UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number: 0-25064
HEALTH FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
(State of incorporation or organization) (I.R.S. Employer Identification No.)
3500 West 80th Street, Bloomington, Minnesota 55431
(Address of principal executive offices) (Zip Code)
(612) 831-6830
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
capital stock, as of May 12, 1998 was:
Common Stock, $.01 par value, 11,786,116 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 795,322 $ 81,639
Trade accounts and notes receivable, less allowance
for doubtful accounts of $245,000 and
$225,000, respectively 6,962,400 6,502,963
Inventories 679,081 810,805
Prepaid expenses and other 491,569 533,321
------------ ------------
Total current assets 8,928,372 7,928,728
PROPERTY, less accumulated depreciation of $1,041,390
and $842,121, respectively 3,619,624 3,598,188
OTHER ASSETS:
Goodwill, less accumulated amortization of
$1,428,569 and $1,276,287, respectively 9,853,944 8,989,848
Noncompete agreements, less accumulated amortization
of $335,016 and $279,639, respectively 876,834 932,211
Copyrights, less accumulated amortization of
$52,110 and $40,944, respectively 617,890 629,056
Trade names, less accumulated amortization of
$18,002 and $13,667, respectively 241,998 246,333
Contracts, less accumulated amortization of
$68,609 and $48,194, respectively 151,390 171,806
Trade accounts and notes receivable, less allowance
for doubtful accounts of $600,000
and $650,000, respectively 655,815 679,376
Deferred financing costs, less accumulated amortization of $65,698 1,321,860
Other 397,012 556,736
------------ ------------
TOTAL ASSETS $ 26,664,739 $ 23,732,282
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,308,523 $ 1,873,472
Accrued salaries, wages, and payroll taxes 1,556,598 1,779,200
Accrued earn-out 533,444 533,444
Other accrued liabilities 884,836 1,233,538
Current portion of long-term debt 435,484 503,540
Deferred revenue 1,717,148 1,844,460
------------ ------------
Total current liabilities 6,436,033 7,767,654
LONG-TERM DEBT, less current portion 6,403,065 5,785,018
DEFERRED LEASE OBLIGATION 18,270 31,170
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none issued or outstanding
Common stock, $.01 par value; 25,000,000 shares
authorized; 11,737,325 and 8,136,828 shares
issued and outstanding, respectively 117,574 81,368
Additional paid-in capital 16,566,794 12,976,680
Accumulated deficit (2,812,451) (2,842,379)
------------ ------------
13,871,917 10,215,669
Stockholder note and interest receivable (64,546) (67,229)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,807,371 10,148,440
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,664,739 $ 23,732,282
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Preventive health care:
Health services $ 5,134,919 $ 4,284,067
Health and fitness products 2,393,036 2,000,293
------------ ------------
7,527,955 6,284,360
Rehabilitative health care 2,536,453 1,949,073
------------ ------------
10,064,408 8,233,433
COSTS OF REVENUES:
Preventive health care:
Health services 3,896,435 3,262,338
Health and fitness products 2,183,908 1,691,388
------------ ------------
6,080,343 4,953,726
Rehabilitative health care 1,785,288 1,621,299
------------ ------------
7,865,631 6,575,025
------------ ------------
GROSS PROFIT 2,198,777 1,658,408
OPERATING EXPENSES:
Salaries 947,049 487,697
Selling, general, and administrative 915,673 662,604
------------ ------------
1,862,722 1,150,301
------------ ------------
OPERATING INCOME 336,055 508,107
INTEREST EXPENSE (313,929) (128,861)
OTHER INCOME 20,141 2,685
------------ ------------
(293,788) (126,176)
------------ ------------
INCOME BEFORE INCOME TAXES 42,267 381,931
INCOME TAXES 12,339 115,060
------------ ------------
NET INCOME $ 29,928 $ 266,871
============ ============
NET INCOME PER SHARE:
Basic $ -- $ 0.04
Diluted -- 0.03
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 9,727,060 7,570,689
Diluted 10,035,237 7,916,257
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,928 $ 266,871
Adjustment to reconcile net income to net cash
used in operating activities:
Net gain on disposition of clinic assets (64,142)
Depreciation and amortization 508,814 315,484
Deferred revenue (127,312) (168,530)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (435,876) (891,774)
Inventories 131,724 (66,996)
Prepaid expenses and other 63,502 188,417
Other assets 112,930 (3,491)
Trade accounts payable (674,150) (655,137)
Accrued liabilities and other (648,311) 465,607
------------ ------------
Net cash used in operating activities (1,038,751) (613,691)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (23,916) (583,691)
Payments for acquisitions, net of liabilities assumed
and cash acquired (648,794) (880,000)
Payments in connection with earn-out provisions (178,966)
Payments in connection with noncompete agreements (120,000)
Proceeds from sale of physical therapy clinics, net 172,500
Collection of non-trade notes receivable 25,000 --
------------ ------------
Net cash used in investing activities (647,710) (1,590,157)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances 520,727
Borrowings under line of credit 5,367,646 913,000
Repayments of line of credit (6,867,646) (962,500)
Repayments of notes payable (3,862,508) --
Payment of financing costs (1,025,048)
Proceeds from long term debt 5,864,944 1,600,743
Repayment of long term debt (13,591)
Proceeds from private placement of equity 2,785,024
Proceeds from the issuance of common stock 135,050 145,750
Advances on notes receivable (2,117) (4,281)
Payments received on notes receivable 4,800 4,000
------------ ------------
Net cash provided by financing activities 2,400,145 2,203,848
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 713,684 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 81,639 --
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 795,323 $ --
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. They should be read in conjunction with the annual
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997. In the opinion of management, the interim
consolidated financial statements include all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of the results for
interim periods presented. Operating results for the three months ended March
31, 1998 are not necessarily indicative of the operating results for the year
ending December 31, 1998.
Certain reclassifications have been made to the consolidated statement of income
operations for the three months ended March 31, 1997. Such reclassifications had
no effect on net income or stockholders' equity as previously reported.
NOTE 2. ACQUISITIONS
On February 27, 1998, the Company completed the acquisition of all the issued
and outstanding stock of closely held Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. The purchase
agreement contained a noncompete provision that covers a period of five years
and prohibits the former owners from directly or indirectly competing with the
Company. In connection with the acquisition of Midlands, the Company issued
200,000 shares of common stock valued at $362,500 and cash consideration of
$648,794.
