
or realize upon the Collateral or otherwise with respect to the rights of Lender
hereunder and under the other Financing Agreements or the ability of Borrower or
any Guarantor to perform its obligations hereunder or under the other Financing
Agreements;
(x) no material adverse change shall have occurred in the business, assets,
condition (financial or otherwise) or results of operations of Borrower or any
Guarantor or since the date of the latest field examination of Lender and no
change or event shall have occurred which would impair the ability of Borrower
or any Guarantor to perform its obligations hereunder or under any of the other
Financing Agreements to which it is a party or of Lender to enforce the
Obligations or realize upon the Collateral; and
(y) the other Financing Agreements and all instruments and documents
hereunder and thereunder shall have been duly executed and delivered to Lender,
in form and substance satisfactory to Lender.
<PAGE>
5.2 Conditions Precedent to All Loans. Each of the following is an
additional condition precedent to the Loans to Borrower, including the initial
Loans and any future Loans:
(a) all representations and warranties contained herein and in the other
Financing Agreements shall be true and correct in all respects with the same
effect as though such representations and warranties had been made on and as of
the date of the making of each such Loan and after giving effect thereto, except
to the extent that such representation and warranties expressly relate solely to
an earlier date (in which case such representations and warranties shall have
been true and accurate on and as of such earlier date);
(b) no law, regulation, order, judgment or decree of any Governmental
Authority shall, and Lender shall not have received any notice that any action,
suit, investigation, litigation or proceeding is pending or threatened in any
court or before any arbitrator or Governmental Authority which, (i) purports to
enjoin, prohibit, restrain or otherwise affect (A) the making of the Loans or
(B) the consummation of the transactions contemplated pursuant to the terms
hereof or of the other Financing Agreements or (ii) has or would have a material
adverse effect on the business, assets, condition (financial or otherwise) or
results of operations or prospects of Borrower or any Guarantor or the legality,
validity, enforceability, perfection or priority of the security interests and
liens of Lender upon the Collateral or the ability of Lender to enforce the
Obligations or realize upon the Collateral or otherwise with respect to the
rights of Lender hereunder and under the other Financing Agreements or the
ability of Borrower or any Guarantor to perform its obligations hereunder or
under the other Financing Agreements; and
(c) no Event of Default and no act, condition or event which, with notice
or passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing on and as of the date of the making of such Loan
and after giving effect thereto.
SECTION 6. COLLATERAL
6.1 As collateral security for the prompt performance, observance and
payment in full of all of the Obligations, Borrower and each Guarantor hereby
grants, pledges and assigns to Lender as security, a continuing security
interest in and lien upon, and right of setoff against, all of the following now
owned and hereafter acquired or existing assets and properties of Borrower and
each Guarantor (which assets and properties, together with all other collateral
security for the Obligations granted to or otherwise held or acquired by Lender
are referred to herein as the "Collateral"):
(a) all Receivables;
<PAGE>
(b) all other present and future general intangibles (including, but not
limited to, licenses, franchises, permits, patents, patent rights, copyrights,
works which are the subject matter of copyrights, trademarks, tradenames,
tradestyles, patent and trademark applications and licenses and rights
thereunder, and all other rights under any of the foregoing, all extensions,
renewals, reissues, divisions, continuations, and continuations-in-part of any
of the foregoing, and all rights to sue for past, present, and future
infringement of any of the foregoing; inventions, trade secrets, formulae,
processes, compounds, drawings, designs, blueprints, surveys, reports, manuals,
and operating standards; goodwill; customer and other lists in whatever form
maintained; and trade secret rights, copyright rights, rights in works of
authorship, and contract rights relating to computer software programs, in
whatever form created or maintained);
(c) all present and future monies, securities and investment property,
credit balances, deposits, deposit accounts and other property of Borrower and
each Guarantor now or hereafter held or received by or in transit to Lender or
its Affiliates or at any other depository or other institution from or for the
account of Borrower or any Guarantor, whether for safekeeping, pledge, custody,
transmission, collection or otherwise;
(d) all present and future liens, security interests, rights, remedies,
title and interest in, to and in respect of Receivables and other Collateral,
including, without limitation, (i) rights and remedies under or relating to
guaranties, contracts of suretyship, letters of credit and credit and other
insurance related to the Collateral; (ii) rights of stoppage in transit,
replevin, repossession, reclamation and other rights and remedies of an unpaid
vendor, lienor or secured party; (iii) goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, Receivables or other Collateral, including, without limitation,
returned, repossessed and reclaimed goods; and (iv) deposits by and property of
Account Debtors or other Persons securing the obligations of Account Debtors;
(e) all Inventory;
(f) all Equipment;
(g) all Records; and
(h) all products and proceeds of the foregoing, in any form, including,
without limitation, any insurance proceeds and any claims against third persons
for loss or damage to or destruction of any or all of the foregoing.
<PAGE>
6.2 Notwithstanding anything to the contrary contained in Section 6.1
above, the types or items of Collateral described in such Section shall not
include any Equipment which is, or at the time of Borrower's or any Guarantor's
acquisition thereof shall be, subject to a purchase money mortgage or other
purchase money lien or security interest (including Capitalized Lease
Obligations) permitted under Section 8.5 hereof if: (a) the valid grant of a
security interest or lien to Lender in such item of Equipment is prohibited by
the terms of the agreement between Borrower (or such Guarantor) and the holder
of such purchase money mortgage or other purchase money lien or security
interest and such prohibition has not been or is not waived, or the consent of
the holder of the purchase money mortgage or other purchase money lien or
security interest has not been or is not otherwise obtained and (b) the purchase
money mortgage or other purchase money lien or security interest on such item of
Equipment is or shall become valid and perfected.
6.3 Nothing contained herein shall be deemed to be (a) an assignment or
grant of a power of attorney as to Medicare Accounts in violation of the Social
Security Act Amendments of 1972, as amended, 42 U.S.C. Section 1395g, or any
similar state statute applicable to Borrower or Guarantors, as amended, and the
rules and regulations promulgated thereunder or (b) an assignment or grant of a
power of attorney as to Medicaid Accounts in violation of the Social Security
Act Amendments of 1972, 42 U.S.C. Section 1396(a)(32), or any similar state
statute applicable to Borrower or Guarantors, as amended, and the rules and
regulations promulgated thereunder.
SECTION 7. REPRESENTATIONS AND WARRANTIES
Borrower and each Guarantor hereby jointly and severally represents and
warrants to Lender as follows, which representations and warranties are
continuing and shall survive the execution and delivery hereof, and the truth
and accuracy of each, together with the representations and warranties in the
other Financing Agreements, being a continuing condition of each Loan:
7.1 Organization and Qualification.
(a) Borrower and each Guarantor is a duly organized and validly existing
corporation in good standing under the laws of its state or jurisdiction of
incorporation, with perpetual corporate existence, and has the corporate power
and authority to own its properties and to transact the business in which it is
engaged or presently proposes to engage. Borrower and each Guarantor has
qualified to do business as a foreign corporation in the states and other
jurisdictions listed on Schedule 7.1(a) which constitute all states or other
jurisdictions where the nature of its business or the ownership or use of
property requires such qualification.
(b) Borrower and Guarantors do not have any Subsidiaries as of the date
hereof, except as set forth on Schedule 7.1(b) hereto.
<PAGE>
(c) As of the date hereof, Borrower has taken, or caused to be taken, all
actions and proceedings required to liquidate and dissolve Health Fitness
Physical Therapy of Tahoe, Inc. in accordance with applicable laws and
regulations, including, but not limited to, appropriate shareholder and board
approvals and filings with the state governmental authorities in accordance with
the Articles of Incorporation and By-Laws of such Subsidiary and all applicable
laws and regulations. The liquidation and dissolution of such Subsidiary shall
not (i) violate any material law or any order or decree of any court or
governmental instrumentality in any material respect and shall not conflict with
or result in the breach of, or constitute a material default under, any
indenture, mortgage, deed of trust, or any other agreement or instrument to
which Borrower, any Guarantor or such Subsidiary is a party or may be bound, and
(ii) result in any increased liabilities of Borrower or any Guarantor in any
material respect. Upon the liquidation and dissolution of such Subsidiary all
assets of such Subsidiary or proceeds thereof have been or shall be transferred
to Borrower.
7.2 Corporate Power and Authority. Borrower has the corporate power and
authority to borrow and Borrower and each Guarantor have the corporate power and
authority to execute, deliver and carry out the terms and provisions of this
Agreement and the other Financing Agreements and all other agreements,
instruments and documents delivered by Borrower and Guarantors pursuant hereto
and thereto applicable to it, and Borrower and each Guarantor have taken or
caused to be taken all necessary corporate action to authorize the execution,
delivery and performance of this Agreement, the other Financing Agreements and
the other agreements relating hereto or thereto to which it is a party, the
present and future borrowings by Borrower hereunder and thereunder and the
execution, delivery and performance of the instruments and documents delivered
and to be delivered by it pursuant hereto and thereto. This Agreement and the
other Financing Agreements to which it is a party constitute and will constitute
legal, valid and binding obligations of Borrower and each Guarantor, enforceable
in accordance with their respective terms.
7.3 Capitalization.
(a) All of the issued and outstanding shares of Capital Stock of HF Rehab,
HF Rehab Iowa, Fitness Centers and Sports Therapy are directly and beneficially
owned and held by Borrower and have been duly authorized and are fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances of
any kind except in favor of Lender. All of the issued and outstanding shares of
Capital Stock of TPC are directly and beneficially owned and held by HF Rehab
and have been duly authorized and are fully paid and non- assessable, free and
clear of all claims, liens, pledges and encumbrances of any kind except in favor
of Lender. All of the issued and outstanding shares of Capital Stock of Duffy,
Medlink and Medlink Services are directly and beneficially owned and held by HF
Rehab Iowa and have been duly authorized and are fully paid and non-assessable
free and clear of all claims, liens, pledges and encumbrances of any kind except
in favor of Lender.
<PAGE>
(b) After the creation of the Obligations, the security interests of Lender
and the other transactions contemplated hereunder, Borrower and each Guarantor
shall continue to be able to pay their respective debts as they mature and each
of them has (and has reason to believe it will continue to have) sufficient
capital (and not unreasonably small capital) to carry on its business and all
businesses in which it is about to engage. The assets and properties of Borrower
and each Guarantor at a fair valuation and at their present fair salable value
are, and will be, greater than the Indebtedness and other liabilities of
Borrower and such Guarantor, and including subordinated and contingent
liabilities computed in the amount which, to the best of Borrower's and
Guarantor's knowledge, represents an amount which can reasonably be expected to
become an actual or matured liability. Borrower and each Guarantor has
sufficient capital to carry on all businesses and transactions in which it now
engages or proposes to engage in, is solvent and will, in the reasonable, good
faith determination of Borrower and Guarantors as of the date hereof, continue
to be solvent after the creation of the Obligations and the security interests
in favor of Lender, and is able to pay its debts as they mature.
7.4 Compliance with Other Agreements and Applicable Law.
(a) Borrower and each Guarantor is not in default under, in violation of or
in contravention of, in any material respect, any Material Contract.
(b) Neither the execution and delivery of this Agreement, the other
Financing Agreements, or any of the instruments and documents to be delivered
pursuant hereto or thereto, nor the consummation of the transactions herein or
therein contemplated, nor compliance with the provisions hereof or thereof, has
violated any law or regulation or any order or decree of any court or
Governmental Authority in any respect or does or will conflict with or result in
the breach of, or constitute a default in any respect under, any Material
Contract, or result in the creation or imposition of any lien, charge or
encumbrance upon any of the property of Borrower or any Guarantor (except as
specifically contemplated hereunder or under the other Financing Agreements) or
violate any provision of the Certificate of Incorporation or By-Laws of Borrower
or any Guarantor.
(c) Borrower and each Guarantor has obtained all material permits,
licenses, approvals, consents, certificates, orders or authorizations of any
Governmental Authority required for the lawful conduct of its business and is in
compliance in all material respects with the requirements of all applicable
laws, rules, regulations and orders of any Governmental Authority relating to
its business (including, without limitation, those set forth in or promulgated
pursuant to ERISA, the Occupational Safety and Health Act of 1970, as amended,
the Health Care Laws, the Fair Labor Standards Act of 1938, as amended, the
Code, and the Environmental Laws). Schedule 7.4 hereto sets forth all material
permits, licenses, approvals, consents, certificates, orders or authorizations
("Permits") held by Borrower and Guarantors as of the date hereof issued by any
Federal, State or local Governmental Authority and any applications pending by
Borrower or any Guarantor with any Federal, State or local Governmental
Authority. The Permits constitute all licenses, permits and certificates
necessary for Borrower and each Guarantor to own and operate its business as
presently conducted or proposed to be conducted and as to Borrower and any
Guarantor which is a Certified Medicare Provider or Certified Medicaid Provider,
for the ownership, operation and conduct of its business in such capacity. All
of the Permits are valid and subsisting and in full force and effect. There are
no actions, claims or proceedings pending or threatened that seek the
revocation, cancellation, suspension or modification of any of the Permits,
except as set forth on Schedule 7.4 hereto. True, correct and complete copies of
the Permits have been delivered to Lender. To the best of Borrower's and
Guarantors' knowledge, no statute, law, rule, regulation, standard or code is
pending or proposed which would substantially reduce the projected revenues of,
or otherwise materially adversely affect the business, assets, condition
(financial or otherwise), or results of operation or prospects of Borrower or
any Guarantor.
<PAGE>
7.5 Governmental Approval. No consent, approval or other action of, or
filing with, or notice to any Governmental Authority is required in connection
with the execution, delivery and performance of this Agreement, the other
Financing Agreements or any of the instruments or documents to be delivered
pursuant hereto or thereto, except for the filing of UCC financing statements.
7.6 Chief Executive Office; Collateral Locations. The addresses of the
principal place of businesses and chief executive offices of Borrower and
Guarantors are set forth on Schedule 7.6 hereto, which addresses are the mailing
address for such principal place of business and chief executive office. The
books and records relating to the Receivables of Borrower and Guarantors are
located at such addresses. The Collateral is located only at the locations set
forth on Schedule 7.6, subject to the right of Borrower and Guarantor to
establish new locations in accordance with Section 8.3 below.
7.7 Priority of Liens/Title to Properties.
(a) The security interests and liens granted to Lender under this Agreement
and the other Financing Agreements constitute valid and perfected liens and
security interests in and upon the Collateral subject only to the liens
indicated on Schedule 7.7 hereto and the liens permitted under Section 8.5
hereof.
(b) Borrower and each Guarantor has good and marketable title to all of its
properties and assets subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except those directly in favor
of or assigned to Lender and such others as are specifically permitted under the
provisions of this Agreement as listed on Schedule 7.7 hereto or are permitted
under Section 8.5 hereof and the other Financing Agreements. Borrower and each
Guarantor has peaceful and undisturbed possession of all real property and
Equipment and such other assets as may be necessary for its business as
presently conducted or proposed to be conducted and under all leases, licenses
and easements necessary for the operation of its properties and business. None
of such leases, licenses and easements contain any unusual or burdensome
provisions which might materially affect or impair the operations of such
properties and business and all such leases, licenses and easements are valid
and subsisting and in full force and effect.
<PAGE>
(c) All assets and properties of Borrower or any Guarantor which were
subject to any security interest or lien in favor of START Physical Therapy, a
California general partnership have been sold, assigned and transferred by
Borrower or such Guarantor to Regency Outpatient Services, Inc., a California
corporation pursuant to the Asset Purchase Agreement, dated as of May 30, 1997,
between Borrower and Regency Outpatient Services, Inc. Pursuant to the terms of
such Asset Purchase Agreement, Regency has assumed all obligations, liabilities
and indebtedness of Borrower or any of its Affiliates to START Physical Therapy
(including, without limitation, all obligations of Borrower to START Physical
Therapy evidenced by or arising under the Commercial Promissory Note, dated June
2, 1994, issued by Borrower payable to START Physical Therapy). START Physical
Therapy has acknowledged and consented to such assignment and assumption. As of
the date hereof, Borrower has no further obligations or liabilities to START
Physical Therapy except for obligations or liabilities to START Physical Therapy
which have been assumed by Regency Outpatient Services, Inc.
7.8 Tax Returns. Except as set forth on Schedule 7.8, Borrower and each
Guarantor has filed, or caused to be filed, all Federal, State, county, local,
foreign and other tax returns, reports and declarations which are required to be
filed by it and as to which an extension has not been granted and has paid or
caused to be paid all taxes shown to be due and payable on said returns and
reports or in any assessment received by it, to the extent that such taxes have
become due and payable, except taxes the validity of which are being contested
in good faith by appropriate proceedings diligently pursued and available to
Borrower or such Guarantor and with respect to which adequate reserves have been
set aside on its books. Adequate provision has been made for the payment of all
accrued and unpaid Federal, State, county, local, foreign and other taxes
whether or not yet due and payable and whether or not disputed.
