1
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, 1999
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 17, 1999 was:
Common Stock, $.01 par value, 11,884,413 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 26,692 $ 29,598
Trade accounts and notes receivable, less allowance for doubtful
accounts of 1,093,688 and $1,293,000 5,093,930 5,356,884
Inventories 28,548 26,459
Prepaid expenses and other 121,612 61,145
------------ ------------
Total current assets 5,270,782 5,474,086
PROPERTY AND EQUIPMENT, net 711,627 1,049,624
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,697,929 and $1,580,098, respectively 7,518,700 7,568,810
Noncompete agreements, less accumulated amortization of $417,290 and $374,478,
respectively 549,560 592,373
Copyrights, less accumulated amortization of $96,775 and $85,608, respectively 573,225 584,391
Trade names, less accumulated amortization of $24,114 and $20,613, respectively 185,886 189,387
Contracts, less accumulated amortization of $33,333 and $23,334, respectively 46,667 56,666
Trade accounts and notes receivable, less allowance for doubtful accounts of $30,000
and $30,000, respectively 530,511 922,966
Deferred financing costs, less accumulated amortization of $1,086,907 and $836,082,
respectively 334,435 585,260
Other 40,983 65,983
Net assets of discontinued operations 3,196,962 3,525,272
============ ============
$ 18,959,338 $ 20,614,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balance $ 671,288 $ --
Notes payable 7,048,031 6,939,692
Current maturites of long-term debt 526,544 572,227
Trade accounts payable 927,545 2,335,509
Accrued salaries, wages, and payroll taxes 1,632,087 1,405,382
Accrued earn-out 215,370 309,962
Other accrued liabilities 659,501 678,624
Deferred revenue 1,659,247 1,629,192
------------ ------------
Total current liabilities 13,339,613 13,870,588
LONG-TERM DEBT, less current portion 809,853 900,148
SUBORDINATED DEBT 115,000 --
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; 11,884,413 and 8,136,828
shares issued and outstanding, respectively 118,844 118,844
Additional paid-in capital 16,725,125 16,725,126
Accumulated deficit (12,103,466) (10,951,526)
------------ ------------
4,740,503 5,892,444
Stockholder note and interest receivable (45,631) (48,362)
------------ ------------
4,694,872 5,844,082
------------ ------------
$ 18,959,338 $ 20,614,818
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ending
March 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUE $ 6,947,658 $ 6,176,739
COSTS OF REVENUE 5,182,095 4,563,216
------------ ------------
GROSS PROFIT 1,765,563 1,613,523
OPERATING EXPENSES:
Salaries 477,908 514,108
Selling, general, and administrative 817,844 667,651
------------ ------------
Total operating expenses 1,295,752 1,181,759
------------ ------------
OPERATING INCOME 469,811 431,764
INTEREST EXPENSE (241,245) (100,729)
OTHER INCOME 45,324 109,473
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 273,890 440,508
INCOME TAXES 831 12,339
------------ ------------
INCOME FROM CONTINUING OPERATIONS 273,059 428,169
------------ ------------
DISCONTINUED OPERATIONS
Loss from operations of Physical Therapy Clinic segment and
Equipment segment (less applicable taxes) (398,241)
Loss on disposal of Physical Therapy Clinic segment and Equipment
segment (less applicable taxes) (1,425,000) --
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (1,425,000) (398,241)
------------ ------------
NET INCOME (LOSS) $ (1,151,941) $ 29,928
============ ============
INCOME PER SHARE FROM CONTINUING OPERATIONS:
Basic $ 0.02 $ 0.04
Diluted 0.02 0.04
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic $ (0.12) $ (0.04)
Diluted (0.11) (0.04)
NET INCOME (LOSS) PER SHARE:
Basic $ (0.10) $ --
Diluted (0.09) --
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 11,884,413 9,727,060
Diluted 13,217,746 10,035,237
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,151,941) $ 29,928
Adjustment to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 526,323 234,040
Discontinued operations 579,984 (1,322,088)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable 655,409 (9,798)
Inventories (2,090) --
Prepaid expenses and other (60,467) 90,524
Other assets 25,000 109,099
Deferred financing costs -- (1,302,828)
Trade accounts payable and checks written in excess of bank balance (736,676) (564,948)
Accrued liabilities and other 112,990 (590,700)
Deferred revenue 30,055 (127,313)
----------- -----------
Net cash used in operating activities (21,413) (3,454,084)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (3,861) (10,364)
Payments in connection with earn-out provisions (67,724) --
----------- -----------
Net cash used in investing activities (71,585) (10,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 108,339 4,364,944
Proceeds from issuance of subordinated debt 115,000 --
Repayment of long term debt (135,978) (3,815,816)
Proceeds from the issuance of common stock for line of credit -- 3,626,320
Advances on notes receivable (698) (2,117)
Payments received on notes receivable 3,429 4,800
----------- -----------
Net cash provided by financing activities 90,092 4,178,131
----------- -----------
NET INCREASE (DECREASE) IN CASH (2,906) 713,683
CASH AT BEGINNING OF YEAR 29,598 81,639
----------- -----------
CASH AT END OF PERIOD $ 26,692 $ 795,322
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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-K for
the year ended December 31, 1998. In the opinion of management, the interim
condensed 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, 1999 are not necessarily indicative of the operating results for the
year ending December 31, 1999.
Certain reclassifications have been made to the condensed consolidated statement
of operations for the three months ended March 31, 1998. Such reclassifications
had no effect on net income or stockholders' equity as previously reported.
NOTE 2. FINANCING
During the quarter ended March 31, 1999, the Company sold $115,000 principal
amount of Secured Convertible Subordinated Debentures ("Debentures") to three
accredited investors. The Debentures are due October 1, 1999 and bear interest
at the rate of 16% per annum. The Debentures are secured by a lien on the
Company's assets, however both the payment of the Debentures and the security
interest securing the Debentures are subordinate to the Company's borrowings
from Abelco Finance LLC. Principal and accrued interest on the Debentures is
convertible into company common Stock at a price of $.30 per share. For each
$4.00 principal amount of Debentures purchased, the purchaser received a Warrant
to purchase one share of Company common stock at $1.00 per share, exercisable
for a period of four years.