The purchase agreement requires the Company to make annual payments up to 35% of
Midlands' net income from operations, as defined, for each of the five fiscal
years ending February 28, 1999 through 2003. The annual payment, if any, is due
in a combination of 50% in cash and 50% in the Company's common stock. The
number of shares issued in connection with the annual payment is calculated by
dividing the portion of the annual payment payable in common stock by $3.00. The
purchase agreement also requires the Company to make an annual payment of
$25,000 for each of the three fiscal years ending February 28, 1999 to 2001 if
net income from operations, as defined, exceeds 20%.
The purchase agreement also required the Company to enter into employment
agreements with certain key employees for a term of five years. These agreements
provide for minimum aggregate annual salaries of $200,000. The Company also
granted stock options to purchase up to 50,000 shares of the Company's common
stock at $4.00 per share in connection with the employment agreements.
Assets acquired:
Prepaid expenses $ 21,750
Property 196,789
Excess of purchase price over net assets acquired (i) 1,013,618
----------
1,232,157
Liabilities assumed:
Notes payable 111,662
Accounts payable 109,201
Common stock issued 362,500
----------
Cash consideration paid $ 648,794
==========
- --------------------
(i) The excess of purchase price over net assets acquired will be reviewed by an
independent, third party appraiser to allocate appropriate values to tradenames,
noncompete agreements and contracts.
<PAGE>
NOTE 3. FINANCING
On February 17, 1998, the Company entered into a credit agreement (the Credit
Agreement) that provides for maximum borrowings of $12.5 million. Interest on
outstanding borrowings is computed at the prime rate plus 7.0% with a minimum
rate of 15.5%. The Company is required to pay monthly interest payments on
outstanding borrowings at the prime rate plus 4.5% with a minimum rate of 13.0%.
The remaining interest is added to the outstanding borrowings as of the first of
the current month. The Company is also required to pay a monthly servicing fee
of $5,000 per month. The Credit Agreement is due on July 17, 1999.
The Company's 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 have been 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 4).
NOTE 4. STOCKHOLDERS' EQUITY
Issuance of Common Stock - In February 1998, the Company obtained gross proceeds
of $3,300,000 of equity financing through a private placement of 3,000,000
units, with each unit consisting of one share of common stock and a detachable
warrant to purchase one-fourth of a share of common stock at $2.25 per share
(the Equity Offering). The warrants are currently exercisable and expire four
years from the date of issuance.
In connection with the private placement, the Company also issued warrants to
purchase 300,000 shares of common stock to the selling agents. The selling
agents' warrants are exercisable from February 18, 1999 through February 18,
2003 at $1.65 per share and contain a net value exercise provision allowing for
the issuance of a lesser number of shares than provided in the warrant without
payment of the cash exercise price.
The Company incurred issuance costs of $514,926 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.
During the three months ended March 31, 1998, the Company received proceeds of
$135,000 when holders of stock options and warrants exercised their right to
purchase a total of 108,000 shares of common stock at a price of $1.25 per
share.
<PAGE>
NOTE 5. INCOME TAXES
The provision for income taxes for the three months ended March 31, 1998 and
1997 have been partially offset by a reduction in the valuation allowance for
deferred taxes.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------------
1998 % 1997 %
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
REVENUES:
Preventive health care:
Health services $ 5,135,000 51.0% $ 4,284,000 52.0%
Health and fitness products 2,393,000 23.8% 2,000,000 24.3%
------------ ----- ------------ -----
7,528,000 74.8% 6,284,000 76.3%
Rehabilitative health care 2,536,000 25.2% 1,949,000 23.7%
------------ ----- ------------ -----
10,064,000 100.0% 8,233,000 100.0%
COSTS OF REVENUES:
Preventive health care:
Health services $ 3,896,000 38.7% $ 3,262,000 39.6%
Health and fitness products 2,184,000 21.7% 1,691,000 20.6%
------------ ----- ------------ -----
6,080,000 60.4% 4,953,000 60.2%
Rehabilitative health care 1,785,000 17.8% 1,622,000 19.7%
------------ ----- ------------ -----
7,865,000 78.2% 6,575,000 79.9%
GROSS PROFIT 2,199,000 21.8% 1,658,000 20.1%
OPERATING EXPENSES:
Salaries 947,000 9.4% 488,000 5.9%
Selling, general, and administrative 916,000 9.1% 662,000 8.0%
------------ ----- ------------ -----
1,863,000 18.5% 1,150,000 13.9%
------------ ----- ------------ -----
OPERATING INCOME:
Preventive health care 698,000 733,000
Rehabilitative health care 46,000 106,000
Corporate (408,000) (331,000)
------------ ----- ------------ -----
TOTAL OPERATING INCOME 336,000 3.3% 508,000 6.2%
INTEREST EXPENSE (314,000) -3.1% (129,000) -1.6%
OTHER INCOME 20,000 0.2% 3,000 0.0%
------------ ----- ------------ -----
(294,000) -2.9% (126,000) -1.6%
------------ ----- ------------ -----
INCOME BEFORE INCOME TAXES 42,000 0.4% 382,000 4.6%
INCOME TAXES 12,000 0.1% 115,000 1.4%
------------ ----- ------------ -----
NET INCOME $ 30,000 0.3% $ 267,000 3.2%
============ ===== ============ =====
</TABLE>
<PAGE>
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 (health services) and the sale and servicing of
health and fitness products. Rehabilitative health care relates to the operation
of physical therapy clinics that provide a full range of rehabilitative
services, provides occupational health (injury prevention and work-injury
management consulting services) and a network of independent physical therapy
clinics.
The Company's preventive health care revenues come from fitness center
management and consulting contracts (health services) and the sales and service
of health and fitness products. The management and consulting contracts provide
for specific management, consulting, and program fees and contain provisions for
modification, termination, and non-renewal.
The Company's rehabilitation revenues come from physical therapy services
provided to patients at Company owned locations and at hospital and corporate
locations, annual fees paid by independent physical therapy clinic network
members for consulting and group buying services, and program and consulting
fees paid by employers, insurers and others for occupational health services.
Net revenues provided to patients at Company owned and worksite locations are a
function of the number of patients treated, the payor mix and the average net
charge per treatment. Consequently, two patients provided substantially similar
treatments may result in different net revenues because of differing
reimbursement environments.
The Company incurs costs at three levels: (i) revenue generating sites; (ii)
regional sites that work closely with the revenue generating sites; and (iii)
general corporate costs. Management views the operational expenses of the
regional sites to be an integral component of the revenue generating sites.
Therefore, the discussion that follows is of revenues and operating income .
