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 June 30, 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 August 13, 1999 was:
Common Stock, $.01 par value, 11,957,720 shares
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 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 $226,526 and $1,101,211 4,675,365 4,344,438
Inventories 28,549 26,459
Prepaid expenses and other 177,654 61,145
------------ ------------
Total current assets 4,908,260 4,461,640
PROPERTY AND EQUIPMENT, net 709,509 1,049,626
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,815,908
and $1,580,098, respectively 7,373,822 7,568,809
Noncompete agreements, less accumulated amortization of
$460,104 and $374,478, respectively 506,747 592,373
Copyrights, less accumulated amortization of $107,941 and $85,608, respectively 562,059 584,392
Trade names, less accumulated amortization of $27,615 and $20,613, respectively 182,385 189,386
Contracts, less accumulated amortization of $43,333 and $23,334, respectively 36,667 56,667
Trade accounts and notes receivable, less allowance for doubtful accounts of
$5,663 and $29,843, respectively 466,220 922,966
Deferred financing costs, less accumulated amortization of $1,337,732 and
$836,082, respectively 83,610 585,260
Other 38,983 65,983
Net assets of discontinued operations 422,039 4,537,716
------------ ------------
$ 15,290,300 $ 20,614,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balance $ 371,457 $ 47,099
Notes payable 4,696,266 6,939,692
Current maturites of long-term debt 440,389 572,227
Trade accounts payable 1,171,252 2,335,509
Accrued salaries, wages, and payroll taxes 1,201,018 1,405,382
Accrued earn-out -- 309,962
Other accrued liabilities 705,514 631,525
Deferred revenue 1,711,374 1,629,192
------------ ------------
Total current liabilities 10,297,269 13,870,588
LONG-TERM DEBT, less current portion 693,043 900,148
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;
11,957,720 and 11,884,413
shares issued and outstanding, respectively 119,577 118,844
Additional paid-in capital 16,796,549 16,725,126
Accumulated deficit (12,690,335) (10,951,526)
------------ ------------
4,225,791 5,892,444
Stockholder note and interest receivable (40,803) (48,362)
------------ ------------
4,184,988 5,844,082
------------ ------------
$ 15,290,300 $ 20,614,818
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE $ 6,350,508 $ 6,235,309 $ 13,298,166 $ 12,412,048
COSTS OF REVENUE 5,013,382 4,670,953 10,195,477 9,234,169
------------ ------------ ------------ ------------
GROSS PROFIT 1,337,126 1,564,356 3,102,689 3,177,879
OPERATING EXPENSES:
Salaries 461,095 388,923 939,003 903,031
Selling, general, and administrative 974,138 795,311 1,791,982 1,462,962
------------ ------------ ------------ ------------
Total operating expenses 1,435,233 1,184,234 2,730,985 2,365,993
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (98,107) 380,122 371,704 811,886
INTEREST EXPENSE (236,379) (180,136) (477,624) (280,865)
OTHER INCOME (EXPENSE) (252,383) 87,998 (207,059) 197,471
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (586,869) 287,984 (312,979) 728,492
INCOME TAXES -- (12,339) 831 --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (586,869) 300,323 (313,810) 728,492
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS
Loss from operations of Physical Therapy
Clinic division and Equipment division -- (884,632) (1,425,000) (1,283,172)
Loss on disposal of Physical Therapy Clinic division
and Equipment division (less applicable taxes) -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS -- (884,632) (1,425,000) (1,283,172)
------------ ------------ ------------ ------------
NET (LOSS) $ (586,869) $ (584,309) $ (1,738,810) $ (554,680)
============ ============ ============ ============
INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Basic $ (0.05) $ 0.03 $ (0.03) $ 0.07
Diluted (0.05) 0.03 (0.02) 0.07
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic $ -- $ (0.08) $ (0.12) $ (0.12)
Diluted -- (0.08) (0.11) (0.12)
NET (LOSS) PER SHARE:
Basic $ (0.05) $ (0.05) $ (0.15) $ (0.05)
Diluted (0.05) (0.05) (0.14) (0.05)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 11,949,383 11,769,808 11,917,078 10,754,077
Diluted 11,949,383 11,769,808 12,583,744 10,754,077
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,738,810) $ (554,676)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,010,644 732,990
Discontinued operations 4,742,636 (1,319,128)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (295,210) (812,817)
Inventories (2,090) 335
Prepaid expenses and other (116,509) (1,938)
Other assets 2,000 87,364
Trade accounts payable and checks written in excess of bank balance (839,899) (759,718)
Accrued liabilities and other (130,374) (589,543)
Deferred revenue 82,182 (167,470)
---------------- ----------------
Net cash provided by (used in) operating activities 2,714,570 (3,384,600)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (4,735) (49,254)
Proceeds from sale of property 700 -
Payments for acquisitions, net of liabilities assumed (210,000)
Collection of non-trade notes receivable 25,000 337,868
Payments in connection with earn-out provisions (316,925) (402,931)
---------------- ----------------
Net cash used in investing activities (295,960) (324,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit (2,243,426) $5,412,925
Proceeds from issuance of subordinated debt 115,000 -
Repayment of long term debt (338,943) ($3,731,873)
Payment of financing costs - (992,595)
Proceeds from private placement of equity - 2,785,024
Proceeds from issuance of common stock 38,294 194,867
Advances on notes receivable (458) (4,140)
Payments received on notes receivable 8,017 10,399
---------------- ----------------
Net cash provided by financing activities (2,421,516) 3,674,607.44
---------------- ----------------
NET INCREASE (DECREASE) IN CASH (2,906) (34,310)
CASH AT BEGINNING OF YEAR 29,598 81,639
---------------- ----------------
CASH AT END OF PERIOD $ 26,692 $ 47,329
================ ================
</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 second quarter and six
months ended June 30, 1999 are not necessarily indicative of the operating
results to be expected for the year ending December 31, 1999.
Certain reclassifications have been made to the condensed consolidated financial
statements for the second quarter and six months ended June 30, 1998. Such
reclassifications had no effect on net income or stockholders' equity as
previously reported.
NOTE 2. FINANCING
During the six months ended June 30, 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 operating losses during the phase out period (January 1 through June 30)
which included projected shutdown costs and the expected net realizable loss
from the sale of these segments, were recorded as discontinued operations during
the year ended December 31, 1998. During the six months ending June 30, 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 segments and increased
employee severance costs.
In the second quarter ending June 30, 1999, the Company completed the sale of
the majority of the PT clinic division for a sales price of $3,750,000. Net
proceeds from the sale of $2,250,000 were used to reduce the Company's note
payable.
NOTE 4. INCOME TAXES
The provision for income taxes for the second quarter and six months ending June
30, 1999 and 1998 have been offset principally by a reduction in the valuation
allowance for deferred taxes.
NOTE 5. SUBSEQUENT EVENT
On July 2, 1999, the Company closed the sale of the equipment division for a
sales price of $175,000 for the inventory and fixed assets. The proceeds from
the sale were cash of $80,000 and two notes receivable. The first note of
$20,000 is due on July 8, 1999 and bears interest at a rate of 9% if the note is
not paid on the due date. The second note of $75,000 is payable in twelve
monthly installments and bears an interest rate of 9%.
<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
June 30,
-------------------------------------------------------
1999 % 1998 %
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
REVENUES $ 6,350,000 100.0 $ 6,235,000 100.0
COSTS OF REVENUES 5,013,000 78.9 4,671,000 74.9
----------- ----- ----------- -----
GROSS PROFIT 1,337,000 21.1 1,564,000 25.1
OPERATING EXPENSES
Salaries 461,000 7.3 389,000 6.2
Selling, general, and administrative 974,000 15.3 795,000 12.8
----------- ----- ----------- -----
1,435,000 22.6 1,184,000 19.0
----------- ----- ----------- -----
OPERATING INCOME (LOSS) (98,000) (1.5) 380,000 6.1
INTEREST EXPENSE (236,000) (3.7) (180,000) (2.9)
OTHER INCOME (EXPENSE) (253,000) (4.0) 88,000 1.4
----------- ----- ----------- -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (587,000) (9.2) 288,000 4.6
INCOME TAXES -- -- (12,000) (0.2)
----------- ----- ----------- -----
INCOME (LOSS) FROM CONTINUING (587,000) (9.2) 300,000 4.8
OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS -- -- (884,000) (14.2)
----------- ----- ----------- -----
NET LOSS $ (587,000) (9.2) $ (584,000) (9.4)
=========== ===== =========== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------------------------
1999 % 1998 %
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
REVENUES $ 13,298,000 100.0 $ 12,412,000 100.0
COSTS OF REVENUES 10,195,000 76.7 9,234,000 74.4
------------ ----- ------------ -----
GROSS PROFIT 3,103,000 23.3 3,178,000 25.6
OPERATING EXPENSES
Salaries 939,000 7.1 903,000 7.3
Selling, general, and administrative 1,792,000 13.4 1,463,000 11.8
------------ ----- ------------ -----
2,731,000 20.5 2,366,000 19.1
------------ ----- ------------ -----
OPERATING INCOME 372,000 2.8 812,000 6.5
INTEREST EXPENSE (478,000) (3.6) (281,000) (2.3)
OTHER INCOME (EXPENSE) (207,000) (1.6) 197,000 1.6
------------ ----- ------------ -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (313,000) (2.4) 728,000 5.8
INCOME TAXES 1,000 0.0 -- --
------------ ----- ------------ -----
INCOME (LOSS) FROM CONTINUING (314,000) (2.4) 728,000 5.8
OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS (1,425,000) (10.7) (1,283,000) (10.3)
------------ ----- ------------ -----
NET LOSS $ (1,739,000) (13.1) $ (555,000) (4.5)
============ ===== ============ =====
</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 has assisted with the sale of the
physical therapy clinics and fitness equipment business segments, will
restructure the Company's financing, and assist with the Company's
re-engineering efforts.
Results of Operations for the quarter ended June 30, 1999 compared to the
quarter ended June 30, 1998.
Revenues. Revenues increased $115,000, or 1.8%, to $6,350,000 for the three
months ended June 30, 1999, from $6,235,000 for the period ended June 30, 1998.
<PAGE>
Consulting and Management Fee revenues increased $160,000, or 2.9%,
for the three months ended June 30, 1999, compared to the same period in 1998.
The increase was primarily due to the effect of adding new hospital contracts.
Occupational Health and On-Site Physical Therapy revenues decreased
$73,000, or 8.7%, for the three months ended June 30, 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 $28,000,
or 144.5% for the three months ended June 30, 1999 compared to the same period
in 1998. IFCN was acquired in June 1998.
Operating Income (Loss). Operating income (loss) decreased $478,000 to a loss of
$98,000 for the three months ended June 30, 1999, from $380,000 for the same
period in 1998. Consulting and Management Fee operating income increased $77,000
from $701,000 for the three months ended June 30, 1998, to $778,000 for the same
period in 1999. The increase was due to the restructuring of the middle
management of the Company's fitness center division. Occupational Health and
On-Site Physical Therapy operating income decreased $141,000 to $44,000 for the
three months ended June 30, 1999, from $185,000 for the same period in 1998. The
decrease was primarily due to the decrease in revenue associated with the
occupational health contracts. IFCN operating income decreased $96,000 from the
same period in 1998 due to the contract renewal cycle.
Corporate Expenses. Corporate expenses increased $318,000 from $502,000 for the
three months ended June 30, 1998, to $820,000 for the same period in 1999. The
increase was due to the investments made to strengthen the management team and
an increase in employee benefits expenses.
Interest Expense. Interest expense of $236,000 for the three months ended June
30, 1999, increased $56,000 from $180,000 for the same period in 1998. The
increase was due to higher average borrowings.
Other Income (expense). Other income (expense) decreased $341,000 from $88,000
income for the three months ended June 30, 1998, to $253,000 expense for the
same period in 1999. The decrease is primarily due to recognizing expenses
associated with preparing fitness center operating systems for Y2K compliance
($295,000).