NOTE 3. DISCONTINUED OPERATIONS
In August 1998 and November 1998, the company formally adopted plans to dispose
of its freestanding physical therapy clinics business segment ("the PT clinic
division") and its fitness equipment business segment ("the equipment
division"). The plans of disposal specifically targets sales of substantially
all the assets of each division to a major provider of outpatient therapy
services and a supplier and retailer of fitness equipment, respectively. The
Company is negotiating with potential buyers and estimates that the transactions
will be completed by June 30, 1999.
The operating losses during the phase out period which includes the quarter
ending March 31, 1999, included projected shutdown costs and the expected net
realizable loss from the sale of the divisions, were recorded as discontinued
operations during the year ended December 31, 1998. During the three months
ending March 31, 1999 the Company accrued an additional loss of $1,425,000 due
to actual operating losses exceeding earlier estimates, changes in the net
realizable value of certain assets, changes in the estimated sales price of the
divisions and increased employee severance costs.
NOTE 4. INCOME TAXES
The provision for income taxes for the three months ended March 31, 1999 and
1998 have been offset principally by a reduction in the valuation allowance for
deferred taxes.
NOTE 5. SUBSEQUENT EVENT
On May 14, 1999, the Company closed the sale of the majority of the PT clinic
division. The sale was completed for a purchase price of $3,600,000. The Company
is negotiating with a potential buyer to sell the remaining clinics. Net
proceeds from the sale of $2,250,000 were used to reduce the Company's note
payable.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the condensed consolidated statements of operations of the Company:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------------------------
1999 % 1998 %
------------------ --------- ----------------- --------
<S> <C> <C> <C> <C>
REVENUES: $ 6,948,000 100.0% $ 6,177,000 100.0%
COSTS OF REVENUES: 5,182,000 74.6% 4,563,000 73.9%
GROSS PROFIT 1,766,000 25.4% 1,614,000 26.1%
OPERATING EXPENSES:
Salaries 478,000 6.9% 514,000 8.3%
Selling, general, and administrative 818,000 11.8% 668,000 10.8%
------------------ --------- ----------------- --------
1,296,000 18.7% 1,182,000 19.1%
------------------ --------- ----------------- --------
OPERATING INCOME: 470,000 6.7% 432,000 7.0%
INTEREST EXPENSE (241,000) (3.4)% (101,000) -1.6%
OTHER INCOME 45,000 0.6% 109,000 1.7%
(196,000) (2.8)% 8,000 0.1%
------------------ --------- ----------------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES 274,000 3.9% 440,000 7.1%
INCOME TAXES 1,000 0.0% 12,000 0.2%
------------------ --------- ----------------- --------
INCOME FROM CONTINUING OPERATIONS 273,000 3.9% 428,000 6.9%
DISCONTINUED OPERATIONS (1,425,000) (20.5)% (398,000) (6.4)%
------------------ --------- ----------------- --------
NET INCOME (LOSS) $(1,152,000) (16.6)% $ 30,000 0.5%
================== ========= ================= ========
</TABLE>
General. The Company is in the business of providing preventive health care
services and products to corporations and health care organizations. Preventive
health care services are integrated health management services that include the
development, marketing and management of corporate and hospital-based fitness
centers, injury prevention and work-injury management consulting and on-site
physical therapy.
The Company's revenues come from fitness center management and
consulting contracts, fees paid by employers, insurers and others for injury
prevention and work-injury management consulting and physical therapy services
provided to patients at corporate locations. The fitness center management and
consulting contracts provide for specific management, consulting, and program
fees and contain provisions for modification, termination, and non-renewal.
On April 8, 1999, the Company retained Manchester Companies, Inc., a
Minneapolis-based multi-disciplinary professional services firm which provides
investment banking, finance, turnaround and management advisory services to
small and middle market companies. Manchester will assist with the sale of the
physical therapy clinics and fitness equipment business segments, will
restructure the Company's financing and will assist with the Company's
re-engineering efforts.
Summary of First Quarter Results. For the quarter ended March 31, 1999, total
revenues were up by $771,000, or 12.5%, from the quarter ended March 31, 1998,
with the growth coming from new fitness center management and International
Fitness Club Network (IFCN) contracts. Gross profit as a percentage of revenue
<PAGE>
decreased .7 percentage points, while gross profit dollars increased $152,000,
or 9.4%. Operating expenses as a percentage of revenue decreased .4 percentage
points, or $114,000 over the prior year period, as the Company restructured
middle management of its fitness center division. Operating income as a percent
of revenue decreased by .2 percentage points. Interest expense increased
$140,000 from the prior year period due to the increased level and cost of
borrowing. Net income from continuing operations for the quarter ended March 31,
1999 was $273,000, a $155,000 decrease from the prior year period. The decrease
was due to a decrease in other income and an increase in interest expense.
Revenues. Revenues increased $771,000, or 12.5%, to $6,948,000 for the three
months ended March 31, 1999, from $6,177,000 for the period ended March 31,
1998.
Consulting and Management Fee revenues increased $704,000, or 13.7%,
for the three months ended March 31, 1999, compared to the same period in 1998.
The increase was primarily due to the effect of adding a net of six corporate
fitness center sites under management during 1998.
Occupational Health and On-Site Physical Therapy revenues decreased
$309,000, or 29.6% for the three months ended March 31, 1999, compared to the
same period in 1998. The decrease is attributable to a reduction in occupational
health contract revenue.
International Fitness Club Network (IFCN) revenues increased
$376,000, or 100% for the three months ended March 31, 1999 compared to the same
period in 1998. IFCN was acquired in the second quarter 1998. Health Fitness
Corporation did not report revenue for the IFCN division until the second
quarter 1998.
Operating Income. Operating income increased $38,000 to $470,000 for the three
months ended March 31, 1999, from $432,000 for the same period in 1998.
Consulting and Management Fee operating income increased $173,000 from $638,000
for the three months ended March 31, 1998, to $811,000 for the same period in
1999. The increase was due to the increase in revenue exceeding the associated
increase in expense. Occupational Health and On-Site Physical Therapy operating
income decreased $228,000 to $63,000 for the three months ended March 31, 1999,
from $291,000 for the same period in 1998. The decrease was primarily due to the
decrease in revenue associated with the occupational health contract revenue.
IFCN operating income increased $261,449 from the same period in 1998 due to the
division being acquired in the second quarter, 1998. Corporate expenses
increased $168,453 from $497,224 for the three months ended March 31, 1998, to
$665,677 for the same period in 1999. The increase was due to the investments
made to strengthen the management team, higher professional fees, and travel
associated with the Bladerunner consulting contract.