Summary of First Quarter Results. For the quarter ended March 31, 1998, total
revenues were up by $1,831,000, or 22.2%, from the quarter ended March 31, 1997,
with slightly less than one third of the growth coming from acquisition. Gross
profit as a percent of revenue improved almost 2 percentage points, while gross
profit dollars increased $541,000, or 32.6%. The increase in gross profit
percent was primarily due to the acquisition of better-performing businesses
offset by the sale of under-performing businesses in 1997. Operating expenses as
a percent of revenue increased 4.6 percentage points, or $713,000 and 62.0% over
the prior year period, as the Company made investments in its organization and
infrastructure. Operating income as a percent of revenue decreased by
approximately 3 percentage points as the investments in organization and
infrastructure more than offset the improvements in gross profit. Interest
expense increased $185,000 from the prior year period due to the increased level
and cost of borrowing. Net income for the quarter ended March 31, 1998 was
$30,000, a $237,000 decrease from the prior year period. The decrease was due to
the decrease in operating income coupled with the increase in interest expense.
<PAGE>
Revenues. Revenues increased $1,831,000, or 22.2%, to $10,064,000 for the three
months ended March 31, 1998 from $8,233,000 for the period ended March 31, 1997.
Preventive health care revenues increased $1,244,000, or 19.8%, for the three
months ended March 31, 1998 compared to the same period in 1997. The increase
was primarily due to the annualized effect of adding a net of 24 corporate
fitness center sites under management and the increase in sales of health and
fitness products of $393,000, or 19.7%.
Rehabilitative health care revenues increased $587,000, or 30.1%, for the three
months ended March 31, 1998, compared to the same period in 1997. The increase
was primarily due to the annualized effect of the 1997 acquisitions of the
Isernhagen Companies (February 1997), K.A.M. (April 1997), Duffy & Associates
(May 1997) and Medlink (August 1997), the acquisition of Midlands Physical
Therapy in February 1998 and the increase in patient visits at certain other
clinics, partially offset by the lost revenue on four under-performing clinics
sold in January 1997 and seven under-performing clinics sold in May 1997. The
newly acquired businesses had revenues of $1,482,000 for the three months ended
March 31, 1998 versus $279,000 for the three months ended March 31, 1997. The
eleven clinics sold had revenues of $797,000 for the three months ended March
31, 1997.
Operating Income. Operating income decreased $172,000 to $336,000 for the three
months ended March 31, 1998 from $508,000 for the same period in 1997.
Preventive health care operating income decreased $35,000 from $733,000 for the
three months ended March 31, 1997 to $698,000 for the same period in 1998. The
decrease was due to lower margins being experienced in the health and fitness
products line of business versus the prior year. Rehabilitative health care
operating income decreased $60,000 to $46,000 for the three months ended March
31, 1998 from $106,000 for the same period in 1997. The decrease was primarily
due to the increase in expenses associated with the centralization of certain
operations and administrative functions. Corporate expenses increased $77,000
from $331,000 for the three months ended March 31, 1997 to $408,000 for the same
period in 1998. The increase was due to the investments made to strengthen the
management team.
Interest Expense. Interest expense of $314,000 for the three months ended March
31, 1998 increased $185,000 from $129,000 for the same period in 1997. The
increase was due to higher average borrowings and the effective interest rate in
1998 versus 1997.
Other Income. Other income increased $17,000 from $3,000 for the three months
ended March 31, 1997 to $20,000 for the same period in 1998.
Income Taxes. Income taxes were calculated based on management's estimate of the
Company's effective tax rate partially offset by a reduction in the valuation
allowance for deferred taxes.
Net Income. The Company's net income decreased $237,000 to $30,000 or $.00
diluted net income per share for the three months ended March 31, 1998 from
$267,000 or $.03 diluted net income per share for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $2,492,000 at March 31, 1998 versus
working capital of $161,000 at March 31, 1997. The change was primarily due to
the increase in cash and accounts receivable and the overall decrease in
accounts payable and acrrued liabilities. For the three months ended March 31,
1998, the Company used $1,039,000 of cash in operating activities as compared to
$614,000 for the same period in 1997. The increase in usage was due to the
reduction in trade accounts payable and other accrued liabilities after the
revolving credit facility was in place.
On February 27, 1998, the Company completed the acquisition of all the issued
and outstanding stock of closely held Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. The purchase
agreement contained a noncompete provision that covers a period of five years
and prohibits the former owners from directly or indirectly competing with the
Company. In connection with the acquisition of Midlands, the Company issued
200,000 shares of common stock valued at $362,500 and cash consideration of
$650,000.
<PAGE>
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 is due July
1999. The credit facility is subject to various affirmative and negative
covenants customary in transactions of this type, including a requirement to
maintain certain financial ratios and limitations on the Company's ability to
incur additional indebtedness, to make acquisitions outside of certain
established parameters, or to make dividend distributions.
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.
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. 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.
<PAGE>
Corporate expenses, as a percentage of revenues, are anticipated to be
consistent with 1997 levels.
Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. The adoption of
SFAS No. 131 will increase the number of reportable segments for the Company. In
accordance with SFAS No. 131, the additional segment disclosure will be included
in the Company's Form 10-K for the year ending December 31, 1998.
Cautionary Statement
Portions of this Form 10-Q, 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. Further information
on various factors that could cause actual results to differ materially from
such forward-looking statements are set forth in the Company's Annual Report on
Form 10-KSB.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may become involved in various claims
and lawsuits incident to the operation of its business, including claims arising
from accidents or from the alleged negligent provision of physical therapy
services.
