<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NO.
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ICON FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3949 87-0566936
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
(STATE OR OTHER IDENTIFICATION NUMBER)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
----------------
1500 SOUTH 1000 WEST
LOGAN, UTAH 84321
(801) 750-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
BRAD H. BEARNSON
ICON HEALTH & FITNESS, INC.
1500 SOUTH 1000 WEST
LOGAN, UTAH 84321
(801) 750-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPY TO:
ALFRED O. ROSE ROPES & GRAY ONE INTERNATIONAL PLACE BOSTON, MASSACHUSETTS
02110 (617) 951-7000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered or this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
14% Series B Senior
Discount
Notes due 2006........ $162,000,000 50.931% $82,508,220 $25,002.50
</TABLE>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
[LOGO OF ICON FITNESS CORPORATION APPEARS HERE]
ICON FITNESS CORPORATION
OFFER TO EXCHANGE
SERIES B SENIOR DISCOUNT NOTES DUE NOVEMBER 15, 2006
FOR AN EQUAL PRINCIPAL AMOUNT AT MATURITY OF
SERIES A SENIOR DISCOUNT NOTES DUE NOVEMBER 15, 2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED
-----------
ICON Fitness Corporation, a Delaware corporation ("ICON" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount of
up to $162,000,000 at maturity of Series B Senior Discount Notes due 2006 (the
"Exchange Notes") of the Company for a like principal amount at maturity of the
issued and outstanding Series A Senior Discount Notes due 2006 (the "Original
Notes" and, together with the Exchange Notes, the Senior Discount Notes of the
Company from the holders (the "Holders") thereof. The terms of the Exchange
Notes are identical in all material respects to the Original Notes, except for
certain transfer restrictions and registration rights relating to the Original
Notes. The Original Notes were issued at a substantial discount from their
principal amount at maturity. Cash interest will not accrue on the Notes prior
to November 15, 2001. Cash interest at a rate of 14% per annum will be payable
semi-annually on each May 15 and November 15, commencing May 15, 2002. For each
Original Note accepted for exchange, the Holder of such Original Note will
receive an Exchange Note having a principal amount at maturity equal to that of
the surrendered Original Note. Original Issue Discount on the Exchange Notes
will accrue from November 20, 1996, the date of original issuance of the
Original Notes.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
November 20, 1996, among the Company and the other signatories thereto (the
"Registration Rights Agreement"). The Company believes that based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), Exchange Notes issued pursuant to the Exchange Offer in exchange
for Original Notes may be offered for resale, resold and otherwise transferred
by each Holder thereof (other than any such Holder which is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act")), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business
and such Holder has no arrangement with any person to participate in the
distribution of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Original Notes where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date (as defined herein), it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. Tenders of Original Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Original Notes, the Company will promptly
return the Original Notes to the Holders thereof. See "The Exchange Offer."
-----------
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE
EXCHANGE NOTES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The date of this Prospectus is ,1996.
<PAGE>
REFERENCE IN THIS PROSPECTUS IS MADE TO THE FOLLOWING TRADEMARKS AND BRAND
NAMES: ACCUSMART(TM), CONCOR(TM), CRANK-IT-UP(TM), CROSS TRAINER(TM),
CROSSWALK(R), IMAGE(TM), INSYNC(TM), INTELEX(TM), JUMPKING(R), LEGEND(TM),
PROFORM(R), PRO-TECH(TM), SMART CARD(TM), SPACE SAVER(TM), SPEED LINK(TM),
STOWAWAY(TM), TRIPLE PLAY(TM), WEIDERCARE(TM), HEALTHRIDER(R),
AEROBICRIDER(TM), SPORTRIDER(TM), AND LIFERIDER(TM) AND CARDIOGLIDE(R), WHICH
ARE OWNED BY THE COMPANY; LIFESTYLER(TM), WHICH IS OWNED BY SEARS ROEBUCK; AND
WEIDER(R), WHICH IS OWNED BY WEIDER HEALTH AND FITNESS AND WEIDER SPORTING
GOODS, INC. IN THE UNITED STATES AND BY WEIDER SPORTS EQUIPMENT CO. LTD. AND
WEIDER EUROPE B.V. IN OTHER COUNTRIES.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, Holders of Original Notes in any jurisdiction in
which such Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Senior Discount Note (as defined),
which will be deposited with, or on behalf of, The Depository Trust Company
(the "Depositary") and registered in its name or in the name of Cede & Co.,
its nominee. Beneficial interests in the Global Senior Discount Note
representing the Exchange Notes will be shown on, and transfers thereof will
be effected through, records maintained by the Depositary and its
participants. After the initial issuance of the Global Note, Exchange Notes in
certificated form will be issued in exchange for the Global Note only on the
terms set forth in the Senior Discount Note Indenture (as defined). See
"Description of Senior Discount Notes--Book-Entry; Delivery and Form."
Prior to this Exchange Offer, there has been no public market for the
Original Notes. To the extent that Original Notes are tendered and accepted in
the Exchange Offer, a Holder's ability to sell untendered Original Notes could
be adversely affected. If a market for the Exchange Notes should develop, the
Exchange Notes could trade at a discount from their accreted value (as defined
herein). The Company does not currently intend to list the Exchange Notes on
any securities exchange or to seek approval for quotation through any
automated quotation system.
The Company has been advised by Donaldson, Lufkin & Jenrette Securities
Corporation, the initial purchaser (the "Initial Purchaser") of the Original
Notes, that it intends to make a market in the Original Notes and that,
following the Exchange Offer, it intends to make a market in the Exchange
Notes; however, the Initial Purchaser is under no obligation to do so and any
market making activities with respect to the Exchange Notes may be
discontinued at any time.
Pursuant to the Senior Discount Note Indenture (as defined), so long as any
of the Senior Discount Notes are outstanding, whether or not ICON is subject
to the reporting requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), ICON is obligated to
send to the Commission the annual reports, quarterly reports and other
documents that ICON would have been required to file with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act if it were subject to
such reporting requirements. ICON is also obligated to provide to all holders
of the Senior Discount Notes and file with the Senior Discount Note Trustee
(as defined), copies of such annual reports, quarterly reports and other
documents and, if filing such documents by ICON with the Commission is not
permitted under the Exchange Act, promptly upon written request supply copies
of such documents to any prospective purchaser of the Senior Discount Notes,
and to such other persons as may reasonably request.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, located
elsewhere in this Prospectus. In this Prospectus, all references to "IHF
Capital," "ICON," "IHF Holdings" and "Health & Fitness" refer to IHF Capital,
Inc., ICON Fitness Corporation, IHF Holdings, Inc. and ICON Health & Fitness,
Inc., respectively. The issuer of the Exchange Notes is ICON. IHF Capital is a
holding company whose principal assets is all of the capital stock of ICON.
ICON is a holding company whose principal asset is all of the common stock of
IHF Holdings. IHF Holdings is a holding company whose principal asset is all of
the capital stock of Health & Fitness. Health & Fitness and IHF Holdings have
been reporting companies under the Exchange Act. Financial information provided
herein is of ICON unless otherwise noted. Unless the context requires
otherwise, all references in this Prospectus to the "Company" with respect to
periods prior to November 14, 1994 refer to the combined operations of Weslo,
Inc. ("Weslo"), ProForm Fitness Products, Inc. ("ProForm") and American
Physical Therapy, Inc. ("WeiderCare") (collectively, the "Recapitalized
Companies") which were recapitalized in a transaction (the "Recapitalization")
described under "Background," with respect to periods between November 14, 1994
and November 12, 1996, refer to the consolidated operations of IHF Holdings and
Health & Fitness and with respect to periods after November 12, 1996, refer to
the consolidated operations of ICON, IHF Holdings and Health & Fitness. Prior
to the Recapitalization, the Recapitalized Companies were wholly owned
subsidiaries of Weider Health and Fitness ("WHF"), and prior to November 12,
1996, IHF Holdings was a wholly owned subsidiary of IHF Capital. Except as
otherwise specified, references herein to years are to the Company's fiscal
year, which ends on May 31 of each calendar year. For example, "1996" refers to
the fiscal year ended May 31, 1996. Industry data is based on the calendar
year, however. The principal executive offices of the Company are located at
1500 South 1000 West, Logan, Utah 84321. ICON is a Delaware corporation
incorporated on November 12, 1996.
THE COMPANY
The Company is one of the largest manufacturers and marketers of fitness
equipment in the United States. The Company's focus is to address consumers'
interest in a healthy, active lifestyle with a broad range of high quality
products at a variety of price/value relationships specifically targeted to
meet different consumers' health and fitness needs. The Company's line of home
fitness aerobic products includes treadmills, upright rowers, exercise bikes,
stair steppers and cross country skiers, and its line of anaerobic fitness
products includes home gyms, weight benches and recently introduced abdominal
machines. The Company also offers trampolines, recreational sports products,
sports medicine products and fitness accessories. The Company markets the
majority of its products under the brand names ProForm, Image, Weslo, Weider,
WeiderCare, Legend, JumpKing, and Lifestyler (a private label brand
manufactured for Sears).
Founded in 1977, the Company has been a pioneer in the fitness equipment
industry since 1980 and has focused on developing innovative, high-quality
fitness products. The Company estimates that its U.S. net sales (prior to its
acquisitions of HealthRider, Inc. ("HealthRider") and certain related
manufacturing assets which were acquired in August 1996 and which are described
below under the headings "--Pursuing Growth Opportunities" and "HealthRider
Acquisition") represented approximately 30% of total wholesale domestic home
fitness equipment sales in calendar 1995. In the first quarter of fiscal 1996,
the Company began to directly market its products in Europe. In 1996, the
Company had net sales of $747.6 million versus $202.4 million in 1991,
reflecting compound annual growth in net sales of 29.9% and an increase in 1996
net sales of 40.8% from 1995 net sales of $530.8 million. The Company had a net
loss of $12.9 million, net income of $1.6 million and a net loss of $7.1
million in 1995, 1996 and the first quarter of 1997, respectively. The Company
believes that from 1991 to 1996 its sales growth rate exceeded the industry
growth rate due to the Company's emphasis on product innovation through
research and development, its multiple distribution channels and its flexible
manufacturing capacity.
3
<PAGE>
Based on industry trade association data, the Company believes that retail
sales of fitness equipment in the U.S. grew from approximately $.4 billion in
calendar 1980 to approximately $2.6 billion in calendar 1993, $2.8 billion in
calendar 1994 and $2.9 billion in calendar 1995. The growth of the fitness
equipment industry can be attributed primarily to increased consumer emphasis
on health, fitness and weight management. In particular, the medical
community's promotion of exercise as a means of preventing cardiovascular
disease and maintaining health and the diet industry's recognition of the need
to incorporate exercise as a component of weight management programs have
prompted consumers to place greater emphasis on health and fitness. The Company
believes that several other factors have contributed to the growth of the
fitness equipment industry, including product innovation at attractive
price/value relationships, growth in infomercials and cable television shows
which promote exercise and fitness and favorable demographic trends. The
Company believes that sales of home fitness equipment have also benefitted from
consumers' desire to spend more time at home.
The Company's strategy is to expand its market leadership position by, among
other things:
DEVELOPING INNOVATIVE, HIGH-QUALITY PRODUCTS
A key element of the Company's strategy is product innovation and
development. The Company evaluates new product concepts on an ongoing basis and
seeks to respond to the desires and needs of consumers by frequently
introducing new products and repositioning old ones (i.e., selling a modified
product in a different price range). This focus on new products and innovation
enables the Company to begin selling early in a product's life cycle and, as
sales moderate, to extend product life cycles by introducing new features and
repositioning products within the Company's line of brands. In 1994, 1995 and
1996, approximately 40%, 42% and 52%, respectively, of the Company's net sales
were from products that were new, enhanced or repositioned. Recent examples of
the Company's product development include the introduction of the Space Saver
treadmill, which folds vertically for easy storage, the development of the
Cardio family of upright rowers, which significantly improved on upright rower
designs first marketed by others, and the introduction of the Company's
abdominal machines, which improved upon existing products manufactured by
others by adding a fold for storage feature. The Company believes that its
ability to identify industry trends and to quickly take a product from concept
to delivery gives it significant advantages over competitors.
TARGETING MULTIPLE DISTRIBUTION CHANNELS
The Company markets its products under multiple brands through multiple
distribution channels including specialty dealers, sporting goods chains,
department stores, discount merchants, warehouse clubs, catalogue showrooms
and, to a limited extent, infomercials and direct response marketing. The
Company believes the marketing of its products through multiple distribution
channels provides it with several competitive advantages including: (i) greater
growth and increased market access; (ii) the ability to maximize revenue
throughout a product's life cycle by repositioning products in different
channels and under different brand names as products mature; (iii) feedback on
market trends and changing consumer tastes; and (iv) reduced dependence on any
single channel of distribution.
POSITIONING ITS BRANDS
To enhance its distribution strategy, the Company targets its brands to
specific distribution channels. By marketing specific brands tailored to appeal
to different demographic groups, the Company is able to market products with
varying designs, features and price ranges and target these products to a wide
variety of consumers with different fitness needs and disposable incomes. The
Company believes its brand positioning strategy enables it to: (i) achieve
greater appeal to each market segment; (ii) promote price stability across its
product lines as brand segmentation minimizes
4
<PAGE>
conflicts between different distribution channels; and (iii) provide high-
quality products with the price ranges and features desired by different
demographic groups. The Company's various brands are supported by distinct
marketing and product strategies and, in some cases, separate sales forces.
PROVIDING BROAD PRODUCT OFFERINGS
The Company manufactures and distributes a broad line of aerobic and
anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and fitness accessories. The Company offers
a range of technological features, from manual equipment to sophisticated
programmable electronic products, in a variety of price ranges. The Company's
strategy of offering a broad range of products enables it to: (i) offer
categories of fitness products that appeal to different demographic groups;
(ii) respond quickly to changes in consumer preferences and fitness trends;
(iii) reduce its dependence on any single product category; and
(iv) participate in growth opportunities across a wide variety of product
categories.
UTILIZING FLEXIBLE, LOW-COST MANUFACTURING
The Company's manufacturing facilities are designed to be flexible in order
to permit the Company to shift its product mix quickly and efficiently. The
combination of internal manufacturing and assembly capacity and the Company's
access to third-party vendors has helped the Company meet customer demand on a
competitive basis. The design of these facilities provides the Company with the
flexibility to change production runs on short notice and to respond to
changing customer needs.
PURSUING GROWTH OPPORTUNITIES
The Company is seeking strategic acquisition opportunities which would
complement its existing business and provide an opportunity for growth. The
Company believes growth opportunities exist in its current domestic markets as
well as in selected international markets. The North American fitness equipment
market is significantly more developed than other markets around the world.
However, the Company began to directly market its products in the first quarter
of 1996 in the key European markets of the U.K., France, Italy and the Benelux
countries and is attempting to increase its market penetration in these and
other foreign countries. Prior to 1996, the Company had minimal foreign sales.
Net sales from international markets in the four quarters of 1996 and the first
quarter of 1997 were $6.0 million, $9.3 million, $7.8 million, $10.2 million
and $7.1 million, respectively. In connection with the Recapitalization, the
Company granted certain exclusive and non-exclusive rights to distribute its
products in certain other international markets to Weider Sports Equipment Co.,
Ltd. ("Weider Sports"). In September 1996, the Company acquired certain assets
and assumed certain liabilities of the sports equipment business lines of
Weider Sports (the "Weider Sports Acquisition"). Pursuant thereto, the Company
reacquired distribution rights originally granted to Weider Sports in
connection with the Recapitalization, subject to certain rights granted by
Weider Sports to third parties. The Company also purchased certain assets of a
Canadian manufacturing business affiliated with WHF ("CanCo") (the "CanCo
Acquisition"). See "Certain Relationships and Related Transactions" "Business--
Legal Proceedings--Settlement of WHF Litigation" and "Risk Factors--Expansion
Strategy."
HEALTHRIDER ACQUISITION
In keeping with its strategy of pursuing growth opportunities, in August
1996, the Company: (i) purchased substantially all the assets of HealthRider
for approximately $16.8 million and assumed (or refinanced) substantially all
the liabilities of HealthRider; (ii) purchased certain related manufacturing
assets of Parkway Manufacturing, Inc., ("Parkway"), including Parkway's
contract to manufacture and supply upright rowers to HealthRider, for
approximately $10.1 million; and (iii) purchased the minority
5
<PAGE>
interest of HealthRider's European subsidiary for approximately $1.4 million
(of which $.7 million was paid by HealthRider, $.6 million was paid by the
Company in cash and $.1 million was paid by the Company in inventory)
(together, the "HealthRider Acquisition"). The liabilities assumed or
refinanced included capital lease obligations of approximately $19.3 million
and revolving credit borrowings and other long term debt of approximately $9.5
million. For a description of certain accounts payable and other accrued
payables the Company assumed in connection with the HealthRider Acquisition,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
HealthRider, a designer, marketer and distributor of fitness equipment,
distributes its products through direct response advertising, through a
national network of over 200 HealthRider kiosks and stores in shopping malls,
and through third party retailers. HealthRider had net sales of $241.4 million
and $113.2 million and net income of $13.6 million and a net loss of $3.6
million in calendar 1995 and the first six months of calendar 1996,
respectively. HealthRider's flagship product is the HealthRider, a brand of
upright rower. In aggregate, and excluding freight related revenues, sales of
upright rowers (including the HealthRider) accounted for 94.4% and 93.4% of
HealthRider's net sales in calendar 1995 and the first six months of calendar
1996, respectively. In calendar 1995 and the first six months of calendar 1996,
purchases from Parkway accounted for approximately 73.5% and 54.3%,
respectively, of total upright rower purchases by HealthRider. In connection
with the HealthRider Acquisition, the manufacturing agreement between
HealthRider and Parkway was terminated. HealthRider has experienced a
substantial, continuing and accelerating deterioration of its business since
the beginning of calender 1996. See "Risk Factors--Expansion Strategy;
Acquisitions," and "Management's Discussion and Analysis of Financial
Condition--HealthRider," and Note 1 to the HealthRider consolidated financial
statements included herein.
As a result of the HealthRider Acquisition, the Company believes it is the
leading maker and distributor of upright rowers in the United States with its
net sales of upright rowers, calculated on a pro forma basis as if the
HealthRider Acquisition had occurred on December 31, 1994, representing over
76% of all U.S. upright rower sales in calendar 1995. The Company estimates
that its U.S. net sales, calculated on the same pro forma basis represented
approximately 39% of total wholesale domestic home fitness equipment sales in
calendar 1995. The Company believes that the HealthRider Acquisition will
strengthen its position as a leading manufacturer and marketer of fitness
equipment in the United States. The Company's plan for integrating HealthRider
into its business includes: (i) marketing a broad line of products such as
treadmills, stair steppers and cross-country skiing machines under the
HealthRider brand name through HealthRider's established distribution channels;
(ii) altering direct response advertising with respect to HealthRider products
with the goal of enhancing the Company's return on its advertising investment;
and (iii) realizing synergies from the HealthRider Acquisition by integrating
the Company's and HealthRider's operations. The Company expects to increase its
net sales as a result of the HealthRider Acquisition, but by substantially less
than 100% of HealthRider's net sales. The Company will recognize a significant,
non-recurring, non-cash increase in cost of goods sold in the first through
third quarters of 1997 of approximately $12.0 million related to the fact that
the Company's purchase accounting for the HealthRider Acquisition included
writing-up the book value of the acquired HealthRider inventory to fair market
value less estimated sales costs, which will result in higher cost of goods
sold and lower gross profit until the acquired inventory has been sold. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--HealthRider."
The HealthRider Acquisition was funded through additional borrowings under
the Credit Agreement with General Electric Capital Corporation ("GE Capital"),
various other lenders and GE Capital, as Agent, as amended (the "Credit
Agreement"). See "Description of Certain Indebtedness."
6
<PAGE>
BACKGROUND
On November 14, 1994 (the "Recapitalization Closing"), the Company effected
the Recapitalization in which affiliates of Bain Capital, Inc. ("Bain Capital")
and certain other investors invested $40.4 million and became the controlling
and largest shareholders of the Company. At the same time, ICON's subsidiaries
issued $60.0 million in proceeds of 15% Senior Secured Discount Notes due 2004
(the "Holdings Discount Notes") and $100.0 million in proceeds of 13% Senior
Subordinated Notes due 2002 (the "Senior Subordinated Notes") and made term
borrowings of $35.0 million and revolving borrowings of $111.5 million under
the Credit Agreement. As a result of the Recapitalization, the Company had a
deficiency in stockholder's equity of $112.2 million as of August 31, 1996
(unaudited).
Certain of the information contained in this summary and elsewhere in this
Prospectus, including under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and information with respect to the
Company's plans and strategy for its business are forward-looking statements.
For a discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors."