Income (Loss) From Continuing Operations. The Company's income from continuing
operations decreased $887,000 to a loss of $587,000 or $.05 diluted loss per
share from continuing operations for the three months ended June 30, 1999, from
$300,000 or $.03 diluted income per share from continuing operations for the
same period in 1998. The continuing operations performance and subsequent loss
for the three months ended June 30, 1999 is primarily due to re-engineering one
time costs. It is anticipated that this trend will continue for the remainder of
this financial year with retained business operations becoming normalized
relating to cost levels in the first quarter of 2000.
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 operating losses during the phase out period (January 1 through June 30)
which 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 and adjusted in the quarter ending March
31,1999. In the quarter ending June 30, 1999, the Company completed the sale of
a majority of the PT clinic division for a sales price of $3,750,000. On July 2,
1999, the Company completed the sale of the equipment division for $175,000.
Results of Operations for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998.
Revenues. Revenues increased $886,000, or 7.1%, to $13,298,000 for the six
months ended June 30, 1999, from $12,412,000 for the six months ended June 30,
1998.
Consulting and Management Fee revenues increased $864,000, or 8.2%,
for the six months ended June 30, 1999, compared to the same period in 1998. The
increase was primarily due to the effect of adding a net of five corporate
fitness center sites.
<PAGE>
Occupational Health and On-Site Physical Therapy revenues decreased
$381,000, or 20.4%, for the six months ended June 30, 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 were $423,000 for
the six months ended June 30, 1999 compared to $19,000 for the same period in
1998. IFCN was acquired in June 1998.
Operating Income. Operating income decreased $440,000 to $372,000 for the six
months ended June 30, 1999, from $812,000 for the same period in 1998.
Consulting and Management Fee operating income increased $250,000 from
$1,339,000 for the six months ended June 30, 1998, to $1,589,000 for the same
period in 1999. The increase was due to the increase in fitness center contracts
and restructuring of middle management of the fitness center division.
Occupational Health and On-Site Physical Therapy operating income decreased
$369,000 to $107,000 for the six months ended June 30, 1999, from $476,000 for
the same period in 1998. The decrease was primarily due to the decrease in
revenue associated with the occupational health contracts. IFCN operating income
increased $165,000 from the same period in 1998 due to the division being
acquired in the second quarter of 1998.
Corporate Expenses. Corporate expenses increased $487,000 from $999,000 for the
six months ended June 30, 1998, to $1,486,000 for the same period in 1999. The
increase was due to the investments made to strengthen the management team and
higher professional fees.
Interest Expense. Interest expense of $478,000 for the six months ended June 30,
1999, increased $197,000 from $281,000 for the same period in 1998. The increase
was due to higher average borrowings and the cost of borrowing.
Other Income (Expense). Other income (expense) decreased $404,000 from $197,000
income for the six months ended June 30, 1998, to $207,000 expense for the same
period in 1999. The decrease is primarily due to recognizing expenses associated
with preparing fitness center operating systems for Y2K compliance ($295,000).
Income (Loss) From Continuing Operations. The Company's income (loss) from
continuing operations decreased $1,042,000 to a loss of $314,000 or $.02 diluted
loss from continuing operations per share for the six months ended June 30,
1999, from $728,000 or $.07 diluted income per share from continuing operations
for the same period in 1998. The continuing operations performance and
subsequent loss year to date is primarily due to re-engineering one time costs.
It is anticipated that this trend will continue for the remainder of this
financial year with retained business operations becoming normalized relating to
cost levels in the first quarter of 2000.
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 operating losses during the phase out period which includes the six
months ending June 30, 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 six
months ending June 30, 1999, the Company accrued an additional loss of
$1,425,000 due to actual losses exceeding earlier estimates, changes in net
realizable value of certain assets and changes in the estimated sales price of
the divisions.
In the six months ending June 30, 1999, the Company completed the sale
of the majority of the PT clinic division for a sales price of $3,750,000. On
July 2, 1999, the Company completed the sale of the equipment division for
$175,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $(5,389,000) at June 30, 1999,
versus working capital of $(7,714,000) at June 30, 1998. The change was
primarily due to a decrease in short term debt.
<PAGE>
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 former 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 was originally 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 June 30, 1999, the Company
had $129,530 of availability under its revolving credit facility with Abelco
Finance L.L.C.
On May 10, 1999, the Company and the Lender amended the Credit
Agreement. The amendment included the Lender's consent to the Company's sale of
a majority of the Company's PT clinic division which closed on May 14, 1999, and
reduced the maximum Borrowing Base to $4,950,000, as further reduced each week
commencing May 14, 1999 by 25% of the Company's weekly collections on retained
accounts receivable of the sold PT clinic division (see Exhibit 10.1).
On May 24, 1999, the Company and the Lender further amended the Credit
Agreement. The amendment, as modified by a subsequent letter agreement dated as
of June 1, 1999, included the Lender's consent to the Company's sale of its
equipment division which closed on July 2, 1999, and reduced the maximum
Borrowing Base to $4,830,000, as further reduced (a) monthly commencing July 21,
1999 by 25% of the Company's monthly collections on retained accounts receivable
of the sold equipment division, (b) weekly commencing June 7, 1999 by 40% of
amounts received weekly by the Company from operations of equipment by the
equipment division pending its sale, and (c) by $60,000 upon completion of the
sale of the equipment division and by an additional $10,000 one week after
completion of such sale (see Exhibits 10.2 and 10.3).
On June 30, 1999 the Company and the Lender further amended the Credit
Agreement. The amendment included the Lender's consent to the Company's sale of
an additional clinic of the Company's PT clinic division which closed on June
30, 1999, and reduced the maximum Borrowing Base to $4,730,000 less the
reductions described above (see Exhibit 10.4).
On July 15, 1999 the Company and the Lender further amended the Credit
Agreement to extend the final maturity date from July 17, 1999 to October 16,
1999 (see Exhibit 10.5).
In May 1999, in conjunction with the sale of the PT clinic division,
the Company used the net proceeds of $2,250,000 to reduce its outstanding
revolving credit facility balance. Sources of capital to meet future obligations
in 1999 are anticipated to be cash provided by its ongoing operations, the
refinancing of the existing credit facility, and further asset disposals. The
Company expects to replace its revolving credit facility prior to its extended
due date of October 16, 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. Y2K compliant software has been
installed at 40 of the 150 sites at which the Company maintains information
processing technology and the Company expects to install compliant software at
the balance of the locations by September 30, 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.
<PAGE>
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.
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.
Risks to the Company include its ability to generate sufficient working capital,
the need for permanent new management, potential changes in workers'
compensation laws, uncertainties regarding government funding of health care,
competition and the lack of barriers to entry into the Company's industry. For a
more complete description, see Management's Discussion and Analysis section of
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On July 2, 1999 the Company entered into an Employment Agreement with
Loren S. Brink pursuant to which Mr. Brink resigned as the Company's President
and Chief Executive Officer. Pursuant to the Employment Agreement, Mr. Brink
will serve as President of the Company's Consulting and Corporate Development
Division at a salary of $130,000 per year plus a bonus equal to 10% of the
Company's profit margin during the first year of customer contracts closed by
Mr. Brink. The term of the Employment Agreement is through December 31, 2001
subject to automatic one-year extensions. In consideration of a two-year
noncompete covenant from Mr. Brink, the Company paid Mr. Brink $180,000.
<PAGE>
During the second quarter, the Company appointed Charles J.B. Mitchell
as the Company's Acting Chief Executive Officer, Thomas A. Knox as Acting Vice
President/Strategy, and James L. Nichols as Acting Chief Financial Officer.
The Company and an administrator for the government of Medicare and
Medicaid payments have discussed issues relating to the Company's timeliness of
reporting of costs and identification of the provider of services billed to
Medicare and Medicaid. No issues of overcharging or charging for services not
rendered have been raised but, nonetheless, the Company may possibly be liable
for late fees and other penalties. The amounts at issue are not known at this
time but the Company believes that any such amounts would be immaterial to the
financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K
On June 1, 1999, the Company filed a Current Report on Form 8-K
disclosing the Company's sale of a majority of its PT clinic division.
<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: August 13, 1999 HEALTH FITNESS CORPORATION
By /s/ Charles J.B. Mitchell
Charles J.B. Mitchell
Acting 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 -
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.1 Amendment No. 9 to Loan and Security Agreement dated as of May
10, 1999 among the Company, the Company subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C.
10.2 Amendment No. 10 to Loan and Security agreement dated as of
May 24, 1999 among the Company, the Company's subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C.
10.3 Letter agreement dated as of June 1, 1999 among Company, the
Company's subsidiaries and Abelco Finance L.L.C. as assignee
of Madeleine L.L.C. modifying Amendment No. 10 to Loan and
Security Agreement.
10.4 Amendment No. 11 to Loan and Security Agreement dated June 30,
1999 among the Company, the Company's subsidiaries and Abelco
Finance L.L.C. as assignee of Madeleine L.L.C.
10.5 Amendment No. 12 to Loan and security Agreement dated July
15,1999 Among the Company, the Company's subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C.
10.6 Employment Agreement dated June 30, 1999 between Company and
Loren S. Brink.
10.7 Retainer Agreement, dated April 7, 1999, between the Company
and Manchester Business Services, Inc.
27.1 Financial Data Schedule for 6-month period ended June 30, 1999
(in electronic version only)
CONSENT AND AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT
May 10, 1999
Health Fitness Corporation
3500 West 80th Street, Suite 130
Bloomington, Minnesota 55431
Re: Sale of Assets of Health Fitness Corporation, Health Fitness
Rehab of Iowa, Inc., Duffy & Associates Physical Therapy
Corp., Sports & Orthopedic Physical Therapy, Inc. and Midlands
Physical Therapy, Inc.
Ladies and Gentlemen:
Ableco Finance LLC, The Long Horizons Overseas Fund, Ltd., Styx
Partners, L.P. and Styx International, Ltd., as direct or indirect assignees of
Madeleine L.L.C. (individually and collectively, "Lender") and Health Fitness
Corporation ("Borrower") have entered into certain financing arrangements as set
forth in the Loan and Security Agreement, dated February 17, 1998 by and among
Lender, Borrower and Health Fitness Rehab, Inc., The Preferred Companies, Inc.,
Health Fitness Rehab of Iowa, Inc., Duffy & Associates Physical Therapy Services
Corp., Medlink Corporation, Medlink Services, Inc., Fitness Centers of America
and Sports & Orthopedic Physical Therapy, Inc., Midlands Physical Therapy, Inc.
and International Fitness Club Network, Inc. (collectively, "Guarantors"), as
amended pursuant to Amendment No. 1 to Loan and Security Agreement, dated
February 28, 1999, by and among Lender, Borrower and Guarantors, Amendment No. 2
to Loan and Security Agreement, dated June 4, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 3 to Loan and Security Agreement, dated
June 26, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 4 to
Loan and Security Agreement, dated September 10, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 5 to Loan and Security Agreement, dated
November 2, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 6
to Loan and Security Agreement, dated January 8, 1999, by and among Lender,
Borrower and Guarantors ("Amendment No. 6"), Amendment No. 7 to Loan and
Security Agreement, dated February 26, 1999, by and among Lender, Borrower and
Guarantors, and Amendment No. 8 to Loan and Security Agreement, dated as of
March 12, 1999 (and together with all supplements thereto and as the same may
hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement") and other agreements, documents and
instruments referred to therein or at any time executed and/or delivered in
connection therewith or related thereto, including this letter agreement (all of
the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements").
<PAGE>
Borrower, Health Fitness Rehab of Iowa, Inc. ("Iowa"), Duffy &
Associates Physical Therapy Corp. ("Duffy"), Sports & Orthopedic Therapy, Inc.