Item 2. Changes in Securities
During the quarter ended March 31, 1998, the Company sold the following
securities without registration under the Securities Act:
<TABLE>
<CAPTION>
Price per Exemption Relied Upon
Date Amount Purchaser(s) Share/Unit
<S> <C> <C> <C> <C>
2/18/98 2,000,000 Accredited investors purchasing in private $1.10 Section 4(2)
Units* placement
2/18/98 312,497 Common Stock issued to affiliate of Company's N/A Section 4(2)
lender in connection with loan agreement
2/19/98 1,000,000 Accredited investors purchasing in private $1.10 Section 4(2)
Units* placement
2/28/98 200,000 Common Stock issued to sellers of business as N/A Section 4(2)
part of purchase price
3/30/98 80,000 Common Stock issued upon exercise of warrant $1.25 Section 4(2)
</TABLE>
- --------------------------------------------------------------------------------
*Each Unit consisting of one share of Common Stock and one-fourth (.25) of a
warrant to purchase a share of Common Stock at $2.25 per whole share
During the quarter ended March 31, 1998, in addition to stock purchase warrants
included in the Units described above, 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>
2/18/98 50,000 Warrant Selling agent in private $1.65 Section 4(2)
placement
2/19/98 250,000 Warrant Selling agent in private $1.65 Section 4(2)
placement
2/28/98 25,000 Option Employee $4.00 Section 4(2)
2/28/98 25,000 Option Employee $4.00 Section 4(2)
</TABLE>
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K
No Forms 8-K were filed by the Company during the quarter ended March
31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 1998 HEALTH FITNESS CORPORATION
By /s/ Loren S. Brink
Loren S. Brink
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Charles E. Bidwell
Charles E. Bidwell
Secretary, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Michael P. Wise
Michael P. Wise
Vice President and Corporate Controller
(Principal Accounting Officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997
3.2 Restated By-Laws of the Company -- incorporated by reference to
the Company's Registration Statement on Form SB-2 No. 33-83784C
4.1 Specimen of Common Stock Certificate -- incorporated by
reference to the Company's Registration Statement on Form
SB-2 No. 33-83784C
*10.5 Company's 1995 Stock Option Plan, as amended through June 1997
27.1 Financial Data Schedule for 3-month period ended March 31, 1998
(in electronic version only)
*Indicates management contract or compensatory plan or arrangement.
HEALTH FITNESS PHYSICAL THERAPY, INC.
1995 STOCK OPTION PLAN
(As Amended through June 4, 1997)
ARTICLE 1. ESTABLISHMENT AND PURPOSE
1.1 Establishment. Health Fitness Physical Therapy, Inc. (the
"Company") hereby establishes a plan providing for the grant of stock options to
certain eligible employees, directors and consultants of the Company and its
subsidiaries. This plan shall be known as the 1995 Stock Option Plan (the
"Plan").
1.2 Purpose. The purpose of the Plan is to advance the interests of the
Company and its shareholders by enabling the Company to attract and retain
persons of ability as employees, directors and consultants, by providing an
incentive to such individuals through equity participation in the Company and by
rewarding such individuals who contribute to the achievement by the Company of
its long-term economic objectives.
ARTICLE 2. DEFINITIONS
The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "Board" means the Board of Directors of the Company.
2.2 "Change in Control" means an event described in Article 11 below.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Committee" means the entity administering the Plan, as provided in
Article 3 below.
2.5 "Common Stock" means the common stock of the Company, par value
$.01 per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4.3
below.
2.6 "Disability" means the occurrence of an event which constitutes
permanent and total disability within the meaning of Section 22(e)(3) of the
Code.
2.7 "Eligible Persons" means individuals who are (a) salaried employees
(including, without limitation, officers and directors who are also employees)
of the Company, (b) Non-Employee Directors, or (c) consultants to the Company.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE>
2.9 "Fair Market Value" means, with respect to the Common Stock, as of
any date:
(a) if the Common Stock is listed or admitted to unlisted
trading privileges on any national securities exchange or is not so
listed or admitted but transactions in the Common Stock are reported on
the NASDAQ Stock Market, the mean between the reported high and low
sale prices of the Common Stock on such exchange or by the NASDAQ Stock
Market as of such date (or, if no shares were traded on such day, as of
the next preceding day on which there was such a trade); or
(b) if the Common Stock is not listed or admitted to unlisted
trading privileges or reported on the Nasdaq Stock Market, and bid and
asked prices therefor in the over-the-counter market are reported by
the National Quotation Bureau, Inc. (or any comparable reporting
service), the mean of the closing bid and asked prices as of such date,
as reported by the National Quotation Bureau, Inc. (or a comparable
reporting service); or
(c) if the Common Stock is not listed or admitted to unlisted
trading privileges, or reported on the NASDAQ Stock Market, and bid and
asked prices are not reported, the price that the Committee determines
in good faith in the exercise of its reasonable discretion. The
Committee's determination as to the current value of the Common Stock
shall be final, conclusive and binding for all purposes and on all
persons, including, without limitation, the Company, the shareholders
of the Company, the Optionees and their respective
successors-in-interest. No member of the Board or the Committee shall
be liable for any determination regarding current value of the Common
Stock that is made in good faith.
2.10 "Incentive Stock Option" means a right to purchase Common Stock
granted to an Optionee pursuant to Section 6.5 of the Plan that qualifies as an
incentive stock option within the meaning of Section 422 of the Code.
2.11 "Non-Employee Director" means any member of the Board who is not
an employee of the Company or any Subsidiary.
2.12 "Non-Statutory Stock Option" means a right to purchase Common
Stock granted to an Optionee pursuant to Section 6.6 of the Plan that does not
qualify as an Incentive Stock Option.
2.13 "Option" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.14 "Optionee" means an Eligible Person who receives one or more
Incentive Stock Options or Non-Statutory Stock Options under the Plan.
2.15 "Person" means any individual, corporation, partnership, group,
association or other "person" (as such term is used in Section 14(d) of the
Exchange Act), other than the Company, a wholly owned subsidiary of the Company
or any employee benefit plan sponsored by the Company.
<PAGE>
2.16 "Retirement" means the retirement of an Optionee pursuant to and
in accordance with the regular retirement plan or practice of the Company or the
Subsidiary employing the Optionee.
2.17 "Securities Act" means the Securities Act of 1933, as amended.
2.18 "Subsidiary" means any corporation that is a subsidiary
corporation of the Company (within the meaning of Section 424(f) of the Code).
2.19 "Tax Date" means a date defined in Section 6.5(c) of the Plan.
ARTICLE 3. PLAN ADMINISTRATION
The Plan shall be administered by the Board or by a Committee of the
Board consisting of two or more directors who shall be appointed by and serve at
the pleasure of the Board. As long as the Company's securities are registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, then,
to the extent necessary for compliance with Rule 16b-3, or any successor
provision, each of the members of the Committee shall be a `Non-Employee
Director.' For purposes of this paragraph, `Non-Employee Director' shall have
the same meaning as set forth in Rule 16b-3, or any successor provision, as then
in effect, of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended. Members of a Committee, if established, shall be
appointed from time to time by the Board, shall serve at the pleasure of the
Board and may resign at any time upon written notice to the Board. A majority of
the members of the Committee shall constitute a quorum. The Committee shall act
by majority approval of its members, shall keep minutes of its meetings and
shall provide copies of such minutes to the Board. Action of the Committee may
be taken without a meeting if unanimous written consent thereto is given. Copies
of minutes of the Committee's meetings and of its actions by written consent
shall be provided to the Board and kept with the corporate records of the
Company. As used in this Plan, the term "Committee" will refer either to the
Board or to such a Committee, if established.