THE EXCHANGE OFFERS
REGISTRATION RIGHTS
AGREEMENT..................... To fund the repurchase of the common stock of
IHF Capital and warrants to purchase common
stock of IHF Capital held by WHF and certain
other stockholders (the "WHF Stockholders") and
the repurchase of the preferred stock of IHF
Holdings (the "IHF Holdings Preferred Stock")
held by WHF and options to purchase IHF
Holdings Preferred Stock, ICON sold the
Original Notes to the Initial Purchaser (the
"Offering") which offered and sold them to
qualified institutional buyers, as defined
pursuant to Rule 144A under the Securities Act
("Qualified Institutional Buyers") and
institutional accredited investors within the
meaning of Rule 501 under the Securities Act.
ICON and the Initial Purchaser entered into a
Registration Rights Agreement dated as of
November 20, 1996 (the "Registration Rights
Agreement"), which grants the holders of the
Original Notes certain exchange and
registration rights. The Exchange Offer made
hereby is intended to satisfy such exchange
rights. See "The Exchange Offer--Registration
Rights," "--Consequences of Failure to
Exchange" and "--Resales of the Exchange
Notes."
THE EXCHANGE OFFER............ $1,000 principal amount of Exchange Notes will
be issued in exchange for each $1,000 principal
amount of Original Notes. As of the date
hereof, $162,000,000 million aggregate
principal amount of the Original Notes are
outstanding. ICON will issue the Exchange Notes
to holders on the earliest practicable date
following the Expiration Date.
RESALE OF THE EXCHANGE NOTES.. Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, ICON
7
<PAGE>
believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for Original
Notes may be offered for resale, resold and
otherwise transferred by any holder thereof
(other than (i) a broker-dealer who purchased
such Original Notes directly from ICON for
resale pursuant to Rule 144A or any other
available exemption under the Securities Act or
(ii) a person that is an "affiliate" of ICON
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act provided that the holder
is acquiring the Exchange Notes in
its ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate,
in the distribution of the Exchange Notes.
Holders of Original Notes wishing to accept an
Exchange Offer must represent to ICON that such
conditions have been met. In the event that
ICON's belief is inaccurate, holders of
Exchange Notes who transfer Exchange Notes in
violation of the prospectus delivery provisions
of the Securities Act and without an exemption
from registration thereunder may incur
liability under the Securities Act. ICON does
not assume or indemnify holders against such
liability, although ICON does not believe that
any such liability should exist.
A broker-dealer that receives Exchange Notes in
exchange for Original Notes held for its own
account, as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange
Notes. Although such broker-dealer may be an
"underwriter" within the meaning of the
Securities Act, the Letter of Transmittal
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of Exchange Notes received in exchange
for Original Notes. ICON has agreed that, for a
period of 180 days after the Expiration Date,
it will make this Prospectus and any amendment
or supplement to this Prospectus available to
any broker-dealer for use in connection with
any such resales. See "Plan of Distribution."
The Exchange Offers are not being made to, nor
will ICON accept surrenders for exchange from,
holders of Original Notes in any jurisdiction
in which the Exchange Offers or the acceptance
thereof would not be in compliance with the
securities or blue sky laws of such
jurisdiction.
8
<PAGE>
EXPIRATION DATE............... 5:00 p.m., New York City time, on , 1997,
unless the Exchange Offer is extended by ICON
in its sole discretion, in which case the term
"Expiration Date" with respect to such Exchange
Offer means the latest date and time to which
such Exchange Offer is extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
CONDITIONS TO THE EXCHANGE
OFFER......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer--
Conditions of the Exchange Offer."
PROCEDURES FOR TENDERING
NOTES......................... Each holder of Original Notes wishing to accept
the Exchange Offer must complete, sign and date
the accompanying Letter of Transmittal, as the
case may be, or a facsimile thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Original Notes and
any other required documentation to the
Exchange Agent (as defined) at the address set
forth herein. By executing a Letter of
Transmittal, each holder will represent to the
company conducting the related Exchange Offer
that, among other things, (i) the Exchange
Notes acquired pursuant to such Exchange Offer
are being obtained in the ordinary course of
business of the person receiving such Exchange
Notes, whether or not such person is the
holder, (ii) neither the holder nor any such
other person has any arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes and
that such holder is not engaged in, and does
not intend to engage in, a distribution of
Exchange Notes, and (iii) that neither the
holder nor any such other person is an
"affiliate," as defined under Rule 405 of the
Securities Act, of ICON. See "The Exchange
Offer--Procedures for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............ Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. A form of Instruction to
Registered Holder from Beneficial Owner is
included with the applicable Letter of
Transmittal enclosed with this Prospectus for
the convenience of such beneficial owners. See
"The Exchange Offer--Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES.................... Holders of Original Notes who wish to tender
their Original Notes and whose Original Notes
are not immediately available or who cannot
deliver their Original Notes, the Letter of
Transmittal, as the case may be, or any other
9
<PAGE>
documents required by such Letter of
Transmittal to the Exchange Agent (as defined)
(or comply with the procedures for book-entry
transfer) prior to the Expiration Date must
tender their Original Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer--Guaranteed Delivery
Procedures."
UNTENDERED NOTES.............. Following the consummation of the Exchange
Offer, Holders of Original Notes eligible to
participate but who do not tender their
Original Notes will not have any further
exchange rights, and such Original Notes will
continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the
market for such Original Notes could be
adversely affected by the Exchange Offer.
CONSEQUENCES OF FAILURE TO
EXCHANGE..................... The Original Notes that are not exchanged
pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such
Original Notes may be resold only (i) to ICON,
(ii) pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some other
exemption under the Securities Act, (iii)
outside the United States to a foreign person
pursuant to the requirements of Rule 904 under
the Securities Act, or (iv) pursuant to an
effective registration statement under the
Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
SHELF REGISTRATION STATEMENT.. In the event that any changes in law or the
applicable interpretations of the staff of the
Commission do not permit ICON to effect the
Exchange Offer or upon the request of a Holder
of Transfer Restricted Securities (as defined)
under certain circumstances ICON has agreed
pursuant to the Registration Rights Agreement
to register the Original Notes issued by it on
a shelf registration statement (the "Shelf
Registration Statement") and use its best
efforts to cause it to be declared effective by
the Commission. ICON has agreed to maintain the
effectiveness of the Shelf Registration
Statement for, under certain circumstances, a
maximum of three years, to cover resales of the
Original Notes held by any such holders.
WITHDRAWAL RIGHTS............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
ACCEPTANCE OF ORIGINAL NOTES
AND DELIVERY OF EXCHANGE
NOTES........................ ICON will accept for exchange any and all
Original Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
10
<PAGE>
FEDERAL TAX CONSIDERATIONS.... The exchange pursuant to the Exchange Offer
will generally not be a taxable event for
Federal income tax purposes. See "Certain
Federal Tax Considerations."
USE OF PROCEEDS............... There will be no cash proceeds to ICON from the
exchange pursuant to the Exchange Offer.
EXCHANGE AGENT................ Fleet National Bank.
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
GENERAL....................... The form and terms of the Exchange Notes are
the same as the form and terms of the
respective Original Notes except that (i) the
Exchange Notes bear a Series B designation,
(ii) the Exchange Notes have been registered
under the Securities Act and, therefore, will
generally not bear legends restricting the
transfer thereof, and (iii) the Holders of
Exchange Notes generally will not be entitled
to rights under the Registration Rights
Agreement. See "The Exchange Offer." The
Exchange Notes will evidence the same debt as
the Original Notes and will be entitled to the
benefits of the Senior Discount Note Indenture.
As used herein, the term "Senior Discount
Notes" refers collectively to the Exchange
Notes and the Original Notes.
SECURITIES OFFERED............ $162.0 million principal amount of 14% Series B
Senior Discount Notes due 2006.
MATURITY...................... November 15, 2006.
INTEREST...................... Cash interest on the Exchange Notes will not
accrue prior to November 15, 2001. Thereafter
cash interest will accrue at the rate of 14%
per annum, payable semiannually in arrears on
May 15 and November 15, commencing on May 15,
2002.
RANKING....................... The Exchange Notes will rank pari passu in
right of payment with all senior borrowings of
ICON and senior in right of payment to all
subordinated indebtedness of ICON. However, the
operations of ICON are conducted through its
Subsidiaries, including IHF Holdings and Health
& Fitness and, as a result, the Exchange Notes
will be effectively subordinated to all
indebtedness and other liabilities of such
Subsidiaries. As of August 31, 1996, on a pro
forma basis after giving effect to the Offering
and the sale of the building at which
HealthRider's headquarters was located prior to
the HealthRider Acquisition, the aggregate
amount of indebtedness and other obligations of
the Company's Subsidiaries to which the Holders
of the Senior Discount Notes would be
structurally subordinated would have been
approximately $375.7 million.
11
<PAGE>
SECURITY...................... The Senior Discount Notes will be secured by a
first priority lien on and security interest in
all of the issued and outstanding Capital Stock
of IHF Holdings and intercompany notes, if any,
issued by IHF Holdings to the Company. See
"Description of Senior Discount Notes--
Security."
OPTIONAL REDEMPTION........... At any time following the Expiration Date, the
Exchange Notes may be redeemed (subject to
contractual and other restrictions and legal
availability of funds therefor) at the option
of the Company, (i) in whole but not in part,
at the redemption prices set forth herein
(expressed as percentages of the Accreted Value
thereof on the redemption date), plus
Liquidated Damages, if any, thereon to the
redemption date (if redeemed prior to November
15, 2001) and (ii) in whole or in part, at the
redemption prices set forth herein (expressed
as percentages of the principal amount
thereof), plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the
redemption date (if redeemed on or after
November 15, 2001); provided, however, that the
Company may redeem the Exchange Notes in part
only if at least $100 million aggregate
principal amount of the Exchange Notes
originally issued remains outstanding
immediately after each such partial redemption.
See "Description of Senior Discount Notes--
Optional Redemption".
MANDATORY REDEMPTION.......... The Company is required to redeem the Exchange
Notes with the net proceeds of any Public
Equity Offering (as defined) by ICON, any
Parent of ICON or any Subsidiary of ICON (i) at
the redemption prices set forth herein
(expressed as percentages of the Accreted Value
thereof on the redemption date), plus
Liquidated Damages, if any, to the redemption
date (if redeemed prior to November 15, 2001)
and (ii) at the redemption prices set forth
herein (expressed as percentages of the
principal amount), plus accrued and unpaid
interest and Liquidated Damages, if any,
thereon to the redemption date (if redeemed on
or after November 15, 2001). See "Description
of Senior Discount Notes--Mandatory
Redemption".
CHANGE OF CONTROL............. In the event of a Change of Control, the
Holders of the Exchange Notes will have the
right to require the Company to repurchase all
or any part of their Exchange Notes at a price
in cash equal to 101% of the Accreted Value
thereof on any purchase date prior to November
15, 2001, plus Liquidated Damages, if any,
thereon to the purchase date or 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to any purchase date
on or after November 15, 2001. See "Description
of Senior Discount Notes--Change of Control".
12
<PAGE>
COVENANTS..................... The Senior Discount Note Indenture contains
certain covenants which, among other things,
limits the ability of ICON and its Subsidiaries
to incur additional indebtedness and issue
preferred stock, pay dividends or make other
distributions, repurchase or redeem equity
interests or subordinated Indebtedness, make
Restricted Investments (as defined), create or
incur certain liens, engage in sale and
leaseback transactions, create any restriction
on the ability to pay dividends or make
distributions or pay certain indebtedness owed
to or make loans or advances to or transfer
property or assets to ICON or certain of its
Subsidiaries, enter into certain mergers and
consolidations or enter into transactions with
affiliates and to engage in certain business.
In addition, under certain circumstances, ICON
will be required to offer to purchase the
Exchange Notes at a price equal to 101% of the
Accreted Value thereof, plus Liquidated
Damages, if any, to the date of purchase (if
prior to November 15, 2001) or 101% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of purchase (if on or after
November 15, 2001), with the proceeds of
certain Asset Sales (as defined). See
"Description of Senior Discount Notes--
Repurchase at the Option of Holders--Asset
Sales".
13
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, THREE MONTHS ENDED
----------------------------------------- --------------------------------------
SEPTEMBER 2, AUGUST 31,
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $254.1 $314.9 $403.0 $530.8 $747.6 $124.8 $125.8
------ ------ ------ ------ ------ ------ ------
Gross profit........... 59.2 86.3 114.8 152.4 206.1 33.9 33.4
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and
administrative and
other operating
expenses............. 46.9 64.6 83.5 105.0 148.7 27.5 31.4
Compensation expense
attributable to
options.............. -- -- -- 39.0 (2) 2.8 -- --
------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 46.9 64.6 83.5 144.0 151.5 27.5 31.4
------ ------ ------ ------ ------ ------ ------
Income from operations. 12.3 21.7 31.3 8.4 54.6 6.4 2.0
Interest expense....... 4.9 5.5 6.2 21.5 36.5 8.4 8.8
Amortization of
deferred financing
fees.................. -- -- -- 1.7 3.5 .8 .9
Dividends on preferred
stock of subsidiary... -- -- -- 2.8 5.1 1.3 1.3
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 7.4 16.2 25.1 (17.6) 9.5 (4.1) (9.0)
Provision for (benefit
from) income taxes.... 2.8 6.2 9.8 (4.7) 7.9 (.7) (1.9)
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 4.6 $ 10.0 $ 15.3 $(12.9) $ 1.6 $ (3.4) $ (7.1)
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
Depreciation and
amortization.......... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7 $ 4.4 $ 5.9
Capital expenditures .. 4.0 4.0 6.9 8.0 15.4 3.8 6.6
Ratio of earnings to
fixed charges(3)...... 2.2x 3.2x 4.3x -- (4) 1.2x -- (4) -- (4)
</TABLE>
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, 1996
---------------- --------------------
AS
1995 1996 ACTUAL ADJUSTED(5)
------- ------- ------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................... $ 4.1 $ 19.3 $ 4.6 $ 4.6
Working capital........................ 137.7 159.0 194.7 194.2
Total assets........................... 290.2 316.7 425.4 425.6
Total indebtedness..................... 268.1 282.8 366.1 458.2
Preferred stock of subsidiary
(including accrued dividends)......... 42.8 47.9 49.2 --
Stockholders' deficit.................. (109.6) (104.8) (112.2) (161.6)
</TABLE>
- -------
(1) Financial data through May 31, 1994 reflect the combined results of the
Recapitalized Companies and their subsidiaries. Financial data for periods
ending thereafter reflect the consolidated results of ICON and its
subsidiaries.
(2) Consists of accounting charges incurred in connection with the
Recapitalization as a result of the exchange by certain senior executives
of the Company of their options to purchase capital stock of the
Recapitalized Companies for $34.7 million of replacement options to
purchase common stock of IHF Capital and $4.0 million of replacement
options to purchase IHF Holdings Preferred Stock and related warrants to
purchase common stock of IHF Capital ( the "Preferred Warrants") and $.3
million of related payroll tax payments made by the Company. After the
Recapitalization, the Company redeemed $26.4 million of the $34.7 million
of replacement options (the "Redeemable Options").
(3) Earnings consists of income from operations before income taxes and fixed
charges. Fixed charges consist of interest expense on debt and amortization
of deferred financing fees, the accumulating dividends on the preferred
stock of ICON's subsidiary, IHF Holdings, and the portion (approximately
one-fourth) of rental expense that the Company believes is representative
of the interest component of rental expense.
(4) Earnings were insufficient to cover fixed charges by $17.6 million, $4.1
million and $9.0 million for the year ended May 31, 1995, the three months
ended September 2, 1995 and the three months ended August 31, 1996,
respectively.
(5) Reflects: (i) the sale by ICON of $162.0 million 14% in Series A Senior
Discount Notes to: (a) pay approximately $42.5 million in connection with
the purchase of the common stock of IHF Capital and warrants to purchase
common stock of IHF Capital held by the WHF Stockholders and approximately
$35.8 million in connection with the purchase the IHF Holdings Preferred
Stock held by WHF and options to purchase IHF Holdings Preferred Stock held
by certain executives of the Company; (ii) the CanCo and Weider Sports
Acquisitions; and (iii) the impact of $32.8 million non-recurring expenses,
net of the related tax benefit, expected to be incurred in the second and
third quarters of 1997, including (a) the expenses related to the WHF
Settlement (as defined herein), and (b) integration expenses and higher
cost of goods sold (resulting from the Company's purchase accounting
included writing-up the book value of the acquired HealthRider inventory to
fair market value less estimated sales costs) related to the HealthRider
Acquisiton; as if such transactions occurred on August 31, 1996. See
"Unaudited Pro Forma Financial Data," "Selected Consolidated Financial
Data" and Notes 12 and 14 of the Notes to the Consolidated Financial
Statements.
14
<PAGE>
RISK FACTORS
Investment in the Exchange Notes involves a high degree of risk. Prospective
purchasers of the Exchange Notes should give careful consideration to the
specific factors set forth below as well as the other information set forth in
this Prospectus.
LEVERAGE: RESTRICTIONS IMPOSED BY LENDERS
The Company is highly leveraged. At August 31, 1996 on a pro forma basis
after giving effect to the Offering, the Company had total consolidated
indebtedness of approximately $458.2 million and consolidated stockholders'
deficit of approximately $161.6 million. See "Unaudited Pro Forma Financial
Data."
The high level of indebtedness of the Company imposes substantial risks to
holders of the Exchange Notes and may adversely affect or impair, among other
things, the ability of ICON, IHF Holdings and Health & Fitness (i) to repay
principal and cash interest on their debt securities when due, (ii) to obtain
additional financing in the future, (iii) to invest the capital necessary to
accomplish certain of their strategic growth objectives, (iv) to maintain
satisfactory relationships with suppliers, and (v) to withstand competitive
pressures or an adverse change in market conditions in the home fitness
industry. The Company's ability to make cash payments with respect to the
Exchange Notes if issued will depend on Health & Fitness's future operating
performance and cash flow, which are subject to prevailing economic conditions
and financial, competitive and other factors beyond their control.
The Credit Agreement and other debt instruments, including the Health &
Fitness Indenture (as defined), the IHF Holdings Indenture (as defined) and
the Senior Discount Note Indenture, contain significant financial and
operating covenants, including, among other things, restrictions on the
ability of ICON, IHF Holdings and Health & Fitness to incur additional
indebtedness, to create or permit liens, to make certain payments and
investments, to sell or otherwise dispose of assets, to merge or consolidate
with another entity or to take certain other corporate actions. The Credit
Agreement also requires Health & Fitness to meet certain financial ratios and
tests. A failure to comply with the obligations contained in the Credit
Agreement, the Health & Fitness Indenture, the IHF Holdings Indenture or the
Senior Discount Note Indenture could result in an event of default thereunder
which could permit acceleration of the related indebtedness and acceleration
of indebtedness under other instruments that may contain cross-acceleration or
cross-default provisions. Although the Company does not believe that its
current operating plans will be materially adversely restricted by these debt
instruments, changes in economic or business conditions, results of
operations, or other facts may in the future result in circumstances in which
such covenants may restrict the plans or business operations of the Company.
SUBSTANTIALLY ALL ASSETS PLEDGED TO LENDERS UNDER CREDIT FACILITY
Under the Credit Agreement, Health & Fitness has pledged to the lenders
substantially all of its and its Subsidiaries' assets. If an event of default
occurs under the Credit Agreement, the lenders thereunder would have a prior
claim on substantially all the assets of ICON and its Subsidiaries and a right
to foreclose upon the pledge of such assets. The 13% Senior Subordinated Notes
due 2002 of Health & Fitness are not secured by any assets of Health & Fitness
or any of its Subsidiaries. The 15% Senior Secured Discount Notes due 2004 of
IHF Holdings are secured by all of the issued and outstanding Capital Stock of
Health & Fitness.
RANKING OF EXCHANGE NOTES
The Exchange Notes will rank pari passu in right of payment with all senior
borrowings of the ICON and senior in right of payment to all subordinated
Indebtedness (as defined) of ICON. In addition,
15
<PAGE>
the Exchange Notes will be secured by a first priority lien on and security
interest in all of the issued and outstanding Capital Stock of IHF Holdings
held by ICON, and intercompany notes, if any, issued by IHF Holdings to ICON.
However the operations of ICON are conducted through its Subsidiaries, and
therefore, ICON is dependent upon the cash flow of its Subsidiaries to meet
its obligations, including its obligations under the Senior Discount Note
Indenture. As a result, the Exchange Notes will be effectively subordinated to
all Indebtedness and other liabilities of ICON's Subsidiaries. As of August
31, 1996, on a pro forma basis after giving effect to the Offering and the
sale of building at which HealthRider's headquarters was located, the
aggregate amount of indebtedness and other obligations of ICON's Subsidiaries
to which holders of the Exchange Notes is structurally subordinated was
approximately $375.7 million.