Interest Expense. Interest expense of $241,000 for the three months ended March
31, 1999, increased $141,000 from $101,000 for the same period in 1998. The
increase was due to higher average borrowings and the cost of borrowing.
Other Income. Other income decreased $64,000 from $109,000 for the three months
ended March 31, 1998, to $45,000 for the same period in 1999. The decrease is
due to the higher collection of previously written-off receivables.
Income From Continuing Operations. The Company's income from continuing
operations decreased $155,000 to $273,000 or $.02 diluted income per share for
the three months ended March 31, 1999, from $428,000 or $.04 diluted income per
share from continuing operations for the same period in 1998.
Discontinued Operations. In August 1998 and November 1998, the company formally
adopted plans to dispose of its freestanding physical therapy clinics business
segment ("the PT clinic division") and its fitness equipment business segment
("the equipment division"). The plans of disposal specifically target sales of
substantially all the assets of each division to a major provider of outpatient
therapy services and a supplier and retailer of fitness equipment, respectively.
The Company is negotiating with potential buyers and estimates that the
transactions will be completed by June 30, 1999.
The operating losses during the phase out period which includes the
quarter ending March 31, 1999, included projected shutdown costs and the
expected net realizable loss from the sale of the divisions, were recorded as
discontinued operations during the year ended December 31, 1998. During the
three months ending March 31, 1999 the Company accrued an additional loss of
$1,425,000 due to actual operating losses exceeding earlier estimates, changes
in net realizable value of certain assets, changes in the estimated sales price
of the divisions and increased employee severance costs.
<PAGE>
On May 14, 1999, the Company closed the sale of the majority of the PT clinic
division. The sale was completed for a purchase price of $3,600,000. The Company
is negotiating with a potential buyer to sell the remaining clinics. Net
proceeds of $2,250,000 from the sale were used to reduce the Company's note
payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $(8,068,000) at March 31, 1999,
versus working capital of $(6,082,000) at March 31, 1998. The change was
primarily due to a decrease in cash and an increase in short term debt.
The Company has a revolving credit facility with Abelco Finance L.L.C.
and other affiliates of Cerberus Partners, L.P. (the "Lender"). The Company's
ability to draw down on the facility is tied to the Borrowing Base formula which
is based upon the Company's EBITDA (defined as earnings before interest, taxes,
depreciation and amortization), revenues, or collections, whichever is less. 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
advances under the credit facility accrue interest at a rate equal to 7.0% in
excess of Chase Manhattan's prime rate , 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%. The unpaid interest
(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. As of March 31, 1999, the Company had $152,000
of availability under its revolving credit facility with Abelco Finance L.L.C.
On February 26, 1999, the Company and the Lender further amended the
Credit Agreement. The amendment reflects the assignment by Madeleine L.L.C. of
its interest in the Credit Agreement to Ableco Finance L.L.C., and other
affiliates of the Cerberus Partners group. The amendment permits the Company to
issue certain secured subordinated debentures.
On March 12, 1999, the Company and the Lender further amended the
Credit Agreement to waive certain covenants as of December 31, 1998.
Sources of capital to meet future obligations in 1999 are anticipated
to be cash provided by operations, cash from the sale of discontinued operations
and the Company's revolving credit facility. The Company expects to renegotiate
its revolving credit facility prior to its due date of July 1999. 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.
Year 2000 Compliance
The Company has initiated a project to prepare its products and
computer systems for the year 2000 impact on its business operations, product
offerings, customers and suppliers. The Company has completed the awareness
phase of the project and is currently in various stages of the assessment,
remediation and internal testing phases. The project is expected to completed be
by the end of the third quarter of calendar year 1999. Accordingly, management
believes the year 2000 issue will not have a significant impact on its business.
If necessary modification and conversions are not completed on a timely basis,
the year 2000 issue could have an adverse effect on the Company's business. At
this time, the Company believes it is unnecessary to adopt a contingency plan
covering the possibility that the project will not be completed in a timely
manner, but as part of the overall project, the Company will continue to assess
the need for a contingency plan.
The Company is also communicating and working with its significant
vendors, customers and other business partners to minimize year 2000 risks and
protect the Company and its customers from potential service interruptions.
However, the Company could be adversely affected by the failure of third parties
to become year 2000 compliant, including the risk of operational outages due to
disruptions in communications or electrical service. Although the Company
believes the effect of such disruptions would be localized and temporary, there
is no assurance that these or other year 2000 risks will not have a material
financial impact in any future period.
<PAGE>
The costs associated with the year 2000 issues are being expensed
during the period in which they are incurred. The financial impact to the
Company of implementing any necessary changes to become year 2000 compliant has
not and is not anticipated to be material to the Company's business. However,
uncertainties that could impact actual costs and timing of becoming year 2000
compliant do exist. Factors that could affect the Company's estimates include,
but are not limited to, the availability and cost of trained personnel, the
ability to identify all systems and programs that are not year 2000 compliant,
the nature and amount of programming necessary to replace or upgrade affected
programs or systems, and the success of the Company's suppliers and customers to
address these issues. The Company will continue to assess and evaluate cost
estimates and target completion dates of the project on a periodic basis.
Cautionary Statement
This Form 10-Q contains forward-looking statements within the meaning
of federal securities laws. These statements include statements regarding
intent, belief, or current expectations of the Company and its management. These
forward-looking statements are not guarantees of the future performance and
involve a number of risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in these statements.
Please refer to the Management's Discussion and Analysis section of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, for
cautionary statements on important factors to consider in evaluating the
forward-looking statements included in this Form 10-Q.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
During the quarter ended March 31, 1999, the Company sold units
consisting of (i) Secured Convertible Subordinated Debentures ("Debentures")
convertible into company common Stock at $.30 per share, and (ii) for each $4.00
principal amount of Debentures purchased, a Warrant to purchase one share of
Company common stock at $1.00 per share, to the following persons without
registration under the Securities Act:
Price per Exemption
Date Amount Purchaser(s) Share/Unit Relied Upon
2/26/99 $50,000 Charles Bidwell N/A Section 4(2)
principal
amount
2/26/99 $50,000 Charles Rasmussen N/A Section 4(2)
principal
amount
2/26/99 $15,000 Susan DeNuccio N/A Section 4(2)
principal
amount
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In April 1999, Charles E. Bidwell resigned as the Company's Chairman of
the Board, Chief Financial Officer, Treasurer and Secretary, but Mr. Bidwell
will continue as a director. In April 1999, the Board of Directors elected James
A. Bernards of Brightstone Capital Ltd. as Chairman, named James L. Nichols of
Manchester Companies, Inc. as acting Chief Financial Officer, and elected Robert
Peterson as Vice President - Finance.