In accordance with the provisions of the Plan, the Committee shall
select the Optionees from Eligible Persons; shall determine the number of shares
of Common Stock to be subject to Options granted pursuant to the Plan, the time
at which such Options are granted, the Option exercise price, Option period and
the manner in which each such Option vests or becomes exercisable; and shall fix
such other provisions of such Options as the Committee may deem necessary or
desirable and as consistent with the terms of the Plan. The Committee shall
determine the form or forms of the agreements with Optionees which shall
evidence the particular terms, conditions, rights and duties of the Company and
the Optionees under Options granted pursuant to the Plan. The Committee shall
have the authority, subject to the provisions of the Plan, to establish, adopt
and revise such rules and regulations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan. With the consent of
the Optionee affected thereby, the Committee may amend or modify the terms of
any outstanding Incentive Stock Option or Non-Statutory Stock Option in any
manner, provided that the amended or modified terms are permitted by the Plan as
then in effect. Without limiting the generality of the foregoing sentence, the
Committee may, with the consent of the Optionee affected thereby, modify the
exercise price, number of shares or other terms and conditions of an Incentive
Award, extend the term of an Incentive Award, accelerate the exercisability or
vesting or otherwise terminate any restrictions relating to an Incentive Award,
extend, renew or accept the surrender of any outstanding Incentive Stock Option
or Non-Statutory Stock Option, to the extent not previously exercised, and the
Committee may authorize the grant of new Options in substitution therefor to the
extent not previously exercised.
<PAGE>
Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan shall be conclusive and binding
for all purposes and on all persons, including, without limitation, the Company
and its Subsidiaries, the shareholders of the Company, the Committee and each of
the members thereof, the directors, officers and employees of the Company and
its Subsidiaries, and the Optionees and their respective successors in interest.
No member of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any Option granted under the Plan.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number. The maximum number of shares of Common Stock that shall be
reserved for issuance under the Plan shall be Two Million (2,000,000), subject
to adjustment upon changes in the capitalization of the Company as provided in
Section 4.3 below. Shares of Common Stock that may be issued upon exercise of
Options shall be applied to reduce the maximum number of shares of Common Stock
remaining available for use under the Plan.
4.2 Unused Stock. Any shares of Common Stock that are subject to an
Option (or any portion thereof) that lapses, expires or for any reason is
terminated unexercised shall automatically again become available for use under
the Plan.
4.3 Change in Shares, Adjustments, Etc. If the number of outstanding
shares of Common Stock is increased or decreased or changed into or exchanged
for a different number or kind of shares of stock or other securities of the
Company or of another corporation by reason of any reorganization, merger,
consolidation, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, combination of shares, rights offering or any other change
in the corporate structure or shares of the Company, the Committee (or, if the
Company is not the surviving corporation in any such transaction, the board of
directors of the surviving corporation) shall make appropriate adjustment as to
the number and kind of securities subject to and reserved under the Plan and, in
order to prevent dilution or enlargement of the rights of Optionees, the number
and kind of securities subject to outstanding Options. Any such adjustment in
any outstanding Option shall be made without change in the aggregate purchase
price applicable to the unexercised portion of the Option but with an
appropriate adjustment in the price for each share or other unit of any security
covered by the Option. However, no change shall be made in the terms of any
outstanding Incentive Stock Options as a result of any such change in the
corporate structure or shares of the Company, without the consent of the
Optionee affected thereby, that would disqualify that Incentive Stock Option
from treatment under Section 422 of the Code or would be considered a
modification, extension or renewal of an option under Section 424(h) of the
Code.
<PAGE>
ARTICLE 5. ELIGIBILITY
Incentive Stock Options or Non-Statutory Stock Options shall be granted
only to those Eligible Persons who, in the judgment of the Committee, are
performing, or during the term of an Option, will perform, vital services in the
management, operation and development of the Company or a Subsidiary, and
significantly contribute or are expected to significantly contribute to the
achievement of long-term corporate economic objectives. Optionees may be granted
from time to time one or more Incentive Stock Options and/or Non-Statutory Stock
Options under the Plan, in any case as may be determined by the Committee in its
sole discretion. The number, type, terms and conditions of Options granted to
various Eligible Persons need not be uniform, consistent or in accordance with
any plan, whether or not such Eligible Persons are similarly situated. The
Committee may grant both an Incentive Stock Option and a Non-Statutory Stock
Option to the same Optionee a the same time or at different times. Incentive
Stock Options and Non-Statutory Stock Options, whether granted at the same or
different times, shall be deemed to have been awarded in separate grants, shall
be clearly identified, and in no event will the exercise of one Option affect
the right to exercise any other Option or affect the number of shares of Common
Stock for which any other Option may be exercised. Upon determination by the
Committee that an Option is to be granted to an Optionee, written notice shall
be given such person specifying such terms, conditions, rights and duties
related thereto. Each Optionee shall enter into an agreement with the Company,
in such form as the Committee shall determine and which is consistent with the
provisions of the Plan, specifying the terms, conditions, rights and duties of
Incentive Stock Options and Non-Statutory Stock Options granted under the Plan.
Options shall be deemed to be granted as of the date specified in the grant
resolution of the Committee, which date shall be the date of the related
agreement with the Optionee.
ARTICLE 6. DURATION AND EXERCISE
6.1 Manner of Option Exercise. An Option may be exercised by an
Optionee in whole or in part from time to time, subject to the conditions
contained herein and in the agreement evidencing such Option, by delivery, in
person or through certified or registered mail, or written notice of exercise to
the Company at its principal executive office (Attention: Secretary), and by
paying in full the total Option exercise price for the shares of Common Stock
purchased in accordance with Section 6.3. Such notice shall be in a form
satisfactory to the Committee and shall specify the particular Option (or
portion thereof) that is being exercised and the number of shares with respect
to which the Option is being exercised. Subject to Section 9.1, the exercise of
the Option shall be deemed effective upon receipt of such notice and payment. AS
soon as practicable after the effective exercise of the Option, the Company
shall record on the stock transfer books of the Company the ownership of the
shares purchased in the name of the Optionee, and the Company shall deliver to
the Optionee one or more duly issued stock certificates evidencing such
ownership.