7.9 Litigation. Except as set forth on Schedule 7.9 hereto, there is no
present investigation by any Governmental Authority pending or, to the best of
the knowledge of Borrower or any Guarantor, threatened against or affecting
Borrower or any Guarantor or their respective properties or business and there
is no present action, suit, proceeding or claim by any Person pending or, to the
best of the knowledge of Borrower or any Guarantor, threatened against Borrower
or any Guarantor or its or their assets or goodwill, or against or affecting any
transactions contemplated by this Agreement, the other Financing Agreements, or
other instruments, agreements or documents delivered in connection herewith or
therewith, which if adversely determined with respect to it, would have a
material adverse effect on the business, assets, condition (financial or
otherwise) or results of operation or prospects of Borrower or any Guarantor or
the legality, validity, enforceability, perfection or priority of the security
interests and liens of Lender upon the Collateral or the ability of Lender to
enforce the Obligations or realize upon the Collateral or otherwise with respect
to the rights of Lender hereunder or under the other Financing Agreements or the
ability of Borrower or such Guarantor to perform its obligations hereunder or
under the other Financing Agreements.
7.10 Intellectual Property. Borrower and each Guarantor owns or licenses
all patents, trademarks, service-marks, logos, tradenames, trade secrets,
know-how, copyrights, or licenses and other rights with respect to any of
foregoing, which are necessary for the operation of its business as presently
conducted or proposed to be conducted. To the best of the knowledge of Borrower
and any Guarantor, no product, process, method, substance, part or other
material presently contemplated to be sold by or employed by Borrower or any
Guarantor infringes any patent, trademark, service-mark, tradename, copyright,
license or other right owned by any other Person and no claim or litigation is
pending or threatened against or affecting Borrower or any Guarantor contesting
its right to sell or use any such product, process, method, substance, part or
other material.
<PAGE>
7.11 Accounts.
(a) Each Account representing an obligation for the payment of money
constitutes a valid and legally enforceable indebtedness based upon an actual
and bona fide sale and delivery of goods or rendition of services in the
ordinary course of the businesses of Borrower and Guarantors, which has been
finally accepted by the Account Debtor and other than as to Medicare Accounts
and Medicaid Accounts, for which the Account Debtor is unconditionally liable to
make payment of the amount stated in each invoice or other document evidencing
the Account representing an obligation for the payment of money in accordance
with the terms thereof, without offset, defense or counterclaim and as to
Medicare Accounts, for which the Fiscal Intermediary or other Account Debtor is
liable to make payment of the Allowable Costs for the sale and delivery of goods
and rendition of services giving rise to such Account. All statements made and
all unpaid balances appearing in the invoices, instruments or other
documentation evidencing each Account are true and correct and are in all
material respects what they purport to be (except as to Medicare Accounts to the
extent Borrowers and Guarantors are only entitled to payment of the Allowable
Costs) and all signatures and endorsements that appear thereon are genuine. None
of the transactions underlying or giving rise to any Account violates any
Federal, State or foreign laws or regulations, and all documents relating to the
Accounts are legally sufficient under such laws or regulations and shall be
legally enforceable in accordance with their terms and all recording, filing and
other requirements of giving public notice under any applicable law have been
duly satisfied.
(b) For each Medicare Account: (i) the person receiving the services giving
rise to such Account is an eligible Medicare beneficiary, (ii) a written
"treatment authorization request" or written "prior approval", if needed, has
been duly obtained within thirty (30) days after service begins, (iii) the
eligibility of the patient under Medicare has been verified with the appropriate
Fiscal Intermediary or appropriate Governmental Authority, (iv) verification
from the patient has been obtained that such person is not eligible for any
other health care or medical insurance coverage or other similar type of
assistance, and (v) all other authorization and billing procedures and
documentation required in order for Borrower or the Guarantor providing such
service to be reimbursed and paid on such account by the Fiscal Intermediary
have been properly completed and satisfied.
(c) For each Medicaid Account: (i) the person receiving the services giving
rise to such Account is an eligible Medicaid beneficiary, (ii) a written
"treatment authorization request" or written "prior approval", if needed, has
been duly obtained within thirty (30) days after service begins, (iii) the
eligibility of the patient under Medicaid has been verified with the appropriate
Governmental Authority, (iv) verification from the patient has been obtained
that such person is not eligible for any other health care or medical insurance
coverage or other similar type of assistance, (v) a copy or original of the
patient's Medicaid eligibility card has been obtained, (vi) confirmation of the
number of service hours has been obtained from the appropriate Governmental
Authority, and (vii) all other authorization and billing procedures and
documentation required in order for Borrower or the Guarantor providing such
service to be reimbursed and paid on such account by the Fiscal Intermediary
have been properly completed and satisfied.
<PAGE>
(d) For each Contract Account: (i) Borrower or the Guarantor who is
providing the services giving rise to such Account has entered into a written
agreement with the Third Party Payor which is the Account Debtor with respect
thereto in which such Third Party Payor agrees to reimburse Borrower or such
Guarantor for health care services provided to its members or participants,
which agreement shall be valid and binding upon the parties thereto and
enforceable in accordance with its terms, (ii) the patient receiving the
services giving rise to such Account is entitled to coverage under such
agreement, (iii) an institutional credit application has been properly completed
in all respects as to the Third Party Payor which is the Account Debtor and
signed by an officer, administrator, owner or partner of such Third Party Payor
and the creditworthiness of such Third Party Payor approved by Borrower or such
Guarantor in accordance with its current standards and practices, (iv) Borrower
or such Guarantor has contacted the Third Party Payor which is the Account
Debtor with respect to such Account and have received confirmation from such
Third Party Payor that: (A) the proposed patient is entitled to coverage under
the terms of the agreement of such Third Party Payor with the Borrower or such
Guarantor providing the services giving rise to such Account, (B) the proposed
service to be provided to such patient which will give rise to such Account is
covered under the terms of such agreement, (C) the costs that the Borrower or
such Guarantor will incur or has incurred in providing the service giving rise
to such Account are otherwise reimbursable under the terms of such agreement,
except for certain costs not to exceed, together with costs which are not
reimbursed as described in Section 7.11(e)(i)(C) below, $10,000 in any one case
or $75,000 in the aggregate (provided, that, for purposes of such limitation,
any costs originally included in the calculation of such costs for purposes of
the limitation which are subsequently reimbursed under the terms of such
agreement shall upon such reimbursement no longer be considered in the
calculation), and (D) the agreement of Borrower or such Guarantor with such
Third Party Payor does not prohibit or restrict in any manner the assignment of
rights to payment under such agreement by the patient receiving the services to
Borrower, such Guarantor or any other third party, and (v) all other applicable
procedures and documentation required under such contract in order for the
Borrower or Guarantor providing such service to be reimbursed and paid on such
Account by the Account Debtor have been properly completed and satisfied.
(e) For each Insurance Account: (i) Borrower or the Guarantor who is
providing the services giving rise to such Account has contacted the insurance
company which is the Account Debtor with respect to such Account and has
received confirmation from such insurance company that (A) the proposed patient
is an insured covered by the insurance contract issued by the insurance company
under which the patient is claiming coverage, (B) the type of service to be
provided to such patient which will give rise to such Account is covered under
such insurance contract, (C) the costs that Borrower or such Guarantor will
incur or has incurred in providing the service giving rise to such Account are
otherwise reimbursable under the terms of the patient's insurance coverage with
such insurance company, except for certain costs not to exceed, together with
costs which are not reimbursed as described in Section 7.11(d)(iv)(C) above,
$10,000 in any one case or $75,000 in the aggregate (provided, that, for
purposes of such limitation, any costs originally included in the calculation of
such costs for purposes of the limitation which are subsequently reimbursed
under the terms of the patient's insurance coverage shall upon such
reimbursement no longer be considered in the calculation), and (D) the insurance
coverage provided by the insurance company which was the Account Debtor does not
prohibit or restrict in any manner the assignment of rights to payment
thereunder to Borrower, such Guarantor or any other third party, and (ii) an
assignment of benefits has been duly executed and delivered by the patient
receiving such service to the Borrower or Guarantor providing such service, and
(iii) all other authorization and billing procedures and documentation required
in order for Borrower or the Guarantor providing such service to be reimbursed
and paid on such Account by the insurance company of the patient receiving such
service have been properly completed and satisfied.
<PAGE>
(f) Schedule 7.11 hereto lists (i) all of the persons obligated to make any
payments to Borrower or any Guarantor in respect of any Insurance Account or
other person who is obligated to make payments to Borrower or any Guarantor in
respect of an interest or claim in or under any policy of insurance as of the
date hereof and (ii) all of the persons obligated to make any payment to
Borrower or any Guarantor in respect of any Contract Account as of the date
hereof.
7.12 Employee Benefits.
(a) Except to the extent that all events and obligations described in this
Section 7.12 and then in existence would not, in the aggregate, be reasonably
likely to have a material adverse effect on the business, assets, condition
(financial or otherwise) or results of prospects of Borrower or any Guarantor,
or the legality, validity, enforceability, perfection or priority of the
security interests and liens of Lender upon the Collateral or the ability of
Lender to enforce the Obligations or realize upon the Collateral or otherwise
with respect to the rights of Lender hereunder or under the other Financing
Agreements or the ability of Borrower or any Guarantor to perform its
obligations hereunder or under the other Financing Agreements to the best of the
knowledge of Borrower, and each Guarantor, (i) each Plan (other than a
Multiemployer Plan) is in substantial compliance with ERISA and the Code,
(ii) each Multiemployer Plan is in substantial compliance with ERISA and the
Code, (iii) no Reportable Event has occurred with respect to a Plan (other than
a Multiemployer Plan), (iv) no Multiemployer Plan is insolvent (as defined in
Section 4245 of ERISA) or in reorganization (as defined in Section 4241 of
ERISA), (v) no Plan (other than a Multiemployer Plan) has an Unfunded Current
Liability, (vi) no Plan (other than a Multiemployer Plan) has an accumulated or
waived funding deficiency or has applied for an extension of any amortization
period within the meaning of Section 412 of the Code or Section 302 of ERISA,
(vii) all contributions required to be made with respect to a Plan have been
timely made, (viii) neither Guarantor, Borrower nor any Subsidiary of Borrower
nor any ERISA Affiliate has incurred any liability which as of the date hereof
has not been fully satisfied, to or on account of a Plan pursuant to Sections
409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or
Sections 401(a)(29), 4971, 4975 or 4980 of the Code or expects to incur any
liability under any of the foregoing Sections with respect to any Plan, (ix) no
proceedings have been instituted to terminate or appoint a trustee to administer
any Plan, (x) no condition exists which presents a material risk to Borrower,
any Guarantor, any other Subsidiary of Borrower or any ERISA Affiliate of
incurring a liability to or on account of a Plan pursuant to the foregoing
provisions of ERISA and the Code, (xi) using actuarial assumptions and
computation methods consistent with Part 1 of subtitle E of Title IV of ERISA,
there would be no liabilities of Borrower, any Guarantor, any other Subsidiary
of Borrower or any ERISA Affiliate to all Plans which are Multiemployer Plans in
the event of a complete withdrawal therefrom, as of the close of the most recent
fiscal year of each such Plan ended prior to the date of any Loan, (xii) no lien
imposed under the Code or ERISA on the assets of Borrower or any Guarantor, any
other Subsidiary of Borrower or any ERISA Affiliate exists or is likely to arise
on account of any Plan, and (xiii) Borrower, Guarantor, any other Subsidiary of
Borrower or any ERISA Affiliate do not maintain or contribute to any employee
welfare benefit plan (as defined in Section 3(1) of ERISA) which provides
benefits to retired employees or other former employees (other than as required
by Section 601 of ERISA and Section 4980B of the Code) or any employee pension
benefit plan (as defined in Section 3(2) of ERISA).
<PAGE>
(b) With respect to Plans that are Multiemployer Plans the representations
and warranties in this Section 7.12, other than any made with respect to
liability under Section 4201 of ERISA, are made to the best of the knowledge of
Borrower and Guarantors.
7.13 Environmental Compliance.
(a) Except as set forth on Schedule 7.13 hereto, neither Borrower nor any
Guarantor has generated, used, stored, treated, transported, manufactured,
handled, produced or disposed of any Hazardous Materials, on or off its premises
(whether or not owned by it) in any manner which at any time violates any
applicable Environmental Law or any license, permit, certificate, approval or
similar authorization thereunder in any material respect and the operations of
Borrower and Guarantors comply in all material respects with all Environmental
Laws and all licenses, permits, certificates, approvals and similar
authorizations thereunder.
(b) Except as set forth on Schedule 7.13 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any Governmental Authority or any other person nor is any pending or,
to the best of the knowledge of Borrower and Guarantors threatened, with respect
to any non-compliance with or violation of the requirements of any Environmental
Law by Borrower or any Guarantor in any material respect or the release, spill
or discharge, threatened or actual, of any Hazardous Material or the generation,
use, storage, treatment, transportation, manufacturer, handling, production or
disposal of any Hazardous Materials or any other environmental, health or safety
matter, which affects Borrower or any Guarantor or their businesses, operations
or assets or any properties at which Borrower or any Guarantor transported,
stored or disposed of any Hazardous Materials in any material respect.
(c) Except as set forth on Schedule 7.13 hereto, neither Borrower nor any
Guarantor has any material liability (contingent or otherwise) in connection
with a release, spill or discharge, threatened or actual, of any Hazardous
Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials.
(d) Except as set forth on Schedule 7.13, Borrower and each Guarantor has
all material licenses, certificates, approvals and other Permits required to be
obtained or filed in connection with the operations of Borrower and such
Guarantor under any Environmental Law and all of such licenses, permits,
certificates, approvals and other Permits are valid and in full force and
effect.
<PAGE>
7.14 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower or any Guarantor maintained at
any bank or other financial institution are set forth on Schedule 7.14 hereto,
subject to the right to establish new accounts in accordance with Section 8.20
below.
7.15 Investment Company. Borrower and Guarantors are not an "investment
company", or an "affiliated person" or "promoter" or "principal underwriter", as
such terms are defined in the Investment Company Act of 1940, as amended. The
making of the Loans by Lender, the application of the proceeds and the repayment
thereof by Borrower and the performance by Borrower and Guarantors of the
transactions contemplated herein will not violate any provision of the
Investment Company Act of 1940, as amended, or any rule, regulation or order
issued pursuant thereto.
7.16 Regulation G; Securities Exchange Act of 1934. Neither Borrower nor
any Guarantor owns any "margin security" as such term is defined in Regulation
G, as amended (12 C.F.R. Part 207) of the Board of Governors of the Federal
Reserve System. The proceeds of the borrowings made pursuant to this Agreement
and the other Financing Agreements will be used by Borrower and Guarantors only
for the purposes contemplated hereunder. Neither Borrower nor any Guarantor will
take nor will they permit any agent acting in their behalf to take, any action
which might cause this Agreement or the other Financing Agreements, or
instruments delivered pursuant hereto or thereto, to violate any regulation of
the Board of Governors of the Federal Reserve System or to violate the
Securities Exchange Act or any state or other securities laws, in each case as
in effect on the date hereof or as amended hereafter.
7.17 No Material Adverse Change. There has been no material adverse change
in the business, assets, condition (financial or otherwise) or results of
operations or prospects of Borrower or any Guarantor since the date of the most
recent financial statements with respect thereto submitted to Lender or field
examination with respect thereto conducted by or on behalf of Lender.
<PAGE>
7.18 Financial Statements.
(a) None of the financial statements, reports and other information
furnished or to be furnished by Borrower or any Guarantor to Lender with respect
to Borrower and Guarantors contain, as of their respective dates, any untrue
statement of material fact or (taken as a whole) omit to state any material fact
necessary to make the information therein not misleading. All such audited
financial statements and reports were and will be prepared in accordance with
GAAP consistently applied, and all such financial statements and reports shall
fairly present the consolidated and consolidating financial condition and
results of operations of the applicable Persons, as of the dates and for the
periods indicated thereon.
(b) The opening balance sheets and future cash flow projections for
Borrower and its Subsidiaries (together with the summaries of assumptions and
projected assumptions, based on historical performance with respect thereto)
furnished by Borrower and its Subsidiaries to Lender taken as a whole represent
the reasonable, good faith opinion of Borrower and Guarantors and their
management as to the subject matter thereof and the opening balance sheets
furnished by Borrower and Guarantors to Lender were prepared in accordance with
applicable guidelines of the American Institute of Certified Public Accountants.