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, 1999.
<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 20, 1999 HEALTH FITNESS CORPORATION
By /s/ Loren S. Brink
Loren S. Brink
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Robert Peterson
Robert Peterson
Vice President - Finance
(Principal Financial and 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
4.2 Form of Secured Convertible Subordinated Debentures
27.1 Financial Data Schedule for 3-month period ended March 31, 1999 (in
electronic version only)
THIS SECURED CONVERTIBLE SUBORDINATED DEBENTURE AND THE COMMON STOCK
ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER EITHER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE BLUE SKY LAWS, AND ARE SUBJECT
TO CERTAIN INVESTMENT REPRESENTATIONS. THIS SECURED CONVERTIBLE SUBORDINATED
DEBENTURE AND SUCH UNDERLYING COMMON STOCK MAY NOT BE SOLD, OFFERED FOR SALE OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL
SATISFACTORY IN FORM AND SUBSTANCE TO COUNSEL FOR HEALTH FITNESS CORPORATION,
THAT SUCH TRANSACTION WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE BLUE SKY LAWS.
THIS CONVERTIBLE SECURED SUBORDINATED DEBENTURE IS SUBJECT TO THE TERMS
OF A INTERCREDITOR AND SUBORDINATION AGREEMENT DATED FEBRUARY ______, 1999
BETWEEN THE HOLDER HEREOF AND MADELEINE, L.L.C. (THE "INTERCREDITOR AND
SUBORDINATION AGREEMENT").
SECURED CONVERTIBLE SUBORDINATED DEBENTURE
HEALTH FITNESS CORPORATION
Debenture No. ________ _________, 1999
$______________
1. The Debenture. Health Fitness Corporation, a Minnesota corporation
(the "Company"), for value received, hereby promises to pay to the order of
_____________________, or such holder's successors or assigns, the principal
amount of ________________________Dollars ($_______), to be repaid in full on
October 1, 1999, with interest at a rate of 16% per annum accruing on the
principal balance hereof from the date hereof until paid in full. Interest shall
be computed on the basis of a 360-day year. Payments of principal and interest
shall be made in lawful money of the United States of America at the principal
office of the Company. This Debenture is one of a series of Secured Convertible
Subordinated Debentures in an aggregate principal amount of up to $400,000 which
may be issued by the Company on or before May 1, 1999 with a Conversion Price
equal to or less than the Conversion Price of this Debenture (collectively, the
"Debentures"). Subject to the Intercreditor and Subordination Agreement, the
Company reserves the right to prepay the Debentures in whole or in part at any
time after giving the holder thirty (30) days notice of such prepayment during
which 30-day period the holders may convert the Debentures according to the
provisions of Section 6 below. Any partial prepayment of the Debentures shall be
made pro rata among all outstanding Debentures.
If after receipt of any payment of, or proceeds applied to the payment
of, all or any part of this Debenture, the holder of this Debenture 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 including but not limited to pursuant to the
Intercreditor and Subordination Agreement, then this Debenture or any part
thereof intended to be satisfied shall be revived and continue in full force as
if such payment or proceeds had not been received by the holder of this
Debenture and the Company shall be liable to pay to the holder of this
Debenture, and hereby does indemnify and hold harmless the holder of this
Debenture for the amount of such payment or proceeds surrendered. The provisions
of this paragraph shall be and remain effective notwithstanding any contrary
action which may have been taken by the holder of this Debenture or the
Debenture Agent (as defined below) in reliance upon such payment or proceeds,
and any such contrary action so taken shall be without prejudice to the rights
of the holder under this Debenture and shall be deemed to have been conditioned
upon such payment or proceeds having become final and irrevocable.
2. Security Interest and Subordination. To secure the debt, liability
or obligation of the Company to each holder hereof evidenced by this Debenture
and any extensions, renewals or replacements thereof (herein referred to as the
"Obligations"), the Company hereby grants Charles E. Bidwell or his successors
or assigns, as agent for all holders of the Debentures, a security interest
(herein called the "Security Interest") in the following property (herein called
the "Collateral"):
(a) Inventory. All inventory of the Company, whether now owned
or hereafter acquired and wherever located;
(b) Equipment. All equipment of the Company, whether now owned
or hereafter acquired, including but not limited to all present and
future machinery, vehicles, furniture, fixtures, manufacturing
equipment, shop equipment, office and recordkeeping equipment, parts
and tools, and the goods described in any equipment schedule or list
herewith or hereafter furnished to each holder hereof by the Company
(but no such schedule or list need be furnished in order for the
security interest granted herein to be valid as to all of the Company's
equipment);
(c) Accounts and Other Rights To Payment. Each and every right
of the Company to the payment of money, whether such right to payment
now exists or hereafter arises, whether such right to payment arises
out of a sale, lease or other disposition of goods or other property by
the Company, out of a rendering of services by the Company, out of a
loan by the Company, out of the overpayment of taxes or other
liabilities of the Company, or otherwise arises under any contract or
agreement, whether such right to payment is or is not already earned by
performance, and howsoever such right to payment may be evidenced,
together with all other rights and interests (including all liens and
security interests) that the Company may at any time have by law or
agreement against any account debtor or other obligor obligated to make
any such payment or against any of the property of such account debtor
or other obligor; all including but not limited to all present and
future debt instruments, chattel papers, accounts, loans and
obligations receivable and tax refunds;
(d) General Intangibles. All general intangibles of the
Company, whether now owned or hereafter acquired, including but not
limited to applications for patents, patents, copyrights, trademarks,
trade secrets, good will, trade names, customers lists, permits and
franchises, and the right to use the Company's name;
together with all substitutions and replacements for and products of
any of the foregoing property not constituting consumer goods and
together with proceeds of any and all of the foregoing property and, in
the case of all tangible Collateral, together with (i) all accessions,
(ii) all accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any such
goods, and (iii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
The holder hereby irrevocably appoints Charles E. Bidwell as the
holder's agent for purposes of holding the Security Interest for the benefit of
all Debenture holders (the "Debenture Agent"). In the event of the death,
disability or resignation of Mr. Bidwell as the Debenture Agent, holder agrees
to use holder's best efforts to cause the holders of a majority (by principal
amount) of the outstanding Debentures to designate a successor Debenture Agent.