6.2 Method of Payment of Option Exercise Price. At the time of the
exercise of an Incentive Stock Option or a Non-Statutory Stock Option, the
Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. In the event the Optionee elects to pay the purchase price in whole or
in part with previously acquired shares of Common Stock, the value of such
shares shall be equal to their Fair Market Value on the date of exercise. The
Committee may reject an Optionee's election to pay all or part of the purchase
price with previously acquired shares of Common Stock and require such purchase
price to be paid entirely in cash if, in the sole discretion of the Committee,
payment in previously acquired shares would cause the Company to be required to
recognize a charge to earnings in connection therewith. For purposes of this
Section 6.2, "previously acquired shares" shall include both shares of Common
Stock that are already owned by the Optionee at the time of exercise and shares
of Common Stock that are to be acquired pursuant to the exercise of the Option
concerned. In its sole discretion, the Committee may determine either at the
time of grant or exercise of an Incentive Stock Option or an Non-Statutory Stock
Option, to permit a Optionee to pay all or any portion of the purchase price by
deliver of a promissory note in form and substance acceptable to the Committee.
<PAGE>
6.3 Rights as a Shareholder. The Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by an Option
until the Optionee shall have become the holder of record of such shares, and no
adjustment shall be made for dividends or other distributions or other rights as
to which there is a record date preceding the date the Optionee becomes the
holder of record except as the Committee may determine pursuant to Section 4.3.
6.4 Incentive Stock Options.
(a) Incentive Stock Option Exercise Price. The per share price
to be paid by the Optionee at the time an Incentive Stock Option is
exercised will be determined by the Committee, but shall not be less
than (i) 100% of the Fair Market Value of one share of Common Stock on
the date the Option is granted, or (ii) 110% of the Fair Market Value
of one share of Common Stock on the date the Option is granted if, at
that time the Option is granted, the Optionee owns, directly or
indirectly (as determined pursuant to Section 424(d) of the Code), more
than 10% of the total combined voting power of all classes of stock of
the Company, any Subsidiary or any parent corporation of the Company
(within the meaning of Section 424(e) of the Code).
(b) Aggregate Limitation of Stock Subject to Incentive Stock
Options. Notwithstanding any other provision of the Plan, the aggregate
Fair Market Value (determined as of the date an Incentive Stock Option
is granted) of the shares of Common Stock with respect to which
incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by an Optionee during any calendar
year (under the Plan and any other incentive stock option plans of the
Company, any Subsidiary or any parent corporation of the Company
(within the meaning of Section 424(e) of the Code)) shall not exceed
$100,000 (or such other amount as may be prescribed by the Code from
time to time; provided, however, that if the exercisability or vesting
of an Incentive Stock Option is accelerated as permitted under the
provisions of this Plan and such acceleration would result in a
violation of the limit imposed by this Section 6.4(b), such
acceleration shall be of full force and effect but the number of shares
of Common Stock which exceed such limit shall be treated as having been
granted pursuant to a Non-Statutory Stock Option; and provided,
further, that the limits imposed by this Section 6.4(b) shall be
applied to all outstanding Incentive Stock Options (under this Plan and
any other incentive stock option plans of the Company, any Subsidiary
or any parent corporation of the Company (within the meaning of Section
424(e) of the Code)) in chronological order according to the dates of
grant.
<PAGE>
(c) Duration of Incentive Stock Options. The period during
which an Incentive Stock Option may be exercised shall be fixed by the
Committee at the time such Option is granted, but in no event shall
such period exceed ten years from the date the Option is granted or, in
the case of any Optionee that owns, directly or indirectly (as
determined pursuant to Section 424(d) of the Code) more than 10% of the
total combined voting power of all classes of stock of the Company, any
Subsidiary or any parent corporation of the Company (within the meaning
of Section 424(e) of the Code), five years from the date the Incentive
Stock Option is granted. An Incentive Stock Option shall become
exercisable at such times and in such installments (which may be
cumulative) as shall be determined by the Committee at the time the
Option is granted. Upon the completion of its exercise period, an
Incentive Stock Option, to the extent not then exercised, shall expire.
Except as otherwise provided in Article 7 or 11, all Incentive Stock
Options granted to an Optionee hereunder shall terminate and may no
longer be exercised if the Optionee ceases to be an employee of the
Company and all Subsidiaries or if the Optionee is an employee of a
Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company
(unless the Optionee continues as an employee of the Company or another
Subsidiary).
(d) Disposition of Common Stock Acquired Pursuant to the
Exercise of Incentive Stock Options. Prior to making a disposition (as
defined in Section 424(c) of the Code) of any shares of Common Stock
acquired pursuant to the exercise of an Incentive Stock Option granted
under the Plan before the expiration of two years after the date on
which the Option was granted or before the expiration of one year after
the date on which such shares of Common Stock were transferred to the
Optionee pursuant to exercise of the Option, the Optionee shall send
written notice to the Company of the proposed date of such disposition,
the number of shares to be disposed of, the amount of proceeds to be
received from such disposition and any other information relating to
such disposition that the Company may reasonably request. The right of
an Optionee to make any such disposition shall be conditioned on the
receipt by the Company of all amounts necessary to satisfy any federal,
state or local withholding tax requirements attributable to such
disposition. The Committee shall have the right, in its sole
discretion, to endorse the certificates representing such shares with a
legend restricting transfer and to cause a stop transfer order to be
entered with the Company's transfer agent until such time as the
Company receives the amounts necessary to satisfy such withholding
requirements or until the later of the expiration of two years from the
date the Option was granted or one year from the date on which such
shares were transferred to the Optionee pursuant to the exercise of the
Option.
<PAGE>
(e) Withholding Taxes. The Company is entitled to withhold and
deduct from future wages of the Optionee, or make other arrangements
for the collection of, all legally required amounts necessary to
satisfy any federal, state or local withholding tax requirements
attributable to any action by the Optionee, including, without
limitation, a disposition of shares of Common Stock described in
Section 6.4(d) above, that causes the Incentive Stock Option to cease
to quality as an incentive stock option within the meaning of Section
422 of the Code.
6.5 Non-Statutory Stock Options.
(a) Option Exercise Price. The per share price to be paid by
the Optionee at the time a Non-Statutory Stock Option is exercised will
be determined by the Committee, but shall not be less than 85% of the
Fair Market Value of one share of Common Stock on the date the Option
is granted.