("Sports"), Midlands Physical Therapy, Inc. ("Midlands", and together with
Borrower, Iowa, Duffy and Sports, collectively, "Sellers") and HEALTHSOUTH
Corporation ("Purchaser") have entered into an agreement pursuant to which
Sellers are selling substantially all of Sellers' assets used specifically and
directly by or in Sellers' rehabilitation and therapy businesses listed on
Exhibit A hereto (collectively, the "Sale Assets") as set forth in the Agreement
to Purchase Assets, dated on or before May 15, 1999 among Sellers and Purchaser
(the "Sale Contract").
Borrower and Guarantors have requested (1) that Lender consent to such
sale and (2) certain amendments to the Loan Agreement and Lender is willing to
consent to such sale and agree to such amendments, subject to the terms and
conditions set forth herein.
In consideration of the foregoing, and other good and valuable
consideration, the parties hereto agree as follows:
1. Definitions. For purposes of this Consent and Amendment, unless
otherwise defined herein, all terms used herein, including, but not limited to,
those terms used and/or defined in the recitals above, shall have the respective
meanings assigned to such terms in the Loan Agreement.
2. Consent. Subject to the terms and conditions contained herein,
Lender hereby consents to the sale by Sellers of the Sale Assets in accordance
with the terms of the Sale Contract as in effect on the date hereof.
3. Amendments.
(a) Section 1.8(a)(i) of the Loan Agreement is hereby deleted
in its entirety and the following substituted therefor:
"$4,950,000, as reduced on Friday of each week, commencing
Friday, May 14, 1999, by an amount equal to twenty-five (25%) percent
of the amounts received by Borrower or any Guarantor during the seven
(7) day period immediately preceding each such Friday in payment or
otherwise in respect of Accounts of Borrower, Health Fitness Rehab of
Iowa, Inc., Duffy & Associates Physical Therapy Corp., Sports &
Orthopedic Therapy, Inc. or Midlands Physical Therapy, Inc. arising out
of or resulting from the rehabilitation and therapy businesses of
Borrower, Health Fitness Rehab of Iowa, Inc., Duffy & Associates
Physical Therapy Corp., Sports & Orthopedic Therapy, Inc. and Midlands
Physical Therapy, Inc. (sold to HealthSouth Corporation pursuant to the
Agreement to Purchase Assets, dated on or before May 15, 1999 among
Borrower, Health Fitness Rehab of Iowa, Inc., Duffy & Associates
Physical Therapy Corp., Sports & Orthopedic Therapy, Inc., Midlands
Physical Therapy, Inc. and HEALTHSOUTH Corporation)".
<PAGE>
(b) Section 3(a) of Amendment No. 6 is hereby amended by
deleting the proviso thereto in its entirety, and substituting the following
therefor:
"provided, that, the aggregate amount of Loans up to the
amount of the Borrowing Base plus the Supplemental Loans outstanding at
any tine shall not exceed the amount equal to $4,950,000 as reduced on
Friday of each week, commencing Friday, May 14, 1999, by an amount
equal to twenty-five (25%) percent of the amounts received by Borrower
or any Guarantor during the seven (7) day period immediately preceding
each such Friday in payment or otherwise in respect of Accounts of
Borrower, Health Fitness Rehab of Iowa, Inc., Duffy & Associates
Physical Therapy Corp., Sports & Orthopedic Therapy, Inc. or Midlands
Physical Therapy, Inc. arising out of or resulting from the
rehabilitation and therapy businesses of Borrower, Health Fitness Rehab
of Iowa, Inc., Duffy & Associates Physical Therapy Corp., Sports &
Orthopedic Therapy, Inc. and Midlands Physical Therapy, Inc. (sold to
HealthSouth Corporation pursuant to the Agreement to Purchase Assets,
dated on or before May 15, 1999 among Borrower, Health Fitness Rehab of
Iowa, Inc., Duffy & Associates Physical Therapy Corp., Sports &
Orthopedic Therapy, Inc., Midlands Physical Therapy, Inc. and
HEALTHSOUTH Corporation)."
4. Conditions Precedent. The effectiveness of the consent of Lender
contained in Section 2 hereof and the amendments contained in Section 3 hereof
are subject to the satisfaction of each of the following conditions precedent in
a manner satisfactory to Lender:
(a) all representations, warranties and covenants contained
herein shall be true and correct;
(b) Lender shall have received from Borrower, in cash or other
immediately available funds, on the date hereof not less than $2,250,000 as
total proceeds from the sale of the Sale Assets pursuant to the Sale Contract
(as in effect on the date hereof), all of which shall be applied to the
Obligations in such order and manner as Lender shall determine;
(c) the sale by Sellers of the Sale Assets to Purchaser
pursuant to the Sale Contract shall have occurred by no later than May 15, 1999;
(d) Lender shall have received an original of this Consent and
Amendment, duly authorized, executed and delivered by Borrower and Guarantors;
and
<PAGE>
(e) as of the date hereof and after giving effect to the
transactions contemplated by the Sale Contract, no Event of Default, or event,
act or condition which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred.
5. Additional Representations, Warranties and Covenants. Borrower and
Guarantors, each hereby jointly and severally represents, warrants and covenants
to Lender as follows, which representations, warranties and covenants are
continuing and shall survive the execution and delivery hereof, and the truth
and accuracy of, or compliance with each, together with the representations,
warranties and covenants in the other Financing Agreements, being a continuing
condition of the making of loans and providing other financial accommodations by
Lender to Borrower:
(a) On or about the date hereof, Sellers have sold to
Purchaser all of the Sale Assets pursuant to the Sale Contract (as in effect on
the date hereof).
(b) A true, correct and complete copy of the Sale Contract,
together with all exhibits and schedules thereto, as executed by the parties
thereto is annexed hereto as Exhibit B.
(c) The security interests in and liens of Lender upon the
Collateral (as such term is defined in the Loan Agreement), other than the Sale
Assets, are and shall continue to be in full force and effect, including, but
not limited to, all amounts at any time payable to Borrower, any Guarantor or
any of their respective affiliates pursuant to the Sale Contract (and all
related agreements, documents and instruments), and all rights, benefits and
remedies of Borrower, any Guarantor or any of their respective affiliates
pursuant to the Sale Contract (and all related agreements, documents and
instruments).
(d) Borrower and Guarantors shall cause all amounts at any
time payable to Borrower, any Guarantor or any of their respective affiliates
pursuant to the Sale Contract or any related agreements, documents and
instruments to be paid by Purchaser directly to Lender for application to the
Obligations (as such term is defined in the Loan Agreement) in such order and
manner as Lender shall determine. The net amount payable by Purchaser to
Borrower in cash or other immediately available funds pursuant to the Sale
Contract shall be not less than $2,250,000.
(e) In the event Borrower, Guarantors or any of their
respective affiliates receives any amounts at any time payable to Borrower, any
Guarantor or any of their respective affiliates pursuant to the Sale Contract or
any related agreement, document or instrument, such amounts shall be collected
by Borrower, such Guarantor or such affiliate, as the case may be, as the
property of Lender and held by it or them in trust for Lender and shall on the
date received be remitted to Lender in the form received, with any necessary
assignments or endorsements, for application to the Obligations in such order
and manner as Lender shall determine.
<PAGE>
6. Effect of this Consent and Amendment. Except for the consent
expressly provided herein and as modified pursuant hereto, no other changes or
modifications to the Financing Agreements are intended or implied and in all
other respects the Financing Agreements are hereby specifically ratified,
restated and confirmed by all parties hereto as of the date hereof. To the
extent of conflict between the terms of this Consent and Amendment and the other
Financing Agreements, the terms of this Consent and Amendment shall control. Any
acknowledgment or consent contained herein shall not be construed to constitute
a consent to any other or further action by Borrower or any Guarantor or to
entitle Borrower or any Guarantor to any other consent.
7. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Consent.
8. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
9. Counterparts. This Consent may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Consent, it shall not be necessary
to produce or account for more than one counterpart hereof signed by each of the
parties hereto.
Very truly yours,
ABLECO FINANCE, for itself
and as agent
By:
Title:
AGREED:
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
By:
Title:
<PAGE>
EXHIBIT A
TO
CONSENT AND AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: May 10, 1999
The following rights, property and assets owned by Sellers used
specifically and directly in Sellers' rehabilitation and therapy businesses and
currently located at the premises of Sellers at: (1) One West Charles Street,
Oelwein, Iowa 50662, (2) 112 Jefferson Street, West Union, Iowa 52175, (3) 1600
First Street East, Independence, Iowa 50644, (4) 1100 Fifth Avenue, Plattville,
Wisconsin 53818, (5) 925 East First Street, Suite L, Ankeny, Iowa 50021, (6)
Apple Valley Shopping Venter, 7120 University Avenue, Des Moines, Iowa
52311-1437, (7) 825 Nicolett Mall, Suite 1420, Minneapolis, Minnesota 55402, (8)
920 East 28th Street, Suite 620, Minneapolis, Minnesota 55407, (9) 2222 Lincoln
Avenue, York, Nebraska 68467, (10) Henderson Community Hospital, 1621 Front
Street, Henderson, Nebraska 68371 and (11) Fillmore Community Hospital, 1325 H
Street, Geneva, Nebraska 68361, but only to the extent such rights, property and
assets exist on May __, 1999 (the "Closing Date") and are sold and transferred
by Sellers to Purchaser pursuant to the Sale Contract:
(a) all assets owned by Sellers and used by Sellers in the
operation of their rehabilitation and physical therapy businesses listed on
Schedule 1 to this Exhibit A;
(b) all of Sellers' rights to use the trade names listed on
Schedule 2 to this Exhibit A hereto and any variations thereof;
<PAGE>
(c) goodwill, customer and patent lists, telephone numbers,
trade secrets, patents, copyrights (or, to the extent licensed by Sellers,
Sellers' license rights thereto to the extent assignable), trademarks, service
marks, advertising and marketing ideas owned by Sellers and used by Sellers in
the operation of their rehabilitation and therapy businesses and all other
intellectual property rights used in the marketing or the performance of
Sellers' rehabilitation and therapy businesses and all books and records
relating thereto; and
(d) to the extent assignable, Sellers' rights under all
contracts, leases and agreements owned by Sellers or to which Sellers are a
party in connection with the operation of their rehabilitation and therapy
businesses set forth on Schedule 3 to this Exhibit A and any and all
prepayments, deposits and similar assets associates with such contracts, leases
and agreements, and all licenses, certificates of need and other regulatory
approvals (to the extent transferrable) relating to or necessary for the
operation of Sellers' rehabilitation and therapy businesses.
Notwithstanding anything to the contrary contained herein, Lender does not
release from its security interest any assets or properties of Sellers other
than those specifically described above.