The Debenture Agent shall have the authority to take any and all actions on
behalf of the holders of the Debentures which the Debenture Agent deems
necessary or advisable, with the approval of holders of a majority (by principal
amount) of outstanding Debentures, with respect to the Security Interest and/or
the Intercreditor and Subordination Agreement. Holder agrees to indemnify
against, and hold the Debenture Agent harmless from, holder's pro rata portion
(based on the principal amount of Debentures owned by holder versus the
principal amount of all outstanding Debentures) of any liability, costs and
expenses (including attorneys' fees and costs) suffered or incurred by the
Debenture Agent in connection with the Debenture Agent's actions or inaction as
Debenture Agent. The holder acknowledges that Mr. Bidwell is currently the Chief
Financial Officer, and a significant shareholder, of the Company and holder
waives any conflict of interest that might be created by Mr. Bidwell's status as
such and his acting as Debenture Agent.
The holder acknowledges and agrees that (i) the security interest
created hereby (a) is subject to, and holder agrees to become a party to and by
acceptance hereof shall be bound by, the Intercreditor and Subordination
Agreement, and (b) shall be of equal priority with the security interests
granted pursuant to the other Debentures regardless of the respective dates of
such Debentures or the perfection of such security interest and (ii) the
indebtedness evidenced hereby is subordinate in right of payment to the final
payment and satisfaction in full of all obligations of the Company to Madeleine
L.L.C. and any other "Senior Creditor" (as such term is defined in the
Intercreditor and Subordination Agreement) as set forth in the Intercreditor and
Subordination Agreement. By its acceptance hereof, holder agrees that it shall
be bound by and subject to the terms and conditions of the Intercreditor and
Subordination Agreement, without any further action. Holder agrees to execute
and deliver such other agreements as the Company or Madeleine L.L.C. may from
time to time request to evidence that holder is bound by and a party to the
Intercreditor and Subordination Agreement.
3. Transferability. This Debenture may be converted into Common Stock
of the Company pursuant to the terms of Section 6 hereof (the "Conversion
Shares"), and this Debenture and the Conversion Shares may be transferred,
subject to the following conditions. The holder of this Debenture, by acceptance
thereof, agrees to give written notice to the Company at least ten (10) days
before transferring or converting this Debenture, or transferring any Conversion
Shares, of such holder's intent to do so, describing briefly the manner of the
proposed transfer or conversion. Promptly upon receiving such written notice,
the Company shall present copies thereof to counsel for the Company. If, in the
opinion of counsel satisfactory in form and substance to the Company, the
proposed transfer or conversion may be effected without constituting a violation
of the applicable federal and state securities laws, such holder shall be
entitled to transfer or convert this Debenture or to dispose of the Conversion
Shares received upon conversion of this Debenture as contemplated in the above
referred to notice provided by the holder to the Company, provided that an
appropriate legend may be endorsed on this Debenture or the certificates for any
of the Conversion Shares respecting restrictions on transfer thereof necessary
or advisable in the opinion of counsel satisfactory in form and substance to the
Company to prevent further transfers which would be in violation of the
securities laws or adversely affect the exemptions relied upon by the Company.
To such effect, the Company may request that the intended transferee execute an
investment and representation letter satisfactory in form and substance to the
Company. Upon transfer of this Debenture or any Conversion Shares, the
transferee, by acceptance of this Debenture or Conversion Shares, agrees to be
bound by the provisions, terms, conditions and limitations of this Debenture and
the Intercreditor and Subordination Agreement, and the investment and
representation letter, if any, required by the Company. If (a) no opinion of
counsel referred to in this Section has been provided to the Company, or (b) in
the opinion of such counsel the proposed transfer, conversion or disposition of
this Debenture or the Conversion Shares described in the holder's written notice
given pursuant to this Section may not be effected without registration or
without adversely affecting the exemptions relied upon by the Company, the
holder will limit its activities and restrict its transfer, conversion or
disposition accordingly.
4. Exchange of Debenture. At any time at the request of any holder of
this Debenture and upon compliance with the provisions of Section 3 above and
surrender of this Debenture for such purpose to the Company at its principal
office or such other office or agency as it may authorize for such purpose, the
Company at its expense (except for any transfer tax arising out of the exchange)
shall execute and deliver in exchange therefor a new Debenture or Debentures, in
the denomination or denominations ($1,000 and integral multiples thereof only,
plus one Debenture in a lesser denomination if required) as such holder may
request, in an aggregate principal amount equal to the unpaid portion of the
principal amount of the Debenture surrendered and substantially in the form
thereof, dated as of the date of the Debenture so surrendered and payable to or
upon the order of such holder.
5. Replacement of Debenture. Upon receipt of evidence satisfactory to
the Company of the loss, theft, destruction or mutilation of this Debenture and
in the case of any such loss, theft or destruction, upon delivery of a bond of
indemnity satisfactory to the Company if requested by the Company, or in the
case of any such mutilation, upon surrender and cancellation of this Debenture,
the Company shall issue a new Debenture identical in form to the lost, stolen,
destroyed or mutilated Debenture.
6. Conversion of Debenture.
(a) Right of Conversion. Subject to and upon compliance with
the provisions of Section 3 above and this Section, the holder of this
Debenture or any Debentures issued in exchange for it shall have the
right, at the holder's option, at any time after the earlier of June 1,
1999 or the Company's notice of prepayment of this Debenture to convert
all or any portion of the unpaid principal amount of this Debenture and
all accrued but unpaid interest thereon to the date of conversion, into
that number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100 of a share)
obtained by the amount of this Debenture to be converted, by the
conversion price of $0.30 per share, or such adjusted conversion price
as provided for in this Section (the "Conversion Price"), and by
surrender of this Debenture in whole or in part, such surrender to be
made in the manner provided in Subsection (b) of this Section. The
holders' right of conversion hereunder shall expire on the maturity of
this Debenture.