7.19 Disclosure.
(a) The information contained in the representations and warranties of
Borrower and Guarantors set forth in this Agreement, the other Financing
Agreements, or in any other instrument, document, list, certificate, statement,
schedule or exhibit heretofore delivered or to be delivered to Lender, as
contemplated in this Agreement or in the other Financing Agreements, does not
contain and will not contain any untrue statement of a material fact and does
not omit and will not omit to state a material fact necessary in order to make
the information contained herein or therein not misleading.
(b) After giving effect to the transactions contemplated by this Agreement,
the other Financing Agreements, and the other instruments or documents delivered
in connection herewith and therewith, there does not exist and there has not
occurred any act, condition or event which constitutes an Event of Default or
which, with notice or passage of time or both would constitute an Event of
Default.
7.20 Labor Disputes.
(a) Set forth on Schedule 7.20 hereto is a list (including dates of
termination) of all collective bargaining or similar agreements between or
applicable to Borrower or any Guarantor and any union, labor organization or
other bargaining agent in respect of the employees of the Borrower and/or any
Guarantor on the date hereof.
<PAGE>
(b) There is (i) no significant unfair labor practice complaint pending
against Borrower or any Guarantor or, to the best of the knowledge of Borrower
and Guarantors, threatened against any of them, before the National Labor
Relations Board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is
pending on the date hereof against Borrower or any Guarantor or, to best of the
knowledge of Borrower and Guarantors, threatened against any of them, and
(ii) no significant strike, labor dispute, slowdown or stoppage is pending
against Borrower or any Guarantor or, to the best of the knowledge of Borrower
and Guarantors, threatened against Borrower or any Guarantor.
7.21 Corporate Name; Prior Transactions. Borrower and Guarantors have not,
during the past five years, been known by or used any other corporate or
fictitious name or been a party to any merger or consolidation, or acquired all
or substantially all of the assets of any Person, or acquired any of its
property or assets out of the ordinary course of business, except as set forth
on Schedule 7.21 hereto.
7.22 Restrictions on Subsidiaries. Except for restrictions contained in
this Agreement or any other agreement with respect to Indebtedness of Borrower
permitted hereunder as in effect on the date hereof, there are no contractual or
consensual restrictions on Borrower or any of its Subsidiaries which prohibit or
otherwise restrict (a) the transfer of cash or other assets (i) between Borrower
and any of its Subsidiaries or (ii) between any Subsidiaries of Borrower or (b)
the ability of Borrower or any of its Subsidiaries to grant security interests
to Lender in the Collateral.
7.23 Material Contracts. All of the Material Contracts of Borrower and each
Guarantor are set forth on Schedule 7.23 hereto. Borrower and Guarantors have
delivered true, correct and complete copies of such Material Contracts to Lender
on or before the date hereof. Neither Borrower nor any Guarantor is in breach of
or in default under any Material Contract.
7.24 Payable Practices. Borrower and Guarantors have not made any material
change in the historical accounts payable practices from those in effect
immediately prior to the date hereof.
7.25 Interrelated Businesses. Borrower is the direct and beneficial owner
of all of the issued and outstanding shares of Capital Stock of HF Rehab, HF
Rehab Iowa, Fitness Centers and Sports Therapy. HF Rehab is the direct and
beneficial owner of all of the issued and outstanding shares of Capital Stock of
TPC. HF Rehab Iowa is the direct and beneficial owner of all of the issued and
outstanding shares of Capital Stock of Duffy, Medlink and Medlink Services.
Borrower and Guarantors make up a related organization of various entities
constituting a single economic and business enterprise so that Borrower and
Guarantors share an identity of interests such that any benefit received by any
one of them benefits the others. Borrower and Guarantors render services to or
for the benefit of the other Borrower and Guarantors, make loans and advances
and provide other financial accommoda- tions to or for the benefit of the other
(including, inter alia, the payment by Borrower and Guarantors of creditors of
Borrower and Guarantors and guarantees by Borrower and Guarantors of
Indebtedness of the other Guarantors), and provide administrative, marketing,
payroll and management services to or for the benefit of Borrower and
Guarantors. Borrower and Guarantors have centralized accounting and legal
services, common officers and directors.
<PAGE>
7.26 Compliance with Medicare and Medicaid.
(a) Borrower and each Guarantor so designated on Schedule 7.26 hereto are
eligible to receive payment under Medicare and Medicaid and is a "provider of
services" under existing provider agreements with the Medicare and Medicaid
programs through the applicable Fiscal Intermediary for the states or regions
indicated in Schedule 7.26 so as to constitute a Certified Medicare Provider
and/or Certified Medicaid Provider, as applicable.
(i) Borrower and each Guarantor who is a Certified Medicare Provider or a
Certified Medicaid Provider is in compliance with all Health Care Laws,
including, without limitation, all Medicare and Medicaid program rules and
regulations applicable to them. Without limiting the generality of the
foregoing, none of Borrower or Guarantors is in violation of, or has received
notice of any violation of, any provisions of the Medicare and Medicaid
Anti-Fraud and Abuse or Anti-Kickback Amendments of the Social Security Act
(presently codified in Section 1128(B)(b) of the Social Security Act) or the
Medicare and Medicaid Patient and Program Protection Act of 1987.
(ii) Borrower and each Guarantor which is a Certified Medicare Provider or
Certified Medicaid Provider has in a timely manner filed all requisite cost
reports, claims and other reports required to be filed in connection with all
Medicare and Medicaid programs due on or before the date hereof, all of which
are complete and correct in all material respects. Except as specifically
described and set forth on Schedule 7.26, as of the date hereof, there are no
claims, actions or appeals pending (and Borrower and Guarantors have not filed
any claims or reports which should result in any such claims, actions or
appeals) before any Third Party Payor or Governmental Authority, including
without limitation, any Fiscal Intermediary, the Provider Reimbursement Review
Board or the Administrator of the Health Care Financing Administration, with
respect to any Medicare or Medicaid cost reports or claims filed by Borrower or
Guarantors on or before the date hereof. No validation review or program
integrity review related to Borrower or Guarantors as it may adversely affect
any of the assets or business of Borrower or Guarantors, or the consummation of
the transactions contemplated hereby, has been conducted by any Third Party
Payor or Governmental Authority in connection with Medicare or Medicare
programs, and to the best of Borrower's and Guarantors' knowledge no such
reviews are scheduled, pending or threatened against or affecting Borrower or
Guarantors, or any of their assets, or the consummation of the transactions
contemplated hereby.
(b) Schedule 7.26 lists the names of any applicant, member or former member
of the Borrower's and/or Guarantors' staff whose privileges have been denied,
reduced, curtailed, revoked, limited, suspended, placed under supervision,
modified, terminated or denied, and with respect to which an action or appeal is
currently pending or the period or periods within which such person is required
to give notice to preserve any right of hearing, appeal or further review has
not or have not expired. Borrower and Guarantors shall not be obligated to
provide this information in such detail that it would violate any Federal or
State law regarding the confidentiality of the information or make such
information not protected by attorney/client privilege.
<PAGE>
(c) Except as set forth on Schedule 7.26 hereto, there are no pending or to
the best of Borrower's and Guarantors' knowledge, threatened investigations,
actions or proceedings as a result of the health care activities, programs and
practices of Borrower or Guarantors pursuant to any violations of or failure to
comply with any Health Care Laws, including, without limitation, any Medicare or
Medicaid program rules or regulations.
(d) Any referral system of Borrower and Guarantors, including, without
limitation, the "Fair Share" program, complies with the Medicare and Medicaid
Anti-Fraud and Abuse Amendments of 1977, the Medicare and Medicaid Patient and
Program Protection Act of 1987 and all other Health Care Laws.
(e) The businesses of Borrower and Guarantors as currently conducted do not
require any Certificate of Need.
7.27 Health Care Practitioners Duly Licensed. All Health Care Practitioners
that are employees, agents or independent contractors of Borrower or Guarantors
are duly qualified and duly licensed under the appropriate Federal, State or
local Governmental Authority in the jurisdictions in which they practice
medicine or health care under contract, in the name of or for the benefit of
Borrower or Guarantors.
7.28 Taxpayer Identification Numbers. The Federal employer identification
number of Borrower and each Guarantor is as set forth on Schedule 7.28 hereto.
SECTION 8. ADDITIONAL COVENANTS
In addition to the covenants set forth in the other Financing Agreements,
Borrower and each Guarantor hereby jointly and severally covenant to and agree
with Lender that Borrower and Guarantors shall comply with the following
covenants, or cause the same to be complied with:
8.1 Tradenames. Some of the invoices of Borrower and each Guarantor may
from time to time be rendered to customers under the tradenames listed on
Schedule 7.21 hereto (which, together with any new tradenames used after the
date hereof are referred to collectively as the "Tradenames" and individually,
as a "Tradename"). As to the Tradenames used by it, and the related Accounts:
(a) Each Tradename is a tradename (and not an independent corporation or
other legal entity) by which Borrower and Guarantors may identify and sell or
lease certain of its goods or services and conduct a portion of its business.
<PAGE>
(b) All Accounts and proceeds thereof (including any returned merchandise)
which arise from the sale or lease of goods or rendition of services invoiced
under the Tradename shall be owned solely by Borrower and Guarantors and shall
be subject to the security interests of Lender and other terms of this Agreement
and the other Financing Agreements.
(c) All assignments or confirmatory schedules of Accounts delivered to
Lender by Borrower or any Guarantor, whether in the name of any of the
Tradenames or of Borrower or such Guarantor, shall be executed by Borrower or
such Guarantor as owner of such assigned Accounts, as the case may be.
(d) New Tradenames may be used by Borrower or any Guarantor, but only if
(i) Lender is given at least thirty (30) days prior written notice of the
intended use of any new Tradename and (ii) such supplemental financing
statements or similar instruments as Lender may request shall be executed and
delivered to Lender by Borrower or such Guarantor for filing or recording by
Lender prior to the use of such new Tradename.
8.2 Subsidiaries. Borrower and Guarantors shall not form or acquire any
Subsidiaries after the date hereof, except to the extent permitted under Section
8.7 hereof. In the event Borrower or any Guarantor forms or acquires any
Subsidiary after the date hereof, promptly upon such formation or acquisition of
any such Subsidiary after the date hereof, (a) such Subsidiary shall be subject
to the terms of this Agreement and bound by the terms and conditions hereof
applicable to Guarantors; (b) Borrower or such Guarantor shall cause any such
Subsidiary to execute and deliver to Lender, in form and substance satisfactory
to Lender and its counsel: (i) an absolute and unconditional guarantee of
payment of the Obligations containing terms substantially similar to those
guarantees entered into by the existing Guarantors in favor of Lender as of the
date hereof, (ii) a security agreement granting to Lender a first lien (except
as otherwise consented to in writing by Lender) upon all of the assets of such
Subsidiary containing terms substantially similar to this Agreement and the
other Financing Agreements, (iii) related UCC financing statements, and
(iv) such other agreements, documents and instruments as Lender may require,
including, but not limited to, supplements and amendments hereto and other loan
agreements or instruments evidencing Indebtedness of such new Subsidiary to
Lender; and (c) promptly upon Lender's request: (i) Borrower or such Guarantor
shall execute and deliver to Lender, in form and substance satisfactory to
Lender a pledge and security agreement granting to Lender a first pledge of and
lien on all of the issued and outstanding shares of Capital Stock of such
Subsidiary and (ii) Borrower or such Guarantor shall deliver the original stock
certificates evidencing such shares of Capital Stock together with stock powers
with respect thereto duly executed in blank, and (iii) the amount of the
investment by Borrower or such Guarantor in the Capital Stock of such Subsidiary
and any other amounts paid or liabilities incurred by Borrower in connection
with the formation or acquisition of such Subsidiary shall not exceed the amount
permitted under Section 8.7 hereof.
<PAGE>
8.3 New Collateral Locations. Borrower and any Guarantor may open any new
location within the continental United States provided it (a) gives Lender
thirty (30) days prior written notice of the intended opening of any such new
location, and (b) executes and delivers, or causes to be executed and delivered,
to Lender such agreements, documents, and instruments consistent with the other
then existing Financing Agreements to the extent applicable or otherwise as
Lender may deem reasonably necessary or desirable to protect its interests in
the Collateral to be located in such location, including, without limitation,
UCC financing statements and Collateral Access Agreements.
8.4 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower and
each Guarantor shall not, and shall not permit any Subsidiary to, directly or
indirectly:
(a) merge into or with or consolidate with any other Person or permit any
other Person to merge into or with or consolidate with it; or
(b) sell, assign, lease, transfer, abandon or otherwise dispose of any
Capital Stock or Indebtedness to any other Person or any of its assets to any
other Person, except for:
(i) sales of Inventory in the ordinary course of business;
(ii) the disposition of worn-out or obsolete Equipment so long as
(A) any proceeds of such disposition are paid to Lender, for application to
the Obligations in such order and manner as Lender shall determine and (B)
such sales do not involve Equipment having an aggregate fair market value
in excess of $50,000 for all such Equipment disposed of in any fiscal year
of Borrower or Guarantors;
(iii) the issuance and sale or other disposition by Borrower of
Capital Stock of Borrower after the date hereof, provided, that, (A) Lender
shall have received not less than ten (10) Business Days prior written
notice of such issuance and sale by Borrower, which notice shall specify
the parties to whom such shares are to be sold or otherwise disposed of,
the terms of such sale or other disposition, the total amount which it is
anticipated will be realized from the issuance and sale or other
disposition of such stock and the net cash proceeds which it is anticipated
will be received by Borrower from such sale or other disposition,
(B) Borrower shall not be required to pay any dividends or repurchase or
redeem such Capital Stock or make any other payments in respect thereof,
(C) the terms of such Capital Stock, and the terms and conditions of the
purchase and sale thereof, shall not include any terms which affect the
right of Borrower to request or receive Loans or of Borrower and Guarantors
to amend or modify any of the terms and conditions of this Agreement or any
of the other Financing Agreements or otherwise in any way relate to or
affect the arrangements of Borrower and Guarantors with Lender or are more
restrictive or burdensome to Borrower or any Guarantor than the terms of
any Capital Stock in effect on the date hereof, and (D) as of the date of
such issuance and sale or other disposition and after giving effect
thereto, no Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default shall exist
or have occurred; or
<PAGE>
(iv) the issuance of up to 8,000,000 shares of common stock of
Borrower upon the exercise of any options, warrants to purchase such common
stock or earnout agreements whether outstanding as of the date hereof or
hereafter issued by Borrower whether to officers of Borrower or in
connection with acquisitions permitted hereunder (provided, that, after
giving effect to the issuance of such shares, no Change of Control shall
occur);
(c) wind up, liquidate or dissolve; or
(d) agree to do any of the foregoing.
8.5 Encumbrances. Borrower and each Guarantor shall not, and shall not
permit any Subsidiary to, create, incur, assume or suffer to exist any security
interest, mortgage, pledge, lien, charge or other encumbrance of any nature
whatsoever on any of its assets or properties, including, without limitation,
the Collateral, except:
(a) the liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower, such Guarantor or Subsidiary, as
the case may be, and with respect to which adequate reserves have been set aside
on its books;
(c) non-consensual statutory liens (other than liens securing the payment
of taxes) arising in the ordinary course of the business of Borrower, such
Guarantor or Subsidiary, as the case may be, to the extent: (i) such liens
secure Indebtedness which is not overdue or (ii) such liens secure Indebtedness
relating to claims or liabilities which are fully insured and being defended at
the sole cost and expense and at the sole risk of the insurer or are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower, such Guarantor or Subsidiary, as the case may be, in each
case prior to the commencement of foreclosure or other similar proceedings and
with respect to which adequate reserves have been set aside on its books;
(d) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of real property of Borrower, any Guarantor or
Subsidiary which do not interfere in any material respect with the use of such
real property or ordinary conduct of the business of Borrower, such Guarantor or
Subsidiary, as the case may be, as presently conducted thereon or materially
impair the value of the real property which may be subject thereto;
(e) liens incurred or deposits made by Borrower or any Guarantor or
Subsidiary in the ordinary course of the business of Borrower or such Guarantor
or Subsidiary in connection with worker's compensation, unemployment insurance
or other types of social security benefits consistent with the current practices
of Borrower or such Guarantor or Subsidiary as of the date hereof;
<PAGE>
(f) encumbrances constituting the filing of notice financing statements of
a lessor's rights in and to personal property leased to Borrower or any
Guarantor or Subsidiary in the ordinary course of the business of Borrower or
such Guarantor or Subsidiary;
(g) purchase money liens or security interests upon any specific computer
equipment and related software hereafter acquired existing on any such equipment
or software at the time of the acquisition thereof by Borrower or such Guarantor
or Subsidiary (and including in any event any leases of computer equipment
constituting Capitalized Lease Obligations) to secure Indebtedness permitted
under Section 8.6(e) below; provided, that: (i) no such purchase money lien or
security interest (or lease with respect to Capitalized Lease Obligations, as
the case may be) covering specific future equipment and related software shall
extend to or cover any other property other than the specific equipment and
related software acquired subject to such lien or security interest (or lease)
and the proceeds thereof, (ii) such lien or security interest only secures the
obligation to pay the purchase price of such specific equipment and related
software (or the Capitalized Lease Obligations, as the case may be), (iii) the
principal amount secured thereby shall not exceed one hundred percent (100%) of
the cost of the equipment and related software so acquired (or leased), and (iv)
no Event of Default, or act, condition or event which with notice or passage of
time or both would constitute an Event of Default, shall exist or have occurred
and be continuing;
(h) purchase money liens or security interests upon any specific fitness
equipment hereafter acquired (and including any leases with respect to
Capitalized Lease Obligations); provided, that: (i) no such purchase money lien
or security interest (or lease with respect to Capitalized Lease Obligations, as
the case may be) covering specific future fitness equipment shall extend to or
cover any other property other than the specific fitness equipment so acquired,
and the proceeds thereof, (ii) such lien or security interest only secures the
obligation to pay the purchase price of such specific fitness equipment (or the
Capitalized Lease Obligations, as the case may be), (iii) the principal amount
secured thereby shall not exceed one hundred (100%) percent of the cost of the
fitness equipment so acquired (or leased); and (iv) no Event of Default, or act,
condition or event which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred and be continuing; and
(i) the liens and security interests set forth on Schedule 7.7 hereto.