<PAGE>
SCHEDULE 1
TO
EXHIBIT A
TO
CONSENT AND AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: May 10, 1999
Assets:
[Description of Assets Begins on Following Page]
<PAGE>
SCHEDULE 2
TO
EXHIBIT A
TO
CONSENT AND AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: May 10, 1999
Trade names:
Duffy & Associates Physical Therapy
K.A.M. Physical Therapy
Midlands Physical Therapy
Sports & Orthopedic Physical Therapy
<PAGE>
SCHEDULE 3
TO
EXHIBIT A
TO
CONSENT AND AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: May 10, 1999
Contracts, Leases and Agreements:
[Description of Contracts, Leases and Agreements
Begins on Following Page]
<PAGE>
EXHIBIT B
TO
CONSENT AND AMENDMENT NO. 9 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: May 10, 1999
[Copy of Sale Contract Begins on Following Page]
CONSENT AND AMENDMENT NO. 10 TO LOAN AND SECURITY AGREEMENT
May 24, 1999
Health Fitness Corporation
3500 West 80th Street, Suite 130
Bloomington, Minnesota 55431
Re: Sale of Assets of Health Fitness Corporation
Ladies and Gentlemen:
Ableco Finance LLC, The Long Horizons Overseas Fund, Ltd., Styx
Partners, L.P. and Styx International, Ltd., as direct or indirect assignees of
Madeleine L.L.C. (individually and collectively, "Lender") and Health Fitness
Corporation ("Borrower") have entered into certain financing arrangements as set
forth in the Loan and Security Agreement, dated February 17, 1998 by and among
Lender, Borrower and Health Fitness Rehab, Inc., The Preferred Companies, Inc.,
Health Fitness Rehab of Iowa, Inc., Duffy & Associates Physical Therapy Services
Corp., Medlink Corporation, Medlink Services, Inc., Fitness Centers of America
and Sports & Orthopedic Physical Therapy, Inc., Midlands Physical Therapy, Inc.
and International Fitness Club Network, Inc. (collectively, "Guarantors"), as
amended pursuant to Amendment No. 1 to Loan and Security Agreement, dated
February 28, 1999, by and among Lender, Borrower and Guarantors, Amendment No. 2
to Loan and Security Agreement, dated June 4, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 3 to Loan and Security Agreement, dated
June 26, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 4 to
Loan and Security Agreement, dated September 10, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 5 to Loan and Security Agreement, dated
November 2, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 6
to Loan and Security Agreement, dated January 8, 1999, by and among Lender,
Borrower and Guarantors ("Amendment No. 6"), Amendment No. 7 to Loan and
Security Agreement, dated February 26, 1999, by and among Lender, Borrower and
Guarantors, Amendment No. 8 to Loan and Security Agreement, dated as of March
12, 1999 and Consent and Amendment No. 9 to Loan and Security Agreement, dated
as of May 10, 1999 (and together with all supplements thereto and as the same
may hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement") and other agreements, documents and
instruments referred to therein or at any time executed and/or delivered in
connection therewith or related thereto, including this letter agreement (all of
the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements").
<PAGE>
Borrower and Farhat Fitness Services, Inc. ("Purchaser") have entered
into an agreement pursuant to which Borrower is selling substantially all of
Borrower's assets used specifically and directly by or in Borrower's ProSource
division located at 5614 - 36th Street West, St. Louis Park, Minnesota 55416
(collectively, the "Sale Assets") as set forth in the Asset Purchase Agreement,
dated as of May 21, 1999 among Borrower and Purchaser (the "Sale Contract").
Borrower and Guarantors have requested that Lender consent to such sale
and amend the Financing Agreements in certain respects and Lender is willing to
consent to such sale and make such amendments, subject to the terms and
conditions set forth herein.
In consideration of the foregoing, and other good and valuable
consideration, the parties hereto agree as follows:
1. Definitions. For purposes of this Consent and Amendment, unless
otherwise defined herein, all terms used herein, including, but not limited to,
those terms used and/or defined in the recitals above, shall have the respective
meanings assigned to such terms in the Loan Agreement.
2. Consent. Subject to the terms and conditions contained herein,
Lender hereby consents to the sale by Borrower of the Sale Assets in accordance
with the terms of the Sale Contract as in effect on the date hereof.
3. Amendments.
(a) Section 1.8(a)(i) of the Loan Agreement and Section 3(a)
of Amendment No. 6 are each hereby amended by (i) deleting each reference
therein to "$4,950,000" and in each case substituting therefor "$4,850,000" and
(ii) adding at the end of each such section the following:
"and as reduced on the twenty-first of each month, commencing
on June 21, 1999, by an amount equal to twenty-five (25%)
percent of the amounts received by Borrower or any Guarantor
during the four week period immediately preceding such date in
payment or otherwise in respect of Accounts of Borrower
arising out of or resulting from the "ProSource" division of
Borrower (sold to Farhat Fitness Services, Inc. pursuant to
the Asset Purchase Agreement dated as of May 21, 1999 between
Borrower and Farhat Fitness Services, Inc.)."
(b) Exhibit A to the Collateral Assignment of Notes, dated
February 17, 1998, between Borrower and Lender is hereby amended to include the
two (2) promissory notes of Purchaser payable to the order of Borrower, each in
the principal amount of $40,000, issued pursuant to the Sale Contract, which
promissory notes shall be included in the Collateral.
<PAGE>
4. Conditions Precedent. The effectiveness of the consent of Lender
contained in Section 2 hereof is subject to the satisfaction of each of the
following conditions precedent in a manner satisfactory to Lender:
(a) all representations, warranties and covenants contained
herein shall be true and correct;
(b) Lender shall have received from Borrower, in cash or other
immediately available funds, on the date hereof not less than $175,000 as total
proceeds from the sale of the Sale Assets pursuant to the Sale Contract (as in
effect on the date hereof) payable in cash or other immediately available funds
on the date hereof, $100,000 of which shall be applied to the permanent
reduction of the Obligations in such order and manner as Lender shall determine;
(c) Lender shall have received from Borrower the original
promissory notes issued by Purchaser pursuant to the terms of the Sale Contract,
duly indorsed in favor of Lender;
(d) the sale by Borrower of the Sale Assets to Purchaser
pursuant to the Sale Contract shall have occurred by no later than May 25, 1999;
(e) Lender shall have received an original of this Consent and
Amendment, duly authorized, executed and delivered by Borrower and Guarantors;
and
(f) as of the date hereof and after giving effect to the
transactions contemplated by the Sale Contract, no Event of Default, or event,
act or condition which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred.
5. Additional Representations, Warranties and Covenants. Borrower and
Guarantors, each hereby jointly and severally represents, warrants and covenants
to Lender as follows, which representations, warranties and covenants are
continuing and shall survive the execution and delivery hereof, and the truth
and accuracy of, or compliance with each, together with the representations,
warranties and covenants in the other Financing Agreements, being a continuing
condition of the making of loans and providing other financial accommodations by
Lender to Borrower:
(a) On or about the date hereof, Borrower has sold to
Purchaser all of the Sale Assets pursuant to the Sale Contract (as in effect on
the date hereof).
(b) A true, correct and complete copy of the Sale Contract,
together with all exhibits and schedules thereto, as executed by the parties
thereto is annexed hereto as Exhibit A.
(c) The security interests in and liens of Lender upon the
Collateral (as such term is defined in the Loan Agreement), other than the Sale
Assets, are and shall continue to be in full force and effect, including, but
not limited to, all amounts at any time payable to Borrower, any Guarantor or
<PAGE>
any of their respective affiliates pursuant to the Sale Contract (and all
related agreements, documents and instruments), and all rights, benefits and
remedies of Borrower, any Guarantor or any of their respective affiliates
pursuant to the Sale Contract (and all related agreements, documents and
instruments).
(d) Borrower and Guarantors shall cause all amounts at any
time payable to Borrower, any Guarantor or any of their respective affiliates
pursuant to the Sale Contract or any related agreements, documents and
instruments to be paid by Purchaser directly to Lender for application to the
Obligations (as such term is defined in the Loan Agreement) in such order and
manner as Lender shall determine. The net amount payable by Purchaser to
Borrower in cash or other immediately available funds pursuant to the Sale
Contract shall be not less than $255,000, $175,000 of which shall be payable in
cash or other immediately available funds on the date hereof, $40,000 of which
shall be payable in cash or other immediately available funds on the first
anniversary of the date hereof (subject to the terms of the Sale Contract as in
effect on the date hereof) and $40,000 of which shall be payable in cash or
other immediately available funds on the second anniversary of the date hereof.
(e) In the event Borrower, Guarantors or any of their
respective affiliates receives any amounts at any time payable to Borrower, any
Guarantor or any of their respective affiliates pursuant to the Sale Contract or
any related agreement, document or instrument, such amounts shall be collected
by Borrower, such Guarantor or such affiliate, as the case may be, as the
property of Lender and held by it or them in trust for Lender and shall on the
date received be remitted to Lender in the form received, with any necessary
assignments or endorsements, for application to the Obligations in such order
and manner as Lender shall determine.
6. Effect of this Consent and Amendment. Except for the consent and
amendments expressly provided herein, no other changes or modifications to the
Financing Agreements are intended or implied and in all other respects the
Financing Agreements are hereby specifically ratified, restated and confirmed by
all parties hereto as of the date hereof. To the extent of conflict between the
terms of this Consent and Amendment and the other Financing Agreements, the
terms of this Consent and Amendment shall control. Any acknowledgment or consent
contained herein shall not be construed to constitute a consent to any other or
further action by Borrower or any Guarantor or to entitle Borrower or any
Guarantor to any other consent.
7. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Consent and Amendment.
8. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
<PAGE>
9. Counterparts. This Consent and Amendment may be executed in any
number of counterparts, but all of such counterparts shall together constitute
but one and the same agreement. In making proof of this Consent and Amendment,
it shall not be necessary to produce or account for more than one counterpart
hereof signed by each of the parties hereto.
Very truly yours,
ABLECO FINANCE, for itself
and as agent
By:
Title:
AGREED:
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
By:
Title:
<PAGE>
EXHIBIT A
TO
CONSENT AND AMENDMENT NO. 10 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: May 24, 1999
[Copy of Sale Contract Begins on Following Page]
As of June 1, 1999
Health Fitness Corporation
3500 West 80th Street, Suite 130
Bloomington, Minnesota 55431
Re: Sale of Assets of Health Fitness Corporation
Ladies and Gentlemen:
Ableco Finance LLC, The Long Horizons Overseas Fund, Ltd., Styx
Partners, L.P. and Styx International, Ltd., as direct or indirect assignees of
Madeleine L.L.C. (individually and collectively, "Lender") and Health Fitness
Corporation ("Borrower") have entered into certain financing arrangements as set
forth in the Loan and Security Agreement, dated February 17, 1998 by and among
Lender, Borrower and Health Fitness Rehab, Inc., The Preferred Companies, Inc.,
Health Fitness Rehab of Iowa, Inc., Duffy & Associates Physical Therapy Services
Corp., Medlink Corporation, Medlink Services, Inc., Fitness Centers of America,
Sports & Orthopedic Physical Therapy, Inc., Midlands Physical Therapy, Inc. and
International Fitness Club Network, Inc. (collectively, "Guarantors"), as
amended pursuant to Amendment No. 1 to Loan and Security Agreement, dated
February 28, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 2
to Loan and Security Agreement, dated June 4, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 3 to Loan and Security Agreement, dated
June 26, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 4 to
Loan and Security Agreement, dated September 10, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 5 to Loan and Security Agreement, dated
November 2, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 6
to Loan and Security Agreement, dated January 8, 1999, by and among Lender,
Borrower and Guarantors ("Amendment No. 6"), Amendment No. 7 to Loan and
Security Agreement, dated February 26, 1999, by and among Lender, Borrower and
Guarantors, Amendment No. 8 to Loan and Security Agreement, dated as of March
12, 1999, by and among Lender, Borrower and Guarantors, Consent and Amendment
No. 9 to Loan and Security Agreement, dated as of May 10, 1999, by and among
Lender, Borrower and Guarantors and Consent and Amendment No. 10 to Loan and
Security Agreement, dated May 24, 1999, by and among Lender, Borrower and
Guarantors (and together with all supplements thereto and as the same may
hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement") and other agreements, documents and
instruments referred to therein or at any time executed and/or delivered in
connection therewith or related thereto, including this letter agreement (all of
the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements").
<PAGE>
Borrower and Farhat Fitness Services, Inc. ("Purchaser") have entered
into an agreement pursuant to which Borrower has agreed to sell substantially
all of Borrower's assets used specifically and directly by or in Borrower's
ProSource division located at 5614 - 36th Street West, St. Louis Park, Minnesota
55416 (collectively, the "Sale Assets") as set forth in the Asset Purchase
Agreement, dated as of May 25, 1999, between Borrower and Purchaser, as amended
by an Amendment to Purchase Agreement, dated May 28, 1999, a Second Amendment to
Purchase Agreement, dated July 1, 1999 and a Letter of Clarification between
Purchaser and Borrower (collectively, the "Sale Contract Amendment"), between
Borrower and Purchaser (as amended by the Sale Contract Amendment, the "Sale
Contract").