HOLDING COMPANY STRUCTURE
ICON is a holding company with no material assets other than the common
stock of IHF Holdings. Because the operations of ICON are conducted through
IHF Holdings and its subsidiary, Health & Fitness, the cash flow of ICON and
the consequent ability to meet its obligations with respect to the Exchange
Notes are dependent upon the earnings of IHF Holdings and Health & Fitness and
the distribution of those earnings to ICON, or upon loans or other payments of
funds made by Health & Fitness or such Subsidiaries to IHF Holdings. In
addition, debt agreements applicable to IHF Holdings, Health & Fitness and its
Subsidiaries, including the IHF Indenture, the Health & Fitness Indenture and
the Credit Agreement, impose significant restrictions that affect, among other
things, the ability of IHF Holdings, Health & Fitness and its Subsidiaries to
pay dividends or make other distributions or loans to the Company.
The claims of Holders of the Exchange Notes will be structurally subordinate
to all existing and future liabilities and obligations (whether or not for
borrowed money) of any Subsidiary of ICON. See "Ranking of Exchange Notes."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Original Notes were, and Exchange Notes will be issued at a substantial
discount from their principal amount. Consequently, the purchasers of the
Exchange Notes generally will be required to include amounts in gross income
for federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Certain Federal Tax Considerations" for
a more detailed discussion of the federal income tax consequences to the
Holders of the Exchange Notes of the purchase, ownership and disposition of
the Exchange Notes.
If a bankruptcy case is commenced by or against ICON under the United States
Bankruptcy Code (the "Bankruptcy Code") after the issuance of the Exchange
Notes, the claim of a holder of Exchange Notes with respect to the principal
amount thereof may be limited to an amount equal to the sum of (i) the initial
offering price of the Exchange Notes and (ii) that portion of the original
issue discount that is not deemed to constitute "unmatured interest" for
purposes of the Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest".
FRAUDULENT CONVEYANCE AND OTHER RISKS
In the event of a bankruptcy, reorganization or rehabilitation case or
similar proceeding relating to, or a lawsuit by or on behalf of unpaid
creditors of ICON, a court may review the Offering under relevant federal and
state fraudulent conveyance statutes (the "fraudulent conveyance statutes").
Generally, if a court were to find either (a) that ICON entered into the
Offering with the intent ("fraudulent intent"), which in certain circumstances
may be presumed, of hindering, delaying or defrauding its current or future
creditors or (b) that, after giving effect to the Offering, ICON
16
<PAGE>
both (i) received (or was deemed to have received under applicable law) less
than reasonably equivalent value or fair consideration for or in connection
with the transfer of property or obligations incurred as part of the Offering
and (ii) (A) was insolvent on the date such transfer was made or such
obligations were incurred or was rendered insolvent as a result of such
transfer or obligations, (B) was engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital or (C)
intended to incur, or believed that it would incur, debts beyond its ability
to pay as such debts matured (as all of the foregoing terms are defined in or
interpreted under the fraudulent conveyance statutes) (the circumstances that
meet the requirements of this clause (b) are referred to herein as
"constructive fraud"), such court could, under certain fraudulent conveyance
statutes and subject to applicable statutes of limitation, take action
detrimental to the holders of the Exchange Notes, or to ICON, including, under
certain circumstances, setting aside or subordinating to trade or other
creditors any of the obligations with respect to the Exchange Notes, or
setting aside any transfer of property pursuant thereto by ICON.
The measure for insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction which is being applied in any
proceeding determining that issue. Generally, however, a company will be
considered insolvent if the sum of its debts was greater than the value of all
of its assets at a fair valuation or if the present fair saleable value of its
assets was less than the amount that would be required to pay its probable
liability on its existing debts, as they become fixed in amount and mature.
ICON believes (i) that it did not enter into the Offering with fraudulent
intent, (ii) that circumstances constituting constructive fraud will not have
arisen with respect to ICON as a result of, and after giving effect to, the
Offering and (iii) that, accordingly, the property transferred to ICON as part
of the Offering and the obligations of ICON with respect to the Exchange Notes
would not be subject to such detrimental action. There can be no assurance,
however, that a court passing on these issues would make the same
determination because, among other reasons, certain courts have held that a
company's purchase of capital stock does not constitute reasonably equivalent
value or fair consideration for incurring indebtedness and, after giving
effect to the Offering, ICON will have a negative net worth on a consolidated
basis for accounting purposes.
In addition to the fraudulent conveyance risks described above, certain
courts have held that indebtedness issued in exchange for redeemed capital
stock will be subordinate to the claims of trade or other creditors regardless
of whether the entity which redeems the stock is insolvent at the time the
indebtedness was issued. It is unclear whether a court would apply these
principles to the Offering.
ABSENCE OF PUBLIC MARKET
There is no existing public market for the Original Notes or the Exchange
Notes and ICON does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. The
Initial Purchaser has advised the Company that it currently intends to make a
market in the Senior Discount Notes but it is not obligated to do so and may
discontinue such market making at any time without notice. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the Exchange Offer and the
pendency of the Shelf Registration Statement. Accordingly, no assurance can be
given that an active market will develop for any of the Exchange Notes or as
to the liquidity of the trading market for any of the Exchange Notes. If a
trading market does not develop or is not maintained, holders of the Exchange
Notes may experience difficulty in reselling such Exchange Notes or may be
unable to sell them at all. If a market for the Exchange Notes develops, any
such market may be discontinued at any time. If a trading market develops for
the Exchange Notes, future trading prices of such Exchange Notes will
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depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the market for similar
securities and other factors, including the financial condition of the
Company, the Exchange Notes may trade at a discount from their Accreted Value.
RELIANCE ON MAJOR CUSTOMERS; EXPOSURE TO THE RETAIL INDUSTRY
The Company's two largest customers together accounted for approximately
47%, 43%, 42% and 32% of the Company's revenues in 1994, 1995, 1996 and the
first quarter of 1997, respectively. The Company's largest customer, Sears
Roebuck ("Sears"), accounted for approximately 34%, 31%, 34% and 16% of the
Company's revenues in 1994, 1995, 1996 and the first quarter of 1997,
respectively. The Company's second largest customer, Sam's Warehouse Stores
("Sam's"), accounted for approximately 13%, 12%, 8% and 16% of the Company's
revenues in 1994, 1995, 1996 and the first quarter of 1997, respectively.
Accounts receivable for the Company's two largest customers accounted for
approximately 27%, 37% and 21% of total gross accounts receivable at May 31,
1995, May 31, 1996 and August 31, 1996, respectively. At May 31, 1996, Sears
and Sam's accounted for approximately 32% and 5%, respectively, of the
Company's gross accounts receivable. A third customer, Service Merchandise
Company, Inc., accounted for approximately 11% of total gross accounts
receivable at May 31, 1996 and 7% of the Company's net sales for the year then
ended. The level of the Company's sales to these customers depends in large
part on its relationships with these customers and on consumers' continuing
commitment to home fitness equipment products and on the success of customers'
efforts to market and promote the Company's products, as well as the Company's
competitiveness in terms of price, quality, product innovation, customer
service and other factors. Consistent with industry practice, the Company does
not have long term sales agreements or other commitments as to levels of
future sales. In addition, the Company is not the exclusive supplier of
fitness equipment to any of its major customers. As a result of the
HealthRider Acquisition, the Company offers its products directly to consumers
through the acquired HealthRider kiosk, store and direct response networks.
The Company's direct sales to consumers, particularly through kiosks and
stores in malls where the Company's existing customers have retail sales
outlets, could adversely affect the Company's sales and its relationships with
existing customers.
In 1995, 1996 and the first quarter of 1997 approximately 91%, 97% and 97%,
respectively, of the Company's sales were to retailers. Several significant
retailers maintain substantial account balances payable to the Company. Retail
businesses may be adversely affected by unfavorable local, regional or
national economic developments which result in reduced consumer spending.
There can be no assurance that an economic downturn would not have a material
adverse effect on the Company's customers which could reduce the Company's
sales volumes and gross margins or result in defaults in accounts receivable
from such customers. The loss of, or a substantial decrease in the amount of
purchases by, or a write-off of any significant receivables due from, any of
the Company's major customers or a number of the Company's other customers
would have a material adverse effect on the Company's business.
PRODUCT LIFE CYCLES; DEPENDENCE ON PRODUCT INNOVATION; DEPENDENCE ON
PARTICULAR PRODUCTS AND CONSUMER INTEREST IN FITNESS
Product life cycles can be short in the fitness industry and innovation is
an important component of competition. The Company's sales and gross margins
are dependent upon its success in innovating, developing and marketing new
products. Products tend to generate higher gross margins earlier in the
product life cycle (after an initial start-up period), when there are fewer
companies offering similar products, and tend to generate lower gross margins
over time as competition increases and consumer interest diminishes.
Accordingly, the Company strives to be among the first producers of attractive
new product categories (such as upright rowers) and to add new features to
existing products (such as the Space Saver feature recently added to its
treadmill line), which may increase gross margins by
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reinvigorating demand and differentiating the Company's products from similar
products offered by its competitors. Life cycles may vary significantly in
duration from product to product.
While the Company emphasizes new product innovation and product
repositioning, there can be no assurance that the Company will continue to
develop competitive products in a timely manner or that the Company will be
able to respond adequately to market trends. In addition, there can be no
assurance that new or repositioned products will gain market acceptance, that
interest in the Company's products will be sustained, that significant start-
up costs with respect to new products will be recouped or that the fitness
market will not become saturated. Moreover, although management believes that
fitness and health activities have become important for consumers, there can
be no assurance that interest in any particular fitness activity or fitness
activities in general will be sustained.
In any given year, the Company's sales may be largely attributable to one or
two product categories. For example, the Company was one of the first
manufacturers to introduce motorized treadmills for home use and believes that
it is currently the market leader in sales of such treadmills, with net sales
in 1994, 1995, 1996 and the first quarter of 1997 of $252.6 million, $235.4
million, $289.9 million and $43.9 million, respectively, representing
approximately 63%, 44%, 39% and 35%, respectively, of the Company's net sales
in such periods. The Cardio family of upright rowers was introduced in the
second quarter of fiscal 1995 and produced net sales in 1995, 1996 and the
first quarter of 1997 of $138.1 million, $259.1 million and $18.2 million,
respectively, representing 26%, 35% and 15% of the Company's net sales in such
years. Had the HealthRider Acquisition occurred on June 1, 1994, the Company
would have had net sales of upright rowers in 1995 and 1996 on a pro forma
basis of $300.5 million and $491.8 million, respectively, representing 44% and
49% of the Company's pro forma net sales in such periods. The Company's
upright rower sales declined to $18.2 million during the first quarter of
1997, compared to $47.8 million during the first quarter of 1996. In addition,
HealthRider's upright rower sales have declined substantially in calendar
1996. The decline in sales of upright rowers by the Company and HealthRider
may indicate a weakening of market demand for upright rowers. The Company
would be adversely affected if it experienced a significant decline in the
popularity of certain significant products such as its motorized treadmills or
a continued decline in sales of its upright rowers and one or more similarly
popular products were not developed and introduced by the Company in a timely
manner.
COMPETITION
The fitness equipment market is highly competitive. It is characterized by
frequent introduction of new products, often accompanied by major advertising
and promotional campaigns. The Company believes that the principal competitive
factors affecting its business include price, quality, brand name recognition,
product innovation, marketing resources and customer service.
The Company competes in the U.S. with recreational and exercise activities
offered by health clubs as well as with a number of domestic manufacturers,
domestic direct importers and foreign companies exporting fitness products to
the U.S. and, in its direct sales efforts, with major retailers or
distributors. Competitors in these areas include Precor Inc., CML Group Inc.
(under the NordicTrack(R) brand), LifeFitness, Inc. and Diversified Products
Corporation and Roadmaster Industries Inc., which are commonly owned. The
Company also believes that Reebok International Ltd. will begin marketing home
fitness equipment in the U.S. In Europe, the Company competes principally with
Tunturi, Inc. and Kettler Int'l Inc., a number of Asian importers and some of
its domestic competitors. The Company's products also indirectly compete with
outdoor fitness, sporting goods and other recreational products. Competitors
in these product areas include Huffy Corporation, Canstar Sports Inc. (a
subsidiary of Nike Inc.) and Rollerblade, Inc. Certain competitors are better
capitalized than the Company and may have greater financial and other
resources than those available to the Company. In addition, there are no
significant technological, manufacturing or marketing barriers to entry into
the fitness equipment or exercise accessory markets, although many companies
in the industry, including the Company, have sought and received numerous
patents in an effort to protect their competitive position.
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EXPANSION STRATEGY; ACQUISITIONS
An important part of the Company's strategy is to increase its sales by,
among other things: (i) developing innovative, high-quality products; (ii)
utilizing multiple distribution channels; (iii) positioning its brands to
address specific distribution channels; (iv) providing broad product
offerings; (v) maintaining low-cost flexible manufacturing; and (vi) pursuing
growth opportunities in domestic and international markets, including through
acquisitions. Each of these efforts requires significant investment and
entails a risk of poor consumer response. Product innovation, though necessary
because of product life cycles, requires a significant dedication of
resources. There can be no assurance that new products will be positively
received by consumers.
In August 1996, the Company acquired substantially all the assets and
assumed (or refinanced) substantially all the liabilities of HealthRider.
HealthRider has experienced a substantial, continuing and accelerating
deterioration of its business since the beginning of calendar 1996.
HealthRider increased its selling expense for infomercials to $14.5 million
(net of a write-off of video production costs of $1.6 million) in the first
quarter of 1996 compared to $8.5 million in the first quarter of 1995 and
committed to purchase substantially increased volumes of inventory in
anticipation of sales increases. Despite these expenditures, HealthRider's
total sales increased only modestly to $75.0 million in the first quarter of
1996 from $57.9 million in the first quarter of 1995, while its total
infomercial sales decreased by $8.6 million in the same period. These events
compounded working capital difficulties that HealthRider was already
experiencing, causing HealthRider to reduce selling expense for infomercials
to $5.7 million in the second quarter of 1996 from $10.8 million in the second
quarter of 1995, which contributed to substantial declines in HealthRider's
sales. HealthRider reported net sales in the second quarter of 1996 of $38.2
million compared to $59.1 million in the second quarter of 1995. HealthRider
also reported an operating loss for the first half of 1996 of $4.6 million
compared to operating income for the first half of 1995 of $16.5 million.
HealthRider's inventory at June 30, 1996 was $23.1 million compared to $5.5
million at June 30, 1995. Inventory in the health and fitness industry is
usually at its lowest point in the spring and early summer. The Company
believes that the decline in HealthRider's sales is due in part to (i) a
general weakening of market demand for upright rowers and (ii) the partial
saturation of the audience that can be reached through infomercials.
The Company believes that the HealthRider Acquisition constitutes an
attractive opportunity, given the purchase price. However, there can be no
assurance in this regard.
In the past, WHF and Weider Europe, B.V., who were Affiliates of the
Company, marketed certain of the Company's products outside the U.S. The
Company began directly marketing its products in Europe in the first quarter
of 1996 in the key European markets of the U.K., France, Italy and the Benelux
countries and is attempting to increase its market penetration there and in
other foreign markets. Prior to the Weider Sports Acquisition, Weider Sports
distributed the Company's products in certain other countries. In September
1996, the Company acquired certain assets of Weider Sports. In connection with
the Weider Sports Acquisition, the Company reacquired distribution rights
granted to Weider Sports in connection with the Recapitalization, subject to
certain rights granted by Weider Sports to third parties. The Company also
purchased certain assets of CanCo in connection with the WHF Settlement. The
Company does not have significant experience in conducting business in
European and other foreign markets, and fitness products have not yet been
widely accepted in these markets. The Company's European operations are not
currently profitable. There can be no assurance that the Company will be
successful in selling its products outside of the U.S. Furthermore, increased
targeting of international markets exposes the Company to the general risks of
doing business abroad, including barriers to trade such as quotas, taxes,
duties and other trade restrictions, currency fluctuations and changes in U.S.
and foreign regulations applicable to the export of the Company's products.
The Company does not currently hedge against foreign currencies other than the
Canadian dollar.
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The Company believes there may be other acquisition opportunities which
could complement its existing business, although the Company has no other
acquisition agreements and is not engaged in any discussions regarding other
acquisitions. Any such acquisitions, like the Weider Sports Acquisition, the
CanCo Acquisition and the HealthRider Acquisition, will require integration of
such businesses with the Company's current operations. The HealthRider
Acquisition and the Weider Sports and CanCo acquisitions were financed by
additional borrowings under the Credit Agreement, and any future acquisitions
may involve additional borrowings. There can be no assurance that HealthRider,
Weider Sports or CanCo or any other business that the Company may acquire in
the future, will be effectively and profitably integrated with the Company.
Expansion or acquisition costs could adversely affect the Company's liquidity
and financial stability.
PRICE SENSITIVITY
The Company's customers, especially mass merchandisers, are highly price
sensitive. The Company sets many product prices on an annual basis but
purchases raw materials and components under purchase orders for periods of
less than one year. Accordingly, the Company sets prices for many products
before it has complete knowledge of the costs of raw materials and components
and sometimes before product development is complete and production costs have
been firmly established. After it has established prices, the Company may be
unable to pass cost increases along to its customers, or to compete
effectively if it seeks to pass such costs along, which could have a material
adverse effect on the Company.
RELIANCE ON CERTAIN SUPPLIERS
Since the Company purchases certain components and finished products from
foreign suppliers located in Canada, China, Taiwan and various other
countries, the Company is subject to the general risks of doing business
abroad, particularly with respect to its purchases from China, including
delays in shipment, work stoppages, adverse fluctuations in currency exchange
rates, increases in import duties and tariffs, changes in foreign regulations,
changes in most-favored-nation status and political instability. In addition,
although the Company seeks to maintain dual sources for the materials and
components required for its products, the Company relies on single sources for
certain of its component parts and finished products, including treadmills and
upright rowers. To further control manufacturing and delivery problems
associated with sourcing delays, the Company asks its electronics vendors to
maintain specified inventory levels for some long lead-time components.
Sourcing delays have been occasionally experienced in the past with new
product introductions. In addition, the Company has identified alternative
sources for many key raw materials and components. Despite these precautions,
however, the Company's ability to deliver its products on time is susceptible
to disruptions in its supply of raw materials and components, in part because
of the time needed to retool alternative component manufacturers to produce
required components. In particular, the imposition of trade sanctions on China
could have a material adverse effect on the Company. The occurrence of any of
the risks relating to its foreign suppliers or the loss of certain of these
suppliers could adversely affect the Company's business until alternative
supply arrangements could be secured, particularly if such loss occurred
during the Company's key production periods. There can be no assurance that
the Company would be able to obtain products and supplies on satisfactory
terms should any of these risks materialize.
SEASONALITY; FLUCTUATION IN QUARTERLY RESULTS
Historically, the Company has sold the majority of its products to its
customers in its second and third fiscal quarters (i.e., from September
through February). Increased sales typically have occurred in the Christmas
retail season and the beginning of a new calendar year because of increased
promotions by customers, increased consumer purchases and seasonal changes
that prompt people to exercise inside. The Company has in the past, from time
to time, incurred net losses in the first and
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fourth quarters of its fiscal year. If actual sales for a quarter do not meet
or exceed projected sales for that quarter, expenditures and inventory levels
could be disproportionately high for such quarter and the Company's cash flow
and earnings for that quarter and future quarters could be adversely affected.
The timing of large orders from customers and the mix of products sold may
also contribute to quarterly or other periodic fluctuations.
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends to a considerable extent on the performance of
its senior management team. The loss of services of either Scott Watterson,
the Company's Chief Executive Officer, or Gary Stevenson, the Company's Chief
Operating Officer, as well as the loss of other members of the Company's
management team, could have a material adverse effect on the Company. Although
the Company entered into employment agreements with Messrs. Watterson and
Stevenson which extend through November 1999, they are able to terminate their
employment for cause at any time or without cause upon six months' notice.
However, the employment agreements contain a non-competition clause which runs
for at least two years (which the Company can extend to four years at its
option for an additional severance payment equal to the employee's base salary
plus bonus pro rated for the period of the extension) from the date of the
executive's termination. In addition to the provisions of their employment
agreements, Messrs. Watterson and Stevenson have entered into separate non-
competition agreements with the Company that run through November 1998.
CONTROL BY EXISTING STOCKHOLDERS
The Company is controlled by Affiliates of Bain and the Company's executive
officers and directors. All current stockholders and warrantholders of IHF
Capital have entered into a stockholders agreement (the "Stockholders
Agreement") which includes an agreement with respect to how they will vote on
certain matters, including the election of directors, which effectively
results in Bain and its Affiliates having the ability to control or
significantly influence the election of the Company's directors and the
outcome of corporate actions requiring stockholder approval. The voting
provisions of the Stockholders Agreement will expire on November 14, 2004.
This concentration of ownership and voting power may have the effect of
delaying or preventing a change in control of the Company.