8.6 Indebtedness. Borrower and each Guarantor shall not, and shall not
permit any Subsidiary to, incur, create, assume, become or be liable in any
manner with respect to, or permit to exist, any Indebtedness, except:
(a) the Obligations;
(b) Indebtedness arising in the ordinary course of the business of Borrower
or any Guarantor or Subsidiary in connection with worker's compensation,
unemployment insurance or other types of social security benefits in each case
consistent with the current practices of Borrower or such Guarantor or
Subsidiary as of the date hereof;
<PAGE>
(c) Indebtedness of Guarantors to Borrower arising pursuant to the loans by
Borrower to Guarantors to the extent such loans are permitted under Section 8.7
below;
(d) unsecured Indebtedness of Borrower to any of its Subsidiaries after the
date hereof pursuant to loans by such Subsidiary to Borrower, provided, that,
(i) such Indebtedness is subject to, and subordinate in right of payment to, the
right of Lender to receive the prior indefeasible payment and satisfaction in
full of all of the Obligations on terms and conditions acceptable to Lender,
(ii) Lender shall have received, in form and substance satisfactory to Lender, a
subordination agreement providing for the terms of the subordination in right of
payment of such Indebtedness of Borrower to the prior indefeasible payment and
satisfaction in full of all of the Obligations, duly authorized, executed and
delivered by such Subsidiary and Borrower, (iii) Borrower shall not, directly or
indirectly make, or be required to make, any payments in respect of such
Indebtedness so long as any of the Obligations are outstanding and unpaid,
(iv) Borrower shall not, directly or indirectly, (A) amend, modify, alter or
change any terms of such Indebtedness or any agreement, document or instrument
related thereto, or (B) redeem, retire, defease, purchase or otherwise acquire
such Indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose, and (v) Borrower shall furnish to Lender all notices, demands or other
materials in connection with such Indebtedness either received by Borrower or on
its behalf, promptly after receipt thereof, or sent by Borrower or on its
behalf, concurrently with the sending thereof, as the case may be;
(e) Indebtedness of Borrower or any Guarantor or Subsidiary arising after
the date hereof secured by purchase money liens or security interests permitted
under Section 8.5(g) hereof upon specific computer equipment and related
software hereafter acquired by Borrower or such Guarantor or Subsidiary pursuant
to an acquisition by Borrower or such Guarantor or Subsidiary permitted under
Section 8.7(e);
(f) Indebtedness of Borrower to Brightbridge arising pursuant to the
Brightbridge Agreements, provided, that, (i) such Indebtedness is, and shall at
all times remain, unsecured, (ii) the terms and conditions of such Indebtedness
shall be acceptable in all respects to Lender, (iii) such Indebtedness shall not
exceed $250,000 (less the aggregate amount of all repayments or repurchases of
principal in respect thereof) plus interest thereon at the rate set forth in the
Brightbridge Agreements as in effect on the date hereof, (iv) such Indebtedness
is, in all respects, subject to, and subordinate in right of payment to, the
right of Lender to receive the prior indefeasible payment and satisfaction in
full of all of the Obligations, (v) Borrower shall not, directly or indirectly,
make any payments in respect of such Indebtedness, including, but not limited
to, any prepayments or other non-mandatory payments, except, that, Borrower may
make regularly scheduled payments of principal and interest, on an unaccelerated
basis, in respect of such Indebtedness in accordance with the terms of the
Brightbridge Agreements as in effect on the date hereof, provided, that, as to
any such payment, each of the following conditions is satisfied: (A) as of the
date of such payment and after giving effect thereto, no Event of Default shall
<PAGE>
exist or have occurred and be continuing, (B) as of the date of such payment and
after giving effect thereto, Excess Availability shall be not less than
$1,000,000 and (C) after giving effect to such payment, Borrower shall be in
compliance with the financial covenants set forth in Sections 8.10, 8.11 and
8.12 hereof on a pro forma basis using for this purpose the calculations for
compliance with such covenants as of the last day of the fiscal month of
Borrower ending immediately prior to the date of such payment, (vi) Borrower
shall not, directly or indirectly, (A) amend, modify, alter or change any terms
of such Indebtedness or any agreement, document or instrument related thereto as
in effect on the date hereof, except, that, Borrower may, after prior written
notice to Lender, amend, modify, alter or change the terms thereof so as to
extend the maturity thereof or defer the timing of any payments in respect
thereof, or to forgive or cancel any portion of such Indebtedness (other than
pursuant to payments thereof), or to reduce the interest rate or any fees in
connection therewith or to make any covenants contained therein less restrictive
or burdensome as to Borrower or otherwise more favorable to Borrower, or (B)
redeem, retire, defease, purchase or otherwise acquire such Indebtedness, or set
aside or otherwise deposit or invest any sums for such purpose and (vii)
Borrower shall furnish to Lender all notices or demands in connection with such
Indebtedness either received by Borrower or on its behalf, promptly after the
receipt thereof, or sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be;
(g) Indebtedness of Borrower or any Guarantor or Subsidiary arising after
the date hereof secured by purchase money liens or security interests permitted
under Section 8.5(h) hereof upon specific fitness equipment hereafter acquired
by Borrower or such Guarantor or Subsidiary, provided, that, the aggregate
amount of all such Indebtedness incurred in any fiscal year of Borrower shall
not exceed $100,000 in such fiscal year of Borrower; and
(h) Indebtedness of Borrower or any Guarantor or Subsidiary existing as of
the date hereof set forth on Schedule 8.6 hereto, provided, that, (i) Borrower,
such Guarantor or Subsidiary, as the case may be, may only make regularly
scheduled payments of principal and interest in respect of such Indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such Indebtedness as in effect on the date hereof, (ii) Borrower, such
Guarantor or Subsidiary, as the case may be, shall not, directly or indirectly,
(A) amend, modify, alter or change the terms of such Indebtedness or any
agreement, document or instrument related thereto as in effect on the date
hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such
Indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose, and (iii) Borrower, such Guarantor or Subsidiary, as the case may be,
shall furnish to Lender all notices or demands in connection with such
Indebtedness either received by Borrower, such Guarantor or Subsidiary, as the
case may be, or on its behalf, promptly after the receipt thereof, or sent by
Borrower or on its behalf, concurrently with the sending thereof, as the case
may be.
<PAGE>
8.7 Loans, Investments, Guarantees, Etc. Borrower and each Guarantor shall
not, and shall not permit any Subsidiary to, directly or indirectly, make any
loans or advance money or property to any person, or invest in (by capital
contribution, dividend or otherwise) or purchase or repurchase the Capital Stock
or Indebtedness or all or a substantial part of the assets or property of any
person, or guarantee, assume, endorse, or otherwise become responsible for
(directly or indirectly) the Indebtedness, performance, obligations or dividends
of any Person or hold any cash or Cash Equivalents or agree to do any of the
foregoing, except:
(a) the guarantees by Guarantors and any other Subsidiary of Borrower of
the Obligations in favor of Lender;
(b) the endorsement of instruments for collection or deposit in the
ordinary course of business;
(c) investments in cash or Cash Equivalents so long as there are no Loans
outstanding and such investments are pledged and delivered to Lender promptly
upon Lender's request;
(d) the existing equity investment of Borrower in the Capital Stock of each
of HF Rehab, HF Rehab Iowa, Fitness Centers and Sports Therapy, and the existing
equity investment of HF Rehab in the Capital Stock of TPC and the existing
equity investment of HF Rehab Iowa in the Capital Stock of each of Duffy,
Medlink and Medlink Services, in each case as of the date hereof;
(e) the purchase by Borrower or any Guarantor of all of the issued and
outstanding shares of Capital Stock of any Person or all or a substantial part
of the assets or property of any Person or all or a substantial part of the
assets of property of any operating division or business of any Person, if as to
each such purchase each of the following conditions is satisfied as determined
by Lender in good faith promptly upon receipt of the applicable information:
(i) Lender shall have received not less than thirty (30) days prior written
notice of the intention of Borrower or such Guarantor, as the case may be, to
make such purchase, which notice shall set forth in reasonable detail
satisfactory to Lender, the parties to such purchase, the consideration to be
paid for the purchase of such Capital Stock or assets, the terms and manner of
payment of such consideration, the Capital Stock or assets to be purchased, the
liabilities being assumed pursuant to such purchase and such other information
with respect thereto as Lender may request,
(ii) as of the date of such purchase, and after giving effect thereto, no
Event of Default, or act, condition or event which with notice or passage of
time or both would constitute an Event of Default, shall exist or have occurred
and be continuing,
(iii) such purchase shall be permitted under the terms of all Material
Contracts,
(iv) such purchase shall be on commercially reasonable prices and terms and
in a bona fide arms' length transaction,
<PAGE>
(v) Lender shall have received true, correct and complete copies of all
agreements, documents and instruments relating to such acquisition, as duly
authorized, executed and delivered by the parties thereto,
(vi) the restrictions applicable to Borrower, any Guarantor and their
respective assets included in the agreements, documents and instruments relating
to such purchase shall be acceptable in good faith to Lender,
(vii) Borrower and such Guarantor shall, immediately before and immediately
after giving effect to such transaction or series of transactions, have a
Consolidated Net Worth (including, without limitation, any Indebtedness incurred
or anticipated to be incurred in connection with or in respect of such
transaction or series of transactions) equal to or greater than the Consolidated
Net Worth it had immediately prior to such transaction or series of
transactions,
(viii) Borrower and Guarantors shall not become obligated with respect to
any Indebtedness, nor any of their property become subject to any security
interest or lien, pursuant to such acquisition unless Borrower and Guarantors
could incur such Indebtedness or create such security interest or lien hereunder
or under the other Financing Agreements (and including purchase money liens or
security interests in computer equipment and related software permitted under
Section 8.5 hereof),
(ix) in the case of the purchase of any Capital Stock of any Person,
Borrower or such Guarantor shall, and shall cause such Person, to comply with
Section 8.2 hereof,
(x) the total consideration paid or payable by Borrower or such Guarantor
to purchase the Capital Stock or assets of such Person shall not exceed
$2,000,000 (inclusive of any deferred portion thereof which shall be calculated
in a manner acceptable to Lender),
(xi) the total cash portion of the consideration or paid or payable by
Borrower or such Guarantor to purchase the Capital Stock or assets of such
Person shall not exceed $750,000,
(xii) as of the date of such payment in cash or other immediately available
funds and after giving effect thereto, Excess Availability shall be not less
than the amount equal to ten percent (10%) of the then outstanding Obligations
after giving effect on a pro forma basis to Loans made in connection with such
acquisition and other Loans made or requested on the date of such payment in
cash or other immediately available funds,
(xiii) the EBITDA of the Person whose assets or Capital Stock are being
acquired shall be not less than fifteen (15%) percent of the actual total
revenues of such Person for the immediately preceding four (4) fiscal quarters
of such Person prior to the effective date of such acquisition (and in the case
of the acquisition of assets, to the extent attributable to such assets),
<PAGE>
(xiv) Lender shall have received, in form and substance satisfactory to
Lender, (A) evidence that Lender has valid and perfected security interests in
and liens upon the assets purchased (in the case of the acquisition of assets,
or upon the assets of the Subsidiary acquired in the case of the acquisition of
Capital Stock) consisting of the types and categories of assets which constitute
Collateral hereunder, (B) all Collateral Access Agreements and other consents,
waivers, acknowledgments and other agreements from third persons which Lender
may deem necessary or desirable in order to permit, protect and perfect its
security interests in and liens upon the assets purchased (in the case of the
acquisition of assets, or upon the assets of the Subsidiary acquired in the case
of the acquisition of Capital Stock), (C) the agreement of the seller consenting
to the collateral assignment by Borrower or such Guarantor of all rights and
remedies and claims for damages of Borrower or such Guarantor relating to the
Collateral (including, without limitation, any bulk sales indemnification) under
the agreements, documents and instruments relating to such acquisition and
(D) such other agreements, documents and instruments as Lender may request in
connection therewith,
(xv) Lender shall have received a certificate executed by the chief
financial officer of Borrower (A) stating that no Event of Default, or act,
condition or event which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred or would exist or occur after
giving effect to such acquisition and (B) showing (in reasonable detail and with
appropriate calculations and computations in all respects satisfactory to
Lender) compliance for the succeeding four (4) fiscal quarters (the fiscal
quarter in which such acquisition occurs being the first fiscal quarter of such
period) with the covenants set forth in Sections 8.10, 8.11 and 8.12 hereof on a
prospective pro forma basis (after giving effect to such acquisition and all
transactions related thereto);
(f) loans by any Subsidiary of Borrower to Borrower to the extent the
Indebtedness arising from such loans is permitted under Section 8.6 above;
(g) loans or advances by Borrower to any Guarantor; provided, that, the
Indebtedness of each Guarantor to Borrower arising pursuant to such loans shall
not be evidenced by a promissory note or other instrument, unless the original
of any such note or other instrument is duly and validly endorsed and assigned
by Borrower or such Guarantor payable to the order of Lender, in a manner
satisfactory to Lender and as so endorsed, delivered to, and held by, Lender as
part of the Collateral;
(h) obligations or Capital Stock issued to Borrower or any Guarantor by any
Person (or the representative of such Person) in respect of Indebtedness of such
Person owing to Borrower or such Guarantor in connection with the insolvency,
bankruptcy, receivership or reorganization of such Person or a composition or
readjustment of the debts of such Person; provided, that, the original of any
such stock or instrument evidencing such obligations shall be promptly delivered
to Lender, upon Lender's request, together with such stock power, assignment or
endorsement by Borrower or such Guarantor as Lender may request;
<PAGE>
(i) obligations of account debtors to Borrower or any Guarantor arising
from Accounts which are past due evidenced by a promissory note made by such
account debtor payable to Borrower or such Guarantor; provided, that, promptly
upon the receipt of the original of any such promissory note by Borrower or such
Guarantor, such promissory note shall be endorsed to the order of Lender, in a
manner satisfactory to Lender and as so endorsed, delivered to, and held by,
Lender as part of the Collateral;
(j) loans and advances by Borrower, any Guarantor or Subsidiary to
employees of Borrower, such Guarantor or Subsidiary not to exceed the principal
amount of $25,000 in the aggregate at any time outstanding for: (i) reasonably
and necessary work-related travel or other ordinary business expenses to be
incurred by such employee in connection with their work for Borrower, such
Guarantor or Subsidiary and (ii) reasonable and necessary relocation expenses of
such employees (including home mortgage financing for relocated employees);
(k) the existing loans, advances and guarantees by Borrower, any Guarantor
or Subsidiary outstanding as of the date hereof as set forth on Schedule 8.7
hereto; provided, that, as to such loans, advances and guarantees, (i) Borrower
and such Guarantor or Subsidiary shall not, directly or indirectly, (A) amend,
modify, alter or change the terms of such loans, advances or guarantees or any
agreement, document or instrument related thereto, or (B) as to such guarantees,
redeem, retire, defease, purchase or otherwise acquire such guarantee or set
aside or otherwise deposit or invest any sums for such purpose and (ii) Borrower
or such Guarantor or Subsidiary shall furnish to Lender all notices, demands or
other materials in connection with such loans, advances or guarantees either
received by Borrower, or such Guarantor or Subsidiary, or on its behalf,
promptly after the receipt thereof, or sent by Borrower, such Guarantor or
Subsidiary, or on its behalf, concurrently with the sending thereof, as the case
may be.