Borrower and Guarantors have requested that Lender amend Amendment No.
10 to Loan and Security Agreement, dated May 24, 1999, by and among Lender,
Borrower and Guarantors (as amended hereby, "Amendment No. 10") and the other
Financing Agreements in certain respects and Lender is willing to make such
amendments, subject to the terms and conditions set forth herein.
In consideration of the foregoing, and other good and valuable
consideration, the parties hereto agree as follows:
1. Application of Sale Proceeds. Lender has received $20,000 from
Borrower on June 1, 1999 as the proceeds of the consideration paid by Purchaser
pursuant to the Sale Contract Amendment, which Lender has applied to the
Obligations. Notwithstanding anything to the contrary contained in Amendment No.
10, on the date of the consummation of the sale of the Sale Assets to Purchaser
pursuant to the Sale Contract, Lender shall receive from Borrower, in cash or
other immediately available funds, not less than an additional $60,000 as the
unpaid proceeds from the sale of the Sale Assets pursuant to the Sale Contract
for application to Obligations in such order and manner as Lender shall
determine.
2. Reduction in Borrowing Base.
(a) Section 1.8(a)(i) of the Loan Agreement is hereby deleted in
its entirety and the following substituted therefor:
"(i) $4,830,000, as reduced: (A) on Monday of each week,
commencing Monday, May 31, 1999, by an amount equal to
twenty-five (25%) percent of the amounts received by Borrower or
any Guarantor during the seven (7) day period immediately
preceding each such Monday in payment or otherwise in respect of
Accounts of Borrower, Health Fitness Rehab of Iowa, Inc., Duffy &
Associates Physical Therapy Corp., Sports & Orthopedic Therapy,
Inc. or Midlands Physical Therapy, Inc. arising out of or
resulting from the rehabilitation and therapy business of
Borrower, Health Fitness Rehab of Iowa, Inc., Duffy & Associates
Physical Therapy Corp., Sports & Orthopedic Therapy, Inc. and
Midlands Physical Therapy, Inc. (sold to HealthSouth Corporation
<PAGE>
pursuant to the Agreement to Purchase Assets, dated on or before
May 15, 1999 among Borrower, Health Fitness Rehab of Iowa, Inc.,
Duffy & Associates Physical Therapy Corp., Sports & Orthopedic
Therapy, Inc., Midlands Physical Therapy, Inc. and HEALTHSOUTH
Corporation); (B) on the twenty-first day of each month,
commencing on July 21, 1999, by an amount equal to twenty-five
(25%) percent of the amounts received by Borrower or any
Guarantor during the four week period immediately preceding such
date in payment or otherwise in respect of Accounts of Borrower
arising out of or resulting from the business of the "ProSource"
division of Borrower (sold to Farhat Fitness Services, Inc.
pursuant to the Asset Purchase Agreement dated as of May 25, 1999
between Borrower and Farhat Fitness Services, Inc.); (C) on
Monday of each week, commencing on Monday, June 7, 1999, by an
amount equal to forty (40%) percent of the amounts received by
Borrower or any Guarantor during the seven (7) day period
immediately preceding such Monday in payment or otherwise in
respect of (I) the sale of Inventory of the "ProSource" division
of Borrower prior to the date of the consummation of the sale of
the "ProSource" division to Farhat Fitness Services, Inc.
(including, without limitation, proceeds in respect of Accounts
arising from any sale of such Inventory) and (II) the sale of
equipment of Farhat Fitness Services, Inc. to customers of
Borrower's ProSource division pursuant to the terms of Section
2(c) of the Amendment to Purchase Agreement, dated May 28, 1999,
between Borrower and Farhat Fitness Services, Inc.; (D) upon the
consummation of the sale of the "ProSource" division to Farhat
Fitness Services, Inc. pursuant to the Asset Purchase Agreement,
dated as of May 25, 1999, between Borrower and Farhat Fitness
Services, Inc., as amended by the Amendment to Purchase
Agreement, dated May 28, 1999, between Borrower and Farhat
Fitness Services, Inc., the Second Amendment to Purchase
Agreement, dated July 1, 1999, between Borrower and Farhat
Fitness Services, Inc. and a Clarification Letter between
Borrower and Farhat Fitness Services, Inc. (as amended, the
"ProSource Purchase Agreement"), by an amount equal to $60,000;
and (E) on or before the date that is seven (7) days after the
date of the consummation of the sale of the "ProSource" division
to Farhat Fitness Services, Inc. pursuant to the ProSource
Purchase Agreement, by an amount equal to $10,000 minus the
amount described in Section 1.8(a)(i)(C) hereof, or"
(b) Section 3(a) of Amendment No. 6 is hereby amended by deleting
the proviso thereto in its entirety, and substituting the following therefor:
"provided, that, the aggregate amount of Loans up to the
amount of the Borrowing Base plus the Supplemental Loans
outstanding at any time shall not exceed the amount equal to
$4,830,000, as reduced by the amounts and on the dates set forth
in Section 1.8(a)(i) of the Loan Agreement."
<PAGE>
3. Collateral Assignment of Notes. Exhibit A to the Collateral
Assignment of Notes, dated February 17, 1998, between Borrower and Lender is
hereby amended to delete the references therein to the three (3) promissory
notes of Purchaser payable to the order of Borrower, two in the principal amount
of $40,000 and one in the principal amount of $25,000, and to include the two
(2) promissory notes issued by Purchaser dated July 1, 1999, payable to the
order of Borrower, one (1) in the principal amount of $75,000 and one (1) in the
principal amount of $20,000, issued pursuant to the Sale Contract as in effect
of the date hereof, which promissory notes shall be included in the Collateral.
4. Effectiveness of Consent. Notwithstanding anything to the contrary
set forth in Amendment No. 10, the consent of Lender to the sale by Borrower of
the Sale Assets in accordance with the terms of the Sale Contract set forth in
Section 2 of Amendment No. 10 shall terminate on July 1, 1999 and shall be
subject to the consummation of such sale on or before July 1, 1999. All
references in Amendment No. 10 to "the date hereof" or "May 28, 1999" in respect
of the date of the consummation of the sale of the Sale Assets shall be deemed
to refer to the actual date of the consummation of the sale of the Sale Assets
in accordance with the terms of the Sale Contract as in effect on the date of
this Agreement, provided that the date of the consummation of the sale of the
Sale Assets occurs on or before July 1, 1999.
5. Effect of this Agreement. Except for the amendments expressly
provided herein, no other changes or modifications to the Financing Agreements
are intended or implied and in all other respects the Financing Agreements are
hereby specifically ratified, restated and confirmed by all parties hereto as of
the date hereof. To the extent of conflict between the terms of this Agreement
and the other Financing Agreements, the terms of this Agreement shall control.
Any acknowledgment or consent contained herein shall not be construed to
constitute a consent to any other or further action by Borrower or any Guarantor
or to entitle Borrower or any Guarantor to any other consent.
6. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Agreement.
7. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
<PAGE>
8. Counterparts. This Agreement may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Agreement, it shall not be necessary
to produce or account for more than one counterpart hereof signed by each of the
parties hereto.
Very truly yours,
ABLECO FINANCE, for itself
and as agent
By:
Title:
AGREED:
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
By:
Title:
CONSENT AND AMENDMENT NO. 11 TO LOAN AND SECURITY AGREEMENT
As of June 30, 1999
Health Fitness Corporation
3500 West 80th Street, Suite 130
Bloomington, Minnesota 55431
Re: Sale of Assets of Health Fitness Corporation
Ladies and Gentlemen:
Ableco Finance LLC, The Long Horizons Overseas Fund, Ltd., Styx
Partners, L.P. and Styx International, Ltd., as direct or indirect assignees of
Madeleine L.L.C. (individually and collectively, "Lender") and Health Fitness
Corporation ("Borrower") have entered into certain financing arrangements as set
forth in the Loan and Security Agreement, dated February 17, 1998 by and among
Lender, Borrower and Health Fitness Rehab, Inc., The Preferred Companies, Inc.,
Health Fitness Rehab of Iowa, Inc., Duffy & Associates Physical Therapy Services
Corp., Medlink Corporation, Medlink Services, Inc., Fitness Centers of America,
Sports & Orthopedic Physical Therapy, Inc., Midlands Physical Therapy, Inc. and
International Fitness Club Network, Inc. (collectively, "Guarantors"), as
amended pursuant to Amendment No. 1 to Loan and Security Agreement, dated
February 28, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 2
to Loan and Security Agreement, dated June 4, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 3 to Loan and Security Agreement, dated
June 26, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 4 to
Loan and Security Agreement, dated September 10, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 5 to Loan and Security Agreement, dated
November 2, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 6
to Loan and Security Agreement, dated January 8, 1999, by and among Lender,
Borrower and Guarantors ("Amendment No. 6"), Amendment No. 7 to Loan and
Security Agreement, dated February 26, 1999, by and among Lender, Borrower and
Guarantors, Amendment No. 8 to Loan and Security Agreement, dated as of March
12, 1999, by and among Lender, Borrower and Guarantors, Consent and Amendment
No. 9 to Loan and Security Agreement, dated as of May 10, 1999, by and among
Lender, Borrower and Guarantors and Consent and Amendment No. 10 to Loan and
Security Agreement, dated May 24, 1999, by and among Lender, Borrower and
Guarantors, as amended by a letter agreement dated as of June 1, 1999, by and
among Lender, Borrower and Guarantors (and together with all supplements thereto
and as the same may hereafter be further amended, modified, supplemented,
extended, renewed, restated or replaced, the "Loan Agreement") and other
agreements, documents and instruments referred to therein or at any time
executed and/or delivered in connection therewith or related thereto, including
this letter agreement (all of the foregoing, together with the Loan Agreement,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, being collectively referred to herein
as the "Financing Agreements").
<PAGE>
Borrower and Fairview Red Wing Health Services ("Purchaser") have
entered into an agreement pursuant to which Borrower is selling substantially
all of Borrower's assets used specifically and directly by or in Borrower's
River City Rehab physical therapy business located at 133 Hedin Avenue, Red
Wing, Minnesota 55066 (collectively, the "Sale Assets") as set forth in the
Asset Purchase Agreement, dated June 30, 1999, by and between Borrower and
Purchaser (the "Sale Contract").
Borrower and Guarantors have requested that Lender consent to such sale
and amend the Financing Agreements in certain respects and Lender is willing to
consent to such sale and make such amendments, subject to the terms and
conditions set forth herein.
In consideration of the foregoing, and other good and valuable
consideration, the parties hereto agree as follows:
1. Definitions. For purposes of this Consent and Amendment, unless
otherwise defined herein, all terms used herein, including, but not limited to,
those terms used and/or defined in the recitals above, shall have the respective
meanings assigned to such terms in the Loan Agreement.
2. Consent. Subject to the terms and conditions contained herein,
Lender hereby consents to the sale by Borrower of the Sale Assets in accordance
with the terms of the Sale Contract as in effect on the date hereof.
3. Amendments. Effective upon the consummation of the sale of the Sale
Assets, Section 1.8(a)(i) of the Loan Agreement and Section 3(a) of Amendment
No. 6 are each hereby amended by deleting each reference therein to "$4,830,000"
and in each case substituting therefor "$4,730,000".
4. Conditions Precedent. The effectiveness of the consent of Lender
contained in Section 2 hereof is subject to the satisfaction of each of the
following conditions precedent in a manner satisfactory to Lender:
(a) all representations, warranties and covenants contained
herein shall be true and correct;
(b) Lender shall have received from Borrower, in cash or other
immediately available funds, on the date hereof not less than $150,000 as total
proceeds from the sale of the Sale Assets pursuant to the Sale Contract (as in
effect on the date hereof) payable in cash or other immediately available funds
on the date hereof, $100,000 of which shall be applied to the reduction of the
Obligations in such order and manner as Lender shall determine;
<PAGE>
(c) the sale by Borrower of the Sale Assets to Purchaser
pursuant to the Sale Contract shall have occurred by no later than July 1, 1999;
(d) Lender shall have received an original of this Consent and
Amendment, duly authorized, executed and delivered by Borrower and Guarantors;
and
(e) as of the date hereof and after giving effect to the
transactions contemplated by the Sale Contract, no Event of Default, or event,
act or condition which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred.