(b) Duration of Non-Statutory Stock Options. The period during
which a Non-Statutory Stock Option may be exercised shall be fixed by
the Committee at the time such Option is granted, but in no event shall
such period exceed 10 years and one month from the date the Option is
granted. A Non-Statutory Stock Option shall become exercisable at such
times and in such installments (which may be cumulative) as shall be
determined by the Committee at the time the Option is granted. Upon the
completion of its exercise period, a Non-Statutory Stock Option, to the
extent not then exercised, shall expire. Except as otherwise provided
in Articles 7 or 11, all Non-Statutory Stock Options granted hereunder
to an Optionee who is an employee of the Company or any Subsidiaries
shall terminate and may no longer be exercised if the Optionee ceases
to be an employee of the Company or a Subsidiary or if the Optionee is
an employee of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Company (unless the Optionee continues as an employee
of the Company or another Subsidiary). A Non-Statutory Stock Option
granted hereunder to an Optionee who is not an employee of the Company
or a Subsidiary will terminate as determined by the Committee at the
time of grant.
(c) Withholding Taxes.
(i) The Company is entitled to (aa) withhold and
deduct from future wages of the Optionee, or make other
arrangements for the collection of, all legally required
amounts necessary to satisfy any federal, state or local
withholding tax requirements attributable to the Optionee's
exercise of a Non-Statutory Stock Option or otherwise incurred
with respect to the Option, or (bb) require the Optionee
promptly to remit the amount of such withholding to the
Company before acting on the Optionee's notice of exercise or
the Option.
(ii) The Committee may, in its discretion and subject
to such rules as the Committee may adopt, permit an Optionee
to satisfy, in whole or in part, any withholding tax
obligation which may arise in connection with the exercise of
a Non-Statutory Stock Option either by electing to have the
Company withhold from the shares of Common Stock to be issued
upon exercise that number of shares of Common Stock, or by
electing to deliver to the Company already-owned shares of
Common Stock, in either case having a Fair Market Value, on
the date such tax is determined under the Code (the "Tax
Date"), equal to the amount necessary to satisfy the
withholding amount due. An Optionee's election to have the
Company withhold shares of Common Stock or to deliver
already-owned shares of Common Stock upon exercise is
irrevocable and is subject to the consent or disapproval of
the Committee. When shares of Common Stock are issued prior to
the Tax Date to an Optionee making such an election, the
Optionee shall agree in writing to surrender that number of
shares on the Tax Date having an aggregate Fair Market Value
equal to the tax due.
<PAGE>
ARTICLE 7. EFFECT OF TERMINATION OF EMPLOYMENT ON OPTIONS
7.1 Termination of Employment or Other Service Due to Death, Disability
or Retirement. In the event an Optionee's employment or other service is
terminated with the Company and all Subsidiaries by reason of his death,
Disability or Retirement, all outstanding Incentive Stock Options and
Non-Statutory Stock Options then held by the Optionee shall become immediately
exercisable in full and remain exercisable for a period of three months in the
case of Retirement and one year in the case of death or Disability, provided,
however, that an exercise may not occur after the expiration date thereof in any
event. The Company shall undertake to use its best efforts to notify the
Optionee or his heirs or representatives, as the case may be, of the last date
by which Options may be exercised pursuant to this Section 7.1, at least thirty
(30) days in the case of Retirement and at least sixty (60) days in the case of
death or Disability, prior to such date.
7.2 Termination of Employment or Other Service for Reasons Other than
Death, Disability or Retirement.
(a) Except as otherwise provided in Article 11 and subsection
(b) below, in the event an Optionee's employment or other service is
terminated with the Company and all Subsidiaries for any reason other
than his death, Disability or Retirement, all rights of the Optionee
under the Plan shall immediately terminate without notice of any kind
and no Incentive Stock Option or Non-Statutory Stock Option then held
by the Optionee shall thereafter be exercisable.
(b) Notwithstanding the provisions of Subsection (a) above,
upon an Optionee's termination of employment or other service with the
Company and all Subsidiaries, the Committee may, in its sole discretion
(which may be exercised before or following such termination), cause
Incentive Stock Options and Non-Statutory Stock Options then held by
such Optionee to become exercisable and to remain exercisable following
such termination of employment or other service in the manner
determined by the Committee; provided, however, that no Option shall be
exercisable after the expiration date thereof in any event, and any
Incentive Stock Option that remains unexercised more than three months
following termination of employment shall therefore be deemed to be a
Non-Statutory Stock Option.
<PAGE>
7.3 Date of Termination. For purposes of the Plan, an Optionee's
employment or other service shall be deemed to have terminated on the date that
the Optionee ceases to perform services for the Company or the last day of the
pay period covered by the Optionee's final paycheck, as the case may be.
Notwithstanding the foregoing, the employee Optionee shall not be deemed to have
ceased to be an employee for purposes of the Plan until the later of the 91st
day of any bona fide leave of absence approved by the Company or a Subsidiary
for the Optionee (including, without limitation any layoff) or the expiration of
the period of any bona fide leave of absence approved by the Company or a
Subsidiary for the Optionee (including without limitation any layoff) during
which the Optionee's right to reemployment is guaranteed either by statute or
contract.
ARTICLE 8. RIGHTS OF EMPLOYEES; OPTIONEES
8.1 Employment. Nothing in the Plan shall interfere with or limit in
any way the right of the Company or any Subsidiary to terminate the employment
of any Eligible Person or Optionee at any time, nor confer upon any Eligible
Person or Optionee any right to continue in the employ of the Company or any
Subsidiary.
8.2 Nontransferability. No right or interest of any Optionee in an
Option granted pursuant to the Plan shall be assignable or transferable during
the lifetime of the Optionee, either voluntarily or involuntarily, or subjected
to any lien, directly or indirectly, by operation of law, or otherwise,
including execution, levy, garnishment, attachment, pledge or bankruptcy. In the
event of an Optionee's death, an Optionee's rights and interest in any Options
shall be transferable by testamentary will or the laws of descent and
distribution, and payment of any amounts due under the Plan shall be made to,
and exercise of any Options (to the extent permitted pursuant to Section 7.1)
may be made by, the Optionee's legal representatives, heirs or legatees. If in
the opinion of the Committee an Optionee holding any Option is disabled from
caring for his or her affairs because of mental condition, physical condition or
age, any payments due the Optionee may be made to, and any rights of the
Optionee under the Plan shall be exercised by, such Optionee's guardian,
conservator or other legal personal representative upon furnishing the Committee
with evidence satisfactory to the Committee of such status.