8.8 Dividends and Redemptions. Borrower and Guarantor shall not, directly
or indirectly, declare or pay any dividends on account of any shares of class of
Capital Stock of Borrower or Guarantor now or hereafter outstanding, or set
aside or otherwise deposit or invest any sums for such purpose, or redeem,
retire, defease, purchase or otherwise acquire any shares of any class of
Capital Stock (or set aside or otherwise deposit or invest any sums for such
purpose) for any consideration other than common stock or apply or set apart any
sum, or make any other distribution (by reduction of capital or otherwise) in
respect of any such shares or agree to do any of the foregoing, except for the
payment of dividends by any Guarantor or other Subsidiary of Borrower to any
Guarantor or to Borrower.
<PAGE>
8.9 Transactions with Affiliates. Borrower and each Guarantor shall not,
and shall not permit any Subsidiary to, directly or indirectly, (a) purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
any officer, employee, shareholder, director, agent or any other Affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
its business and upon fair and reasonable terms no less favorable to it than it
would obtain in a comparable arm's length transaction with an unaffiliated
person or (b) make any payments of management, consulting or other fees for
management or similar services, or of any Indebtedness owing to any officer,
employee, shareholder, director or any other Affiliate except (i) reasonable
compensation to officers, employees and directors for services rendered to
Borrower and Guarantors in the ordinary course of business, (ii) Guarantors and
any other Subsidiary of Borrower may make payments to Borrower pursuant to the
tax sharing arrangement by and among Borrower and its Subsidiaries (as in effect
on the date hereof), (iii) Guarantors and any other Subsidiary of Borrower may
make payments to Borrower of management fees and costs, expenses and other
charges paid or incurred by Borrower on behalf or for the benefit of any
Guarantor or other Subsidiary of Borrower, including, without limitation, for
legal and accounting, insurance, marketing, payroll and similar types of
services paid for by Borrower on behalf of Guarantors and (iv) any Guarantor or
other Subsidiary of Borrower may repay Indebtedness of such Guarantor or
Subsidiary to Borrower.
8.10 Change in Retained Earnings. Borrower and each Guarantor shall not
permit the retained earnings of Borrower and its subsidiaries set forth in the
financial statements of Borrower and its subsidiaries as of December 31, 1997 to
decrease by more than, or increase by less than, the amount set forth below
during the period indicated, with the decline calculated as of the end of each
month:
===============================================================================
Period Amount of Change
- -------------------------------------------------------------------------------
From January 1, 1998 through and ($100,000.00)
including March 31, 1998
- -------------------------------------------------------------------------------
From January 1, 1998 through ($200,000.00)
and including June 30, 1998
- -------------------------------------------------------------------------------
From January 1, 1998 through ($ 40,000.00)
and including September 30, 1998
- -------------------------------------------------------------------------------
From January 1, 1998 through $460,000.00
and including December 31, 1998
- -------------------------------------------------------------------------------
From January 1, 1998 through $660,000.00
and including March 31, 1999
- -------------------------------------------------------------------------------
From January 1, 1998 through June 30, $860,000.00
1999
===============================================================================
Changes in retained earnings shall be determined based solely on the
Consolidated Net Income of Borrower and its Subsidiaries.
<PAGE>
8.10 Fixed Charge Coverage Ratio. Borrower and each Guarantor shall not
permit the Fixed Charge Coverage Ratio for any fiscal quarter to be less than
the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ending Ratio
March 31, 1998 1.75 to 1
June 30, 1998 1.75 to 1
September 30, 1998 1.75 to 1
December 31, 1998 and each 2 to 1
fiscal quarter thereafter
8.11 Consolidated Working Capital. Borrower and each Guarantor shall not
permit the Consolidated Working Capital of Borrower and its Subsidiaries at any
time to be less than $1,500,000.
8.12 Maintenance of Existence. Borrower and each Guarantor shall, and shall
cause any Subsidiary to, at all times preserve, renew and keep in full, force
and effect their corporate existence and rights and franchises with respect
thereto and maintain in full force and effect all licenses, trademarks,
tradenames, approvals, authorizations, leases, contracts and Permits necessary
to carry on the business as presently or proposed to be conducted.
8.13 Changes in Business. Borrower and each Guarantor shall not, and shall
not permit any Subsidiary to, engage in any business other than the businesses
of Borrower and Guarantors on the date hereof and any businesses reasonably
related, ancillary or complimentary to the businesses in which Borrower and
Guarantors are engaged on the date hereof.
8.14 Compliance with Laws, Regulations, Etc.
(a) Borrower and each Guarantor shall, and shall cause any Subsidiary to,
at all times comply in all material respects with all applicable provisions of
laws, rules, regulations, licenses, approvals, orders and other Permits and duly
observe all requirements, of any foreign, Federal, State or local Governmental
Authority, including, without limitation, ERISA, the Code, the Occupational
Safety and Health Act of 1970, as amended, the Health Care Laws, the Fair Labor
Standards Act of 1938, as amended, and the rules and regulations thereunder and
all statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including, without
limitation, all of the Environmental Laws.
(b) Borrower and each Guarantor shall, and shall cause any Subsidiary to,
take prompt and appropriate action to respond to any material non-compliance
with any of the Environmental Laws and shall regularly report to Lender with
regard to such response. If Borrower, any Guarantor or Subsidiary receives any
notice of (i) the happening of any event involving the use, spill, discharge or
clean-up of any Hazardous Material or (ii) any complaint, order, citation or
notice with regard to air emissions, water discharges, noise emissions or any
other environmental, health or safety matter affecting Borrower from any Person,
including, but not limited to, the United States Environmental Protection Agency
or any state or local environmental agency or authority, then Borrower shall
give within three (3) Business Days both oral and written notice of same to
Lender.
<PAGE>
8.15 Payment of Taxes and Claims. Borrower and each Guarantor shall, and
shall cause any Subsidiary to, duly pay and discharge all taxes, assessments,
contributions and governmental charges upon or against it or them or its or
their properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower, such Guarantor or Subsidiary, as the case may be, prior
to the date on which penalties attach thereto. Borrower and each Guarantor shall
be liable for any tax or penalty imposed upon any transaction under this
Agreement or any of the other Financing Agreements or giving rise to the
Accounts or any other Collateral or which Lender may be required to withhold or
pay for any reason, and Borrower and each Guarantor agrees to indemnify and hold
Lender harmless with respect thereto, and to repay to Lender on demand the
amount thereof, and until paid by Borrower such amount shall be added and deemed
part of the Loans, provided, that, nothing contained herein shall be construed
to require Borrower or any Guarantor to pay any income tax attributable to the
income of Lender from any amounts charged or paid hereunder to Lender.
8.16 Properties in Good Condition.
(a) Borrower and each Guarantor shall, and shall cause any Subsidiary to,
keep its properties, in good repair, working order and condition (reasonable
wear and tear excepted) and, from time to time, make and cause any Subsidiary to
make all needful and proper repairs, renewals, replacements, additions and
improvements thereto, so that the business carried on may be properly and
advantageously conducted at all times in accordance with prudent business
management. The Inventory shall only be used in the businesses of Borrower and
Guarantors and not for personal, family, household or farming use.
(b) All of the Inventory is and will be held for sale or lease, or to be
furnished in connection with the rendition of services, in the ordinary course
of the business of Borrower and Guarantors, and is and will be fit for such
purposes. Borrower and Guarantors shall keep the Inventory in good and
marketable condition, at its own expense. Borrower and Guarantors shall not
acquire or accept any Inventory on consignment or approval, except if such
Inventory is at all times clearly identified on the books and records of
Borrower or such Guarantor as Inventory held on consignment or approval and such
Inventory is separately reported to Lender and not included in the Inventory of
Borrower as reported to Lender in a manner satisfactory to Lender. Borrower
shall conduct a physical count of the Inventory at least once per fiscal year,
and at any time on or after an Event of Default and so long as the same is
continuing, at such other times as Lender reasonably requests, and in each case
shall promptly supply Lender with a copy of such count accompanied by a report
of the Value of such Inventory. Borrower shall not, without Lender's prior
written consent, sell any Inventory on a bill-and-hold (except if reported to
Lender as bill-and-hold goods), guaranteed sale, sale and return, sale on
approval, or other repurchase or return basis.
<PAGE>
8.17 Insurance. Borrower and each Guarantor shall, and shall cause any
Subsidiary to, at all times maintain with financially sound and reputable
insurers, insurance with respect to the Collateral against loss or damage of the
kind and in the amounts customarily insured against by corporations of
established reputation engaged in the same or similar businesses and similarly
situated and Borrower and each Guarantor shall, and shall cause any Subsidiary
to, maintain public liability insurance against claims for personal injury,
death or property damage occurring upon, in, about or in connection with the use
of any properties owned, occupied or controlled by Borrower and occurring in
connection with the use (or otherwise) of any products manufactured or sold by
Borrower or such Guarantor or Subsidiary or services rendered by Borrower or
such Guarantor or Subsidiary, and workmen's compensation insurance (except as to
workmen's compensation insurance to the extent Borrower is self-insured with
respect thereto). Said policies of insurance shall be satisfactory to Lender as
to form, amount and insurer. Borrower shall furnish certificates, policies or
endorsements to Lender as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower, any Guarantor or Subsidiary, in
obtaining, and at any time on or after the occurrence of an Event of Default,
adjusting, settling, amending and canceling such insurance. Borrower and
Guarantors shall obtain non-contributory lender's loss payable endorsements to
all insurance policies in form and substance reasonably satisfactory to Lender
specifying that the proceeds of such insurance shall be payable to Lender as its
interests may appear and further specifying that Lender shall be paid regardless
of any act or omission by Borrower or any Guarantor. At its option, Lender may
apply any insurance proceeds received by Lender at any time to the cost of
replacement of Collateral and/or to payment of the Obligations, whether or not
then due, in any order and in such manner as Lender may determine, except, that,
notwithstanding anything to the contrary contained herein, in the event that any
Equipment or other tangible property of Borrower, any Guarantor or Subsidiary
shall be physically damaged or destroyed, Lender shall release the net cash
proceeds from insurance received by Lender pursuant to this Section 8.18 as a
result of such damage or destruction to the extent necessary for the repair,
refurbishing or replacement of such Equipment or other tangible property of
Borrower, any Guarantor or Subsidiary; provided, that, each of the following
conditions is satisfied: (a) no Event of Default or act, condition or event
which with notice or passage of time or both would constitute an Event of
Default shall exist or have occurred and be continuing; (b) no Event of Default
or act, condition or event which with notice or passage of time or both would
constitute an Event of Default shall occur during the course of such repair,
refurbishing or replacement; (c) the amount of the insurance proceeds are
sufficient, in Lender's good faith determination, to effect such repair,
refurbishing or replacement in a satisfactory manner; (d) such proceeds shall be
used solely to repair, refurbish or replace the Equipment or other tangible
property of Borrower, any Guarantor or Subsidiary so damaged or destroyed (free
and clear of any security interests, liens, claims or encumbrances) and shall be
released by Lender as needed for such purpose; (e) the insurance carrier shall
have waived any right of subrogation against Borrower or such Guarantor or
Subsidiary under its policy; and (f) no more than $200,000 in insurance proceeds
has been paid for all such damage or destruction (in any one case and in the
aggregate).
<PAGE>
8.18 Compliance with ERISA.
(a) Borrower and Guarantors shall not with respect to all "employee benefit
plans" maintained by Borrower, any Guarantor or any of their ERISA Affiliates:
(i) terminate any of such employee benefit plans so as to incur any liability to
the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii)
allow or suffer to exist any prohibited transaction involving any of such
employee benefit plans or any trust created thereunder which would subject
Borrower, such Guarantor or ERISA Affiliate to a tax or penalty or other
liability on prohibited transactions imposed under Section 4975 of the Code or
Section 502(i) of ERISA, (iii) fail to pay to any such employee benefit plan any
contribution which it is obligated to pay under Section 302 of ERISA, Section
412 of the Code or the terms of such plan, (iv) allow or suffer to exist any
accumulated funding deficiency, whether or not waived, with respect to any such
employee benefit plan, (v) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such employee
benefit plan that is a single employer plan, which termination could result in
any liability to the Pension Benefit Guaranty Corporation or (vi) incur any
withdrawal liability with respect to any Multiemployer Plan.
(b) As soon as possible and, in any event, within five (5) days after
Borrower, any Guarantor or any of their Subsidiaries or ERISA Affiliate knows or
has reason to know of the occurrence of any of the following events relating to
a Plan, Borrower and Guarantors shall deliver to Lender a certificate of the
chief financial officer of Borrower setting forth details as to such occurrence
and the action, if any, that Borrower, such Guarantor or ERISA Affiliate is
required or proposes to take, together with any notices required to be given to
or filed with or by Borrower, such Guarantor, the ERISA Affiliate, the Pension
Benefit Guaranty Corporation, a Plan participant or the Plan administrator with
respect thereto: (i) that a reportable event has occurred (other than with
respect to a Plan which is a Multiemployer Plan) which could reasonably be
expected to result in material liability of Borrower, any Guarantor or ERISA
Affiliate, (ii) that, with respect to a Plan, an accumulated funding deficiency
has been incurred or an application will be or has been made to the Secretary of
the Treasury for a waiver or modification of the minimum funding standard
(including any required installment payments) or an extension of any
amortization period under Section 412 of the Code or Section 302 of ERISA with
respect to a Plan, (iii) that a contribution required to be made to a Plan by
Borrower, any Guarantor or ERISA Affiliate has not been timely made, (iv) that a
Plan has been or is reasonably expected to be terminated, (v) that a Plan that
is a Multiemployer Plan has been or is reasonably expected to be reorganized,
partitioned or declared insolvent under Title IV of ERISA, (vi) that a Plan,
<PAGE>
which is not a Multiemployer Plan, has an Unfunded Current Liability giving rise
to a lien under ERISA or the Code, (vii) that proceedings may be or have been
instituted to terminate a Plan, (viii) that a proceeding has been instituted
pursuant to Section 515 of ERISA to collect a delinquent contribution of
Borrower, any Guarantor or ERISA Affiliate to a Plan, or (ix) that Borrower, any
Guarantor or ERISA Affiliate will or is reasonably expected to incur any
material liability (including any contingent or secondary liability) to or on
account of the termination of or withdrawal from a Plan under Sections 4062,
4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under
Sections 409 or 502(i) or 502(1) of ERISA, or (x) Borrower or any Guarantor or
ERISA Affiliate may incur any material liability pursuant to any employee
welfare benefit plan that provides benefits to retired employees or other former
employees (other than as required by Section 601 of ERISA) or any employee
pension benefit plan. Upon the request of Lender, Borrower will deliver to
Lender a complete copy of the annual report (Form 5500) of each Plan required to
be filed with the Internal Revenue Service. In addition to any certificates or
notices delivered to Lender pursuant to the first sentence hereof, copies of any
material notices received by Borrower, any Guarantor or ERISA Affiliate with
respect to any Plan shall be delivered to Lender no later than three (3)
Business Days after the date such notice has been received by Borrower or such
Guarantor or ERISA Affiliate, as applicable.
(c) As used in this Section 8.19, the terms "employee pension benefit
plans," "employee benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
Section 4975 of the Code and Section 406 of ERISA.
8.19 Additional Bank Accounts. Borrower and each Guarantor shall not, and
shall not permit any Subsidiary to, directly or indirectly, open, establish or
maintain any deposit account, investment account or any other account with any
bank or other financial institution, other than the Collection Accounts and the
accounts set forth in Schedule 7.14 hereto, except: (a) as to any new or
additional Collection Accounts and other such new or additional accounts which
contain any Collateral or proceeds thereof, with the prior written consent of
Lender and subject to such conditions thereto as Lender may establish and (b) as
to any accounts used by Borrower or any Guarantor or Subsidiary to make payments
of payroll, taxes or other obligations to third parties, after prior written
notice to Lender.