5. Additional Representations, Warranties and Covenants. Borrower and
Guarantors, each hereby jointly and severally represents, warrants and covenants
to Lender as follows, which representations, warranties and covenants are
continuing and shall survive the execution and delivery hereof, and the truth
and accuracy of, or compliance with each, together with the representations,
warranties and covenants in the other Financing Agreements, being a continuing
condition of the making of loans and providing other financial accommodations by
Lender to Borrower:
(a) As of July 1, 1999, Borrower has sold to Purchaser all of
the Sale Assets pursuant to the Sale Contract (as in effect on the date hereof).
(b) A true, correct and complete copy of the Sale Contract,
together with all exhibits and schedules thereto, as executed by the parties
thereto is annexed hereto as Exhibit A.
(c) The security interests in and liens of Lender upon the
Collateral (as such term is defined in the Loan Agreement), other than the Sale
Assets, are and shall continue to be in full force and effect, including, but
not limited to, all amounts at any time payable to Borrower, any Guarantor or
any of their respective affiliates pursuant to the Sale Contract (and all
related agreements, documents and instruments), and all rights, benefits and
remedies of Borrower, any Guarantor or any of their respective affiliates
pursuant to the Sale Contract (and all related agreements, documents and
instruments).
(d) Borrower and Guarantors shall cause all amounts at any
time payable to Borrower, any Guarantor or any of their respective affiliates
pursuant to the Sale Contract or any related agreements, documents and
instruments to be paid by Purchaser directly to Lender or to be deposited in one
of the Collection Accounts (as such term is defined in the Loan Agreement) for
application to the Obligations (as such term is defined in the Loan Agreement)
in such order and manner as Lender shall determine. The net amount payable by
Purchaser to Borrower pursuant to the Sale Contract shall be not less than
$150,000, which shall be payable in cash or other immediately available funds on
the date hereof.
(e) In the event Borrower, Guarantors or any of their
respective affiliates receives any amounts at any time payable to Borrower, any
Guarantor or any of their respective affiliates pursuant to the Sale Contract or
any related agreement, document or instrument, such amounts shall be collected
by Borrower, such Guarantor or such affiliate, as the case may be, as the
property of Lender and held by it or them in trust for Lender and shall on the
date received be remitted to Lender in the form received, with any necessary
assignments or endorsements, for application to the Obligations in such order
and manner as Lender shall determine.
<PAGE>
6. Effect of this Consent and Amendment. Except for the consent and
amendments expressly provided herein, no other changes or modifications to the
Financing Agreements are intended or implied and in all other respects the
Financing Agreements are hereby specifically ratified, restated and confirmed by
all parties hereto as of the date hereof. To the extent of conflict between the
terms of this Consent and Amendment and the other Financing Agreements, the
terms of this Consent and Amendment shall control. Any acknowledgment or consent
contained herein shall not be construed to constitute a consent to any other or
further action by Borrower or any Guarantor or to entitle Borrower or any
Guarantor to any other consent.
7. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Consent and Amendment.
8. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
9. Counterparts. This Consent and Amendment may be executed in any
number of counterparts, but all of such counterparts shall together constitute
but one and the same agreement. In making proof of this Consent and Amendment,
it shall not be necessary to produce or account for more than one counterpart
hereof signed by each of the parties hereto.
Very truly yours,
ABLECO FINANCE, for itself
and as agent
By:
Title:
AGREED:
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
By:
Title:
<PAGE>
EXHIBIT A
TO
CONSENT AND AMENDMENT NO. 11 TO LOAN AND SECURITY AGREEMENT
AMONG
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
AND
ABLECO FINANCE, FOR ITSELF AND AS AGENT
DATED: as of June 30, 1999
[Copy of Sale Contract Begins on Following Page]
AMENDMENT NO. 12 TO LOAN AND SECURITY AGREEMENT
July __, 1999
Health Fitness Corporation
3500 West 80th Street, Suite 130
Bloomington, Minnesota 55431
Re: Sale of Assets of Health Fitness Corporation
Ladies and Gentlemen:
Ableco Finance LLC, The Long Horizons Overseas Fund, Ltd., Styx
Partners, L.P. and Styx International, Ltd., as direct or indirect assignees of
Madeleine L.L.C. (individually and collectively, "Lender") and Health Fitness
Corporation ("Borrower") have entered into certain financing arrangements as set
forth in the Loan and Security Agreement, dated February 17, 1998 by and among
Lender, Borrower and Health Fitness Rehab, Inc., The Preferred Companies, Inc.,
Health Fitness Rehab of Iowa, Inc., Duffy & Associates Physical Therapy Services
Corp., Medlink Corporation, Medlink Services, Inc., Fitness Centers of America,
Sports & Orthopedic Physical Therapy, Inc., Midlands Physical Therapy, Inc. and
International Fitness Club Network, Inc. (collectively, "Guarantors"), as
amended pursuant to Amendment No. 1 to Loan and Security Agreement, dated
February 28, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 2
to Loan and Security Agreement, dated June 4, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 3 to Loan and Security Agreement, dated
June 26, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 4 to
Loan and Security Agreement, dated September 10, 1998, by and among Lender,
Borrower and Guarantors, Amendment No. 5 to Loan and Security Agreement, dated
November 2, 1998, by and among Lender, Borrower and Guarantors, Amendment No. 6
to Loan and Security Agreement, dated January 8, 1999, by and among Lender,
Borrower and Guarantors, Amendment No. 7 to Loan and Security Agreement, dated
February 26, 1999, by and among Lender, Borrower and Guarantors, Amendment No. 8
to Loan and Security Agreement, dated as of March 12, 1999, by and among Lender,
Borrower and Guarantors, Consent and Amendment No. 9 to Loan and Security
Agreement, dated as of May 10, 1999, by and among Lender, Borrower and
Guarantors, Consent and Amendment No. 10 to Loan and Security Agreement, dated
May 24, 1999, by and among Lender, Borrower and Guarantors, as amended by a
letter agreement dated as of June 1, 1999, by and among Lender, Borrower and
Guarantors and Consent and Amendment No. 11 to Loan and Security Agreement,
dated as of June 30, 1999, by and among Lender, Borrower and Guarantors (and
together with all supplements thereto and as the same may hereafter be further
amended, modified, supplemented, extended, renewed, restated or replaced, the
"Loan Agreement") and other agreements, documents and instruments referred to
therein or at any time executed and/or delivered in connection therewith or
related thereto, including this letter agreement (all of the foregoing, together
with the Loan Agreement, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced, being
collectively referred to herein as the "Financing Agreements").
<PAGE>
Borrower and Guarantors have requested that Lender extend the Final
Maturity Date to October 16, 1999 and Lender is willing to extend the Final
Maturity Date to October 16, 1999, subject to the terms and conditions set forth
herein.
In consideration of the foregoing, and other good and valuable
consideration, the parties hereto agree as follows:
1. Definitions. For purposes of this Amendment, unless otherwise
defined herein, all terms used herein, including, but not limited to, those
terms used and/or defined in the recitals above, shall have the respective
meanings assigned to such terms in the Loan Agreement.
2. Final Maturity Date. Section 1.38 of the Loan Agreement is hereby
amended by deleting the reference therein to "July 17, 1999" and substituting
therefor "October 16, 1999".
3. Conditions Precedent. The effectiveness of the amendment contained
in Section 2 hereof is subject to the satisfaction of each of the following
conditions precedent in a manner satisfactory to Lender:
(a) Lender shall have received an original of this Amendment,
duly authorized, executed and delivered by Borrower and Guarantors; and
(b) as of the date hereof, no Event of Default, or event, act or
condition which with notice or passage of time or both would constitute an Event
of Default, shall exist or have occurred.
4. Effect of this Amendment. Except for the amendment expressly
provided herein, no other changes or modifications to the Financing Agreements
are intended or implied and in all other respects the Financing Agreements are
hereby specifically ratified, restated and confirmed by all parties hereto as of
the date hereof. To the extent of conflict between the terms of this Amendment
and the other Financing Agreements, the terms of this Amendment shall control.
Any acknowledgment or consent contained herein shall not be construed to
constitute a consent to any other or further action by Borrower or any Guarantor
or to entitle Borrower or any Guarantor to any other consent.
5. Fee. As partial consideration for Lender entering into this
Amendment, Borrower shall pay to Lender a fee in the amount of $15,000, which
shall be fully earned and payable as of the date hereof.
<PAGE>
6. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Amendment.
7. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
8. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart hereof signed by each of the
parties hereto.
Very truly yours,
ABLECO FINANCE LLC, for itself
and as agent
By:
Title:
AGREED:
HEALTH FITNESS CORPORATION
HEALTH FITNESS REHAB, INC.
DUFFY & ASSOCIATES PHYSICAL
THERAPY SERVICES CORP.
THE PREFERRED COMPANIES, INC.
MEDLINK CORPORATION
HEALTH FITNESS REHAB OF IOWA, INC.
MEDLINK SERVICES, INC.
FITNESS CENTERS OF AMERICA
SPORTS & ORTHOPEDIC PHYSICAL THERAPY, INC.
INTERNATIONAL FITNESS CLUB NETWORK, INC.
MIDLANDS PHYSICAL THERAPY, INC.
By:
Title:
EMPLOYMENT AGREEMENT
Parties: Health Fitness Corporation ("HFC")
3500 West 80th Street, Suite 130
Minneapolis, MN 55431
Loren S. Brink ("Brink")
9635 Bennett Place
Eden Prairie, MN 55347
Date: June 30, 1999
Recitals:
A. HFC and Brink are parties to an Executive Employment Agreement entered
into May 22, 1997 (the "1997 Agreement").
B. HFC and Brink wish to revise the terms of Brink's employment and to
replace the 1997 Agreement with this Agreement.
C. Brink is willing to incur an obligation not to compete with HFC in the
future in order to obtain an up front payment.
Agreements:
1. Termination of 1997 Agreement. The 1997 Agreement is hereby terminated
without further obligation by either party under the terms of such 1997
Agreement with the exception that confidential information which was
the subject of such 1997 Agreement shall be subject to the applicable
provisions of this Agreement. In connection with such termination,
Brink hereby resigns as President and Chief Executive Officer of HFC.
2. Employment. Upon the terms and conditions set forth in this Agreement,
HFC hereby employs Brink as President of its Consulting and Corporate
Development Division (the "Division"), and Brink accepts such
employment.
3. Duties. Brink shall devote his full-time and best efforts to HFC and
shall fulfill the duties of his position which shall be to promote the
sales and marketing of the Division and to perform such other functions
as may be assigned to him by the CEO of HFC or the CEO's designee.
4. Term. Subject to the provisions of Section11 hereof, Brink's employment
pursuant to this Agreement shall commence on the date hereof
("Employment Date") and continue through December 31, 2001, but shall
be automatically extended, unless otherwise terminated in accordance
herewith, for consecutive one year terms on each January 1 thereafter,
unless either party gives written notice to the other of termination in
accordance herewith.
<PAGE>
5. Compensation.
(a) Base Salary. For the balance of calendar year 1999, HFC shall pay
Brink a base salary at an annual rate of $130,000, payable in
accordance with the existing payroll practices of HFC ("Base Salary").
In subsequent years, Brink's Base Salary shall be established through
negotiation with the CEO and the Compensation Committee of the Board of
Directors of HFC at an annual rate of not less than $130,000.
(b) Performance Bonus. Brink shall be paid a cash bonus equal to 10% of
the "profit margin" on all customer contracts closed by Brink during
the first year of the terms of such contracts. "Profit margin" for
purposes of this provision shall mean net sales minus center expenses
and division expenses and shall be equal to that which is known at HFC
as division contribution.