PRODUCT LIABILITY
Due to the nature of the Company's products, the Company is subject to
product liability claims involving personal injuries allegedly related to the
Company's products. As of August 31, 1996, the Company had $1.5 million in
reserves for product liability related losses. The Company currently carries
an occurrence-based product liability insurance policy. The policy for the
period from October 1, 1996 to October 30, 1998 provides coverage of up to $25
million per occurrence, and $25 million in the aggregate annually with a
deductible on each claim of $250,000 for claims related to trampolines and
$100,000 for claims related to all other products. Previously, the Company
maintained similar occurrence-based policies with somewhat lower coverage
limits and higher deductibles. The Company believes that its insurance has
been and continues to be adequate to cover product liability claims.
Nevertheless, currently pending claims and any future claims are subject to
the uncertainties related to litigation, and the ultimate outcome of any such
proceedings or claims cannot be predicted. Due to uncertainty with respect to
the nature and extent of manufacturers' and distributors' liability for
personal injuries, there is also no assurance that the product liability
insurance of the Company is or will be adequate to cover such claims. In
addition, there can be no assurance that the Company's insurers will be
solvent when required to make payments on claims. Furthermore, there can be no
assurance that insurance will remain available or, if available, that it will
not be prohibitively expensive. The loss of insurance coverage or claims
exceeding that coverage could have a material adverse effect on the Company's
results of operations and financial condition. In addition, the Consumer
Products Safety Commission has conducted an inquiry and made claims relating
to defects in certain of HealthRider's
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products. Although no consumer litigation has resulted from such defects to
date, there can be no assurance that consumer litigation will not result.
FTC PRELIMINARY INVESTIGATIONS
The Federal Trade Commission ("FTC") is conducting an investigation to
determine whether the Company may have made excessive advertising claims with
respect to its "CrossWalk" treadmill products (which constitute a substantial
portion of the Company's sales), in violation of the Federal Trade Commission
Act. The FTC has asked the Company to voluntarily provide information and
documents on several occasions, and the Company has responded to these
requests.
The Company believes that its advertising for the CrossWalk products was
appropriately substantiated, and therefore that the Company did not make
excessive advertising claims. The FTC and the Company are negotiating to
resolve this matter through a consent decree. If these discussions do not
resolve the matter, and if the FTC concludes that the Company made excessive
advertising claims and issues a complaint, it may seek relief in the form of a
cease and desist order, civil monetary penalties and/or consumer redress in
the form of, among other things, refunds to consumers and public notification
respecting the advertisements, if any, which the FTC concludes were excessive.
Management does not believe that this matter will have a material adverse
effect on its results of operations or financial position, however there can
be no assurance in this regard.
The FTC is conducting a similar preliminary investigation of HealthRider to
determine whether HealthRider may have made excessive advertising claims with
respect to its HealthRider family of products (which constitute virtually all
of HealthRider's sales), in violation of the Federal Trade Commission Act. The
FTC has asked HealthRider to voluntarily provide documents and information on
several occasions, and HealthRider has responded to these requests. If the FTC
were to conclude that HealthRider did violate the Federal Trade Commission
Act, it may seek relief in the form of a consent decree, a cease and desist
order, civil money penalties and public notification respecting the
advertisements, if any, which the FTC concludes were excessive. The Company
has assumed all of HealthRider's liabilities in connection with this matter.
Management does not believe that this matter will have a material adverse
effect on its results of operations or financial position, however there can
be no assurance in this regard.
FRAUDULENT CONVEYANCE RISK REGARDING HEALTHRIDER ACQUISITION
In the event of a bankruptcy or similar proceeding relating to, or a lawsuit
by or on behalf of unpaid creditors of, HealthRider, a court may review the
HealthRider Acquisition under relevant federal and state fraudulent conveyance
statutes (the "fraudulent conveyance statutes"). Generally, if a court were to
find either (i) that HealthRider entered into the HealthRider Acquisition with
the intent ("fraudulent intent"), which in certain circumstances may be
presumed, of hindering, delaying or defrauding its current or future creditors
or (ii) that, after giving effect to the HealthRider Acquisition, HealthRider
both (a) received (or was deemed to have received under applicable law) less
than reasonably equivalent value or fair consideration for or in connection
with the transfer of assets and liabilities as part of the HealthRider
Acquisition and (b) (1) was insolvent on the date such transfer was made or
was rendered insolvent as a result such transfer, (2) was engaged or about to
engage in a business or transaction for which its assets constituted
unreasonably small capital or (3) intended to incur, or believed that it would
incur, debts beyond its ability to pay as such debts matured (as all of the
foregoing terms are defined in or interpreted under the fraudulent conveyance
statutes) (the circumstances that meet the requirements of this clause (ii)
are referred to herein as "constructive fraud"), such court could, under
certain fraudulent conveyance statutes, unwind the HealthRider Acquisition or
require the Company to make additional payments with respect thereto. In
addition, while the Company believes that it paid fair value for the assets
acquired, HealthRider was not prohibited from paying dividends and making
other payments to its stockholders. Such dividends or payments, if any, would
reduce the assets
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available to satisfy the claims of creditors of HealthRider and therefore
enhance the risk of a bankruptcy, reorganization or similar proceeding
involving, or lawsuit on behalf of creditors of, HealthRider.
ENVIRONMENTAL CONSIDERATIONS
The Company's operations are subject to federal, state and local
environmental and health and safety laws and regulations that impose workplace
standards and limitations on the discharge of pollutants into the environment
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances
and wastes. The nature of the Company's manufacturing and assembly operations
expose it to the risk of claims with respect to environmental matters, and
although compliance with local, state and federal requirements relating to the
protection of the environment has not had a material adverse effect on the
Company's financial condition or results of operations, there can be no
assurance that material costs or liabilities will not be incurred in
connection with such environmental matters. Future events, such as changes in
existing laws and regulations or enforcement policies or the discovery of
contamination on sites owned or operated by the Company, may give rise to
additional compliance costs or operational interruptions which could have a
material adverse effect on the Company's financial condition.
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CAPITALIZATION
The following table sets forth as of August 31, 1996 (i) the consolidated
capitalization of the Company and (ii) the consolidated capitalization as
adjusted to reflect (a) the sale by the Company of $162.0 million aggregate
principal amount of Senior Discount Notes ($82.5 million gross proceeds); (b)
the application of the estimated net proceeds to the Company from the Offering
(after deducting the estimated offering expenses) to finance the purchase of
the common stock of IHF Capital and warrants to purchase common stock of IHF
Capital held by the WHF Stockholders for approximately $42.5 million and to
finance the purchase of all of the outstanding IHF Holdings preferred stock
held by WHF and options to purchase IHF Holdings preferred stock held by
certain executive officers of IHF Capital for approximately $35.8 million; (c)
the effect of the HealthRider Acquisition; and (d) the Weider Sports
Acquisition, the CanCo Acquisition, the payment of settlement expenses and the
settlement of payables and receivables between the Company's subsidiaries and
WHF, in connection with the WHF Settlement, which together total approximately
$25.5 million, as if such transactions had occurred on August 31, 1996. This
table should be read in conjunction with the historical consolidated financial
statements, the unaudited pro forma financial information and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 31, 1996
-------------------------
HISTORICAL(1) AS ADJUSTED
------------- -----------
(IN MILLIONS)
<S> <C> <C>
Short-term debt, consisting of current portions of
long-term debt and capital lease obligations...... $ 4.6 $ 4.2
Long-term liabilities (excluding current portion):
Capital lease obligations........................ 18.1 1.8
Revolving credit borrowings...................... 142.0 167.5
Term loans....................................... 30.3 30.3
Senior Subordinated Notes........................ 99.3 99.3
Discount Notes................................... 71.8 71.8
Senior Discount Notes............................ -- 82.5
Other long-term debt............................. -- .8
------- -------
Total long-term liabilities...................... 361.5 454.0
------- -------
Minority interest in preferred stock of subsidiary. 49.2 -- (2)
Stockholders' equity:
Common stock and additional paid-in-capital...... 77.7 48.6
Receivable from officers for purchase of equity.. (.8) (.8)
Cumulative translation adjustment................ .2 .2
Accumulated deficit.............................. (189.3) (209.6)(3)
------- -------
Total stockholders' equity (deficit)............. (112.2) (161.6)
------- -------
Total Capitalization........................... $ 303.1 $ 296.6
======= =======
</TABLE>
- --------
(1) Represents the unaudited consolidated capitalization of ICON at August 31,
1996. These amounts carry over the historical basis of ICON's parent, IHF
Capital, adjusted to reflect the fact that, as of November 12, 1996, ICON
became a wholly-owned subsidiary of IHF Capital and IHF Holdings became a
wholly-owned subsidiary of ICON.
(2) Reflects (i) the redemption of (a) the IHF Holdings preferred stock at
face value less a $3.9 million discount and (b) the options to purchase
IHF Holdings preferred stock at face value less the exercise price and a
$.3 million discount, and (ii) the application of gross proceeds by the
Company from the Offering.
(3) The change in accumulated deficit of $20.3 million represents the non-
recurring expenses, including the related tax benefits, expected to be
incurred in the second and third quarters of 1997. See "Unaudited Pro
Forma Financial Data."
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BACKGROUND
On November 14, 1994, the Company effected the Recapitalization in which,
(i) the shareholders of the Recapitalized Companies (the "Original
Shareholders") contributed their capital stock of the Recapitalized Companies
to the Company, in exchange for $21.9 million of common stock of IHF Capital,
$36.0 million of IHF Holdings Preferred Stock and Preferred Warrants, and
$159.3 million of demand promissory notes (the "Shareholder Notes"); (ii)
certain senior executives of the Company exchanged their options to purchase
capital stock of the Recapitalized Companies for $34.7 million of replacement
options to purchase common stock of IHF Capital, of which $26.4 million were
Redeemable Options and $4.0 million of replacement options to purchase IHF
Holdings Preferred Stock and Preferred Warrants; (iii) affiliates of Bain
Capital and certain other investors purchased $40.4 million of common stock of
IHF Capital; (iv) $60.0 million in proceeds of IHF Holdings Units, each
consisting of $1,000 principal amount at maturity of the Holdings Discount
Notes, one warrant to purchase 6.46726 shares of Class A Common Stock of IHF
Capital at an exercise price of $.01 per share and one warrant to purchase
.64673 shares of Class L Common Stock of IHF Capital at an exercise price of
$.01 per share, and $100.0 million in proceeds of Health & Fitness Units, each
consisting of $1,000 principal amount at maturity of the Senior Subordinated
Notes, one warrant to purchase 1.97531 shares of Class A Common Stock of IHF
Capital at an exercise price of $.01 per share and one warrant to purchase
.19753 shares of Class L Common Stock of IHF Capital at an exercise price of
$.01 per share, were issued; (v) term borrowings of $35.0 million and
revolving borrowings of $111.5 million under the Credit Agreement were made;
and (vi) the Shareholder Notes and certain indebtedness of the Recapitalized
Companies were repaid.
Concurrent with the Recapitalization Closing, the Company obtained exclusive
licenses to market fitness equipment and certain non-ingestive sports medicine
products under the "Weider" and related brand names. Under one such license,
the Company made a $5.0 million payment at the Recapitalization Closing; the
other license provides for royalty payments to be paid over time. See
"Business--Legal Proceedings--WHF Litigation" and "--Settlement of WHF
Litigation." The Company also executed non-compete agreements with WHF and
certain key executives under which it made total payments of $6.5 million. In
addition, after the Recapitalization, the Company redeemed the Redeemable
Options for $26.4 million.
On November 12, 1996, ICON was incorporated as a wholly-owned subsidiary of
IHF Capital and IHF Holdings became a wholly-owned subsidiary of ICON.
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UNAUDITED PRO FORMA FINANCIAL DATA
The following pages present the unaudited pro forma consolidated results of
operations of the Company and its Subsidiaries for the year ended May 31,
1996, three months ended August 31, 1996, and the twelve month period
beginning September 3, 1995 and ending August 31, 1996, as well as its
unaudited pro forma consolidated balance sheet as of August 31, 1996. The
historical balance sheet at August 31, 1996 and the historical results of
operations for the periods presented carry over the consolidated financial
position and consolidated results of operations of the Company's parent, IHF
Capital, resulting from the contribution of IHF Capital's investment in IHF
Holdings to the Company. The principal difference between the consolidated
financial position of IHF Capital and the consolidated financial position of
the Company is the composition of the Company's common stock and additional
paid-in capital accounts. These accounts reflect the fact that the Company is
a wholly-owned subsidiary of IHF Capital. In addition, the unaudited pro forma
consolidated financial statements have been adjusted to reflect the following
events:
(i) the sale of $162.0 million aggregate principal face amount of Senior
Discount Notes at an aggregate price of $82.5 million, resulting in net
proceeds of approximately $78.3 million;
(ii) the purchase of all of the IHF Holdings preferred stock and options
to purchase IHF Holdings preferred stock at a price of $35.8 million
(representing a $4.2 million discount from face value, and the forgiveness
of $9.2 million of accrued dividends thereon) at August 31, 1996 (accrued
dividends forgiven were $10.3 million at November 20, 1996);
(iii) the purchase of the common stock of IHF Capital and warrants to
purchase common stock of IHF Capital owned by the WHF Stockholders at a
price of approximately $42.5 million;
(iv) the WHF settlement, including the Weider Sports Acquisition, the
CanCo Acquisition, the payment of settlement expenses and the settlement of
payables and receivables between ICON and WHF, which together total
approximately $25.5 million, and the amortization of goodwill resulting
from the Weider Sports Acquisition and the CanCo Acquisition;
(v) the payment of $4.2 million of fees and expenses relating to the
Offering; and
(vi) the HealthRider Acquisition.
The Unaudited Pro Forma Consolidated Statement of Operations gives effect to
the events described above as if they had occurred on June 1, 1995. The
Unaudited Pro Forma Consolidated Balance Sheet data give effect to the events
described above as if they had occurred on August 31, 1996, except for the
HealthRider Acquisition which closed on August 16, 1996 and for which the
historical consolidated balance sheet data of the Company and its subsidiaries
includes the impact of this transaction. The statement of operations data and
balance sheet data of Weider Sports are not reflected in the unaudited pro
forma financial data because they are not significant; however, the statement
of operations data and balance sheet data of CanCo have been reflected in the
unaudited pro forma financial data, though the CanCo acquisition was not
considered significant. The following unaudited pro forma financial statements
have been prepared from, and should be read in connection with, the historical
consolidated financial statements of the Company and the related notes
thereto.
The unaudited pro forma financial statements are provided for informational
purposes only and are not necessarily indicative of the consolidated results
of operations or financial position of the Company and its subsidiaries had
the transactions assumed therein occurred, nor are they necessarily indicative
of the results of operations which may be expected to occur in the future. The
Company expects that HealthRider revenues in the period subsequent to the
HealthRider Acquisition will decline substantially.
27
<PAGE>
The unaudited pro forma balance sheet also includes the following charges
related to the WHF Settlement and the HealthRider Acquisition which the
Company and its subsidiaries expect to incur in the second and third quarters
of fiscal 1997: (i) approximately $5.0 million in integration expenses in
connection with the HealthRider Acquisition; (ii) a significant, non-
recurring, non-cash increase in cost of goods sold of approximately $12.0
million, based on HealthRider's inventory at August 16, 1996 (due to the fact
that the purchase accounting for the HealthRider Acquisition included writing-
up the book value of the acquired HealthRider inventory to fair market value
less estimated sales costs); and (iii) approximately $15.8 million in
settlement expenses related to the WHF Settlement. Such charges aggregate
$20.3 million, net of the related tax benefit of $12.5 million.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHRIDER
STATEMENT OF CANCO
OPERATIONS STATEMENT OF
HISTORICAL TWELVE MONTHS OPERATIONS ADJUSTMENTS PRO FORMA
YEAR ENDED ENDED YEAR ENDED -------------------------- YEAR ENDED
MAY 31, JUNE 30, MAY 31, 1996 WELDER SETTLEMENT MAY 31,
1996 1996 (1) (2) COMBINED & ACQUISITIONS OFFERING 1996
---------- ------------- ------------ ---------- ----------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $747,577 $237,565(3) $51,316 $1,036,458 $(51,316)(a) $ -- $985,142
Cost of sales........... 541,443 87,612(4) 43,387 672,442 (50,716)(a) -- 621,726
-------- -------- ------- ---------- -------- ------- --------
Gross profit........... 206,134 149,953 7,929 364,016 (600) -- 363,416
Operating expenses
Selling................ 93,924 131,801 20 225,745 (9,966)(b) -- 215,779
Research and
development........... 6,759 -- -- 6,759 -- -- 6,759
General and
administrative........ 48,055 17,562 4,315 69,932 (4,208)(c) -- 65,268
(456)(d)
Write-off of goodwill.. -- -- 4,153 4,153 (4,153)(e) -- --
Compensation expense
attributable to
options............... 2,769 -- -- 2,769 -- -- 2,769
-------- -------- ------- ---------- -------- ------- --------
Total operating ex-
pense............... 151,507 149,363 8,488 309,358 (18,783) -- 290,575
-------- -------- ------- ---------- -------- ------- --------
Income (loss) from
operations............. 54,627 590 (559) 54,658 18,183 -- 72,841
Interest expense........ 36,527 1,405 99 38,031 4,503 (f) 11,550 (g) 53,418
(666)(d)
Other income............ -- (2,264) (240) (2,504) -- -- (2,504)
Amortization of deferred
financing fees......... 3,483 -- -- 3,483 -- 420 (h) 3,903
Dividends on cumulative
preferred stock of a
subsidiary held by a
minority interest...... 5,100 -- -- 5,100 -- (5,100)(i) --
-------- -------- ------- ---------- -------- ------- --------
Income (loss) before
taxes.................. 9,517 1,449 (418) 10,548 14,346 (6,870) 18,024
Provision for income
taxes.................. 7,896 1,405 413 9,714 3,873 (j) (4,549)(j) 9,038
-------- -------- ------- ---------- -------- ------- --------
Net income (loss)....... $ 1,621 $ 44 $ (831) $ 834 $ 10,473 $(2,321) $ 8,986
======== ======== ======= ========== ======== ======= ========
OTHER DATA:
Cash interest expense.. $ 32,892
Depreciation and
amortization (5)...... 23,236
Capital expenditures... 21,582
Ratio of earnings to
fixed charges (6)..... 1.3x
</TABLE>
- --------
(1) HealthRider's fiscal year ends December 31. For purposes of pro forma
presentation, the twelve month period ended June 30, 1996 is included and
represents the period comparable to the Company's fiscal year ended May
31, 1996. In the opinion of management, these unaudited financial
statements include all adjustments necessary for a fair presentation of
the periods presented and has been prepared on a basis consistent with
HealthRider's audited consolidated financial statements.
(2) CanCo's fiscal year ends May 31.
(3) The Company and its subsidiaries expect to increase their net sales as a
result of the HealthRider Acquisition, but by substantially less than 100%
of HealthRider's net sales.
(4) In conjunction with the HealthRider acquisition, the Company and its
subsidiaries will recognize a significant, non-recurring, non-cash
increase in cost of goods sold in the second and third quarters of 1997 of
approximately $12.0 million related to the fact that the purchase
accounting for the HealthRider Acquisition included writing-up the book
value of the acquired HealthRider inventory to fair market value less
estimated sales costs. This inventory write-up will result in higher cost
of goods sold and lower gross profits until the acquired inventory has
been sold. The effect of this charge is not reflected in the unaudited pro
forma statement of operations.
(5) Includes amortization of debt discount and deferred financing fees.
(6) Earnings consist of income from operations before income taxes and fixed
charges. Fixed charges consist of interest expense on debt and
amortization of financing costs, the accumulating preferred stock
dividends and the portion (approximately one-fourth) of rental expense
that the Company believes is representative of the interest component of
rental expense.