8.20 Financial Statements and Other Information.
(a) Borrower and each Guarantor shall promptly furnish to Lender all such
financial and other information as Lender shall reasonably request relating to
the Collateral and the assets, businesses and operations of Borrower and
Guarantors, and notify the auditors and accountants of Borrower and Guarantors
that Lender is authorized to obtain such information directly from them. Without
limiting the foregoing, Borrower and Guarantors shall furnish to Lender, in such
detail as Lender shall request, the following:
<PAGE>
(i) As soon as available, but in any event not later than ninety-seven
(97) days after the end of each fiscal year, (A) audited consolidated
balance sheet, consolidated statement of operations and consolidated
statement of cash flows for Borrower and its Subsidiaries in each case for
such fiscal year, and the accompanying notes thereto, and (B) unaudited
consolidating balance sheets, statements of operations and statements of
cash flows for Borrower and its Subsidiaries for such fiscal year, and the
accompanying notes thereto, setting forth in each case in comparative form
figures for the previous fiscal year, all in reasonable detail, fairly
presenting the financial position and the results of operations of Borrower
and its Subsidiaries as at the date thereof and for the fiscal year then
ended, and prepared in accordance with GAAP consistently applied. Such
audited consolidated statements of Borrower and its Subsidiaries shall be
examined in accordance with generally accepted auditing standards by and
accompanied by a report thereon unqualified as to scope of independent
certified public accountants selected by Borrower and satisfactory to
Lender and a compliance certificate by the chief executive officer, chief
financial officer or vice president-corporate controller substantially in
the form of Exhibit D hereto along with a schedule in form reasonably
satisfactory to Lender of the calculations used in determining, as of the
end of such fiscal year, whether Borrower was in compliance with the
covenants set forth in Sections 8.10, 8.11 and 8.12 of this Agreement for
such year and a certificate of the independent certified public accountants
that examined such statements to the effect that they have reviewed and are
familiar with the Financing Agreements and that, in examining such
financial statements, they did not become aware of any fact or condition
which then constituted an Event of Default, except for those, if any,
described in reasonable detail in such certificate.
(ii) As soon as available, but in any event not later than fifty-two
(52) days after the end of each fiscal quarter (other than any fiscal
quarter which is also the end of any fiscal year of Borrower and its
Subsidiaries) and not later than ninety-seven (97) days after the end of
any fiscal year, consolidated and consolidating unaudited balance sheets of
Borrower and its Subsidiaries as at the end of such quarter, and
consolidated and consolidating unaudited statements of operations and
statements of cash flow for Borrower and its Subsidiaries for such quarter
and for the period from the beginning of the fiscal year to the end of such
quarter, together with the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and results of operation
of Borrower and its Subsidiaries as at the date thereof and for such
periods, prepared in accordance with GAAP consistently applied (except that
such interim financial statements shall not include accompanying notes and
shall be subject to normal year-end adjustments). Such statements shall be
certified to be correct by the chief financial officer of Borrower, subject
to normal year-end adjustments and accompanied by a compliance certificate
substantially in the form of Exhibit D hereto along with a schedule in form
reasonably satisfactory to Lender of the calculations used in determining,
as of the end of such fiscal quarter, whether the Borrower was in
compliance with the covenants set forth in Sections 8.10, 8.11 and 8.12 of
this Agreement for such quarter.
<PAGE>
(iii) As soon as available, but in any event not later than
thirty-five (35) days after the end of each month, consolidated unaudited
balance sheets of Borrower and its Subsidiaries as at the end of such
month, and consolidated unaudited statements of operations for Borrower and
its Subsidiaries for such month and for the period from the beginning of
the fiscal year to the end of such month, all in reasonable detail, fairly
presenting the financial position and results of operation of Borrower and
its Subsidiaries as at the date thereof and for such periods, and prepared
in accordance with GAAP consistently applied (except that such interim
financial statements shall not include accompanying notes and shall be
subject to normal year-end adjustments). Such statements shall be certified
to be correct by the chief financial officer of Borrower, subject to normal
year-end adjustments and accompanied by a compliance certificate
substantially in the form of Exhibit D hereto along with a schedule in form
reasonably satisfactory to Lender of the calculations used in determining,
as of the end of such fiscal month, whether the Borrower was in compliance
with the covenants set forth in Sections 8.10, 8.11 and 8.12 of this
Agreement for such month.
(iv) Not later than fifteen (15) days prior to the last day of each
fiscal year (commencing with the fiscal year of Borrower ending December
31, 1998), preliminary projected consolidated and consolidating financial
statements of Borrower and its Subsidiaries for the next fiscal year
following such then current fiscal year and not later than forty-five (45)
days after the last day of each such fiscal year (commencing with the
fiscal year of Borrower ending December 31, 1998), final projected
consolidated and consolidating financial statements of Borrower and its
Subsidiaries as provided above. Such projected financial statements shall
be prepared on a monthly basis for the next succeeding year, on a quarterly
basis for the second and third succeeding years and on an annual basis
thereafter.
(v) Within twenty (20) days after the last day of each month, a
calculation of the EBITDA of Borrower and its Subsidiaries for the
immediately preceding twelve (12) months and by no later than Thursday of
each week or more frequently upon Lender's request, a duly completed
Borrowing Base Certificate which shall: (A) identify the basis for the
calculations set forth therein in reasonable detail satisfactory to Lender
as to collections and revenues of Borrower and its Subsidiaries as of the
Saturday of the immediately preceding week (or in the case of the
calculation of EBITDA, as of the last day of the preceding month), (B) be
prepared by or under the supervision of the Borrower's chief executive
officer or chief financial officer and certified by such officer, and (C)
have attached thereto such additional schedules and other information as
Lender may from time to time request.
(vi) As soon as available, but in any event not later than twenty (20)
days after the last day of each month, agings of accounts receivable,
agings of accounts payable and inventory reports by location, cost and
category.
(vii) Promptly upon any Insurance Account or other Receivable in
respect of an interest or claim in or under any policy of insurance
arising, which is payable by persons other than those persons listed on
Schedule 7.11 hereto, the name and address of the person obligated to make
payments thereon.
<PAGE>
(viii) Promptly upon entering into any agreement after the date hereof
giving rise to a Contract Account other than with those persons designated
on Schedule 7.11 hereto, the name and address of the person obligated to
make payments thereon.
(ix) Promptly after delivery thereof, copies of any management letters
and reports by such independent certified public accountants to Borrower
and its Subsidiaries.
(x) Promptly upon becoming aware of the existence of any condition or
event which constitutes an Event of Default or any condition or event
which, with the passage of time or notice or both would constitute such an
Event of Default, pursuant to the provisions of this Agreement or the other
Financing Agreements, Borrower shall give Lender written notice thereof
specifying the nature of such condition or event.
(xi) Promptly upon the earlier of the mailing or filing thereof,
copies of all registration statements and any other filings or other
communications made by Borrower to holders of its publicly traded
securities or the Securities Exchange Commission from time to time pursuant
to the Securities Exchange Act of 1934, as amended, or the Securities Act
of 1933, as amended.
(xii) Promptly and in any event after becoming aware of the occurrence
of any of the following events: (A) any Material Contract of Borrower or
any Guarantor is terminated or amended or any new Material Contract is
entered into (in which event Borrower or such Guarantor shall provide
Lender with a copy of such Material Contract), or (B) any order, judgment
or decree in excess of $100,000 (after reasonably expected insurance and
indemnity recovery) shall have been entered against Borrower or such
Guarantor or any of their respective properties or assets, or (C) any
notification of violation of any laws or regulations (including, without
limitation, any Health Care Laws) shall have been received by Borrower or
any Guarantor or from any Governmental Authority the results of which are
reasonably likely to have a material adverse effect on the business,
assets, condition (financial or otherwise) or results of operations or
prospects of Borrower or any Guarantor or the legality, validity,
enforceability, perfection or priority of the security interests and liens
of Lender upon the Collateral or the ability of Lender to enforce the
Obligations or realize upon the Collateral or otherwise with respect to the
rights of Lender hereunder or under the other Financing Agreements or the
ability of Borrower or any Guarantor to perform its obligations hereunder
or under the other Financing Agreements.
(b) Simultaneously with the delivery of each of the annual audited and
quarterly and monthly unaudited financial statements as set forth herein, Lender
shall receive a certificate of the chief financial officer of Borrower (i)
stating that, except as explained in reasonable detail in such certificate, (A)
all of the representations, warranties and covenants of Borrower and Guarantor
contained in this Agreement and the other Financing Agreements are correct and
complete as at the date of such certificate and (B) no Event of Default then
exists or existed during the period covered by such financial statements, and
(ii) describing and analyzing in reasonable detail all material trends, changes
and developments in each and all financial statements. If such certificate
discloses that a representation or warranty is not correct or complete, or that
a covenant has not been complied with, or that an Event of Default existed or
exists, such certificate shall set forth the action Borrower and Guarantors have
taken or propose to take with respect thereto.
<PAGE>
(c) Upon Lender's request, Borrower shall promptly notify any person
obligated to make payments on any Contract Account of the security interest of
Lender in such Contract Accounts, pursuant to a form acceptable to Lender, and
obtain the acknowledgment and consent of such person to the security interests
of Lender therein.
(d) Borrower and each Guarantor shall promptly notify Lender in writing of
any loss, damage, investigation, action, suit, proceeding or claim relating to
the Collateral or which might result in any material adverse change in its
business, properties, assets, goodwill or condition, financial or otherwise.
(e) Borrower and each Guarantor shall promptly provide Lender such budgets,
forecasts, projections and other information respecting the business operations
and financial or other condition of Borrower and Guarantors, as Lender may, from
time to time, reasonably request.
(f) Lender is hereby authorized to deliver a copy of any financial
statement or any other information relating to the business, operations or
financial condition of Borrower or its Subsidiaries, which may be furnished to
it hereunder or otherwise, to any regulatory body or agency or other
Governmental Authority having jurisdiction over Lender or upon notice to
Borrower (to the extent permitted under applicable law), to any court or to any
other Person which shall, or shall have any right or obligation to, succeed to
all or any part of the interests of Lender in any of the Loans, this Agreement,
the other Financing Agreements or the Collateral.
8.21 End of Fiscal Years; Fiscal Quarters. Borrower and each Guarantor
shall, for financial reporting purposes, cause its, and each of its
Subsidiaries' (a) fiscal years to end on December 31 of each year and (b) fiscal
quarters to end on March 31, June 30, September 30 and December 31 of each year.
8.22 Limitation on Restrictions Affecting Subsidiaries. Borrower and each
Guarantor shall not, and shall not permit any Subsidiary to, directly, or
indirectly, create or otherwise cause or suffer to exist any encumbrance or
restriction which prohibits or limits the ability of any Guarantor or other
Subsidiary of Borrower to (a) pay dividends or make other distributions or pay
any Indebtedness owed to Borrower or any Subsidiary of Borrower; (b) make loans
or advances to Borrower or any Subsidiary of Borrower; (c) transfer any of its
properties or assets to Borrower or any Subsidiary of Borrower; or (d) create,
incur, assume or suffer to exist any lien upon any of its property, assets or
revenues, whether now owned or hereafter acquired, other than encumbrances and
restrictions arising under (i) applicable law, (ii) this Agreement,
(iii) customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of Borrower or any of its Subsidiaries,
(iv) customary restric- tions on dispositions of real property interests found
in reciprocal easement agreements of Borrower, any Guarantor or Subsidiary,
(v) any agreement relating to permitted Indebtedness incurred by a Subsidiary of
Borrower prior to the date on which such Subsidiary was acquired by Borrower and
outstanding on such acquisition date, and (vi) the extension or continuation of
contractual obligations in existence on the date hereof; provided, that, any
such encumbrances or restrictions contained in such extension or continuation
are no less favorable to Lender than those encumbrances and restrictions under
or pursuant to the contractual obligations so extended or continued.
<PAGE>
8.23 Additional Negative Pledges. Borrower and each Guarantor shall not,
and shall not permit any Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective, or permit any Guarantor
or Subsidiary to create or otherwise cause or suffer to exist or become
effective, directly or indirectly, (a) any prohibition or restriction (including
any agreement to provide equal and ratable security to any other Person in the
event a security interest or lien is granted to or for the benefit of Lender) on
the creation or existence of any security interest or lien upon the assets of
Borrower, any Guarantor or other Subsidiary, other than the restrictions
contained in this Agreement or the other Financing Agreements; (b) any agreement
relating to a lien permitted pursuant to Section 8.5(g) hereof as relating to
the property encumbered thereby; or (c) restrictions described in Section 8.23
hereof.
8.24 Compliance with Action Plan. Borrower and Guarantors shall take each
of the actions set forth in the Action Plan and shall have complied with all of
the terms of the Action Plan and completed all actions required thereunder in a
manner satisfactory to Lender by no later than April 30, 1998. Borrower shall
cooperate with Ernst & Young to conduct such periodic reviews, audits and
analysis as Lender may from time to time require to confirm the compliance by
Borrower with the Action Plan.
8.25 Further Assurances.
(a) Borrower and each Guarantor has executed or will contemporaneously
herewith execute and deliver to Lender such of the other Financing Agreements to
which it is a party and financing statements pursuant to the UCC, in form and
substance satisfactory to Lender. Borrower and each Guarantor shall, at its
expense, at any time or times duly execute and deliver, or shall cause to be
duly executed and delivered, such further agreements, instruments and documents,
including, without limitation, additional security agreements, collateral
assignments, UCC financing statements or amendments or continuations thereof,
certificates of title with respect to motor vehicles and applications for
notation of the liens of Lender thereon, Collateral Access Agreements and
consents to the exercise by Lender of all the rights and remedies hereunder,
under any of the other Financing Agreements or applicable law with respect to
the Collateral, and do or cause to be done such further acts as may be necessary
or proper in Lender's opinion to evidence, perfect, maintain and enforce the
security interest and the priority thereof in the Collateral and to otherwise
effectuate the provisions or purposes of this Agreement or any of the other
Financing Agreements.
(b) Where permitted by law, Borrower and each Guarantor hereby authorizes
Lender to execute and file one or more UCC financing statements signed only by
Lender. Upon the request of Lender, at any time and from time to time, Borrower
and each Guarantor shall, at its cost and expense, do, make, execute, deliver
and record, register or file, financing statements, mortgages, deeds of trust,
deeds to secure debt, and other instruments, acts, pledges, assignments and
transfers (or cause the same to be done) and will deliver to Lender such
instruments evidencing items of Collateral as may be requested by Lender.
<PAGE>
(c) Upon Lender's request, Borrower shall cause to be delivered (within
forty- five (45) days of Lender's request) opinions of counsel, selected by
Borrower and acceptable to Lender, licensed to practice in the States which
Borrower, any Guarantor or any person obligated to make payments in respect of
any Medicaid Account, Insurance Account or Contract Account is located as Lender
may from time to time specify. All such opinions shall be in form and substance
satisfactory to Lender, and either (i) confirm to Lender that no further actions
are required in order to perfect the security interest of Lender in such
Accounts in such States or (ii) shall set forth in reasonable detail any such
further actions as may be required. In the event that for any reason further
actions are required as set forth in such opinions, upon Lender's request,
Borrower and each Guarantor shall promptly take such actions or cause them to be
taken, as the case may be.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES
9.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an "Event of Default" hereunder:
(a) Borrower shall be in default in the payment of any of the Obligations
when due, which default shall continue for two (2) days; or
(b) (i) Borrower, any Guarantor or other Obligor shall fail to observe or
perform any of the covenants or agreements contained in Sections 8.2, 8.3, 8.10,
8.11, 8.12, 8.13, 8.14, 8.15, 8.16, 8.17, 8.19, 8.20 and 8.22 of this Agreement
or any covenants or agreements covering substantially the same matter as such
sections in any of the other Financing Agreements, and such failure shall
continue for ten (10) days, provided, that, such ten (10) day period shall not
apply in the case of: (A) any failure to observe any such covenant or agreement
which is not capable of being cured at all or within such ten (10) day period or
which has been the subject of a prior failure within a six (6) month period or
(B) an intentional breach by Borrower, and Guarantor or their management of any
such covenant or agreement, or (ii) Borrower, any Guarantor or other Obligor
shall fail to observe or perform any covenants or agreements contained in this
Agreement, the other Financing Agreements or in any other document or instrument
referred to therein, other than as described in Section 9.1(a) or 9.1(b)(i)
above; or
(c) any present or future representation, warranty or statement of fact
when made by or on behalf of Borrower or any Guarantor to Lender is false or
misleading in any material respect; or
(d) one or more judgments are rendered against Borrower or any Obligor in
excess of $200,000 in any one case or $400,000 in the aggregate and the same
shall remain undischarged for a period in excess of thirty (30) days or
execution shall at any time not be effectively stayed except if it is a judgment
for which Borrower or such Obligor is fully insured and with respect to which
the insurer has admitted in writing its liability for the full amount thereof
and so long as execution is at all times effectively stayed; or
<PAGE>
(e) Borrower or any Obligor shall be generally unable to pay its debts as
they mature, suspend or discontinue doing business for any reason, become
insolvent, call a meeting of creditors or have a creditors' committee appointed,
make a general assignment for the benefit of creditors, shall admit in writing
its inability to pay its debts as they become due or shall commence any action
or proceeding for the appointment of any trustee, receiver, custodian or
liquidator of Borrower or such Obligor or all or any part of their respective
properties or assets; or
(f) Borrower or any Obligor shall commence any action or proceeding for
relief under the Bankruptcy Code or any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under the
Bankruptcy Code or any other present or future statute, law or regulation or
shall take any corporate action to authorize any of such actions or proceedings;
or
(g) Borrower or any Obligor shall have commenced against it any action or
proceeding for relief under the Bankruptcy Code or any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the Bankruptcy Code or any other present or future statute, law or
regulation, or any action or proceeding for the appointment of any trustee,
receiver, custodian or liquidator of any of Borrower or such Obligor or all or
any part of their respective properties or assets, which is not dismissed within
forty-five (45) days of its commencement, or Borrower or such Obligor shall file
any answer admitting or not contesting the allegations of a petition filed
against it in any such proceeding or by any act or omission indicates its
consent to, acquiescence in or approval of, any such action or proceeding or if
the relief requested is granted sooner; or
(h) Borrower or any Obligor shall default in the payment of any amounts at
any time due on any Indebtedness for borrowed money in excess of $200,000,
Capitalized Lease Obligations in excess of $200,000 or any contingent
Indebtedness in connection with any guarantee, indemnity or similar type of
instrument in excess of $200,000 at any time owing to any Person other than
Lender and in the performance of any other terms or covenants or any evidence of
same or other agreement relating thereto or securing same and which causes or
permits the holders of such Indebtedness to cause such Indebtedness to become
due prior to its maturity, and which default continues for more than the
applicable cure period, if any, with respect thereto, but in no event more than
thirty (30) days after the occurrence of any such default; or
(i) (i) any Plan shall fail to satisfy the minimum funding standard
required for any plan year or part thereof or a waiver of such standard or
extension of any amortization period is sought or granted under Section 412 of
the Code or Section 302 of ERISA, or any Plan is, shall have had or is
reasonably likely to have a trustee appointed to administer such Plan, or any
Plan is, shall have been, or is reasonably likely to be terminated or the
subject of termination proceedings under ERISA, or an event shall have occurred
or a condition shall exist in either case entitling the Pension Benefit Guaranty
Corporation to terminate a Plan, any Plan shall have an Unfunded Current
Liability, a contribution required to be made to a Plan has not been timely made
by Borrower or any of its Subsidiaries, Borrower or any of its respective
Subsidiaries (or any ERISA Affiliate, with respect to ERISA Sections 4062, 4063,
4069, 4201, 4204 and 4212 and Code Section 4971) has incurred or is reasonably
likely to incur a material liability to or on account of a Plan under Sections
409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4214 of ERISA or
Sections 401(a)(29), 4971, 4975 or 4980 of the Code, or Borrower or any of its
respective Subsidiaries has incurred or is reasonably likely to incur material
liabilities pursuant to one or more employee welfare benefit plans (as defined
in Section 3(1) of ERISA) that provide benefits to retired employees or other
former employees (other than as required by Section 601 of ERISA and Section
4980B of the Code) or employee pension benefit plans (as defined in Section 3(2)
of ERISA) or (ii) there shall result from any event or events set forth in
clause (i) of this Section 9.1(i) the imposition of a lien, the granting of a
security interest, or a material liability or a material risk of incurring a
material liability; or
<PAGE>
(j) there is a Change of Control; or
(k) the occurrence of any default or event of default under any of the
other Financing Agreements and such default or event of default continues for
more than the applicable cure periods, if any, with respect thereto.