(c) Option Grants. Brink shall be eligible for grants of options at the
discretion of HFC's Board of Directors based upon the board's
evaluation of his performance. All options currently held by Brink
shall remain in full force and effect in accordance with their
respective terms.
(d) Fringe Benefits. In addition to the Base Salary and performance
bonus as provided above:
(i) Automobile. Brink shall be entitled to an automobile
allowance of $750 per month throughout the term of his active
employment pursuant to this Agreement or the lease of a
suitable automobile; from such allowance Brink shall pay all
costs associated with maintenance, operation and insurance of
the automobile and HFC shall not be responsible for paying any
mileage allowance or other amount.
(ii) Vacation. Brink shall be entitled to paid vacation each
calendar year in accordance with HFC's policies. All unused
paid vacation shall accumulate, provided that any unused
portion carried into a subsequent year shall not exceed an
aggregate of four calendar weeks.
(iii) Medical Exam. Brink, during the period of his
employment, shall receive an annual medical or personal health
examination or treatment at a facility of his choice at a cost
to HFC of up to $1,000 which HFC will pay to the provider if
the examination is not fully covered by Brink's health
insurance.
(iv) Life and Long-Term Disability Insurance. HFC shall
maintain life and long-term disability insurance on Brink in
amounts and on terms and conditions consistent with past
practice and with that provided to other employees of HFC of a
similar level of authority and compensation. All benefits
related to insured benefit programs shall be payable only by
the insurance carriers subject to terms and conditions of
applicable policies and HFC shall have no obligations to pay
any such benefits.
<PAGE>
(v) Country Club Membership. Brink, during the term of his
employment pursuant to this Agreement, shall be entitled to
maintain a country club membership for use primarily in
entertaining customers, employees and vendors of HFC. HFC
shall be responsible for the payment of all dues relating to
such membership, as well as all ordinary and necessary
expenses related to the use of such membership for business
purposes.
(vi) Other Benefits. Brink shall be entitled during the term
of his employment to participate in all other benefit programs
offered by HFC to its full-time employees.
(vii) Financial Counseling. Brink shall be entitled to receive
a one-time payment of $1,000 in reimbursement of fees for
personal financial counseling.
6. Business Expenses. HFC shall, in accordance with, and to the extent of,
its policies in effect from time to time, pay or reimburse Brink for
all customary business expenses (including country club expenses as
specified above) incurred by Brink in performing his duties as an
employee of HFC, provided that Brink incurs all such expenses in
accordance with the policies of HFC as revised from time to time and
that he promptly accounts for such expenses in the manner prescribed by
HFC.
7. Special Compensation Payments. In response to Brink's requests for
immediate additional cash and in consideration of Brink's covenant not
to compete with HFC contained in Section 10 of this Agreement, HFC
agrees to pay Brink the sum of $180,000, less all applicable income and
payroll tax withholdings. One-half of such amount shall be paid upon
execution of this Agreement and one-half shall be paid 30 days later.
8. Confidential Information.
(a) For purposes of this Section 8, the term "Confidential Information"
means information which is not generally known and which is proprietary
to HFC, including: (i) trade secret information about HFC and its
services; and (ii) information relating to the business of HFC as
conducted at any time within the previous five (5) years or anticipated
to be conducted by HFC, and to any of its past, current or anticipated
products, including, without limitation, information about HFC's
research, development, services, purchasing, accounting, engineering,
marketing, selling, leasing or servicing. All information which Brink
has a reasonable basis to consider Confidential Information or which is
treated by HFC as being Confidential Information shall be presumed to
be Confidential Information, whether originated by Brink, or by others,
and without regard to the manner in which Brink obtains access to such
information.
<PAGE>
(b) Brink will not during the term of this Agreement and following the
expiration or termination of this Agreement, use or disclose any
Confidential Information to any person not employed by HFC without the
prior written authorization of HFC and will use reasonably prudent care
to safeguard, protect and to prevent the unauthorized disclosure of,
all such Confidential Information.
10. Non-Competition. Brink agrees that during the term of this Agreement
and for a period of twenty-four (24) months following termination of
his employment by HFC for any reason, he will not directly or
indirectly, alone or as a partner, officer, director, or shareholder or
holder of similar position of any other firm or entity, engage in any
commercial activity in the United States in competition with any part
of HFC's business.
11. Termination. Subject to the respective continuing obligations of the
parties pursuant to Sections 8, 9, 10, 11, 12, 13 and 14, this
Agreement may be terminated prior to the expiration of its then
remaining applicable term only as follows:
(a) By HFC. HFC may terminate this Agreement under the following
circumstances:
(i) For "Cause". HFC may terminate this Agreement on
thirty (30) days written notice to Brink for "cause",
including, fraud, misrepresentation, theft or
embezzlement of HFC assets, material intentional
violations of law of HFC policies, or a material
breach of the provisions of this Agreement, including
specifically the failure to perform his duties as
required by Section 2 hereof after written notice of
such failure from HFC, however, in the event of
termination related to Brink's failure to perform
duties, Brink's termination shall only be effective
upon the expiration of a sixty (60) day cure period
following a lack of corrective action having been
undertaken by Brink during said cure period.
(ii) Without "Cause". HFC may terminate this Agreement
upon thirty (30) days written notice without "cause".
Brink may also terminate this Agreement upon thirty
(30) days written notice to HFC for any reason.
(b) Death and Disability.
(i) Death. If Brink should die during the term of this
Agreement, this Agreement shall thereupon terminate;
provided, however, that HFC shall pay to Brink's
beneficiary or estate the compensation provided in
Section 12 below.
(ii) Permanent Disability. In the event brink should
become permanently disabled during the term of this
Agreement, this Agreement shall also terminate. For
the purposes hereof, a permanent disability shall
mean that disability resulting from injury, disease
or other cause, whether mental or physical, which
incapacitates Brink from performing his normal duties
as an employee, appears to be permanent in nature and
contemplates the continuous, necessary and
substantially complete loss of all management and
professional activities for a continuous period of
six (6) months.
<PAGE>
(iii) Partial Disability. If Brink should become partially
disabled, he shall be entitled to his salary as
provided herein for a period of nine (9) months. At
the end of said period of time, if Brink remains
partially disabled, his salary shall be reduced
according to the amount of time he is able to devote
to HFC's business.
(iv) Temporary Disability. In the event Brink should
become disabled, but such disability is not
permanent, as defined above, he shall be entitled to
his salary for a period of nine (9) months. If such
temporary disability continues longer than said
period of time, then Brink shall be deemed to have
become permanently disabled for the purposes of this
Agreement at the end of said nine (9) month period.
12. Compensation Payable Following Early Termination of Employment.
(a) In the event of any termination pursuant to Section 11, Brink's
Base Salary shall be paid as follows:
(i) In the event of termination pursuant to Section 6 (a)
(i) (for "Cause"), Brink's Base Salary shall be
discontinued as of the effective date of termination.
(ii) In the event of termination of this Agreement by
reason of Brink's death, Brink's Base Salary shall
terminate as of the end of the six (6) months
following Brink's death;
(iii) In the event of termination of this Agreement by
reason of permanent disability, Brink's Base Salary
shall be paid until Brink becomes eligible for
benefits pursuant to disability insurance provided by
HFC becomes payable;
(iv) In the event of any termination by HFC pursuant to
Section 11(a)(ii) (without "Cause"), Brink's Base
Salary shall be paid through the date of termination
of this Agreement as in effect on the date
immediately preceding the date of such termination of
employment (e.g. if Brink's employment is terminated
by HFC without cause prior to December 31, 2001, he
shall be paid his Base Salary through such date and
if Brink's employment is terminated without cause in
January of 2002, he shall be paid his Base Salary
through December 31, 2002); and
(v) In the event of termination of employment by Brink
for any reason, Brink's Base Salary shall be paid
through the date of such termination of employment.
<PAGE>
(b) In the event of termination by Brink for any reason, Brink's
Base Salary shall be paid through the date of such termination
of employment.
13. No Adequate Remedy. The parties declare that it is impossible to
measure in money the damages which will accrue to either party by
reason of a failure to perform any of the obligations under this
Agreement. Therefore, if either party shall institute any action or
proceeding to enforce the provisions hereof, such person against whom
such action or proceeding is brought hereby waives the claim or defense
that such party has an adequate remedy at law, and such person shall
not urge in any such action or proceeding the claim or defense that
such party has an adequate remedy at law.
14. Miscellaneous.
(a) Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of all successors and assigns of HFC,
whether by way of merger, consolidation, operation of law,
assignment, purchase or other acquisition of substantially all
of the assets or business of HFC and shall only be assignable
under the foregoing circumstances and shall be deemed to be
materially breached by HFC if any such successor assign does
not absolutely and unconditionally assume all of HFC's
obligations to Brink hereunder. Any such successor or assign
shall be included in the term "HFC" as used in this Agreement.
(b) Notices. All notices, requests, and demands given to, or made,
pursuant hereto shall, except as otherwise specified herein,
be in writing and be delivered or mailed to any such party at
its address which:
(i) In the case of HFC shall be:
HEALTH FITNESS CORPORATION 3500 West 80th Street,
Suite 130 Minneapolis, Minnesota 55431
With copies to:
JAMES A. BERNARDS
7200 Metro Boulevard, Suite 200
Edina, MN 55439
and
TIMOTHY M. HEANEY
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
<PAGE>
(ii) In the case of the Executive shall be:
MR. LOREN S. BRINK
9635 Bennett Place
Eden Prairie, MN 55437
With a copy to:
PATRICIA A. BLOODGOOD
Lockridge Grundel Nauen & Holstein L.L.P.
100 Washington Avenue South, Suite 100
Minneapolis, MN 55401-2159
Either party may, by notice hereunder, designate a change of address.
Any notice, if mailed properly addressed, postage prepaid, registered
or certified mail, shall be deemed dispatched on the registered date or
that stamped on the certified mail receipt, and shall be deemed
received within the fifth business day thereafter, or when it is
actually received, whichever is sooner.
(c) Captions. The various headings or captions in this Agreement are
for convenience only and shall not affect the meaning or interpretation
of this Agreement.
(d) Governing Law. The validity, construction and performance of this
Agreement shall be governed by the laws of the State of Minnesota and
any legal proceeding arising out of or in connection with this
Agreement shall be brought in the appropriate courts of the State of
Minnesota, with each of the parties hereto consenting to the exclusive
jurisdiction of said courts for this purpose.
(e) Construction. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or the remaining
provisions of this Agreement.
(f) Waivers. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
or remedy hereunder preclude any other or further exercise thereof or
the exercise of any right or remedy granted hereby or by any related
document or by law.
(g) Modification. This Agreement may not be, and shall not be, modified
or amended except by a written instrument signed by both parties
hereto.
(h) No Conflicting Business. Brink agrees that he will not, during the
term of this Agreement, transact business with HFC personally, directly
or indirectly, or as an agent, consultant, owner, partner, officer,
<PAGE>
shareholder, director or holder of any similar position of any other
entity; provided, however, Brink may enter into any business
transaction that is, in the opinion of HFC's Board of Directors,
reasonable, prudent or beneficial to HFC, so long as any such business
transaction is at arms-length as though between independent and prudent
individuals and is ratified and approved by the designated members of
HFC's Board of Directors after receipt of written disclosure of the
full nature of Brink's interest in the business.
(i) Entire Agreement. This Agreement constitutes the entire Agreement
and understanding between the parties hereto in reference to all the
matters herein agreed upon.
(j) Counterparts. This Agreement shall be executed in at least two
counterparts, each of which shall constitute an original, but both of
which, when taken together, will constitute one in the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered the day and year first above written.