8.3 Non-Exclusivity of the Plan. Nothing contained in the Plan is
intended to amend, modify or rescind any previously approved compensation plans
or programs entered into by the Company. The Plan will be construed to be an
addition to any and all such other plans or programs. Neither the adoption of
the Plan nor the submission of the Plan to the shareholders of the Company for
approval will be construed as creating any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
<PAGE>
ARTICLE 9. SHARE ISSUANCE AND TRANSFER RESTRICTIONS
9.1 Share Issuances. Notwithstanding any other provision of the Plan or
any agreements entered into pursuant hereto, the Company shall not be required
to issue or deliver any certificate for shares of Common Stock under this Plan
(and an Option shall not be considered to be exercised, notwithstanding the
tender by the Optionee of any consideration therefor), unless and until each of
the following conditions has been fulfilled:
(a) (i) there shall be in effect with respect to such shares a
registration statement under the Securities Act and any applicable
state securities laws if the Committee, in its sole discretion, shall
have determined to file, cause to become effective and maintain the
effectiveness of such registration statement; or (ii) if the Committee
has determined not to so register the shares of Common Stock to be
issued under the Plan, (A) exemptions from registration under the
Securities Act and applicable state securities laws shall be available
for such issuance (as determined by counsel to the Company) and (B)
there shall have been received from the Optionee (or, in the event of
death or disability, the Optionee's heir(s) or legal representative(s))
any representations or agreements requested by the Company in order to
permit such issuance to be made pursuant to such exemptions; and
(b) there shall have been obtained any other consent, approval
or permit from any state or federal governmental agency which the
Committee shall, in its sole discretion upon the advice of counsel,
deem necessary or advisable.
9.2 Share Transfer. Shares of Common Stock issued pursuant to the
exercise of Options granted under the Plan may not be sold, assigned,
transferred, pledged, encumbered or otherwise disposed of (whether voluntarily
or involuntarily) except pursuant to registration under the Securities Act and
applicable state securities laws or pursuant to exemptions from such
registrations. The Company may condition the sale, assignment, transfer, pledge,
encumbrance or other disposition of such shares not issued pursuant to an
effective and current registration statement under the Securities Act and all
applicable state securities laws on the receipt from the party to whom the
shares of Common Stock are to be so transferred of any representations or
agreements requested by the Company in order to permit such transfer to be made
pursuant to exemptions from registration under the Securities Act and applicable
state securities laws.
9.3 Legends. Unless a registration statement under the Securities Act
is in effect with respect to the issuance or transfer of shares of Common Stock
issued under the Plan, each certificate representing any such shares shall be
endorsed with a legend in substantially the following form, unless counsel for
the Company is of the opinion as to any such certificate that such legend is
unnecessary:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE
STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH
STATE LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
AND SUCH STATE LAWS, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
THE SATISFACTION OF THE COMPANY.
<PAGE>
ARTICLE 10. PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may suspend or terminate the Plan or any portion thereof at
any time, and may amend the Plan from time to time in such respects as the Board
may deem advisable in order that Incentive Stock Options and Non-Statutory Stock
Options under the Plan shall conform to any change in applicable laws or
regulations or in any other respect that the Board may deem to be in the best
interests of the Company; provided, however, that no amendment shall, either
directly or indirectly, (a) materially increase the total number of shares of
Common Stock as to which Options may be granted under the Plan, except as
provided in Section 4.3 of the Plan; (b) materially increase the benefits
accruing to Optionees under the Plan; or (c) materially modify the requirements
as to eligibility for participation in the Plan without the approval of the
shareholders, but only if such approval is required for compliance with the
requirements of any applicable law or regulation; and provided, further, that
the Plan may not, without the approval of the shareholders, be amended in any
manner that will cause Incentive Stock Options to fail to meet the requirements
of Internal Revenue Code Section 422. No termination, suspension or amendment of
the Plan shall alter or impair any outstanding Option without the consent of the
Optionee affected thereby; provided, however, that this sentence shall not
impair the right of the Committee to take whatever action it deems appropriate
under Section 4.3.
ARTICLE 11. CHANGE IN CONTROL
If, during the term of an Option, (i) the Company merges or
consolidates with any other corporation and is not the surviving corporation
after such merger or consolidation; (ii) the Company transfers all or
substantially all of its business and assets to any other person; or (iii) more
than 50% of the Company's outstanding voting shares are purchased by any other
person, the Committee may, in its sole discretion, provide for the acceleration
of the right to exercise the option prior to the anticipated effective date of
any of the foregoing transactions or take any other action as it may deem
appropriate to further the purposes of this Plan or protect the interests of the
Optionee.
ARTICLE 12. EFFECTIVE DATE OF THE PLAN
12.1 Effective Date. The Plan is effective as of February 25, 1995, the
effective date it was adopted by the Board subject to the approval of the
shareholders within 12 months. Options may be granted under the Plan prior to
shareholder approval if made subject to shareholder approval.
<PAGE>
12.2 Duration of the Plan. The Plan shall terminate at midnight on ten
(10) years from February 25, 1995 and may be terminated prior thereto by Board
action, and no Options shall be granted after such termination. Options
outstanding upon termination of the Plan may continue to be exercised in
accordance with their terms.
ARTICLE 13. MISCELLANEOUS
13.1 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Minnesota
without regard to the conflict of laws provisions of any jurisdictions. All
parties agree to submit to the jurisdiction of the state and federal courts of
Minnesota with respect to matters relating to the Plan and agree not to raise or
assert the defense that such forum is not convenient for such party.
13.2 Gender and Number. Except when otherwise indicated by the context,
reference to the masculine gender in the Plan shall include, when used, the
feminine gender and any term used in the singular shall also include the plural.
13.3 Construction. Wherever possible, each provision of this Plan shall
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Plan shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Plan.
13.4 Successors and Assigns. This Plan shall be binding upon and inure
to the benefit of the successors and permitted assigns of the Company,
including, without limitation, whether by way of merger, consolidation,
operation of law, assignment, purchase or other acquisition of substantially all
of the assets or business of the Company, and any and all such successors and
assigns shall absolutely and unconditionally assume all of the Company's
obligations under the Plan.
13.5 Survival of Provisions. The rights, remedies, agreements,
obligations and covenants contained in or made pursuant to the Plan, any
agreement evidencing an Incentive Award and any other notices or agreements in
connection therewith, including, without limitation, any notice of exercise of
an Option, shall survive the execution and delivery of such notices and
agreements and the delivery and receipt of shares of Common Stock and shall
remain in full force and effect.
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