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHRIDER CANCO
STATEMENT OF STATEMENT OF
HISTORICAL OPERATIONS OPERATIONS
THREE MONTHS THREE MONTHS THREE MONTHS ADJUSTMENTS PRO FORMA
ENDED ENDED ENDED -------------------------- THREE MONTHS
AUGUST 31, JUNE 30, AUGUST 31, WELDER SETTLEMENT ENDED AUGUST
1996 (1) 1996 (2) 1996 (3) COMBINED & ACQUISITIONS OFFERING 31, 1996
------------ ------------ ------------ -------- ----------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $123,018 $38,141 $8,999 $170,158 (8,999)(a) $ -- $161,159
Cost of sales........... 89,244 14,975 7,415 111,634 (8,399)(a) -- 103,235
-------- ------- ------ -------- ------ ------ --------
Gross profit........... 33,774 23,166 1,584 58,524 (600) -- 57,924
Operating expenses
Selling................ 16,920 25,113 -- 42,033 (1,855)(b) -- 40,178
Research and
development........... 1,639 -- -- 1,639 -- -- 1,639
General and
administrative........ 10,617 4,696 667 15,980 (1,125)(c) -- 14,551
(304)(d)
-------- ------- ------ -------- ------ ------ --------
Total operating
expense............. 29,176 29,809 667 59,652 (3,284) -- 56,368
-------- ------- ------ -------- ------ ------ --------
Income from operations.. 4,598 (6,643) 917 (1,128) 2,684 -- 1,556
Interest expense........ 8,658 949 7 9,614 1,126 (f) 2,888 (g) 13,137
(491)(d)
Other income............ -- (722) (51) (773) -- -- (773)
Amortization of deferred
financing fees......... 949 -- -- 949 -- 105 (h) 1,054
Dividends on cumulative
redeemable preferred
stock of a subsidiary
held by a minority
interest............... 1,275 -- -- 1,275 -- (1,275)(i) --
-------- ------- ------ -------- ------ ------ --------
Income (loss) before
taxes.................. (6,284) (6,870) 961 (12,193) 2,049 (1,718) (11,862)
Provision for income
taxes.................. (1,213) (2,384) 299 (3,298) 779 (j) (1,137)(i) (3,656)
-------- ------- ------ -------- ------ ------ --------
Net income (loss)....... $ (5,071) $(4,486) $ 662 $ (8,895) $1,270 $ (581) $ (8,206)
======== ======= ====== ======== ====== ====== ========
Other Data:
Cash interest expense.. $ 7,704
Depreciation and
amortization (4)...... 6,841
Capital expenditures... 7,819
Ratio of earnings to
fixed charges (5)..... -- (6)
</TABLE>
- -------
(1) For purposes of the pro forma presentation, the historical three month
period ended August 31, 1996 for the Company and its subsidiaries excludes
the results of operations of HealthRider subsequent to an acquisition by a
subsidiary of the Company on August 16, 1996.
(2) HealthRider's fiscal year ends on December 31. For purposes of the pro
forma presentation, the three month period ended June 30, 1996 represents
the period comparable to the Company's three month period ended August 31,
1996. These results of operations have been included in both the twelve
month period ended June 30, 1996 and the three month period ended June 30,
1996 for HealthRider.
(3) CanCo's fiscal year ends on May 31.
(4) Includes amortization of debt discount and deferred financing fees.
(5) Earnings consist of income from operations before income taxes and fixed
charges. Fixed charges consist of interest expense on debt and
amortization of financing costs, the accumulating preferred stock
dividends and the portion (approximately one-fourth) of rental expense
that the Company believes is representative of the interest component of
rental expense.
(6) Earnings were insufficient to cover fixed charges by $11.9 million.
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHRIDER CANCO
STATEMENT OF STATEMENT OF PRO FORMA
HISTORICAL OPERATIONS OPERATIONS ADJUSTMENTS TWELVE
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS ----------------------- MONTHS
ENDED ENDED ENDED WEIDER ENDED
AUGUST 31, JUNE 30, MAY 31, SETTLEMENT & AUGUST 31,
1996(1) 1996(2) 1996(3) COMBINED ACQUISITIONS OFFERING 1996
------------- ------------- ------------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $745,756 $237,565(4) $51,316 $1,034,637 $(51,316)(a) $ -- $983,321
Cost of sales........... 539,755 87,612(5) 43,387 670,754 (50,716)(a) -- 620,038
-------- -------- ------- ---------- -------- ------- --------
Gross profit........... 206,001 149,953 7,929 363,883 (600) -- 363,283
Operating expenses
Selling................ 95,015 131,801 20 226,836 (9,966)(b) -- 216,870
Research and
development........... 6,852 -- -- 6,852 -- -- 6,852
General and
administrative........ 48,581 17,562 4,315 70,458 (4,208)(c) -- 65,794
(456)(d)
Write-off of goodwill.. -- -- 4,153 4,153 (4,153)(e) -- --
Compensation expense
attributable to
options............... 2,769 -- -- 2,769 -- -- 2,769
-------- -------- ------- ---------- -------- ------- --------
Total operating
expense............... 153,217 149,363 8,488 311,068 (18,783) -- 292,285
-------- -------- ------- ---------- -------- ------- --------
Income (loss) from
operations............. 52,784 590 (559) 52,815 18,183 -- 70,998
Interest expense........ 36,803 1,405 99 38,307 4,503 (f) 11,550(g) 53,694
(666)(d)
Other income............ -- (2,264) (240) (2,504) -- -- (2,504)
Amortization of deferred
financing fees......... 3,571 -- -- 3,571 -- 420(h) 3,991
Dividends on cumulative
preferred stock of a
subsidiary held by a
minority interest...... 5,100 -- -- 5,100 -- (5,100)(i) --
-------- -------- ------- ---------- -------- ------- --------
Income (loss) before
taxes.................. 7,310 1,449 (418) 8,341 14,346 (6,870) 15,817
Provision for income
taxes.................. 7,370 1,405 413 9,188 3,873 (j) (4,549)(j) 8,512
-------- -------- ------- ---------- -------- ------- --------
Net income (loss)....... $ (60) $ 44 $ (831) $ (847) $ 10,473 $(2,321) $ 7,305
======== ======== ======= ========== ======== ======= ========
Other Data:
Cash interest expense.. $ 32,455
Depreciation and
amortization(6)....... 24,686
Capital expenditures... 24,349
Ratio of earnings to
fixed charges(7)...... 1.3x
</TABLE>
- -------
(1) For purposes of the pro forma presentation, the historical twelve month
period from September 3, 1995 to August 31, 1996 for the Company and its
subsidiaries excludes the results of operations of HealthRider subsequent
to its acquisition by a subsidiary of the Company on August 16, 1996.
(2) HealthRider's fiscal year ends on December 31. For purposes of the pro
forma presentation, the twelve month period ended June 30, 1996 is
included and represents the period comparable to the Company's trailing
twelve month period ended August 31, 1996. In the opinion of management,
these unaudited financial statements include all adjustments necessary for
a fair presentation of the periods presented and have been prepared on a
basis consistent with HealthRider's audited consolidated financial
statements.
(3) CanCo's fiscal year ends on May 31. For purposes of the pro forma
presentation, the fiscal year ended May 31, 1996 is included and
represents the period comparable to the Company's trailing twelve month
period ended August 31, 1996 for which it was practicable to obtain
financial data.
(4) The Company and its subsidiaries expect to increase their net sales as a
result of the HealthRider Acquisition, but by substantially less than 100%
of HealthRider's net sales.
(5) In conjunction with the HealthRider acquisition, the Company and its
subsidiaries will recognize a significant, non-recurring, non-cash
increase in cost of goods sold in the second and third quarters of 1997 of
approximately $12.0 million related to the fact that the purchase
accounting for the HealthRider Acquisition included writing-up the book
value of the acquired HealthRider inventory to fair market value less
estimated sales costs. This inventory write-up will result in higher cost
of goods sold and lower gross profits until the acquired inventory has
been sold. The effect of this charge is not reflected in the unaudited pro
forma statement of operations.
(6) Includes amortization of debt discount and deferred financing fees.
(7) Earnings consist of income from operations before income taxes and fixed
charges. Fixed charges consist of interest expense on debt and
amortization of financing costs, the accumulating preferred stock
dividends and the portion (approximately one-fourth) of rental expense
that the Company believes is representative of the interest component of
rental expense.
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
(a) Represents the elimination of CanCo product sales to the Company and the
elimination of the cost of product sales, as adjusted for profits in the
CanCo inventory held by the Company as of period end.
(b) Represents the elimination of royalties paid by HealthRider in accordance
with certain royalty agreements which were canceled or amended in
conjunction with the HealthRider Acquisition ($6.7 million and $1.0 million
for the twelve months ended June 30, 1996 and the three months ended June
30, 1996, respectively) and the elimination of the monthly retainer fees
paid by HealthRider in accordance with a redundant advertising agreement
canceled in conjunction with the HealthRider Acquisition ($3.3 million and
$.8 million for the twelve months ended June 30, 1996 and the three months
ended June 30, 1996, respectively).
(c) Represents adjustments to general and administrative expenses as summarized
below:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
AUGUST 31, 1996
AND FISCAL YEAR THREE MONTHS
ENDED ENDED AUGUST
MAY 31, 1996 31, 1996
------------------- ------------
<S> <C> <C>
Elimination of HealthRider executive and
related severance costs for terminated
executives performing duplicate functions as
ICON executives............................. $(1,725) $(1,040)
Elimination of the write-down of fixed assets
recorded by CanCo in conjunction with the
CanCo Acquisition(1)........................ (315) --
Elimination of executive bonuses paid by
HealthRider and CanCo (net of additional
bonuses payable at the historical rate of
adjusted earnings by the Company applied to
the earnings of CanCo and HealthRider)...... (1,612) (221)
Elimination of management fee paid by CanCo
to the Company and certain executives of the
Company in connection with the termination
of a management fee agreement............... (1,100) --
Additional amortization of goodwill
attributable to the excess purchase price of
Weider Sports Equipment and CanCo over the
net assets acquired......................... 544 136
------- -------
$(4,208) $(1,125)
======= =======
</TABLE>
- --------
(1) This adjustment represents the elimination of a one-time charge which
was recorded in the historical accounts of CanCo which results directly
from the acquisition of CanCo. The historical statement of operations
of CanCo for the year ended May 31, 1996 was adjusted to reflect the
negotiated discount for the fixed assets and inventory of CanCo being
purchased by the Company's subsidiaries and the elimination of the
historical amount of goodwill recorded in the balance sheet of CanCo at
May 31, 1996. Had the CanCo acquisition not been consummated, these
adjustments would not have been recorded in the statement of operations
of CanCo.
(d) Represents elimination of the depreciation ($.5 million and $.3 million for
the twelve months ended June 30, 1996 and the three months ended June 30,
1996, respectively) on the building acquired by a subsidiary of the Company
in connection with the HealthRider Acquisition and the related interest
($.7 million and $.5 million for the twelve months ended June 30, 1996 and
the three months ended June 30, 1996, respectively) incurred on the capital
lease obligation for such building as recorded in the historical accounts
of HealthRider. The Company intends to sell such building and is currently
in the process of obtaining the necessary appraisals. The Company expects
to consummate the sale of the building within one year of the closing of
the HealthRider Acquisition.
(e) Represents elimination of the write-off of goodwill by CanCo recorded in
conjunction with the CanCo Acquisition. See footnote (1) to adjustment (c)
above.
32
<PAGE>
(f) Represents additional interest expense (at a rate of 8.50%) on the
additional borrowings under the Company's credit agreement required to
effect the HealthRider Acquisition ($27.5 million) and the WHF Settlement
($25.5 million). The pro forma statement of operations does not give
effect to the $15.8 million of settlement expenses incurred in connection
with the WHF Settlement.
(g) Represents additional interest expense on the $162.0 million aggregate
principal ($82.5 million gross proceeds) of the Senior Discount Notes
offered at a 14.00% effective rate.
(h) Represents additional amortization of deferred financing fees of $4.2
million recorded in connection with the $162.0 million aggregate principal
of Senior Discount Notes offered.
(i) Represents elimination of the cumulative dividends recorded during the
period on the IHF Holdings Preferred Stock and the options to purchase IHF
Holdings Preferred Stock redeemed in connection with the Offering.
(j) Represents the additional income tax expense resulting from the pro forma
adjustments to income at a 38% effective rate. Income tax adjustments
exclude the impact of the adjustment to eliminate the write-off of
goodwill in conjunction with the CanCo Acquisition and the adjustment to
eliminate the cumulative dividends which do not give rise to tax
deductions.
33
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
CANCO ------------------------
BALANCE PRO
HISTORICAL SHEET WELDER FORMA
AUGUST 31, MAY 31, SETTLEMENT & AUGUST 31,
1996 1996 COMBINED ACQUISITIONS OFFERING 1996
---------- ------- --------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 4,587 $ 1,068 $ 5,655 $ (1,068)(a) $ -- $ 4,587
Short-term investments. -- 2,217 2,217 (2,217)(a) -- --
Accounts receivable,
net................... 129,685 2,031 131,716 2,459 (b) -- 132,144
(2,031)(a)
Inventory.............. 163,705 707 164,412 3,388 (c) -- 155,800
(12,000)(c)
Deferred income taxes.. 5,240 -- 5,240 12,455 (c) -- 17,695
Prepaid income taxes... 9,476 -- 9,476 -- -- 9,476
Other assets........... 8,877 25 8,902 (1,200)(b) -- 7,677
(25)(a)
--------- ------- --------- --------- -------- ---------
Total current assets... 321,570 6,048 327,618 (239) -- 327,379
Property and equipment,
net.................... 71,484 315 71,799 1,343 (b) -- 56,296
(16,846)(d)
Deferred income taxes... 5,629 -- 5,629 -- -- 5,629
Other assets............ 26,685 -- 26,685 5,439 (b) 4,200 (a) 36,324
--------- ------- --------- --------- -------- ---------
$ 425,368 $ 6,363 $ 431,731 $ (10,303) $ 4,200 $ 425,628
========= ======= ========= ========= ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of
long-term debt........ $ 4,581 $ 81 $ 4,662 $ (483)(d) $ -- $ 4,179
Accounts payable....... 98,954 4,214 103,168 1,759 (b) -- 100,713
(4,214)(a)
Accrued expenses....... 21,651 1,692 23,343 5,000 (c) -- 26,651
(1,692)(a)
Income taxes payable... -- 1,631 1,631 (1,631)(a) -- --
Interest payable....... 1,645 -- 1,645 -- -- 1,645
--------- ------- --------- --------- -------- ---------
Total current
liabilities........... 126,831 7,618 134,449 (1,261) -- 133,188
Long-term debt.......... 361,515 58 361,573 25,528 (f) 82,500 (a) 454,038
800 (b)
(16,363)(d)
Minority interest in
preferred stock of
subsidiary............. 49,179 -- 49,179 -- (35,800)(e) --
(13,379)(g)
Stockholder's equity
(deficit)
Common stock and
additional paid in
capital............... 77,730 274 78,004 (274)(a) (42,500)(e) 48,609
13,379 (g)
Receivable from
officers for purchase
of equity............. (758) -- (758) -- -- (758)
Cumulative translation
adjustment............ 152 -- 152 -- -- 152
Accumulated deficit.... (189,281) (1,587) (190,868) 1,587 (a) -- (209,601)
(20,320)(c)
--------- ------- --------- --------- -------- ---------
(112,157) (1,313) (113,470) (19,007) (29,121) (161,598)
--------- ------- --------- --------- -------- ---------
$ 425,368 $ 6,363 $ 431,731 $ (10,303) $ 4,200 $ 425,628
========= ======= ========= ========= ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET
(a) Represents the elimination of the net assets and liabilities which were
not acquired as part of the CanCo Acquisition and the elimination of the
CanCo equity structure upon the closing of the CanCo Acquisition.
(b) Represents: (i) the allocation of the purchase price related to the Weider
Sports Acquisition ($8.7 million) and the CanCo Acquisition ($1.8
million); (ii) the assumption of a $.8 million mortgage and the payment of
$.5 million in connection with the acquisition of two CanCo plants from
affiliates of WHF formerly leased by CanCo; (iii) the repayment of $1.8
million of outstanding payables to WHF by the Company's subsidiaries; and
(iv) the receipt of $3.0 million for outstanding receivables from WHF by
the Company's subsidiaries, in conjunction with the WHF Settlement.
The allocation of the purchase price of the Weider Sports Acquisition and
CanCo Acquisition is as follows:
<TABLE>
<S> <C>
Cash purchase price of Weider Sports.............................. $ 8,650
Cash purchase price of CanCo...................................... 1,760
-------
Total purchase price............................................ $10,410
=======
Accounts receivable of Weider Sports.............................. $ 2,459
Inventory of Weider Sports........................................ 3,388
Accounts payable of Weider Sports................................. (1,759)
Inventory of CanCo................................................ 707
Property and equipment of CanCo................................... 315
Capital lease obligations of CanCo................................ (139)
Goodwill.......................................................... 5,439
-------
Total purchase price allocation................................. $10,410
=======
</TABLE>
Under purchase accounting, the total purchase price of CanCo will be
allocated to the acquired assets and liabilities based on their relative
fair values as of the closing date of the CanCo Acquisition on September 6,
1996. In conjunction with the CanCo Acquisition, the Company and its
subsidiaries acquired only certain inventory and property and equipment
assets and assumed only certain capital lease obligations related to the
property and equipment acquired. Because the CanCo balance sheet reflected
herein is at May 31, 1996 and the closing date of the CanCo Acquisition was
September 6, 1996, the final allocations will be different from the amounts
reflected herein, although such differences will not be significant.
(c) Represents the recognition of: (i) approximately $5.0 million of
integration expenses; (ii) $12.0 million in higher cost of goods sold
(resulting from the fact that the purchase accounting included writing-up
the book value of the acquired HealthRider inventory to fair market value
less estimated sales costs); (iii) $15.8 million in settlement expenses
related to the WHF Settlement; and (iv) the related tax benefit of $12.5
million.
(d) Represents elimination of the HealthRider building and the related capital
lease obligation at August 31, 1996. The Company intends to sell the
building acquired as part of the HealthRider Acquisition and is currently
in the process of obtaining the necessary appraisals. The Company expects
to consummate the sale of the building within one year of the closing of
the HealthRider Acquisition. Assuming the building is sold, the purchase
accounting applied to the HealthRider Acquisition will be revised to
include a revaluation of the building to its sales price such that there
will be no gain or loss associated with the sale of the building as is
required under generally accepted accounting principles. In addition, the
sale will result in the excess of the fair value of the assets acquired
over the purchase price of HealthRider being allocated as a write-down of
other fixed assets and other long-term assets acquired.
35
<PAGE>
(e) Represents the net proceeds of the Offering of $78.3 million (after the
payment of $4.2 million of expenses of the Offering) and the use of such
amounts, as of August 31, 1996, to (i) finance the purchase of all of the
IHF Holdings Preferred Stock and all of the options to purchase IHF
Holdings Preferred Stock (at a price of $32.1 million for such preferred
stock held by WHF and $3.7 million for such options to purchase IHF
Holdings Preferred Stock held by Scott Watterson and Gary Stevenson), and
(ii) finance the purchase of the common stock of IHF Capital and warrants
to purchase common stock of IHF Capital held by the WHF Stockholders for
approximately $42.5 million.
(f) Represents the additional borrowings under the Credit Agreement to fund:
(i) the Weider Sports Acquisition ($8.7 million), the CanCo acquisition
($1.8 million) and the acquisition of two CanCo plants ($.5 million); and
(ii) the payment of $15.8 million in settlement expenses as well as $1.8
million of payables, net of the receipt of $3.0 million of receivables, in
connection with the WHF Settlement.
(g) Represents the preferred stock dividends forgiven and the discount upon
redemption (total was $14.5 million at November 20, 1996).
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
THE COMPANY--HISTORICAL
The selected consolidated financial data for the Company for the five years
ended May 31, 1996 have been derived from the historical audited consolidated
financial statements of the Company (formerly known as Weslo, ProForm, and
WeiderCare) and subsidiaries. The selected financial data for the period
beginning June 1, 1995 and ending September 2, 1995 and the period beginning
June 1, 1996 and ending August 31, 1996 and as of August 31, 1996 have been
derived from the historical unaudited consolidated financial statements of the
Company which in the opinion of the mangement, contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
consolidated results of operations and financial position of the Company for
such periods and at such dates. The results of operations for the period
beginning June 1, 1996 and ended August 31, 1996 are not necessarily
indicative of the results of operations to be expected for the full year,
because the Company's sales are generally lower in its first and fourth fiscal
quarters than in its second and third fiscal quarters. The selected financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Unaudited Pro Forma
Financial Data" and the introduction and notes thereto, and the historical
consolidated financial statements of the Company and the notes thereto
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED MAY 31, (1) THREE MONTHS ENDED
---------------------------------------- ------------------------
SEPTEMBER 2, AUGUST 31,
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ------------ ----------
(IN MILLIONS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $254.1 $314.9 $403.0 $530.8 $747.6 $124.8 $125.8
Cost of sales.......... 194.9 228.6 288.2 378.4 541.5 90.9 92.4
------ ------ ------ ------ ------ ------ ------
Gross profit........... 59.2 86.3 114.8 152.4 206.1 33.9 33.4
Operating Expenses:
Selling................ 25.1 38.5 52.1 68.7 93.9 15.8 18.8
Research and
development........... 1.2 1.6 2.8 5.2 6.8 1.6 1.7
General and
administrative........ 20.6 24.5 28.6 31.1 48.0 10.1 10.9
Compensation expense
attributable to
options............... -- -- -- 39.0(2) 2.8 (3) -- --
------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 46.9 64.6 83.5 144.0 151.5 27.5 31.4
------ ------ ------ ------ ------ ------ ------
Income from operations. 12.3 21.7 31.3 8.4 54.6 6.4 2.0
Interest expense....... 4.9 5.5 6.2 21.5 36.5 8.4 8.8
Amortization of
deferred financing
fees.................. -- -- -- 1.7 3.5 .8 .9
Dividends on subsidiary
preferred stock....... -- -- -- 2.8 5.1 1.3 1.3
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 7.4 16.2 25.1 (17.6) 9.5 (4.1) (9.0)
Provision for (benefit
from) income taxes.... 2.8 6.2 9.8 (4.7) 7.9 (.7) (1.9)
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 4.6 $ 10.0 $ 15.3 $(12.9) $ 1.6 $ (3.4) $ (7.1)
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
Depreciation and
amortization.......... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7 $ 4.4 $ 5.9
Capital expenditures... 4.0 4.0 6.9 8.0 15.4 3.8 6.6
Ratio of earnings to
fixed charges (4)..... 2.2x 3.2x 4.3x -(5) 1.2x -- (5) -- (5)
</TABLE>
<TABLE>
<CAPTION>
MAY 31, (1)
-------------------------------------- AUGUST 31,
1992(1) 1993 1994 1995 1996 1996
------- ------ ------ ------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash....................... $ .2 $ .2 $ .1 $ 4.1 $ 19.3 $ 4.6
Working capital............ 64.2 24.8 97.8 137.7 159.0 194.7
Total assets............... 110.3 151.7 184.7 290.2 316.7 425.4
Total indebtedness......... 52.0 72.4 65.4 268.1 282.8 366.1
Preferred stock of
subsidiary (including
accrued dividends)........ -- -- -- 42.8 47.9 49.2
Stockholders' equity
(deficit)................. 30.2 39.8 54.5 (109.6) (104.8) (112.2)
</TABLE>
37
<PAGE>
- --------
(1) Financial data through May 31, 1994 reflect the combined results of the
Recapitalized Companies and their subsidiaries. Financial data for periods
ending thereafter reflect the consolidated results of the Company and its
subsidiaries. The balance sheet data of WeiderCare are not included in
balance sheet data for May 31, 1992. Such balance sheet data are
immaterial to the combined balance sheet at that date.