9.2 Remedies.
(a) Without limiting the rights of Lender to demand payment sooner in
accordance with the terms of this Agreement, upon or at any time during the
existence of any one or more of such Events of Default, upon termination of this
Agreement or the other Financing Agreements, or if this Agreement and the other
Financing Agreements are not renewed, in addition to any other rights Lender may
have under the Financing Agreements or otherwise:
(i) Lender may declare any or all of the Obligations to be immediately
due and payable, together with interest at the highest rate of interest
hereunder until fully and indefeasibly paid, without presentment for
payment, demand, notice of dishonor or protest or any or other further
notice, all of which are hereby expressly waived by Borrower (provided,
that, upon the occurrence of any Events of Default described in Sections
9.1(f) or 9.1(g), all Obligations shall automatically become immediately
due and payable);
(ii) without further notice to Borrower or any Guarantor and Lender
may appropriate, set off and apply to the payment of any or all of the
Obligations, any or all Collateral, in such manner as Lender shall
determine, enforce payment of any Collateral, settle, compromise or release
in whole or in part, any amounts owing on the Collateral, make allowances
and adjustments with respect thereto, issue credits in Lender's name, sell,
assign and deliver the Collateral (or any part thereof), at public or
private sale, at broker's board, for cash, upon credit or otherwise, at
Lender's option and discretion, and Lender may bid or become purchaser at
any such sale, if public, free from any right of redemption which is hereby
expressly waived to the extent permitted under applicable laws;
(iii) without limiting the generality of the foregoing, Lender is
hereby authorized at any time and from time to time, to set off and apply
any and all deposits (general or special, time or demand, provisional or
final) at any time held and other Indebtedness at any time owing by Lender
to or for the credit or the account of Borrower against any and all of the
Obligations, whether or not then due and payable; and
(iv) Lender shall have the right, without notice to Borrower or any
Guarantor (except as otherwise expressly provided herein), at any time and
from time to time in its discretion, with or without judicial process or
the aid or assistance of others and without cost to Lender (A) to enter
upon any premises on or in which any of the Inventory may be located and,
without resistance or interference by Borrower or any Guarantor, take
possession of the Inventory or Equipment, (B) to complete processing,
manufacturing and repair of all or any portion of the Inventory or
Equipment, (C) to sell, foreclose or otherwise dispose of any part or all
of the Inventory or Equipment on or in any premises of Borrower or any
Guarantor or premises of any other party, (D) to require Borrower or any
Guarantor, at its expense, to assemble and make available to Lender any
part or all of the Inventory or Equipment at any reasonable place and time
designated by Lender, and (E) to remove any or all of the Inventory or
Equipment from any premises on or in which the same may be located, for the
purpose of effecting the sale, foreclosure or other disposition thereof or
for any other purpose.
<PAGE>
(b) Lender shall have all of the rights and remedies of a secured party
under the UCC or applicable law of any State in which any Collateral may be
situated, in addition to all of the rights and remedies set forth in this
Agreement and the other Financing Agreements, and in any instrument or document
referred to herein or therein, and/or under any other applicable law relating to
this Agreement, the other Financing Agreements, the Obligations or the
Collateral.
(c) Borrower and each Guarantor agrees that the giving of ten (10) days
notice to Borrower by Lender at Borrower's address set forth below, designating
the place and time of any public sale or of the time after which any private
sale or other intended disposition of the Collateral is to be made, shall be
deemed to be reasonable notice thereof and Borrower and each Guarantor waives
any other notice with respect thereto.
(d) The proceeds resulting from the exercise of any of the foregoing
consisting of cash or other immediately available funds, rights or remedies
shall be applied by Lender to the payment of the Obligations in such order as
Lender may elect, and Borrower and each Guarantor shall remain jointly and
severally liable to Lender for any deficiency and, in the event of any surplus,
shall be paid to Borrower or Guarantor or such other person as may be entitled
thereto under applicable law or order of any court or other governmental
authority. Without limiting the generality of the foregoing, if Lender enters
into any credit transaction, directly or indirectly, in connection with the
disposition of any Collateral, it shall have the option, at any time, in its
discretion, to reduce the Obligations by the principal amount of such credit
transaction or to defer the reduction thereof until actual receipt by Lender of
cash or other immediately available funds in connection therewith.
(e) In the event Lender institutes an action to recover any Collateral or
seeks recovery of any Collateral by way of prejudgment remedy or otherwise,
Borrower and each Guarantor hereby irrevocably waives to the extent permitted
under applicable law, (i) the posting of any bond, surety or security with
respect thereto which might otherwise be required, (ii) any demand for
possession prior to the commencement of any suit or action to recover the
Collateral, and (iii) any requirement that Lender retain possession and not
dispose of any Collateral until after trial or final judgment.
<PAGE>
(f) Lender may, at its option, cure any default by Borrower or any
Guarantor under any agreement with any Person, which constitutes, or with notice
or passage of time or both would constitute, an Event of Default hereunder or
under any of the other Financing Agreements, or pay or bond on appeal any
judgment entered against Borrower or any Guarantor (irrespective of the amount
of said judgment or the time elapsed since entry thereof), and charge Borrower's
loan account(s) with Lender therefor, such amounts to be repayable by Borrower
on demand, together with interest thereon at the highest rate of interest
payable hereunder; provided, however, Lender shall be under no obligation to
effect such cure, payment or bonding and shall not, by making any payment for
the account(s) or Borrower or any Guarantor, be deemed to have assumed any
obligation or liability of Borrower or any Guarantor.
(g) The enumeration of the foregoing rights and remedies is not intended to
be exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies Lender may have under the UCC or
other applicable law. Lender shall have the right to determine which rights and
remedies, and in which order any of the same, are to be exercised, and to
determine which Collateral is to be proceeded against and in which order, and
the exercise of any right or remedy shall not preclude the exercise of any
others, all of which shall be cumulative.
(h) No act, failure or delay by Lender shall constitute a waiver of any of
the rights and remedies of Lender. No single or partial waiver by Lender of any
provision of this Agreement or any of the other Financing Agreements, or breach
or default thereunder, or of any right or remedy which Lender may have shall
operate as a waiver of any other provision, breach, default, right or remedy or
of the same provision, breach, default, right or remedy on a future occasion.
(i) Borrower and each Guarantor waives presentment, notice of dishonor,
protest and notice of protest of all instruments included in or evidencing any
of the Obligations or the Collateral and any and all notices or demands
whatsoever (except as expressly provided herein). Lender may, at all times,
proceed directly against Borrower or any Guarantor to enforce payment of the
Obligations and shall not be required to take any action of any kind to
preserve, collect or protect any rights in the Collateral.
<PAGE>
SECTION 10. EFFECTIVE DATE; TERMINATION; COSTS;
ASSIGNMENTS; AMENDMENTS; ETC.
10.1 Term.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date hereof and shall continue in full force and effect for
a term ending on the Final Maturity Date.
(b) In addition, Lender may terminate this Agreement and the other
Financing Agreements, or terminate only the provisions of this Agreement as to
future Loans immediately at any time upon the occurrence of an Event of Default
or an act, condition or event which with notice or passage of time or both would
constitute an Event of Default.
(c) Borrower may, at any time, upon ten (10) days prior written notice to
Lender, terminate this Agreement and the other Financing Agreements.
(d) Upon the effective date of termination of the Financing Agreements
(whether upon the Final Maturity Date, pursuant to Sections 10.1(b) or 10.1(c)
above, or otherwise), Borrower shall pay to Lender in full, all outstanding and
unpaid Obligations (including, but not limited to, the Loans and all interest,
fees, charges, expenses and other amounts provided for hereunder, under the
other Financing Agreements or otherwise) and shall furnish cash collateral to
Lender in such amounts as Lender determines are reasonably necessary to secure
Lender from loss, cost, damage or expense, including reasonable attorneys' fees
and legal expenses, in connection with any contingent Obligations, including any
checks or other payments provisionally credited to the Obligations and/or as to
which Lender has not yet received final and indefeasible payment. Such payments
in respect of the Obligations and cash collateral shall be remitted by wire
transfer in Federal funds to such bank account of Lender, as Lender may, in its
discretion, designate in writing to Borrower for such purpose. Interest at the
then applicable rate shall be due until and including the next Business Day, if
the amounts so paid by Borrower to the bank account designated by Lender are
received in such bank account later than 12:00 noon, New York, New York time.
(e) No termination of the Financing Agreements shall relieve or discharge
either Borrower or any Guarantor of its duties, obligations and covenants under
the Financing Agreements until all Obligations have been fully indefeasibly
discharged and paid, and the continuing security interests of Lender in the
Collateral shall remain in effect until all such Obligations have been fully and
indefeasibly discharged and paid.
<PAGE>
10.2 Expenses and Additional Fees.
(a) Borrower and Guarantors shall pay to Lender on demand all reasonable
costs and expenses that Lender may pay or incur in connection with the
negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement and the other Financing Agreements, including,
without limitation: (i) fees and disbursements of counsel to Lender (including
allocated costs of in-house counsel), accountants, appraisers and other
consultants, experts or advisors retained by Lender, (ii) costs and expenses
(including reasonable attorneys' and paralegals' fees and disbursements, and
allocated costs of in-house counsel) for any amendment, supplement, waiver,
consent, or subsequent closing in connec- tion with the Financing Agreements and
the transactions contemplated thereby (whether or not such amendment,
supplement, waiver or consent is ever executed or delivered), (iii) costs and
expenses of lien and title searches and title insurance, (iv) taxes, fees and
other charges for recording any agreements or documents with the Office of
Patents and Trademarks, the Copyright Office or any other Governmental
Authority, and the filing of UCC financing statements and continuations, and
other actions to perfect, protect, and continue the security interests and liens
of Lender in the Collateral, (v) sums paid or incurred to pay any amount or take
any action required of Borrower or any Guarantor under the Financing Agreements
that Borrower or such Guarantor fails to pay or take, (vi) costs, fees and other
charges of Ernst & Young in connection with the periodic reviews, audits and
analysis of the compliance by Borrower and Guarantors with the Action Plan,
(vii) costs of appraisals, environmental audits, inspections, and verifications
of the Collateral and the Borrowing Base, including, without limitation, travel,
lodging, and meals for inspections of the Collateral and the Borrowing Base, and
the operations of Borrower or any Guarantor by Lender or its agents (including
any review thereof by a third party firm selected by Lender), plus a per person
per day charge for the field examiners of Lender, provided, that, Lender and its
agents shall not conduct such inspections and field examinations more than six
(6) times in any twelve (12) month period prior to an Event of Default,
(viii) costs and expenses of forwarding loan proceeds, collecting checks and
other items of payment, and establishing and maintaining payment accounts and
lock boxes, (ix) costs and expenses of preserving and protecting the Collateral,
and (x) costs and expenses (including attorneys' and paralegals' fees and
disbursements and allocated costs of in-house counsel) paid or incurred to
obtain payment of the Obligations, enforce the security interests and liens of
Lender, sell or otherwise realize upon the Collateral, and otherwise enforce the
provisions of this Agreement and the other Financing Agreements, or to defend
any claims made or threatened against Lender arising out of the transactions
contemplated hereby (including, without limitation, preparations for and
consultations concerning any such matters). The foregoing shall not be construed
to limit any other provisions of the Financing Agreements regarding costs and
expenses to be paid by Borrower.
(b) Borrower shall pay to Lender all of its customary charges and fees in
connection with opening bank accounts and lockboxes, depositing checks and
receiving and transferring funds, including any payment, claim or refund
relating to the dishonor of any checks or other items of Borrower, any Guarantor
or Account Debtors.
(c) All sums provided for in this Section 10.2 shall be part of the
Obligations, shall be payable on demand, and shall accrue interest after demand
for payment thereof at the applicable rate of interest then payable hereunder.
Lender is hereby irrevocably authorized to charge any amounts payable hereunder
directly to any of the account(s) maintained by Lender or Lender with respect to
Borrower. This Section 10.2 shall survive the termination of this Agreement.
<PAGE>
10.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by a duly authorized officer of
Lender, and as to any amendment, an officer of Borrower. Lender shall not, by
any act, delay, omission or otherwise be deemed to have expressly or impliedly
waived any of its rights, powers and/or remedies unless such waiver shall be in
writing and signed by a duly authorized officer of Lender. Any such waiver shall
be enforceable only to the extent specifically set forth therein. A waiver by
Lender of any right, power and/or remedy on any one occasion shall not be
construed as a bar to or waiver of any such right, power/and or remedy which
Lender would otherwise have on any future occasion, whether similar in kind or
otherwise.
10.4 Independence of Representations, Warranties and Covenants. The
representations, warranties and covenants contained in the Financing Agreements
shall be independent of each other and no exception to any representation,
warranty or covenant shall be deemed to be an exception to any other
representation, warranty or covenant contained in the Financing Agreements
unless expressly provided, nor shall any such exception be deemed to permit any
action or omission that would be in contravention of applicable law.
10.5 Partial Invalidity. If any provision of this Agreement or the other
Financing Agreements is held to be invalid or unenforceable, such invalidity or
unenforceability shall not invalidate this Agreement or the other Financing
Agreements as a whole but this Agreement or the particular Financing Agreement,
as the case may be, shall be construed as though it did not contain the
particular provision or provisions held to be invalid or unenforceable and the
rights and obligations of the parties shall be construed and enforced only to
such extent as shall be permitted by law.
10.6 Headings. The headings used herein are for convenience only and do not
constitute matters to be considered in interpreting this Agreement.
10.7 Counterparts. This Agreement may be executed in any number of
counterparts, and by Lender, Borrower and any Guarantor in separate
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same agreement.
10.8 Survival of Agreement. All agreements, representations and warranties
contained herein or made in writing by the parties hereto in connection with the
transactions contemplated hereby shall survive the execution and delivery of
this Agreement, the other Financing Agreements and the consummation of the
transactions contemplated herein or therein regardless of any investigation made
by or on behalf of Lender.