HEALTH FITNESS CORPORATION
By:
Its: Loren S. Brink
MANCHESTER BUSINESS SERVICES, INC
RETAINER AGREEMENT
THIS AGREEMENT (the "Agreement") dated as of April 7, 1999 confirms that HEALTH
FITNESS CORPORATION ("COMPANY") has engaged, as of the date hereof, Manchester
Business Services, Inc. ("MBSI") to perform certain Organization
Reengineering/Renewal Services (the "Services") for COMPANY. In connection with
the foregoing, COMPANY and MBSI agree that:
1. Retention. COMPANY hereby retains MBSI on an exclusive basis,
subject to COMPANY'S existing consulting arrangements, in
connection with providing Organization Reengineering/Renewal
Services for COMPANY as described herein.
2. Termination. The initial terms of this Agreement shall be for
twelve (12) months commencing on the date hereof. During the
initial twelve (12) month term, this Agreement may not be
terminated by either COMPANY or MBSI except for failure to
provide, using reasonable business practices, the Services
described herein. Following expiration of the initial twelve
(12) month term of this Agreement, either MBSI or COMPANY may
terminate this Agreement at any time upon 30 days written
notice, delivered to the other, and without liability or
continuing obligation on the part of MBSI. However, COMPANY'S
obligations to MBSI shall continue after the termination of
this Agreement.
3. Services to be performed:
A. Evaluate and analyze the business operations,
financing and capitalization of the COMPANY and its
Divisions and make recommendations for improvement to
COMPANY's management and the Board. MBSI's activities
will include, but not be limited to; review of cash
flow projections, review of cost accounting systems,
review of inventory controls, review of overall
accounting/control environment, recommendations for
expediting collection of accounts receivable,
negotiations with trade creditors, negotiations with
banks regarding credit agreements, negotiations with
major suppliers/customers regarding outstanding
issues, review of sales/pricing mechanisms, and
assistance with decision/management oversight and
processes.
B. Develop a short-term intervention management plan for
the COMPANY to achieve positive cash
flow/profitability.
C. Review and recommend appropriate actions regarding
impending NASDAQ de-listing.
D. Evaluate "Strategic Options" for the COMPANY
including merger, sale, divestiture of division(s)
and or the COMPANY's assets (including its corporate
structure). If it is determined that a sale
transaction is an appropriate strategic option for
the COMPANY, the COMPANY may decide to retain
Manchester Financial Group, Inc., upon terms to be
mutually agreed.
E. Make recommendations regarding refinancing as
appropriate. Should MBSI become involved in such
financing activities they would be handled under a
separate agreement with Manchester Financial Group,
Inc. ("MFGI"), an affiliate of MBSI. Fees for such
services are described in Section 4C herein.
F. Develop/implement strategy for communications to
shareholders, employees, creditors and equity
markets.
G. Reengineer operations to achieve acceptable gross
margins.
H. Refocus/restructure the organization in accordance
with the intervention management plan.
I. Assure organizational effectiveness through
appropriate policies, procedures, HR management and
system controls.
J. Develop reliable financial reporting
systems/procedures including the timely preparation
and review of Bank, SEC, NASDAQ and other Regulatory
reporting/compliance documents.
K. Provide the Board with timely updates on progress.
Seek audit committee approval for any significant
changes in the COMPANY's current financial reporting
policies and procedures.
L. Assist the COMPANY in developing a definitive
business plan including, but not limited to,
business/industry description, management team
resumes, products/services features and functions,
market research/analysis, estimated market
share/sales, design/development plans, operations
plan, overall schedule and critical risks/problems.
It is our mutual understanding that MBSI would serve as consultants to
the COMPANY. However, MBSI will be vested by the COMPANY's Board with
the appropriate authority to effectively execute the intervention
management plan, subject to prior approval thereof by the COMPANY's
Board, and the Services described herein. MBSI will report only to the
COMPANY's Board of Directors.
MBSI does not provide legal advice and the COMPANY agrees to rely upon
advice from its own legal counsel as to all legal matters. COMPANY
acknowledges it is entering into this Retainer Agreement: (i) without
any undue influence by an third party including any creditor, and (ii)
without any promises or representations by MBSI or any third party as
to actual results that will be achieved by MBSI.
4. Fees and Expenses.
A. A monthly fee of $25,000 beginning with the effective
date of MBSI's engagement and on the same day of each
month thereafter for a period of eleven (11) months.
If the COMPANY enters into the Engagement Agreement
referred in paragraph 3.D above for investment
banking services, the $25,000 monthly fee would then
be allocated between MBSI and MFGI.
B. Notwithstanding the foregoing and except as provided
below in this paragraph if whether or not directly or
indirectly introduced by MBSI or its affiliate MFGI,
during the term of this Agreement the COMPANY enters
into a contract or letter of intent to sell, exchange
or otherwise dispose of all or a material (more than
10%) portion of the COMPANY, whether accomplished by
a sale of stock or assets by or through the COMPANY
and/or its shareholders, and if the COMPANY engages
MBSI or MFGI to assist it in such transaction, then
MBSI or MFGI will be paid a financial advisory fee at
the closing of such transaction, with no deductions
for retainers previously paid by the COMPANY of two
and one half percent (2.5%) of total transaction
consideration.
If it is determined by the COMPANY's Board that MBSI
or MFGI is to be involved in investment banking
activities with respect to the sale of the physical
therapy business of the COMPANY to Health South or
Healthcare Innovations, the accomplishment fee
payable to MFGI shall be reduced by twenty-five
percent, but in no event less than $150,000.00.
C. In the event, at the request of the COMPANY's Board,
MBSI or MFGI arrange for debt or equity financing,
the following fees and Warrants would be payable,
unless otherwise agreed at the time of such
engagement:
o Senior Debt Financing: Two percent (2%)
o Junior Debt Financing: Five percent (5%)
o Equity Financing: Eight percent (8%)
In addition, with regard to each Financing, MBSI/MFGI
or its designees will be granted a Warrant or
Warrants to purchase 100,000 shares of the COMPANY's
common stock (the "Warrants"). Such Warrants will be
exercisable at any time for a period of five (5)
years from the date of issuance at an exercise price
equal to the average closing price of the COMPANY's
stock during the ten (10) trading days before the
announcement of the respective Transaction. The
Warrants shall contain a net exercise provision,
customary anti-dilution provisions and shall provide
for participation of the shares underlying the
Warrants on a "piggy-back" basis in any registration
by the COMPANY during the Warrants duration and two
(2) years thereafter, and registration to be at the
expense of the COMPANY. The Warrants will also
contain ratchet-down provisions which will result in
the repricing of the Warrants in the event that
shares, options or warrants are subsequently issued
by the COMPANY at a lower price.
D. COMPANY agrees to, on an as-incurred basis, as
documented by MBSI, to reimburse MBSI for all
reasonable out-of-pocket expenses incurred in
connection with the rendering of the Services. MBSI
will submit expense reimbursement bills on a monthly
basis, and COMPANY agrees that they will be paid
within 10 days. Any individual expense in excess of
$200 will be subject to COMPANY's prior written
approval. MBSI's fees do not include any fees which
may be charged by other related or non-related
entities involved in pursuit of the execution of the
Services outlined herein. Such other fees may
include, but are not limited to, those charged by
legal counsel, auditors and tax advisors, appraisal
companies, environment testing concerns, lenders,
industry consultants and other consultants or
professionals as may be mutually determined to be
necessary.
5. Cooperation. COMPANY will cooperate with MBSI and provide,
where possible, information reasonably required by MBSI in
connection with fulfilling service obligations under this
Agreement. In addition, MBSI will require the involvement of,
and COMPANY agrees to provide reasonable access to the Senior
Management of COMPANY.
6. Confidentiality.
A. This Agreement and its contents, including any
proprietary COMPANY information, will be treated by
COMPANY and MBSI as confidential except as required
by law. MBSI will also treat as confidential the
contemplated plans and strategies of COMPANY. Neither
COMPANY nor MBSI will, unless required by a statute,
rule, regulation, agency or court, make any public or
private statements about COMPANY, their financing or
structure, without the prior consent of the other
parties to this Agreement.
B. Without limiting the generality of Section 6(a), any
advice rendered by MBSI pursuant to this Agreement
may not, unless required by an statute, rule,
regulation, agency or court, be disclosed publicly or
privately in any manner without MBSI's prior written
approval and will be treated as confidential.
C. COMPANY will provide MBSI with all reasonable
financial and other information requested by MBSI for
the purpose of rendering its Services pursuant to
this Agreement. All non-public information given to
MBSI by COMPANY will be treated by MBSI as
confidential by it and will not be used by MBSI for
any purposes other than the performance of the
Services rendered to COMPANY under this Agreement.
D. With respect to information about their businesses
provided by COMPANY, MBSI agrees that, for a period
of one (1) year, the information will be kept
confidential by it and that access to the information
will be limited to those persons under its
supervision who may have a need to know the
information. MBSI further agrees that such
information shall be deemed to be the property of
COMPANY and, when in tangible form, shall be returned
to COMPANY upon request. COMPANY's information shall
be used only for purposes expressed herein and may be
used for other purposes only with the prior written
approval of COMPANY. MBSI also agrees to keep
confidential in accordance herewith any analysis,
compilation, study, or other documents prepared by
MBSI for use in connection with the above-mentioned
Services.
E. In the event that any party hereto, or either of its
representatives, are requested or required (by oral
questions, interrogatories, requests for information
or documents, subpoena, Civil Investigative Demand,
similar process or otherwise), to disclose any
information of the other party, it is agreed that the
requested or required party will provide the other
with prompt notice of such request so that the other
may seek an appropriate protective order and/or waive
compliance with the provisions of this Agreement. It
is further agreed that, if in the absence of a
protective order or the receipt of a waiver
hereunder, any party or its representatives is
nonetheless, in the opinion of its respective
counsel, compelled to disclose information or else
stand liable for contempt or suffer other censure or
penalty or other adverse consequences, the requested
party or its representative may disclose such
information without liability hereunder.
F. The phrase "information" does not include information
which (i) is or becomes available to the public other
than as a result of a disclosure in violation of the
terms hereof; (ii) was in the possession of a
respective party on a non-confidential basis prior to
its disclosure under this Agreement; or (iii) becomes
available on a non-confidential basis from a source
other than a party hereto or its respective
representative.
G. Because damages at law would be difficult to
ascertain in the event of the failure or refusal of
either party hereto to comply with the provisions of
this paragraph 6, each party, in addition to, and not
in limitation of, any of the rights, remedies or
damages available at law or in equity, shall (a) be
entitled to seek or restrain any such breach and (b)
be entitled to seek the recovery from the breaching
party of all costs and expenses, including reasonable
attorneys' fees in connection therewith, incurred by
the party seeking to enforce or prevent any breach or
threatened breach of this paragraph 6.
7. Indemnification. If, in connection with any Services or
matters that are the subject of this Agreement, MBSI becomes
involved in any capacity in any action or legal proceeding,
pending or threatened, COMPANY agrees (i) to reimburse MBSI
for the reasonable legal fees, disbursements of counsel and
other expenses (including the cost of investigation and
preparation) incurred by MBSI as such fees, disbursements and
other expenses are incurred; and (ii) to indemnify, defend,
and hold MBSI harmless against any losses, claims, damages, or
liabilities, joint or several, to which MBSI may become
subject arising out of any such action or legal proceeding
unless such claims arise from MBSI's gross negligence or
willful misconduct as determined in a judicial proceeding.
8. Survival. The provisions of this Agreement shall, where
applicable, survive the expiration of the period of this
Agreement, including any extensions thereof.
9. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the
subject matter hereof and supersedes and cancels as of the
date hereof all prior understandings, written or oral, with
respect to the subject matter hereof.
10. Governing Law. This Agreement and the agreements contained
herein shall be governed by, and construed in accordance with,
the laws of the State of Minnesota, without giving effect to
the principles of conflicts of laws thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MANCHESTER BUSINESS SERVICES, INC.
By __________________________________________________
Its __________________________________________________
HEALTH FITNESS CORPORATION
By __________________________________________________
Its __________________________________________________
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
0
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<INCOME-PRETAX> (313,810)
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