(b) Surrender of Debenture. In order to exercise the
conversion privilege, the holder of the Debenture to be converted in
whole or in part shall surrender such Debenture to the Company at its
principal office or at such other agency maintained for such purpose by
the Company, and shall give written notice to the Company at such
office or agency that the holder elects to convert such Debenture or
the portion thereof specified in said notice. Such notice shall also
state the name or names, together with address or addresses, in which
the certificate or certificates for shares of Common Stock which shall
be issuable on such conversion shall be issued. The Debenture
surrendered for conversion shall, unless the shares issuable on
conversion are to be issued in the same name as the name of the
original holder, be accompanied by instruments of transfer, in form
satisfactory to the Company, duly executed by each holder or his duly
authorized attorney. As promptly as practicable after the surrender of
such Debenture, as aforesaid, the Company shall issue and shall deliver
at such office or agency to such holder, or on his written order, a
certificate or certificates for the number of full shares of Common
Stock issuable upon the conversion of such Debenture or portion thereof
in accordance with the provisions of this Section. Any fractional
interest in respect of a share of Common Stock arising upon such
conversion shall be settled as provided in Subsection (c) of this
Section. In case any Debenture shall be surrendered for partial
conversion, the Company shall execute and deliver to or upon the
written order of the holder of the Debenture so surrendered, at the
expense of the Company, a new Debenture or Debentures in authorized
denominations in an aggregate principal amount equal to the unconverted
portion of the surrendered Debenture. Each conversion shall be deemed
to have been effected immediately prior to the close of business on the
date on which such Debenture shall have been surrendered and such
notice received by the Company as aforesaid, and the person or persons
in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented
thereby at such time. Such conversion shall be at the Conversion Price
in effect at such time, unless the stock transfer books of the Company
shall be closed on that date, in which event such person or persons
shall be deemed to have become such holder or holders of record at the
close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the Conversion
Price in effect on the date upon which such Debentures shall have been
surrendered and such notice received by the Company.
(c) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of any Debenture. Instead of any
fractional interest in a share of Common Stock which would otherwise be
deliverable upon the conversion of any Debenture, the Company shall
make an adjustment therefor to the nearest 1/100 of a share in cash at
the current market price thereof on the day of conversion. If more than
one Debenture shall be surrendered for conversion at one time by the
same holder, the number of full shares issuable upon conversion thereof
shall be computed on the basis of the aggregate principal amount of the
Debentures, or specified portions thereof to be converted, so
surrendered.
(d) Adjustment Upon Issue of Common Shares for a Consideration
Less Than Conversion Price. Except for the issuance of options or
warrants approved by the Board of Directors of the Company to
employees, directors and consultants, if and whenever the Company shall
issue or sell any of its Common Stock or Convertible Securities (as
defined in Subsection (e)(i) below) for a consideration per share less
than the Conversion Price in effect immediately prior to the time of
such issue or sale, then, forthwith upon such issue or sale, the
Conversion Price shall be reduced to the amount of the consideration
per share received by the Company on such issuance or sale.
(e) Determination of Consideration for Issuance. For the
purposes of subsection (d) of this section, the following provisions
(i) through (iv), inclusive, shall also be applicable:
(i) Issuance of Rights to Purchase Common Stock or
Convertible Securities. Except for the issuance of options or
warrants approved by the Board of Directors of the Company to
employees, directors and consultants, in case at any time the
Company shall grant (whether directly or by assumption in a
merger or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or
any stock or securities convertible into Common Stock (such
convertible stock or securities being herein called
"Convertible Securities") whether or not such rights or
options or the right to convert any such Convertible
Securities are immediately exercisable, and the price per
share at which Common Stock are issuable upon the exercise of
such rights or options or upon conversion of such Convertible
Securities (determined by dividing (aa) the total amount, if
any, received or receivable by the Company as consideration
for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the
Company upon the exercise of such rights or options, plus, in
the case of such rights or options which relate to Convertible
Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion thereof, by
(bb) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or options or upon
the conversion of all such Convertible Securities issuable
upon the exercise of such rights or options) shall be less
than the Conversion Price in effect immediately prior to the
time of the granting of such rights or options, then the total
maximum number of shares of Common Stock issuable upon the
exercise of the rights or options or upon conversion of the
total maximum amount of such Convertible Securities issuable
upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to have
been issued for such price per share. Except as provided in
subsection (f) below, no further adjustments of the Conversion
Price shall be made upon the actual issue of such Common Stock
or of such Convertible Securities upon exercise of such rights
or options or upon the actual issue of such Common Stock upon
conversion of such Convertible Securities.
(ii) Issuance of Convertible Securities. Except for
the issuance of options or warrants approved by the Board of
Directors of the Company to employees, directors and
consultants, in case the Company shall issue (whether directly
or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to convert
thereunder are immediately exercisable, and the price per
share for which Common Stock are issuable upon such conversion
(determined by dividing (aa) the total amount received or
receivable by the Company as consideration for the issue or
sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable
to the Company upon the conversion thereof, by (bb) the total
maximum number of shares of Common Stock issuable upon the
conversion of all such Convertible Securities) shall be less
than the Conversion Price in effect immediately prior to the
time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion of all such
Convertible Securities shall (as of the date of the issue or
sale of such Convertible Securities) be deemed to be
outstanding and to have been issued for such price per share,
provided that (x) except as provided in subsection (f) below,
no further adjustments of the Conversion Price shall be made
upon the actual issue of such Common Stock upon conversion of
such Convertible Securities, and (y) if any such issue or sale
of such Convertible Securities is made upon exercise of any
rights to subscribe for or to purchase or any option to
purchase any such Convertible Securities for which adjustments
of the Conversion Price have been or are to be made pursuant
to other provisions of this subsection (e), no further
adjustment of the Conversion Price shall be made by reason of
such issue or sale. Without limitation of the foregoing, if
additional Debentures are issued having a Conversion Price
less than the Conversion Price of this Debenture, then the
Conversion Price of this Debenture shall be reduced to equal
the Conversion Price of such newly issued Debenture.
(iii) Determination of Amount of Consideration
Received. In case any Common Stock or Convertible Securities
or any rights or options to purchase any Common Stock or
Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the
amount received by the Company therefor, without deduction
therefrom of any expenses incurred or any underwriting
commissions, discounts or concessions paid or allowed by the
Company in connection therewith. In case any Common Stock or
Convertible Securities or any rights or options to purchase
any Common Stock or Convertible Securities shall be issued or
sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be
deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the
Company, without deduction of any expenses incurred or any
underwriting commissions, discounts or concessions paid or
allowed by the Company in connection therewith. In case any
Common Stock or Convertible Securities or any rights or
options to purchase Common Stock or Convertible Securities
shall be issued in connection with any merger or consolidation
in which the Company is the surviving corporation, the amount
of consideration therefor shall be deemed to be the fair value
as determined in good faith by the Board of Directors of the
Company of such portion of the assets and business of the
non-surviving corporation or corporations as such Board shall
have determined to be attributable to such Common Stock,
Convertible Securities, rights or options as the case may be.