(2) Consists of accounting charges incurred in connection with the
Recapitalization as a result of the exchange by certain senior executives
of the Company of their options to purchase capital stock of the
Recapitalized Companies for $34.7 million of replacement options to
purchase Class A and Class L Common Stock of the Company and $4.0 million
of replacement options to purchase IHF Holdings Preferred Stock and the
Preferred Warrants and $.3 million of related payroll tax payments made by
IHF Capital. After the Recapitalization, the Company redeemed the
Redeemable Options.
(3) Consists of compensation expense attributable to the difference between
the fair value of the underlying stock and the exercise price of related
options granted to certain members of management.
(4) Earnings consists of income from operations before income taxes and fixed
charges. Fixed charges consist of interest expense on debt and
amortization of deferred financing, fees, the accumulating dividends on
the IHF Holdings Preferred Stock and the portion (approximately one-
fourth) of the rental expense that the Company believes is representative
of rental expense.
(5) Earnings were insufficient to cover fixed charges by $17.6 million, $4.1
million and $9.0 million for the year ended May 31, 1995, the three months
ended September 2, 1995 and the three months ended August 31, 1996,
respectively.
38
<PAGE>
HEALTHRIDER--HISTORICAL
The selected consolidated financial data for HealthRider for each of the
three years in the period ended December 31, 1995 and as of December 31, 1994
and 1995 have been derived from the historical audited consolidated financial
statements of HealthRider and its subsidiaries. The selected consolidated
financial data for the six months ended June 30, 1995 and June 30, 1996 and as
of June 30, 1996 have been derived from the historical unaudited consolidated
financial statements of HealthRider which in the opinion of management,
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the consolidated results of operations and
financial position of HealthRider for such periods and at such date.
HealthRider's sales have decreased substantially during the six months ended
June 30, 1996 and its operating loss and net loss have increased
substantially. Accordingly, HealthRider's results of operations for the six
months ended June 30, 1996 are not indicative of the results of operations to
be expected for the full year. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--HealthRider," and the historical consolidated
financial statements of HealthRider and the notes thereto contained elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE
ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------- -----------------
JUNE 30, JUNE 30,
1993 1994 1995 1995 1996
----- ------ ------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales .......................... $21.2 $106.6 $241.4 $117.0 $113.2
Cost of sales ...................... 7.1 37.5 84.5 40.3 43.5
----- ------ ------ ------ ------
Gross profit ....................... 14.1 69.1 156.9 76.7 69.7
Operating Expenses:
Selling and marketing ............ 12.0 48.4 119.3 53.3 65.8
General and administrative ....... 1.1 5.0 15.9 6.8 8.5
----- ------ ------ ------ ------
Total operating expenses ........... 13.1 53.4 135.2 60.1 74.3
----- ------ ------ ------ ------
Income (loss) from operations ...... 1.0 15.7 21.7 16.6 (4.6)
Interest expense ................... (.7) (1.1) (.1) (.1) (1.3)
Other Income, net................... .1 .7 2.1 .9 1.1
----- ------ ------ ------ ------
Income (loss) before income taxes .. .4 15.3 23.7 17.4 (4.8)
Provision (benefit) for income tax-
es ................................ .1 6.4 10.1 7.5 (1.2)
----- ------ ------ ------ ------
Net Income (loss)................... $ .3 $ 8.9 $ 13.6 $ 9.9 $ (3.6)
===== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1994 1995 1996
----- ----- --------
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash..................................................... $ 1.2 $ .5 $ .9
Working Capital.......................................... 3.9 15.4 8.6
Total Assets............................................. 21.7 64.7 88.4
Total Indebtedness....................................... 1.1 .9 31.1
Stockholders' Equity..................................... 8.7 22.7 19.2
</TABLE>
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the historical audited and
unaudited consolidated financial statements and the related notes thereto
appearing elsewhere in this Prospectus. Certain of the information contained
in this summary and elsewhere in this Prospectus, including under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and information with respect to the Company's plans and strategy
for its business are forward-looking statements. For a discussion of important
factors that could cause actual results to differ materially from the forward-
looking statements, see "Risk Factors."
The Company's fiscal year ends on May 31 of the corresponding calendar year.
For example, 1996 ended on May 31, 1996.
OVERVIEW
The Company is one of the largest manufacturers and marketers of fitness
equipment in the United States and in the first quarter of 1996, commenced
direct marketing of its products in Europe. The Company's fitness products are
targeted to home use. The Company's sales grew from $202.4 million in 1991 to
$747.6 million in 1996. The Company believes that during that period its
growth rate exceeded the industry growth rate due to the Company's emphasis on
product innovation through research and development, its broad distribution
strategy and its flexible manufacturing capacity. While the Company's growth
rate to date has been high, its annual percentage increase in domestic sales
cannot be expected to continue at historical levels.
Recent Acquisitions. In August 1996, the Company completed the HealthRider
Acquisition, and in September 1996, the Company consummated the Weider Sports
Acquisition and the CanCo Acquisition. Unless otherwise noted, management's
discussion and analysis of the financial condition of the Company and results
of its operations does not include the HealthRider Acquisition, the Weider
Sports Acquisition or the CanCo Acquisition. For more information regarding
the HealthRider Acquisition, including information with respect to the effect
of purchase accounting (and its expected effect on margins during the second
and third quarters of 1997), the cost of integrating HealthRider into the
Company's business and HealthRider's cost of sales and selling expense (which
are materially different from the Company's), see "--HealthRider." For more
information regarding the Weider Sports Acquisition and the CanCo Acquisition,
see "Business--Litigation--Settlement of WHF Litigation."
Margins. The Company's sales and gross margins depend upon its success in
innovating, developing and marketing new products. Products tend to generate
higher gross margins earlier in the product life cycle (after production
efficiencies have been realized following an initial start-up period), when
there are fewer companies offering similar products, and tend to generate
lower gross margins over time as competition increases and consumer interest
diminishes. For example, during 1996, the Company's gross margins on its
Cardio family of upright rowers, first introduced by the Company in October
1994 in response to consumer interest in other companies' upright rowers,
substantially exceeded gross margins on its exercise bike product line, a more
mature product. However, the Company's sales of upright rowers, excluding
sales of HealthRider brand upright rowers, declined from $47.8 million during
the first quarter of 1996 to $18.2 million during the first quarter of 1996,
and gross margins on the Company's upright rowers have begun and are expected
to continue to decline. Accordingly, the Company strives to be among the first
producers of attractive new product categories (such as upright rowers) and to
add new features to existing products (such as the Space Saver feature
recently added to its treadmill line which had not yet achieved full
production efficiencies by the end of 1996), which may increase gross margins
by reinvigorating demand and differentiating the Company's products from
similar products offered by its competitors. Life cycles may vary
significantly in duration from product to product.
40
<PAGE>
Direct Sales; European Operations. In 1992, the Company began selling
products directly to the public through television infomercials and print
media campaigns (i.e., direct marketing). Products sold through direct
marketing are sold at retail prices and therefore at higher gross margins than
products sold through the Company's other distribution channels. However,
direct marketing sales have higher associated selling, advertising,
distribution and other roll-out expenses. The Company is currently focusing
principally on 30 and 60 second television advertisements designed to enhance
both retail and direct response sales of its products as opposed to 30 minute
infomercials. Notwithstanding the foregoing, the Company will continue to
utilize direct response marketing with respect to HealthRider products. After
the Recapitalization, the Company began selling Weider branded products (for
which it pays royalties). See "Business--Marketing," "--Legal Proceedings" and
"Certain Relationships and Related Transactions."
During the first quarter of 1996, the Company established its own sales
operations in Europe. Prior to that, the Company's products were distributed
in Europe primarily by affiliates of WHF, an affiliate of the Company. The
Company's European operations have been consolidated in the statement of
operations for 1996 and the balance sheet at May 31, 1996. The Company's
European operations are not currently profitable, and there can be no
assurance that the Company will be successful in selling its products in non-
U.S. markets.
Non-Recurring Items and Other Expected Expenses. The Company incurred a
$39.0 million compensation expense with respect to the exchange of management
stock options in connection with the Recapitalization, including the
redemption of the Redeemable Options at a price of $26.4 million and related
tax payments of $.3 million. Such redemption resulted in a $26.7 million cash
compensation expense for the period in which the redemption occurred, which
was included in the computation of the loss in 1995. The Company also recorded
a $12.3 million non-cash compensation expense at the Recapitalization Closing
as a result of the exchange of options to purchase capital stock of the
Recapitalized Companies for $4.0 million of options to buy IHF Holdings
Preferred Stock and $8.3 million of options to buy Common Stock and the
Company also recorded an offsetting tax benefit to account for the future tax
benefit when, and if, such options are exercised. In connection with the
redemption of the options to buy IHF Holdings Preferred Stock, the Company
will realize a tax benefit related to the redemption price of such options of
$3.7 million and a non-taxable extraordinary gain of $.3 million.
In the first through third quarters of 1997, the Company expects to incur
(i) approximately $5.0 million of integration expenses in connection with the
HealthRider Acquisition; (ii) a significant, non-recurring, non-cash increase
in cost of goods sold of approximately $12.0 million (due to the fact that the
Company's purchase accounting for the HealthRider Acquisition included
writing-up the book value of the acquired HealthRider inventory to fair market
value less estimated sales costs); (iii) approximately $15.8 million in
settlement expenses related to the WHF Settlement; and (iv) the related tax
benefit of $12.5 million.
41
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company
expressed as a percentage of net sales for 1994, 1995 and 1996 and the three
months ended September 2, 1995 and August 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, THREE MONTHS ENDED,
----------------------- -----------------------
SEPTEMBER 2, AUGUST 31,
1994 1995 1996 1995 1996
------ ------ ------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 71.5 71.3 72.4 72.8 73.5
------ ------ ------ ----- -----
Gross profit.................. 28.5 28.7 27.6 27.2 26.5
------ ------ ------ ----- -----
Operating expenses:
Selling....................... 12.9 12.9 12.6 12.7 14.9
Research and development...... .7 1.0 .9 1.2 1.3
General and administrative.... 7.2 5.9 6.4 8.1 8.7
Stock option compensation
expense...................... -- 7.3 .4 -- --
------ ------ ------ ----- -----
Total operating expenses...... 20.8 27.1 20.3 22.0 24.9
------ ------ ------ ----- -----
Income from operations........ 7.7 1.6 7.3 5.2 1.6
Interest expense and
amortization of debt
financing fees............... 1.5 4.4 5.3 7.4 7.7
Dividends on subsidiary
preferred stock.............. -- .5 .7 1.0 1.0
------ ------ ------ ----- -----
Income before income taxes.... 6.2 (3.3) 1.3 (3.2) (7.1)
Provision (benefit) for income
taxes........................ 2.4 (.9) 1.1 (.5) (1.5)
------ ------ ------ ----- -----
Net income (loss)............. 3.8% (2.4%) .2% (2.7%) (5.6%)
====== ====== ====== ===== =====
</TABLE>
THREE MONTHS ENDED AUGUST 31, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 2,
1996
Net sales were $125.8 million in the first quarter of 1997, compared to
$124.8 million in the first quarter of 1996. Sales of company's line of
abdominal machines, first introduced in April of 1996, totaled $14.4 million
with no comparable sales during the first quarter of 1996. Sales of the
company's home weight systems increased $5.1 million, while treadmill sales
increased $3.0 million in the first quarter of 1997 compared to first quarter
of 1996. Treadmill sales accounted for approximately 34.6% and 32.5% of total
net sales during the first quarter of 1997 and 1996. Sales of trampolines
increased $2.2 million in the first quarter of 1997 to $17.4 million from
$15.2 million in the first quarter of 1996. Sales of the Company's line of
upright rowers, excluding sales of HealthRider brand of upright rowers,
decreased $29.6 million to $18.2 million from $47.8 million in the first
quarter of 1996. Sales in Europe were $7.1 million compared to $6.0 million in
the same period for 1996.
Gross profit for the first quarter of 1997 was $33.4 million, or 26.6% of
net sales, compared to $33.9 million, or 27.2% of net sales, for the first
quarter of 1996. The step-up of HealthRider inventory increased cost of sales
by $1.9 million. Without this charge, the gross profit would have increased
.8% due to gross margin improvements in the Company's line of treadmill
products.
Selling expenses were $18.8 million, or 14.9% of net sales, in the first
quarter of 1997 compared to $15.8 million, or 12.7% of net sales, for the
first quarter of 1996. This increase is primarily attributed to a $1.9 million
increase in warranty and customer service expenditures to handle customer
returns and inquiries. In addition, selling expenses of the European
subsidiaries totaled $2.1 million this year compared to $1.5 million in the
same period of the prior year.
Research and development expenses were $1.6 million or 1.3% of net sales,
for the first quarter of 1997 compared $1.5 million, or 1.2% of net sales, for
the first quarter of 1996.
42
<PAGE>
General and administrative expenses totaled $10.9 million, or 8.7% of net
sales, for the first quarter of 1997 compared to $10.1 million, or 8.1% of net
sales, for the first quarter of 1996. Personnel costs increased $.3 million
over the same period in the prior year.
As a result of the foregoing factors, operating income was $2.0 million, or
1.6% of net sales in the first quarter of 1997, compared to a $6.4 million, or
5.1% of net sales, in the first quarter of 1996.
Interest expense (which includes dividends on IHF Holdings Preferred Stock
and options to purchase IHF Holdings Preferred Stock) and amortization of
deferred financing fees increased to $11.0 million for the first quarter of
1997 from $10.5 million for the first quarter of 1996. Interest expense
increased due to the costs associated with the Senior Discount notes of IHF
Holdings. The issuance of the Senior Discount Notes, as well as, the increase
in operating debt associated with the HealthRider Acquisition and the WHF
Settlement is expected to result in increased interest expense in future
periods.
The income tax benefit was $1.9 million for the first quarter of 1997
compared with a tax benefit of $.7 million for the first quarter of 1996. This
is a result of the increase in the loss before income tax during the first
quarter of 1997 compared to the same period in the preceding year.
As a result of the foregoing factors, the net loss was $7.1 million for the
first quarter of 1997 compared to a net loss of $3.4 million for the same
period of 1996.
Advertising allowances with retail customers have increased by $.6 million
from September 2, 1995 to $5.3 million at August 31, 1996. Advertising
allowances are generally a fixed percentage of sales to customers.
Fluctuations in the balance of this allowance are attributable to changes in
customer sales mix and the timing of when allowances are taken.
Bad debt allowances total $2.4 million at August 31, 1996 compared to $1.3
at September 2, 1995. Terms with retail customers remained unchanged from
previous periods.
Prepaid income taxes were $9.5 million at August 31, 1996. A significant
portion of this balance is attributable to the HealthRider Acquisition, with
the remaining $2.6 million the result of losses from current operations.
YEAR ENDED MAY 31, 1996 COMPARED TO THE YEAR ENDED MAY 31, 1995
Net sales increased by $216.8 million, or 40.8%, from $530.8 million in 1995
to $747.6 million in 1996. The increase was primarily attributable to sales
increases of $121.0 million of the Company's Cardio family of upright rowers
and increases of $72.0 million in treadmill sales. During 1996, upright rower
sales were $259.1 million or 34.7% of net sales, and treadmill sales were
$312.4 million, or 41.8% of net sales. Upright rower sales during the fourth
quarter of 1996 declined to $30.3 million, compared to $67.7 million during
the fourth quarter of 1995. Direct European sales, which began during the
first quarter of 1996, totaled $33.3 million.
Gross profit for 1996 was $206.1 million, or 27.6% of net sales, compared to
$152.5 million, or 28.7% of net sales, for 1995. Gross profit as a percentage
of net sales declined due to an increased proportion of sales to retailers
which generate a lower gross profit percentage than direct sales. Direct
response sales decreased from 9% of total sales in 1995 to 3% of total sales
in 1996.
Selling expenses were $93.9 million, or 12.6% of net sales, in 1996 compared
to $68.7 million, or 12.9% of net sales, in 1995. The dollar increase in
selling expenses resulted primarily from increased variable selling expenses
directly related to increased sales volume and from selling expenses of the
European subsidiaries (which were not operating in 1995). In total,
cooperative advertising and discount allowances increased from $14.1 million
to $34.6 million, with promotional activity (i.e., cooperative advertising)
with retailers increasing by $11.6 million and sales discounts to retailers,
which are charged against sales, increasing by $8.9 million as a result of
increased sales in the retail
43
<PAGE>
channel. In addition, warranty expenditures increased by $5.6 million in 1996
compared to 1995 and sales commissions also increased by $.7 million due to
the increase in sales volume. Bad debt expense increased by $1.1 million to
provide for potential write-offs associated with increased trade receivable
balances.
Research and development expense was $6.8 million, or .9% of net sales, for
1996 compared to $5.2 million, or 1.0% of net sales, for 1995. This dollar
increase is related to on-going development of both current and future product
offerings.
General and administrative expense totaled $48.1 million, or 6.4% of net
sales, for 1996 compared to $31.1 million, or 5.9% of net sales, for 1995.
Legal expenses increased during 1996 by $3.5 million over the same period
during the prior year. These legal expenses have resulted from certain patent
defense actions, product liability claims and legal fees associated with the
WHF Litigation. See "Business--Legal Proceedings." General and administrative
expenses in 1996 for the European subsidiaries totaled $5.4 million.
Expenditures under the Company's self-insured health plan increased by $.8
million. A $2.7 million management fee derived from monthly profits earned
under management agreements for services provided to Weider Sporting Goods,
Inc. ("WSG") through November 14, 1995 was recorded in 1995 with no
corresponding amount in 1996. This fee was recorded as an offset against
general and administrative expense incurred on behalf of WSG and was
nonrecurring. Following the Recapitalization, fees under the WSG agreement
stopped. Other increases totaling $4.6 million have occurred following the
Recapitalization to service the increase in sales. The major increases
include: personnel cost, management fees paid to Bain Capital (which will not
continue after the closing of the Offering), increased management information
systems expenditures, additional facility rental and other administrative
expenses.
Compensation related to management stock options resulted in an expense of
$2.8 million in 1996 compared to $39.0 million of compensation expense in
1995.
As a result of the foregoing factors, operating income increased to $54.6
million, or 7.3% of net sales, in 1996, from operating income of $8.4 million,
or 1.6% of net sales, in 1995.
Interest expense (which includes the accrual of dividends on IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock) and
amortization of deferred financing fees increased to $45.1 million in 1996
from $26.0 million for 1995. Interest expense has increased due to the
Company's high level of borrowing incurred in connection with the
Recapitalization. In 1996, the Company recorded interest expense of $5.1
million, compared to $2.8 million in 1995, related to dividends accruing on
IHF Holdings Preferred Stock which was issued in connection with the
Recapitalization and which is held by affiliates of the Company. Borrowings
incurred and IHF Holdings Preferred Stock and options therefor issued in
connection with the Recapitalization were outstanding for all of 1996, but
were outstanding for only 197 days in 1995. The Company plans to redeem all of
the outstanding Discount Notes, all of the IHF Holdings Preferred Stock
(including options to purchase IHF Holdings Preferred Stock) and $35.0 million
principal amount of Senior Subordinated Notes with proceeds of the Offering,
which would reduce interest expense going forward. This decrease will be
partially offset by an increase in interest expense resulting from an
additional $81.0 million in revolving credit borrowings (calculated on a pro
forma basis at May 31, 1996), which will result from the transactions referred
to under "Unaudited Pro Form Financial Data." The decrease in interest expense
may also be offset by increased working capital borrowings to service
increased sales.