<PAGE>
10.9 No Waiver; Cumulative Remedies. No failure to exercise, and no delay
in exercising on the part of Lender any right, power or privilege under this
Agreement or under any of the other Financing Agreements or other documents
referred to herein or therein shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or privilege hereunder or
thereunder preclude any other or further exercise thereof or the exercise of any
other right, power and privilege. No notice to or demand on Borrower or any
Guarantor not required hereunder or any of the other Financing Agreements shall
entitle Borrower or any Guarantor to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of Lender to
any other or further action in any circumstances without notice or demand. The
rights and remedies of Lender under this Agreement, the other Financing
Agreements and any other present and future agreements between Lender and
Borrower or any Guarantor are cumulative and not exclusive of any rights or
remedies provided by law or under any of the Financing Agreements or such other
agreements and all such rights and remedies may be exercised successively or
concurrently.
10.10 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to the applicable party at its address set forth on the
signature page hereof, or to such other address as either party may designate by
written notice to the other in accordance with this provision, and (b) deemed to
have been given or made: if delivered in person, immediately upon delivery; if
by telex, telegram or facsimile transmission, immediately upon sending and upon
confirmation of receipt; if by nationally recognized overnight courier service
with instructions to deliver the next Business Day, one (1) Business Day after
sending; and if by certified mail, return receipt requested, ten (10) days after
mailing.
10.11 Successors.
(a) This Agreement, the other Financing Agreements and any other documents
referred to herein or therein shall be binding upon and inure to the benefit of
and be enforceable by Lender, Borrower, Guarantors and their respective
successors and assigns, except that Borrower and Guarantors may not assign their
rights under this Agreement, the other Financing Agreements and any other
documents referred to herein or therein without the prior written consent of
Lender. Subject to Section 10.11(b) below, Lender may assign its rights and
delegate its obligations under this Agreement and the other Financing Agreements
and further may assign, or sell participations in, all or any part of the Loans
or any other interest herein to another financial institution or other person,
in which event, the assignee or participant shall have, to the extent of such
assignment or participation, the same rights and benefits it would have if it
were the Lender hereunder, except as otherwise provided by the terms of such
assignment or participation, provided, that (i) in no event shall Borrower or
Guarantors be required to pay the costs and expenses of more than two (2) of
such assignees or participants as required under Section 10.2 hereof and (ii) as
to any assignment to person which is not an Affiliate, Lender shall give
Borrower notice thereof.
<PAGE>
(b) (i) Upon the request of Lender, Borrower shall maintain, or cause to be
maintained, a register (the "Register") that, at the request of Borrower, may be
kept by Lender on behalf of Borrower at no charge to Borrower at the address to
which notices to Lender are to be sent hereunder, on which it enters the name of
Lender as the registered owner of the Loans held by Lender. Registered Loans
(and the Registered Notes, if any, evidencing the same) may be assigned or sold
in whole or in part only by registration of such assignment or sale on the
Register (and each Registered Note shall expressly so provide). Any assignment
or sale of all or part of such Registered Loans (and the Registered Notes, if
any, evidencing the same) may be effected only by registration of such
assignment or sale on the Register, together with the surrender of the
Registered Notes, if any, evidencing the same duly endorsed by (or accompanied
by a written instrument of assignment or sale duly executed by) the holder of
such Registered Note, whereupon, at the request of the designated assignee(s) or
transferee(s), one or more new Registered Notes in the same aggregate principal
amount shall be issued to the designated assignee(s) or transferee(s). Prior to
the registration of assignment or sale of any Registered Loans (and the
Registered Notes, if any evidencing the same), Borrower shall treat the Person
in whose name such Loans (and the Registered Notes, if any, evidencing the same)
is registered as the owner thereof for the purpose of receiving all payments
thereon and for all other purposes, notwithstanding notice to the contrary.
(ii) In the event that Lender sells participations in the Registered Loans,
the Lender shall maintain a register on which it enters the name of all
participants in the Registered Loans held by it (the "Participant Register").
Registered Loans (and the Registered Notes, if any, evidencing the same) may be
participated in whole or in part only by registration of such participation on
the Participant Register (and each Registered Note shall expressly so provide).
Any participation of such Registered Loan (and the Registered Note, if any,
evidencing the same) may be effected only by the registration of such
participation on the Participant Register.
(iii) Any foreign Person who purchases or is assigned or participates in
any portion of such Loans shall provide Borrower (in the case of a purchase or
assignment) or Lender (in the case of a participation) with a completed Internal
Revenue Service Form W-8 (Certificate of Foreign Status) or a substantially
similar form for such purchaser, participant or any other affiliate who is a
holder of beneficial interests in the Loans.
10.12 Entire Agreement. This Agreement, the other Financing Agreements, any
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represent the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior and contemporaneous agreements,
understandings, negotiations and discussions, representations, warranties,
offers and contracts concerning the subject matter hereof and thereof, whether
oral or written.
<PAGE>
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
(a) The validity, interpretation and enforcement of this Agreement and the
other Financing Agreements and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of New York (without giving
effect to principles of conflicts of law).
(b) Borrower, Guarantors and Lender irrevocably consent and submit to the
non- exclusive jurisdiction of the Supreme Court of the State of New York in New
York County and the United States District Court for the Southern District of
New York and waive any objection based on venue or forum non conveniens with
respect to any action instituted therein arising under this Agreement or any of
the other Financing Agreements or in any way connected with or related or
incidental to the dealings of the parties hereto in respect of this Agreement or
any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agree that any dispute with respect to
any such matters shall be heard only in the courts described above. Lender shall
have the right to bring any action or proceeding against Borrower or any
Guarantor or its property in the courts of any other jurisdiction which Lender
deems necessary or appropriate in order to realize on the Collateral or to
otherwise enforce its rights against Borrower or any Guarantor or its property).
(c) Borrower and each Guarantor hereby waives personal service of any and
all process upon it and consents that all such service of process may be made by
registered mail, postage prepaid, directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed ten
(10) days after the same shall have been so deposited in the U.S. mails,
registered mail, postage prepaid, or, at option of Lender, by service upon
Borrower or any Guarantor in any other manner provided under the rules of any of
the foregoing courts. Within thirty (30) days after such service, Borrower or
such Guarantor shall appear in answer to such process, failing which Borrower or
such Guarantor shall be deemed in default and judgment may be entered by Lender
against Borrower or such Guarantor for the amount of the claim and other relief
requested. Lender hereby consents to service of process by registered mail,
postage prepaid, directed to its address set forth on the signature page hereof
and service so made shall be deemed completed ten (10) days after the same shall
have been so deposited in the U.S. mails, registered mail, postage prepaid.
(d) BORROWER, GUARANTORS AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER,
GUARANTORS AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY
AND THAT BORROWER, GUARANTORS OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A
COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
<PAGE>
(e) Lender shall not have any liability to Borrower or any Guarantor
(whether in tort, contract, equity or otherwise) for losses suffered by Borrower
or any Guarantor in connection with, arising out of, or in any way related to
the transactions or relationships contemplated by this Agreement, or any act,
omission or event occurring in connection herewith, unless it is determined by a
final and non-appealable judgment by a court of competent jurisdiction that the
losses were the result of such party's own acts or omissions constituting gross
negligence or willful misconduct. In any such litigation, Lender shall be
entitled to the benefit of the rebuttable presumption that it acted in good
faith and with the exercise of ordinary care in the performance by it of the
terms of this Agreement.
11.2 Waiver of Notices. Borrower and each Guarantor hereby expressly waives
demand, presentment, protest and notice of protest and notice of dishonor with
respect to any and all instruments and commercial paper, included in or
evidencing any of the Obligations or the Collateral, and any and all other
demands and notices of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except such as are expressly
provided for herein. No notice to or demand on Borrower or any Guarantor which
Lender may elect to give shall entitle Borrower or any Guarantor to any other or
further notice or demand in the same, similar or other circumstances. Without
limiting the generality of the foregoing, Borrower and each Guarantor waives (a)
notice prior to Lender's taking possession or control of any of the collateral
or any bond or security which might be required by any court prior to allowing
Lender to exercise any of Lender's remedies, including the issuance of an
immediate writ of possession and (b) the benefit of all valuation, appraisement
and exemption laws.
11.3 Waiver of Counterclaims. Borrower and each Guarantor waives all rights
to interpose any claims, deductions, setoffs or counterclaims of any nature
(other than compulsory counterclaims) in any action or proceeding with respect
to this Agreement, the Obligations, the Collateral or any matter arising
therefrom or relating hereto or thereto.
11.4 Indemnification. Borrower and each Guarantor shall indemnify Lender
and its respective officers, directors, agents, employees and counsel, and hold
the same harmless from and against any and all losses, claims, damages,
liabilities, costs or expenses imposed on, incurred by or asserted against any
of them in connection with any litigation, investigation, claim or proceeding
commenced or threatened related to the negotiation, preparation, execution,
delivery, enforcement, performance or administration of this Agreement, any
other Financing Agreements, or any undertaking or proceeding related to any of
the transactions contemplated hereby or any act, omission, event or transaction
related or attendant thereto, including, without limitation, amounts paid in
settlement, court costs, and the fees and expenses of counsel except to the
extent resulting directly from the gross negligence or wilful misconduct of
Lender as determined pursuant to a final non-appealable order of a court of
competent jurisdiction. To the extent that the undertaking to indemnify, pay and
hold harmless set forth in this Section may be unenforceable because it violates
any law or public policy, Borrower and Guarantors shall pay the maximum portion
which it is permitted to pay under applicable law to Lender in satisfaction of
indemnified matters under this Section. The foregoing indemnity shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, Lender, Borrower and Guarantors have caused these
presents to be duly executed as of the day and year first above written.
MADELEINE, L.L.C. HEALTH FITNESS CORPORATION
By: /s/ Daniel E. Wolf By: /s/ Charles E. Bidwell
Title: Managing Director Title: CFO
Address for Notices: Address for Notices:
450 Park Avenue 3500 West 80th Street, Suite 130
New York, New York 10022 Bloomington, Minnesota 55431
Attention: Mr. Daniel E. Wolf Attention: Mr. Loren S. Brink
Telephone: (212) 891-2121 Telephone: (612) 831-6830
Telecopier: (212) 758-5305 Telecopier: (612) 831-7264
HEALTH FITNESS REHAB, INC.
By: /s/ Charles E. Bidwell
Title: CFO
THE PREFERRED COMPANIES, INC.
By: /s/ Charles E. Bidwell
Title: CFO
[SIGNATURES CONTINUED ON THE NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM THE PREVIOUS PAGE]
HEALTH FITNESS REHAB OF IOWA, INC.
By: /s/ Charles E. Bidwell
Title: CFO
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
By: /s/ Charles E. Bidwell
Title: CFO
MEDLINK CORPORATION
By: /s/ Charles E. Bidwell
Title: CFO
MEDLINK SERVICES, INC.
By: /s/ Charles E. Bidwell
Title: CFO
FITNESS CENTERS OF AMERICA
By: /s/ Charles E. Bidwell
Title: CFO
[SIGNATURES CONTINUED ON THE NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM THE PREVIOUS PAGE]
SPORTS & ORTHOPEDIC PHYSICAL
THERAPY, INC.
By: /s/ Charles E. Bidwell
Title: CFO
Address for Notices:
3500 West 80th Street, Suite 130
Bloomington, Minnesota 55431
Attention: Mr. Loren S. Brink
Telephone: (612) 831-6830
Telecopier: (612) 831-7264
Exhibit 21.1
Subsidiaries (as of 3/17/98)
1. Sports & Orthopedic Physical Therapy, Inc., a Minnesota corporation
2. Fitness Centers of America, Inc. d/b/a Fitness Systems, a California
corporation
3. The Preferred Companies, Inc. d/b/a Preferred Therapy Providers of America,
an Arizona corporation
4. Health Fitness Rehab, Inc., a Minnesota corporation
5. Health Fitness Rehab of Iowa, Inc., an Iowa corporation
6. Duffy and Associates Physical Therapy Corp., an Iowa corporation
7. Medlink Management Services, Inc., an Iowa corporation
8. Medlink Corporation, an Iowa corporation
9. Midlands Physical Therapy, Inc., a Nebraska 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 Employee Stock Option Plan of
our report dated April 8, 1998, appearing in the Annual Report on Form 10-KSB of
Health Fitness Corporation and Subsidiaries for the year ended December 31,
1997.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 81,639
<SECURITIES> 0
<RECEIVABLES> 6,727,963
<ALLOWANCES> 225,000
<INVENTORY> 810,805
<CURRENT-ASSETS> 7,928,728
<PP&E> 4,440,309
<DEPRECIATION> 842,121
<TOTAL-ASSETS> 23,732,282
<CURRENT-LIABILITIES> 7,767,654
<BONDS> 5,785,018
0
0
<COMMON> 81,368
<OTHER-SE> 10,067,072
<TOTAL-LIABILITY-AND-EQUITY> 23,732,282
<SALES> 6,809,944
<TOTAL-REVENUES> 33,670,724
<CGS> 4,839,962
<TOTAL-COSTS> 26,968,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 650,347
<INCOME-PRETAX> (1,046,690)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,046,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,046,690)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS CONTAINED IN REGISTRANT'S FORM 10-QSB FOR THE QUARTER
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,787,550
<ALLOWANCES> 270,000
<INVENTORY> 534,742
<CURRENT-ASSETS> 6,297,288
<PP&E> 3,250,230
<DEPRECIATION> 838,662
<TOTAL-ASSETS> 20,366,714
<CURRENT-LIABILITIES> 7,011,232
<BONDS> 2,936,684
0
0
<COMMON> 76,791
<OTHER-SE> 10,271,755
<TOTAL-LIABILITY-AND-EQUITY> 20,366,714
<SALES> 2,000,294
<TOTAL-REVENUES> 8,233,433
<CGS> 1,433,276
<TOTAL-COSTS> 6,575,025
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,592
<INTEREST-EXPENSE> 128,861
<INCOME-PRETAX> 381,931
<INCOME-TAX> 115,060
<INCOME-CONTINUING> 266,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 266,871
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,781,876
<ALLOWANCES> 485,000
<INVENTORY> 454,254
<CURRENT-ASSETS> 5,554,543
<PP&E> 2,965,372
<DEPRECIATION> 780,037
<TOTAL-ASSETS> 18,178,897
<CURRENT-LIABILITIES> 7,630,136
<BONDS> 576,490
0
0
<COMMON> 71,733
<OTHER-SE> 9,820,355
<TOTAL-LIABILITY-AND-EQUITY> 18,178,897
<SALES> 6,042,583
<TOTAL-REVENUES> 28,514,344
<CGS> 4,414,273
<TOTAL-COSTS> 22,813,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 408,647
<INTEREST-EXPENSE> 292,421
<INCOME-PRETAX> 1,005,581
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,005,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005,581
<EPS-PRIMARY> .15
<EPS-DILUTED> .13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,297
<SECURITIES> 0
<RECEIVABLES> 4,456,943
<ALLOWANCES> 260,394
<INVENTORY> 436,701
<CURRENT-ASSETS> 4,820,750
<PP&E> 2,367,324
<DEPRECIATION> 822,773
<TOTAL-ASSETS> 15,313,214
<CURRENT-LIABILITIES> 5,329,031
<BONDS> 0
0
0
<COMMON> 71,394
<OTHER-SE> 9,604,038
<TOTAL-LIABILITY-AND-EQUITY> 15,313,214
<SALES> 4,011,618
<TOTAL-REVENUES> 20,743,499
<CGS> 2,935,880
<TOTAL-COSTS> 16,369,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 148,370
<INTEREST-EXPENSE> 223,440
<INCOME-PRETAX> 774,669
<INCOME-TAX> 0
<INCOME-CONTINUING> 774,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 774,669
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 45,596
<SECURITIES> 0
<RECEIVABLES> 4,495,264
<ALLOWANCES> 170,394
<INVENTORY> 392,158
<CURRENT-ASSETS> 5,024,967
<PP&E> 1,739,365
<DEPRECIATION> 736,540
<TOTAL-ASSETS> 15,223,389
<CURRENT-LIABILITIES> 5,509,342
<BONDS> 0
0
0
<COMMON> 70,963
<OTHER-SE> 9,316,644
<TOTAL-LIABILITY-AND-EQUITY> 15,223,389
<SALES> 2,720,089
<TOTAL-REVENUES> 13,872,653
<CGS> 1,961,923
<TOTAL-COSTS> 10,920,936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 58,371
<INTEREST-EXPENSE> 196,229
<INCOME-PRETAX> 512,208
<INCOME-TAX> 0
<INCOME-CONTINUING> 512,208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 512,208
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