(iv) Record Date Deemed Issuance Date. In case the
Company shall take a record of the holders of its Common Stock
for the purpose of entitling them (aa) to receive a dividend
or other distribution payable in Common Stock or in
Convertible Securities, or in any rights or options to
purchase Common Stock or Convertible Securities, or (bb) to
subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the
date of the issue or sale of the Common Stock deemed to have
been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the
granting of such rights of subscription or purchase, as the
case may be; provided, however, that in the event that any
such dividend or other distribution is not in fact effected,
or in the event that the Common Stock or Convertible
Securities thus subscribed for are not in fact purchased, any
adjustment in the Conversion Price made as a result of the
declaration of such dividend or the making of such other
distribution or the granting of such rights of subscription or
purchase, as the case may be, shall be reversed.
(f) Adjustment Upon Change in Option or Conversion Price. Upon
the happening of any of the following events, namely, if the purchase
price provided for in any rights or options referred to in clause (i)
of subsection (e), the additional consideration, if any, payable upon
the conversion of Convertible Securities referred to in clause (i) or
(ii) of subsection (e), or the rate at which any Convertible Securities
referred to in clause (i) or (ii) of subsection (e) are convertible
into Common Stock shall change (other than under or by reason of
provisions designed to protect against dilution), the Conversion Price
in effect at the time of such event shall forthwith be increased or
decreased to the Conversion Price which would have been obtained had
the adjustments made upon the issuance of such rights, options or
Convertible Securities been made upon the basis of (i) the issuance of
the number of shares of Common Stock theretofore actually delivered
upon the exercise of such options or rights or upon the conversion of
such Convertible Securities, and the total consideration received
therefor, and (ii) the issuance at the time of such change of any such
options, rights or Convertible Securities then still outstanding for
the consideration, if any, received by the Company therefor and to be
received on the basis of such changed price; and on the expiration of
any such option or right or the termination of any such right to
convert such Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be adjusted to the Conversion Price
which would have obtained had the adjustments made upon the issuance of
such rights or options or Convertible Securities been made upon the
basis of the issuance of the Common Stock theretofore actually
delivered (and the total consideration received therefor) upon the
exercise of such rights or options or upon the conversion of such
Convertible Securities. If the purchase price provided for in any such
right or option referred to in clause (i) of subsection (e) or the rate
at which any Convertible Securities referred to in clause (i) or clause
(ii) of subsection (e) are convertible into Common Stock shall decrease
at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of
Common Stock upon the exercise of any such right or option or upon
conversion of any such Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be decreased to such
Conversion Price as would have obtained had the adjustments made upon
the issuance of such right, option or Convertible Securities been made
upon the basis of the issuance of (and the total consideration received
for) the Common Stock delivered as aforesaid.
(g) Adjustment for Splits or Combinations. The Conversion
Price shall also be adjusted from time to time such that, in case the
Company shall hereafter: (1) pay a dividend or make a distribution on
its Common Stock in shares of Common Stock, (2) subdivide its
outstanding shares of Common Stock into a greater number of shares, (3)
combine its outstanding shares of Common Stock into a smaller number of
shares, or (4) issue by reclassification of its Common Stock any shares
of capital stock of the Company, the Conversion Price in effect
immediately prior to such action shall be adjusted so that the holder
of any Debenture thereafter surrendered for conversion into Common
Stock shall be entitled to receive the number of shares of Common Stock
or other capital stock of the Company which he would have owned
immediately following such action had such Debenture been converted
immediately prior thereto. An adjustment made pursuant to this
subsection shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made
pursuant to this subsection, the holder of any Debenture thereafter
surrendered for conversion shall become entitled to receive shares of
two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose good
faith determination shall be conclusive) shall determine the allocation
of the adjusted Conversion Price between or among shares of such
classes of capital stock or shares of Common Stock and other capital
stock. All calculations under this subsection shall be made to the
nearest cent or to the nearest 1/100 of a share, as the case may be. In
the event that at any time as a result of an adjustment made pursuant
to this subsection, the holder of any Debenture thereafter surrendered
for conversion shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the Conversion
Price of such other shares so receivable upon conversion of any
Debenture shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Section.
(h) Adjustment for Mergers. In case of any consolidation or
merger to which the Company is a party other than a merger or
consolidation in which the Company is the continuing corporation, or in
case of any sale or conveyance to another corporation of the property
of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), there shall be no
adjustment under Subsection (d) of this Section above but the holder of
each Debenture then outstanding shall have the right thereafter to
convert such Debenture into the kind and amount of shares of stock and
other securities and property which he would have owned or have been
entitled to receive immediately after such consolidation, merger,
statutory exchange, sale or conveyance had such Debenture been
converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance and in
any such case, if necessary, appropriate adjustment shall be made in
the application of the provisions set forth in this Section with
respect to the rights and interest thereafter of any holders of the
Debenture, to the end that the provisions set forth in this Section
shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock and other securities
and property thereafter deliverable on the conversion of the Debenture.
The provisions of this subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(i) Notice of Adjustment of Conversion Prices. Upon any
adjustment of the Conversion Price, then and in each such case the
Company shall give written notice thereof as set forth in Section 11
hereof, which notice shall state the Conversion Price resulting from
such adjustment and the increase or decrease, if any, in the number of
shares receivable at such price upon the conversion, setting forth in
reasonable detail the method of calculation and the facts upon which
such calculation is based.
(j) Reservation of Common Stock. The Company covenants that it
will at all times reserve and keep available out of its authorized but
unissued Common Stock, solely for the purpose of delivering upon
conversion of this Debenture as herein provided, such number of shares
of Common Stock as shall them be deliverable upon the conversion of
this Debenture.
(k) Definition of Common Stock. For the purposes of the
foregoing subsections (a) through (k), the term "Common Stock" shall
include all shares of capital stock authorized by the Company's
Articles of Incorporation, as from time to time amended, which are not
limited to a fixed sum or percentage of the par value in respect to the
right of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution, bankruptcy proceeding or winding up of the Company.