The income tax provision was $7.9 million for 1996 compared with a tax
benefit of $4.7 million for 1995. The effective tax rate for 1996 differs from
that used for 1995 as a result of the non-deductibility of the dividends on
IHF Holdings Preferred Stock and the fact that no income tax benefit was
recognized in 1996 for the losses incurred in connection with the Company's
newly established European subsidiaries due to uncertainty regarding such
subsidiaries' ability to generate future taxable income against which such
losses can be applied.
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As a result of the foregoing factors, net income increased to $1.6 million
for 1996 compared to a net loss of $12.9 million for 1995.
YEAR ENDED MAY 31, 1995 COMPARED TO THE YEAR ENDED MAY 31, 1994
Net sales increased by $127.8 million, or 31.7%, from $403.0 million in 1994
to $530.8 million in 1995. The increase was primarily attributable to sales of
$138.1 million of the Company's Cardio family of upright rowers which was
introduced in October 1994 and was marketed through direct response
infomercials and other distribution channels. Treadmill sales during 1995 were
$240.4 million compared to $256.8 million in 1994.
Gross profit for 1995 was $152.5 million, or 28.7% of net sales, compared to
$114.8 million, or 28.5% of net sales, for 1994. Gross profit was positively
impacted by higher margins on new products sold through direct response
marketing, primarily the Cardio family of upright rowers, which were offset by
declining margins on certain mature product lines.
Selling expenses were $68.7 million, or 12.9% of net sales, in 1995 compared
to $52.1 million, or 12.9% of net sales, for 1994. The dollar increases in
selling expenses resulted from increased variable selling expenses directly
related to increased sales volume and increased expenditures on direct
marketing efforts (e.g. video production costs).
Research and development expense was $5.2 million, or 1.0% of net sales, for
1995 compared to $2.9 million, or .7% of net sales, for 1994. The increase was
primarily related to the development of new products and product concepts.
General and administrative expense totaled $31.1 million, or 5.9% of net
sales, for 1995 compared to $28.6 million, or 7.2% of net sales, for 1994. The
reduction in general and administrative expense as a percent of net sales was
largely due to the receipt in 1995 of a $2.7 million management fee derived
from monthly fees earned under management agreements for services provided to
WSG through November 14, 1994. This fee was recorded in 1995 as an offset
against general and administrative expense incurred on behalf of WSG and will
be nonrecurring.
A $39.0 million compensation expense was incurred in 1995 with respect to
management stock options. This expense consists of accounting charges incurred
in connection with the Recapitalization as a result of the exchange by certain
senior executives of the Company of their options to purchase capital stock of
the Recapitalized Companies for $34.7 million of replacement options to
purchase Common Stock and $4.0 million of replacement options to purchase IHF
Holdings Preferred Stock and $.3 million of related payroll tax payments made
by the Company. After the Recapitalization, the Company redeemed the
Redeemable Options for $26.4 million in cash.
As a result of the foregoing factors, operating income decreased by $22.8
million from $31.2 million in 1994 to $8.4 million in 1995.
Interest expense and amortization of deferred financing fees increased to
$23.2 million in 1995 from $6.2 million for 1994. The increased expense was
due to increased borrowings related to the Recapitalization and, to a lesser
extent, increases in interest rates and higher working capital borrowings. The
borrowings incurred in connection with the Recapitalization were outstanding
for 198 days of 1995. In addition, in 1995, the Company recorded an expense of
$2.8 million related to dividends accruing on the IHF Holdings Preferred Stock
issued in connection with the Recapitalization that is held by affiliates of
the Company.
The income tax benefit was $4.7 million for 1995 compared with a provision
of $9.8 million for 1994. The benefit for 1995 resulted from the recognition
of a deferred tax asset for the net operating loss generated in that year. The
combined federal and state income tax rate is assumed to be 38% which is
consistent with historical rates.
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As a result of the foregoing factors, net income decreased to a net loss of
$12.9 million for 1995 compared to net income of $15.3 million during the same
period of 1994.
SEASONALITY
The following are the net sales and operating income of the Company by
quarter for years 1997, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales
1997...................................... $125.8 $ -- $ -- $ --
1996...................................... 124.8 228.5 240.9 153.4
1995...................................... 70.6 163.0 182.8 114.4
1994...................................... 54.1 115.4 124.0 109.5
Operating Income
1997...................................... $ 2.0 $ -- $ -- $ --
1996...................................... 6.4 20.0 25.4 2.8
1995...................................... 2.6 (22.9)(1) 22.9 5.8
1994...................................... .4 9.9 11.3 9.7
Net Income (Loss)
1997...................................... $ (7.1) $ -- $ -- $ --
1996...................................... (3.4) 4.2 7.1 (6.3)
1995...................................... .9 (16.3)(1) 5.3 (2.8)
1994...................................... (.6) 5.0 5.9 5.0
</TABLE>
- --------
(1) Includes $39.0 million in one-time compensation expense attributable to
the exchange and partial redemption of management options.
Historically, the Company has sold a majority of its products to customers
in its second and third fiscal quarters (i.e., from September through
February). Increased sales and distribution typically have occurred in the
Christmas retail season and the beginning of a new calendar year because of
increased promotions by customers, increased consumer purchases and seasonal
changes that prompt people to exercise inside. The Company has in the past,
from time to time, incurred net losses in the first and fourth quarters of its
fiscal year. If actual sales for a quarter do not meet or exceed projected
sales for that quarter, expenditures and inventory levels could be
disproportionately high for such quarter and the Company's cash flow for that
quarter and future quarters could be adversely affected. The timing of large
orders from customers and the mix of products sold may also contribute to
periodic fluctuations. While seasonality has been the trend, it may not be
indicative of the results to be expected for this fiscal year or for any
future years.
LIQUIDITY AND CAPITAL RESOURCES
In the first three months of fiscal 1997, the Company used $31.6 million of
cash in operating activities primarily as a result of increased inventory. In
the same period, the Company had a net decrease in cash of $14.7 million. The
Company also used $6.6 million of cash in the first three months of fiscal
1997 for capital expenditures primarily related to tooling, manufacturing
equipment and building expansion and $28.2 million to fund the HealthRider
Acquisition.
In 1996, the Company generated $24.5 million of cash from operating
activities and had net borrowings of $6.4 million under the Credit Agreement's
revolving credit facility primarily to finance increases in accounts
receivable. The Company used $15.4 million in cash for capital expenditures
related to upgrades in plant and tooling, purchases of additional
manufacturing equipment and building expansion and $.7 million for repayments
of long term debt. In addition, the effect of exchange rates
46
<PAGE>
increased the Company's cash balances at May 31, 1996 by $.4 million. As a
result of the foregoing factors, the Company had a net increase in cash of
$15.2 million from May 31, 1995 to May 31, 1996.
In 1995, the Company used $31.3 million of cash in operating activities
primarily as a result of increases in working capital, particularly
inventories, and other operating assets of $35.6 million. The Company made
distributions of $166.7 million to its shareholders as part of the
Recapitalization and used $58.2 million to make payments on long-term
indebtedness. These uses of cash were financed primarily with the proceeds of
long-term borrowing that totaled $195.0 million, net borrowings under the
Credit Agreement of $66.4 million and net proceeds from the issuance of stock
of $38.6 million. The Company also used $8.0 million in cash in 1995 for
capital expenditures related to tooling and manufacturing equipment. During
1995, the Company had a net increase in cash of $4.0 million.
The Company's primary short-term liquidity needs consist of financing
seasonal merchandise inventory buildups and paying cash interest expense under
its Credit Agreement and on the Senior Subordinated Notes. The Company's
principal source of financing for seasonal merchandise inventory buildup and
increased receivables during the past several years has been revolving lines
of credit with various financial institutions. Since the Recapitalization
Closing, its principal source of financing for such needs has been revolving
credit borrowings under the Credit Agreement. The Company's working capital
borrowing needs are typically at their lowest level in April through June,
increase somewhat through the summer and sharply increase from September
through November to finance accounts receivable and purchases of inventory in
advance of the Christmas and post-holiday selling season. Generally, in the
period from November through February, the Company's working capital
borrowings remain at their highest level and then are paid down to their
lowest annual levels by April.
At August 31, 1996, Health & Fitness had $142.0 million of revolving credit
borrowings outstanding under the Credit Agreement. Advances under the Credit
Agreement's revolving credit facility are subject to the amount of Eligible
Accounts and Eligible Inventory (each as defined in the Credit Agreement) of
Health & Fitness. Health & Fitness' ability to make revolving credit
borrowings under the Credit Agreement expires on November 14, 1999. At May 31,
1996, Health & Fitness had $47.4 million of additional indebtedness available
to be drawn on a revolving credit basis under the Credit Agreement. Revolving
credit borrowings have primarily been used to increase inventory levels, to
finance normal trade credit for customers, to make interest payments on debt
issued in connection with the Recapitalization and to make capital
expenditures. The Credit Agreement contains a number of covenants, with which
Health & Fitness believes it was in compliance or as to which it has obtained
waivers of compliance as of the date hereof. The Company amended the Credit
Agreement as of August 23, 1996 to permit total revolving credit borrowings of
up to $310 million, subject to the Borrowing Base (as defined), in order to
meet the Company's longer term needs. The Company intends to use a portion of
its revolving credit borrowings to fund long-term non-working capital
requirements. The Company believes that cash flow from operations and
availability of revolving credit borrowings under the Credit Agreement will
provide adequate funds for its working capital needs, planned capital
expenditures and debt service obligations. The Company is highly leveraged,
and its ability to fund its operations and make planned capital expenditures,
to make scheduled payments and to refinance its indebtedness depends on its
future operating performance and cash flow, which in turn, are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond its control. See "Risk Factors--Risks Associated with
Substantial Amounts of Indebtedness."
The Company's longer term liquidity needs include (a) required quarterly
amortization payments on the term loans under the Credit Agreement, consisting
of $.7 million from March 31, 1996, $1.0 million from March 31, 1997 and
greater amounts on or after March 31, 1998 and (b) payments of interest and
principal on the Senior Subordinated Notes. See Note 8 of the Notes to the
Consolidated Financial Statements.
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<PAGE>
The Company made capital expenditures of approximately $15.4 million during
fiscal 1996 and expects to make capital expenditures of approximately $12.3
million (including $2.9 million for HealthRider) in 1997. Such expenditures
are primarily for expansion of physical plant, purchases of additional or
replacement manufacturing equipment and revisions and upgrades in plant
tooling. The Company also made research and development expenditures in 1996
of approximately $6.8 million, and expects to make research and development
expenditures of approximately $7.8 million in 1997.
The Company funded the HealthRider Acquisition, the Weider Sports
Acquisition and the CanCo Acquisition with borrowings under the Credit
Agreement.
HealthRider had operating lease payments (generally short term) for kiosks
and stores of approximately $5.6 million in the six months ended June 30,
1996. HealthRider also had non-cancellable long term operating lease
obligations of $5.3 million as of December 31, 1995. In addition, as of June
30, 1996, HealthRider had capitalized lease payment obligations (including
interest) of approximately $38.0 million. The Company assumed these
liabilities in connection with the HealthRider Acquisition. The Company
assumed accounts payable and other accrued payables of approximately $30.0
million in connection with the HealthRider Acquisition which will become due
and payable within 60 to 90 days after the closing of the HealthRider
Acquisition. The Company will fund such payments with borrowings under the
Credit Agreement.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Although the Company cannot accurately predict the precise effect of
inflation on its operations, it does not believe that inflation has had a
material effect on sales or results of operations in recent years. The Company
does import some finished products and components from Canada and Asia. All
purchases from Asia are fixed in U.S. dollars and, therefore, the Company is
not subject to foreign currency fluctuations on such purchases, although the
Company's vendors may respond to foreign currency fluctuations by seeking to
raise their prices. Purchases of inventory from Canada are settled in Canadian
dollars and therefore the Company is subject to fluctuations in the value of
the Canadian dollar which could have an impact on the Company's operating
results. In connection with the importation of products and components from
Canada, the Company from time to time engages in hedging transactions by
entering into forward contracts for the purchase of Canadian dollars which are
designed to protect against such fluctuations. The Company's hedging
transactions do not subject it to exchange rate risk because gains and losses
on these contracts offset losses and gains on the transaction being hedged.
The unhedged portion of purchases from Canada is not significant.
In addition, the Company, in the first quarter of 1996, began to directly
market its products in the key European markets of the United Kingdom, France,
Germany, the Benelux countries, Italy, Austria and Switzerland and Mexico. In
connection with the Recapitalization, the Company granted Weider Sports
certain exclusive and non-exclusive rights to distribute certain of the
Company's products. Under this distribution agreement, Weider Sports purchased
the Company's products in U.S. dollars and, therefore, the Company was not
subject to foreign currency fluctuations on such sales although the volume of
such sales may be affected by exchange rates. Sales made in Europe by the
Company itself, outside of the Weider Sports distribution agreement, have been
made in European currencies and are currently not hedged by the Company, while
the related expenses are principally in U.S. and Canadian dollars. In
September 1996, in connection with the Weider Sports Acquisition, the Company
reacquired distribution rights originally granted to Weider Sports in
connection with the Recapitalization, subject to certain rights granted by
Weider Sports to third parties. Accordingly, the Company will make sales in
other foreign countries in local currencies and expects to be increasingly
subject to the fluctuations in the foreign currency market, which could have
an impact on the Company's operating results. As sales volume in Europe grows,
the Company may begin to try to manage related foreign currency exchange risk
through hedging transactions.
48
<PAGE>
HEALTHRIDER
OVERVIEW
In August 1996, the Company acquired substantially all the assets and
assumed (or refinanced) substantially all the liabilities of HealthRider.
HealthRider experienced a substantial, continuing and accelerating
deterioration of its business since the beginning of calendar 1996.
HealthRider increased its selling expense for infomercials to $14.5 million
(net of a write-off of video production costs of $1.6 million) in the first
quarter of 1996 compared to $8.5 million in the first quarter of 1995 and
committed to purchase substantially increased volumes of inventory in
anticipation of sales increases. Despite the substantial increase in
advertising expenditures, HealthRider's total sales increased only modestly to
$75.0 million in the first quarter of 1996 from $57.9 million in the first
quarter of 1995, while its total infomercial sales decreased by $8.6 million
in the same period. These events compounded working capital difficulties that
HealthRider was already experiencing, causing HealthRider to reduce selling
expense for infomercials to $5.7 million in the second quarter of 1996 from
$10.8 million in the second quarter of 1995, which contributed to substantial
declines in HealthRider's sales. HealthRider reported net sales in the second
quarter of 1996 of $38.2 million compared to $59.1 in the second quarter of
1995. HealthRider also reported an operating loss for the first half of 1996
of $4.6 million compared to operating income for the first half of 1995 of
$16.5 million. HealthRider's inventory at June 30, 1996 was $23.1 million
compared to $5.5 million at June 30, 1995. Inventory in the health and fitness
industry is usually at its lowest point in the spring and early summer. The
Company believes that the decline in HealthRider's sales is due in part to a
general weakening of market demand for upright rowers and the partial
saturation of the audience that can be reached through infomercials. The
Company also believes that HealthRider's working capital crisis was
exacerbated by lower than expected revenues, by higher per minute costs of
infomercials and by more lenient payment terms and deferred payment plans. The
Company terminated these plans upon consummation of the HealthRider
Acquisition.
The HealthRider Acquisition was structured as an asset purchase and was
accounted for under the purchase method of accounting. The Company will
recognize a significant, non-recurring, non-cash increase in cost of goods
sold in the first through third quarters of 1997 of approximately $12.0
million (due to the fact that the Company's purchase accounting for the
HealthRider Acquisition included writing-up the book value of the acquired
HealthRider inventory to fair market value less estimated sales costs).
Following the sale of the acquired inventory, the Company may be able to
improve profitability through greater manufacturing efficiency.
In addition, the HealthRider Acquisition is expected to result in expenses
of approximately $5.0 million in the second and third quarters of 1997 related
to the integration of HealthRider into the Company's business. These expenses
are expected to include the cost of severance, plant relocation expenses,
expenses associated with closing unprofitable kiosks and other fees and
expenses. The majority of integration related expenses is expected to be
expensed in the second and third quarters of 1997.
The Company's plan for integrating HealthRider into its business includes:
(i) marketing a broad line of products such as treadmills, stair steppers and
cross-country skiing machines under the HealthRider brand name through
HealthRider's established distribution channels; (ii) altering direct response
advertising with respect to HealthRider products with the goal of enhancing
the Company's return on its advertising investment; and (iii) realizing
synergies from the HealthRider Acquisition by integrating the Company's and
HealthRider's operations.
Following the HealthRider Acquisition, the Company expects to increase its
net sales, but by substantially less than 100% of HealthRider's net sales. The
Company also expects that its overall
49
<PAGE>
selling expenses will rise as a result of HealthRider's direct response
advertising. This may be offset somewhat through cost savings on combined
overhead.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Net sales of HealthRider consist of product sales plus freight, less
discounts and return allowances. Net sales of HealthRider increased from $57.9
million in the first quarter of 1995 to $75.0 million during the first quarter
of 1996 but decreased from $59.1 million in the second quarter of 1995 to
$38.2 million during the second quarter of 1996, resulting in an aggregate
decrease in net sales for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995 of $3.8 million. This decrease reflects a
$29.7 million decrease in net sales through direct response marketing due to a
reduction of demand through this distribution channel, despite an increase of
$2.6 million in selling expense for direct response marketing (including the
write-off of infomercial production costs of $1.6 million). The decrease in
sales through the direct response marketing channel in the first six months of
calendar 1996 was partially offset by a $15.1 million increase in net sales
through HealthRider kiosks and stores which increased from $36.0 million to
$51.1 million, a $4.7 million increase in net sales through third-party
retailers which increased from $25.0 million to $29.7 million, and a $6.1
million increase attributable to sales of a newly created subsidiary in
Europe. The increase in the number of HealthRider kiosks and retail stores
from approximately 170 to approximately 225 and the introduction of several
accessory items account for the majority of the increase in net sales through
the HealthRider kiosks and retail stores. The number of kiosks and stores at
June 30, 1996 decreased from December 31, 1995 due to seasonal changes in
demand. The total number of fitness machines sold by HealthRider increased
from approximately 306,000 in the first two quarters of 1995 to approximately
336,000 in the first two quarters of 1996.
Gross profits of HealthRider decreased from $76.7 million to $69.7 million
and, as a percentage of net sales, decreased from 65.5% during the first six
months of 1995 to 61.6% during the first six months of 1996. The percentage
decrease was primarily due to modifications to the "1996 HealthRider" upright
rower that increased HealthRider's costs and a decrease in sales of the
HealthRider upright rower (a higher margin product) as a percentage of total
sales from 77.4% to 69.0% for the respective six month periods, in part as a
result of the introduction of lower margin machines (i.e., the SportRider and
LifeRider) subsequent to June 30, 1995.
Selling and marketing expenses of HealthRider increased from $53.3 million
during the first six months of 1995 to $65.8 million during the first six
months of 1996. As a percentage of net sales, selling and marketing expenses
increased from 45.6% to 58.2% from the first six months of calendar 1995 to
the first six months of calendar 1996. The increase is primarily due to lower
than expected revenues from an increased level of infomercial advertising from
$19.3 million in the first six months of 1995 to $20.2 million in the first
six months of 1996 (not including the write-off of $1.6 million in first
quarter 1996 in direct response infomercial production costs). The increase
was also affected by an increase in HealthRider's bad debt expense from $3.1
million in the first six months of 1995 to $3.7 million in the first six
months of 1996 to reflect higher anticipated losses related to a 10 month
payment plan introduced in November 1995. The Company terminated this plan
upon consummation of the HealthRider Acquisition.
General and administrative expenses of HealthRider increased from $6.8
million during the first six months of 1995 to $8.5 million during the first
six months of 1996. As a percentage of net sales, general and administrative
expenses increased from 5.8% to 7.5%. The dollar increase in general and
administrative expenses reflects increases in payroll for administrative,
financial and customer service personnel, professional services, and other
costs related to anticipated sales increases which did not occur and the
establishment of HealthRider's new headquarters building in Salt Lake City.
The increase as a percentage of sales is also due to those factors.
50
<PAGE>
As a result of the foregoing factors, HealthRider reported an operating loss
of $4.6 million in the six months ended June 30, 1996 compared to operating
income of $16.5 million in the six months ended June 30, 1995.