7. Events of Default. Each of the following events shall be an Event of
Default ("Event of Default") for purposes of this Debenture:
(a) Convertible Debenture Terms. The Company defaults in the
due and punctual performance or observance of any material terms
contained in this Debenture, including, without limitation, the failure
to pay principal and interest when due, and such default continues for
a period of thirty (30) consecutive days after written notice thereof
to the Company by any holder of this Debenture or Common Stock issued
upon conversion of this Debenture; except that any default occurring
due to the failure of the Company to act in accordance with Section 1
hereof will result in an immediate default by the Company and such
default may be waived by the holders of a majority of the total
principal amount of all of the then outstanding Debentures; or
(b) Insolvency Matters. The Company makes an assignment for
the benefit of creditors, or admits in writing its inability to pay its
debts as they become due, or files a voluntary petition in bankruptcy,
or is adjudicated a bankrupt or insolvent, or files any petition or
answer seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, or files any answer
admitting or fails to deny the material allegations of a petition filed
against the Company for any such relief, or seeks or consents to or
acquiesces in the appointment of any trustee, receiver or liquidator of
the Company or all or any substantial part of the properties of the
Company, or the Company or its directors or majority stockholders take
any action looking to the dissolution or liquidation of the Company.
8. Remedies on Default. Upon the occurrence of an Event of Default as
described under Section 7 hereof, then, subject to the terms and provisions of
the Intercreditor and Subordination Agreement, the holder shall have the right,
subject to approval of the holders of a majority of the principal amount of the
Debentures outstanding, to:
(a) declare the principal amount hereof and all accrued but
unpaid interest thereon through the date of the Company's full payment
hereof, to be immediately due and payable upon written notice from the
holder to the Company;
(b) exercise and enforce any or all rights and remedies
available upon default to a secured party under the Uniform Commercial
Code;
(c) exercise or enforce any or all other rights or remedies
available to each holder hereof by law or agreement against the
Collateral, against the Company or against any other person or
property. The holder is hereby granted a nonexclusive, worldwide and
royalty-free license to use or otherwise exploit all trademarks, trade
secrets, franchises, copyrights and patents of the Company that the
holder hereof deems necessary or appropriate to the disposition of any
Collateral in connection with the enforcement of such holder's remedies
on default.
9. Registration Rights.
(a) Piggyback Registration Rights. If at any time during the
two-year period following conversion of this Convertible Debenture, the
Company proposes to register under the 1933 Act (except by a Form S-4
or Form S-8 Registration Statement or any successor forms thereto), any
of its equity securities or debt with equity features, it will give
written notice to the holder of the Common Stock underlying this
Debenture of its intention to do so and, on the written request of any
such holder given within twenty (20) days after receipt of any such
notice (which request shall specify the interest in such shares of
Common Stock intended to be sold or disposed of by such holder and
describe the nature of any proposed sale or other disposition thereof),
the Company will use its best efforts to cause all such shares, the
holder of which shall have requested the registration or qualification
thereof, to be included in such registration statement proposed to be
filed by the Company; provided, however, that if a greater number of
shares is offered for participation in the proposed offering than in
the reasonable opinion of the managing underwriter of the proposed
offering can be accommodated without adversely affecting the proposed
offering, then the amount of shares proposed to be offered by such
holder for registration, as well as the number of securities of any
other selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) Expenses. With respect to each inclusion of securities in
a registration statement pursuant to this Section 9, the Company shall
bear the following fees, costs, and expenses: all registration, filing
and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, fees and disbursements of counsel for the
underwriter or underwriters of such securities (if the Company is
required to bear such fees and disbursements), all internal expenses,
the premiums and other costs of policies of insurance against liability
arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any
jurisdictions in which the securities to be offered are to be
registered or qualified. Fees and disbursements of special counsel and
accountants for the selling holders, underwriting discounts and
commissions, and transfer taxes for selling holders and any other
expenses relating to the sale of securities by the selling holders not
expressly included above shall be borne by the selling holders.
(c) Indemnification. The Company hereby indemnifies each of
the holders of the shares of Common Stock underlying this Debenture,
and the officers and directors, if any, who control such holders,
within the meaning of Section 15 of the 1933 Act, against all losses,
claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (and as amended or supplemented if
the Company shall have furnished any amendments thereof or supplements
thereto), any Preliminary Prospectus or any state securities law
filings; (2) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses,
claims, damages or liabilities are caused by any untrue statement or
omission contained in information furnished in writing to the Company
by such holder expressly for use therein; and each such holder by its
acceptance hereof severally agrees that it will indemnify and hold
harmless the Company, each of its officers who signs such Registration
Statement, and each person, if any, who controls the Company, within
the meaning of Section 15 of the 1933 Act, with respect to losses,
claims, damages or liabilities which are caused by any untrue statement
or omission contained in information furnished in writing to the
Company by such holder expressly for use therein.
10. Modification and Waiver. No purported amendment, modification or
waiver of any provision hereof shall be binding unless set forth in a written
document signed by the Company and the holder of this Debenture or Common Stock
issued upon conversion of this Debenture (in the case of amendments or
modifications) or by the party to be charged thereby (in the case of waivers).
Any waiver shall be limited to the provision hereof in the circumstances or
events specifically made subject thereto, and shall not be deemed a waiver of
any other term hereof or of the same circumstance or event upon any reoccurrence
thereof.
11. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been given, when received, if personally delivered or delivered by telex,
telegram or telecopy, or five (5) days after depositing in the U.S. Mails for
delivery by first class mail, postage prepaid and addressed as provided below,
(a) if to any holder of this Debenture or Common Stock issued upon conversion of
this Debenture, addressed to such holder at its address as shown on the books of
the Company, or at such other address as such holder may specify by written
notice to the Company, or (b) if to the Company at 3500 West 80th Street, Suite
130, Minneapolis, Minnesota 55431, Attention: President, or at such other
address as the Company may specify by written notice to the holders of this
Debenture or Common Stock issued upon conversion of this Debenture.
12. Successors and Assigns. All the terms and provisions of this
Debenture shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the Company and each holder of this
Debenture, whether or not so expressed.
13. Applicable Law. The laws of the State of Minnesota shall govern the
validity of this Debenture, the construction of its terms and the interpretation
of the rights and duties of the Company and each holder of this Debenture.
14. Waiver of Demand, Presentment and Notice of Dishonor. The
undersigned and each endorser or guarantor hereof hereby waives demand,
presentment, protest, notice of protest and notice of dishonor.
15. Corporate Obligation. The obligation evidenced by this Debenture is
an obligation of the Company only.
IN WITNESS WHEREOF, the Company has caused this Debenture to be signed
by its duly authorized officer as of the date first written above.
HEALTH FITNESS CORPORATION.
By:
Loren S. Brink, President and Chief
Executive Officer
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