Interest expense of HealthRider increased from less than $.1 million during
the first six months of 1995 to $1.3 million during the first six months of
1996. This increase was due to borrowings on a revolving line of credit and
increased capital lease obligations during the first six months of 1996.
Other income, which consists primarily of finance charges paid by customers,
of HealthRider increased from $.9 million during the first six months of 1995
to $1.1 million during the first six months of 1996. The increase in other
income was primarily due to an increase in sales of HealthRiders to customers
purchasing the HealthRider on the installment plan, pursuant to which interest
is charged. The Company terminated this plan upon consummation of the
HealthRider Acquisition.
As a result of the foregoing factors, HealthRider reported a net loss of
$3.6 million in the first six months of 1996 compared to net income of $9.9
million in the same period of 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Net sales of the HealthRider consist of product sales plus freight, less
discounts and return allowances. Net sales increased from $106.6 million
during 1994 to $241.4 million during 1995. The increase in net sales was due
to a $72.6 million increase in net sales through HealthRider kiosks which
increased from $19.3 million to $91.9 million, a $34.0 million increase in net
sales through third party retailers which increased from $24.8 million to
$58.8 million, a $27.1 million increase in net sales through direct-response
advertising which sales increased from $62.5 million to $89.6 million and a
$1.1 million increase attributed to the start up of a subsidiary in Europe in
the fourth quarter of 1995. The continued increase in the number of
HealthRider kiosks and stores from approximately 140 to approximately 250
during 1995 and the introduction of a number of accessory items account for
the increase in net sales through the HealthRider kiosks and stores. The
increase in net sales through third-party retailers was due to increased sales
of the aeROBICRider and the introduction of the SportRider and other private
labeled machines during 1995. The increase in net sales through direct-
response advertising was primarily due to the successful introduction of
HealthRider's third television infomercial and increased media spending at a
higher level of efficiency. The total number of all fitness machines sold by
HealthRider increased from approximately 275,000 during 1994 to approximately
695,000 during 1995.
Gross profit of HealthRider as a percentage of net sales increased slightly
from 64.8% to 65.0% during 1995. The increase was due to the addition of
higher margin accessory items to the product line and lower product costs due
to overseas production of certain products.
Selling and marketing expenses increased from $48.4 million to $119.3
million during 1995. As a percentage of net sales, selling and marketing
expenses increased from 45.4% to 49.4% during 1995. This increase reflects the
overall increase in advertising in conjunction with HealthRider's sales growth
along with general increases in bad debt expense, warranty expense and other
expenses. In 1995 marketing related expenses were $113.1 million, bad debt
expenses were $4.9 million and warranty expenses were $1.3 million.
General and administrative expenses of HealthRider increased from $5.0
million to $15.9 million during 1995. As a percentage of net sales, general
and administrative expenses increased from 4.7% during 1994 to 6.6% during
1995. The dollar and percentage increase in general and administrative
expenses reflect increases in payroll for administrative, financial and
customer service personnel, professional services, and other costs related to
HealthRider's growth.
As a result of the foregoing factors, income from operations increased $6.1
million, or 38.9%, to $21.8 million in 1995 from $15.7 million in 1994. Income
from operations decreased as a percentage of net sales to 9.0% in 1995 from
14.8% in 1994.
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Interest expense decreased from $1.1 million to $.1 million during 1995.
This decrease was primarily due to the decrease in average outstanding debt
balances and interest expense incurred on a note payable to a stockholder of
$.7 million during 1994. Principal and interest on this note payable to the
stockholder were paid in full during 1994.
Other income of HealthRider increased from $.7 million to $2.1 million
during 1995. The increase in other income was primarily due to the increase in
customers purchasing HealthRider upright rowers on the installment plan,
pursuant to which interest is charged.
As a result of the foregoing factors, net income increased by $4.7 million,
or 52.8%, to $13.6 million in 1995 from $8.9 million in 1994.
52
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BUSINESS
OVERVIEW
The Company is one of the largest manufacturers and marketers of fitness
equipment in the United States. The Company's focus is to address consumers'
interest in a healthy, active lifestyle with a broad range of high quality
products at a variety of price/value relationships specifically targeted to
meet different consumers' health and fitness needs. The Company's line of home
fitness aerobic products includes treadmills, upright rowers, exercise bikes,
stair steppers and cross country skiers, and its line of anaerobic fitness
products includes home gyms, weight benches and recently introduced abdominal
machines. The Company also offers trampolines, recreational sports products,
sports medicine products and fitness accessories. The Company currently
markets the majority of its products under the brand names ProForm, Image,
Weslo, Weider, WeiderCare, Legend, JumpKing, and Lifestyler (a private label
brand manufactured for Sears).
Founded in 1977, the Company has been a pioneer in the fitness equipment
industry since 1980 and has focused on developing innovative, high-quality
fitness products. The Company estimates that its U.S. net sales (prior to the
HealthRider Acquisition) represented approximately 30% of total wholesale
domestic home fitness equipment sales in calendar 1995. In the first quarter
of 1996, the Company began to directly market its products in Europe. In 1996,
the Company had net sales of $747.6 million versus $202.4 million in 1991,
reflecting compound annual growth in net sales of 29.9% and an increase in
1996 net sales of 40.8% from 1995 net sales of $530.8 million. The Company had
a net loss of $12.9 million, net income of $1.6 million and a net loss of $7.1
million in 1995 and 1996 and the first quarter of 1997, respectively. The
Company believes that from 1991 to 1996 its growth rate exceeded the industry
growth rate due to the Company's emphasis on product innovation through
research and development, its multiple distribution channels and its flexible
manufacturing capacity. While the Company's growth rate to date has been high,
its annual percentage increase in domestic sales cannot be expected to
continue at historical levels.
BUSINESS STRATEGY
The Company's strategy is to expand its market leadership position by, among
other things:
DEVELOPING INNOVATIVE, HIGH-QUALITY PRODUCTS
A key element of the Company's strategy is product innovation and
development. The Company evaluates new product concepts on an ongoing basis
and seeks to respond to the desires and needs of consumers by frequently
introducing new products and repositioning old ones (i.e., selling a modified
product in a different price range). This focus on new products and innovation
enables the Company to begin selling early in a product's life cycle and, as
sales moderate, to extend product life cycles by introducing new features and
repositioning products within the Company's line of brands. In 1994, 1995 and
1996, approximately 40%, 42% and 52%, respectively, of the Company's net sales
were from products that were new, enhanced or repositioned. Recent examples of
the Company's product development include the introduction of the Space Saver
treadmill, which folds vertically for easy storage, the development of the
Cardio family of upright rowers, which significantly improved on upright rower
designs first marketed by others, and the introduction of the Company's
abdominal machines, which improved upon existing products manufactured by
others by adding a fold for storage feature. The Company believes that its
ability to identify industry trends and to quickly take a product from concept
to delivery gives it significant advantages over competitors.
TARGETING MULTIPLE DISTRIBUTION CHANNELS
The Company markets its products under multiple brands through multiple
distribution channels including specialty dealers, sporting goods chains,
department stores, discount merchants, warehouse
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clubs, catalogue showrooms and, to a limited extent, infomercials and direct
response marketing. The Company believes the marketing of its products through
multiple distribution channels provides it with several competitive advantages
including: (i) greater growth and increased market access; (ii) the ability to
maximize revenue throughout a product's life cycle by repositioning products
in different channels and under different brand names as products mature;
(iii) feedback on market trends and changing consumer tastes; and (iv) reduced
dependence on any single channel of distribution.
POSITIONING ITS BRANDS
To enhance its distribution strategy, the Company targets its brands to
specific distribution channels. By marketing specific brands tailored to
appeal to different demographic groups, the Company is able to market products
with varying designs, features and price ranges and target these products to a
wide variety of consumers with different fitness needs and disposable incomes.
The Company believes its brand positioning strategy enables it to: (i) achieve
greater appeal to each market segment; (ii) promote price stability across its
product lines as brand segmentation minimizes conflicts between different
distribution channels; and (iii) provide high-quality products with the price
ranges and features desired by different demographic groups. The Company's
various brands are supported by distinct marketing and product strategies and,
in some cases, separate sales forces.
PROVIDING BROAD PRODUCT OFFERINGS
The Company manufactures and distributes a broad line of aerobic and
anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and fitness accessories. The Company offers
a range of technological features, from manual equipment to sophisticated
programmable electronic products, in a variety of price ranges. The Company's
strategy of offering a broad range of products enables it to: (i) offer
categories of fitness products that appeal to different demographic groups;
(ii) respond quickly to changes in consumer preferences and fitness trends;
(iii) reduce its dependence on any single product category; and (iv)
participate in growth opportunities across a wide variety of product
categories.
UTILIZING FLEXIBLE, LOW-COST MANUFACTURING
The Company's manufacturing facilities are designed to be flexible in order
to permit the Company to shift its product mix quickly and efficiently. The
combination of internal manufacturing and assembly capacity and the Company's
access to third-party vendors has helped the Company meet customer demand on a
competitive basis. The Company uses over 1,500,000 square feet of total
domestic manufacturing capacity, and, in 1995, the Company manufactured or
assembled over 80% of its products at its production facilities in Utah, Texas
and Colorado. The design of these facilities provides the Company with the
flexibility to change production runs on short notice and to respond to
changing customer needs.
PURSUING GROWTH OPPORTUNITIES
The Company is seeking strategic acquisition opportunities which would
complement its existing business and provide an opportunity for growth. The
Company believes growth opportunities exist in its current domestic markets as
well as in selected international markets. The North American fitness
equipment market is significantly more developed than other markets around the
world. However, the Company began to directly market its products in the first
quarter of 1996 in the key European markets of the U.K., France, Italy and the
Benelux countries and is attempting to increase its market penetration in
these and other foreign countries. Prior to 1996, the Company had minimal
foreign sales. Net sales from international markets in the four quarters of
1996 and the first quarter of 1997 were $6.0 million, $9.3 million, $7.8
million, $10.2 million and $7.1 million, respectively. In connection with the
Recapitalization, the Company granted certain exclusive and non-exclusive
rights to distribute its
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<PAGE>
products in certain other international markets to Weider Sports. In September
1996, in connection with the Weider Sports Acquisition, the Company reacquired
such distribution rights from Weider Sports, subject to certain rights granted
by Weider Sports to third parties. The Company also consummated the CanCo
Acquisition. In addition, the Company is considering offering services that
complement its product offerings, such as on-line personal training services.
See "--Legal Proceedings--Settlement of WHF Litigation," "Certain
Relationships and Related Transactions" and "Risk Factors--Expansion
Strategy."
In keeping with its strategy of pursuing growth opportunities, in August
1996, the Company: (i) purchased substantially all the assets of HealthRider
for approximately $16.8 million and assumed (or refinanced) substantially all
the liabilities of HealthRider; (ii) purchased certain related manufacturing
assets of Parkway, including Parkway's contract to manufacture and supply
upright rowers to HealthRider, for approximately $10.1 million; and
(iii) purchased the minority interest of HealthRider's European subsidiary for
approximately $1.4 million (of which $.7 million was paid by HealthRider, $.6
million was paid by the Company in cash and $.1 million was paid by the
Company in inventory). The liabilities assumed included capital lease
obligations of approximately $19.3 million and revolving credit borrowings and
other long term debt of approximately $9.5 million. In addition, for a
description of certain accounts payable and other accrued payables the Company
assumed in connection with the HealthRider Acquisition, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
INDUSTRY OVERVIEW
Based on industry trade association data, the Company believes that retail
sales of home fitness equipment in the U.S. grew from approximately $.4
billion in calendar 1980 to approximately $2.1 billion, $2.1 billion, $2.6
billion, $2.8 billion and $2.9 billion in calendar 1991, 1992, 1993, 1994 and
1995, respectively.
The growth of the fitness equipment industry can be attributed primarily to
increased consumer emphasis on health, fitness and weight management. In
particular, the medical community's promotion of exercise as a means of
preventing cardiovascular disease and maintaining health and the diet
industry's recognition of the need to incorporate exercise as a component of
weight management programs have prompted consumers to place greater emphasis
on health and fitness. The Company believes that several other factors have
also contributed to the growth of the fitness equipment industry, including
product innovation at attractive price/value relationships, growth in
infomercials and cable television shows which promote exercise and fitness and
favorable demographic trends. The Company believes that sales of home fitness
equipment have also benefited from consumers' desire to spend more time at
home. The Company competes with recreational and exercise activities offered
by fitness clubs, as well as with a number of domestic manufacturers, domestic
direct importers, foreign companies exporting fitness products to the U.S.
and, in its limited direct sales efforts, with major retailers or
distributors. The Company's products also compete indirectly, but effectively,
with outdoor fitness, sporting goods and other recreational products.
While the total fitness equipment market has experienced strong overall
growth, individual product categories within the market have exhibited varying
life cycles and rates of growth. Traditional rowers experienced a relatively
short product life cycle. Since 1984, unit sales of traditional rowers have
equaled or exceeded 1.7 million units in only two years, with peak sales of
1.8 million in 1985 and 1986 and marginal sales in 1994 and 1995, and totaled
less than 10 million units over this period. In contrast, unit sales of
exercise bikes since 1984 have equaled or exceeded 1.7 million units in each
of the years up to 1993, with peak unit sales of 3.3 million in 1986 and sales
of .9 million in 1995, and have totaled over 38 million units. Unit sales of
treadmills have increased from .8 million in 1989 to 2.5 million units in
1995. The Company's sales of treadmills have been relatively flat for 1995 and
1996. However, sales of the Company's Cardio family of upright rowers which
was introduced in the second quarter of 1994 were approximately 1.0 million
units in 1995 and approximately 2.2 million units in
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1996. Calculated on a pro forma basis as if the HealthRider Acquisition
occurred on May 31, 1994, the Company's unit sales of upright rowers would
have been approximately 1.5 million and approximately 2.9 million in 1995 and
1996, respectively.
Different categories of fitness equipment products appeal to different
demographic groups. In general, home fitness equipment products tend to appeal
to higher income groups, with over 65% of purchasers having household income
exceeding $35,000. The Company believes that the aging of the baby-boom
generation and the resulting increase in the 35-64 year old segment in the
U.S. population has led to growth in sales of home fitness equipment.
1995 INDUSTRY CONSUMER DEMOGRAPHICS
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Age
- ---------------------------------------------------------------------
Product (0-34) (35-64) (65+)
- -------
<S> <C> <C> <C>
Treadmills 13.3 71.5 15.2
Exercise Bikes 28.6 50.5 20.9
Stairstepper 27.5 63.7 8.9
Cross Country Skiers 27.1 62.0 10.9
Home Gyms 45.6 42.1 12.3
Upright Rower 19.1 65.0 5.6
<CAPTION>
Income
------
Product $0-25,000 $25,000-35,000 $35,000+
- ------- --------- -------------- --------
<S> <C> <C> <C>
Treadmills 23.4 10.6 66.0
Exercise Bikes 26.1 18.2 55.7
Stairstepper 16.6 14.1 69.3
Cross Country Skiers 24.0 11.1 64.9
Home Gyms 29.5 15.9 54.6
Upright Rower 19.9 14.6 65.6
</TABLE>
Source: National Sporting Goods Association
DISTRIBUTION AND MARKETING
DISTRIBUTION
The Company markets its products under multiple brands through multiple
distribution channels, including specialty dealers, sporting goods chains,
department stores, warehouse clubs, discount merchants, catalogue showrooms
and direct response marketing. In 1995 and 1996, the Company's sales through
retailers were approximately 91% and 97%, respectively, of total sales.
The Company believes the marketing of products through multiple distribution
channels provides it with several competitive advantages, including: (i)
greater growth opportunities by participating in all distribution channels;
(ii) the ability to maximize revenue throughout a product's life cycle by
repositioning the product from higher to lower brand niches as the product
matures; and (iii) the ability to appeal to each market segment through the
marketing of specific brands designed to meet differing needs. The latter
capability is an important factor since different categories of fitness
equipment products appeal to different demographic groups.
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The following chart lists examples of the Company's brand names, price
positioning, distribution channels and customers within each channel:
<TABLE>
<CAPTION>
BRAND NAMES PRICE POSITIONING DISTRIBUTION CHANNELS CUSTOMER EXAMPLES
----------- ----------------- --------------------- -----------------
<S> <C> <C> <C>
Image................... High Specialty Dealers Busy Body
ProForm................. Middle Department Stores J.C. Penney
Sporting Goods Chains Sports Authority
Direct Response Individuals
Lifestyler(1)........... Middle Department Store Sears
Weslo/Weider............ Entry Level Discounters Wal-Mart and Target
Warehouse Clubs Sam's
Catalogue Showrooms Service Merchandise
</TABLE>
- --------
(1) The Lifestyler brand name is owned by Sears.
The Company targets its brands to specific distribution channels. For
example, the Company's products are sold under the Image name through specialty
dealers, under the ProForm name through sporting goods chains, under the
Lifestyler name through Sears, under the Weslo name through catalogue
showrooms, warehouse clubs and discount merchants, and under the ProForm and
Legend names through the Company's direct marketing campaigns. The Company's
various brands are supported by distinct marketing and product strategies and,
in some cases, separate sales forces.
The following charts summarize the Company's sales by distribution channel in
1995 and 1996:
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <S> <C>
DEPARTMENT STORES 45% DEPARTMENT STORES 47%
WAREHOUSE CLUBS 17% WAREHOUSE CLUBS 11%
SPORTING GOODS STORES 11% SPORTING GOODS STORES 10%
CATALOGUE SHOWROOMS 10% CATALOGUE SHOWROOMS 12%
DIRECT RESPONSE 9% DIRECT RESPONSE 9%
DISCOUNT RETAILERS 4% DISCOUNT RETAILERS 4%
MAIL ORDER 3% MAIL ORDER 3%
OTHER 1% OTHER 1%
</TABLE>
In addition to providing superior market access, the Company's presence
across multiple distribution channels provides a valuable source of feedback on
changing consumer tastes and market trends, enabling the Company to anticipate
industry trends and develop innovative products.
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<PAGE>
MARKETING
The Company's primary sales and marketing group is based in Logan, Utah. For
certain of its products, the Company augments the efforts of this group with
smaller sales forces based in Colorado and Texas. The Company employs
approximately 130 sales and marketing personnel. Such personnel are
compensated on the basis of salary and a bonus based on the Company's
profitability. In addition, the Company utilizes 22 outside sales agents, who
are compensated on the basis of their sales.
Starting in 1992, the Company sold products directly to consumers through
direct response television infomercials and print media campaigns. The Company
believes that direct response marketing can help educate consumers about new
products, increase brand name awareness and stimulate sales through
traditional distribution channels. The expansion of the Company's direct
response marketing required a greater investment than traditional 30 to 60
second television advertisements, and therefore greater risk, as a result of
the cost of creating infomercials and purchasing media time and space. In
1996, the Company wrote off $2.2 million of direct response video productions
because they failed to generate adequate sales. The Company is currently
focusing principally on traditional 30 to 60 second television advertisements
designed to enhance both retail and direct response sales of its products as
opposed to 30 minute infomercials.
INTERNATIONAL MARKETS
The North American fitness equipment market is significantly more developed
than other markets around the world, and the Company believes growth
opportunities exist in selected international markets. The Company began, in
the first quarter of 1996, to directly market its products in the key European
markets of the U.K., France, Italy and the Benelux countries and is attempting
to increase its market penetration in these and other foreign markets. Net
sales from international markets in the four quarters of 1996 and the first
quarter of 1997 were $6.0 million, $9.3 million, $7.8 million, $10.2 million
and $7.1 million, respectively. The Company's penetration of these markets is
lower and its operating costs are higher than in the U.S., and the Company's
European operations are not currently profitable. There can be no assurance
that the Company will be successful in selling its products in non-U.S.
markets. In connection with the Recapitalization, the Company granted certain
exclusive and non-exclusive rights to distribute its products in certain other
international markets to Weider Sports. In September 1996, in connection with
the Weider Sports Acquisition, the Company reacquired such distribution rights
from Weider Sports, subject to certain rights granted by Weider Sports to
third parties. See "--Legal Proceedings--WHF Litigation", "--Settlement of WHF
Litigation," "Risk Factors--Expansion Strategy" and "Certain Relationships and
Related Transactions."
CUSTOMERS
The Company's two largest customers for the past several years have been
Sears and Sam's. In 1995, these customers collectively generated an aggregate
of $229.5 million in net sales for the Company and accounted for approximately
31% and 12%, respectively, of the Company's total net sales. In 1996, these
customers accounted for approximately 34% and 8%, respectively, of the
Company's total net sales. In 1995 and 1996, Sam's accounted for approximately
94% and 70%, respectively, of net sales at the Company's JumpKing subsidiary.
Although sales to Sears still account for a substantial portion of the
Company's net sales, the percentage of net sales has decreased substantially
in the past several years from approximately 68% in 1989. Nevertheless, the
dollar amount of the Company's net sales to Sears has increased during this
time period.
The Company has more than 2,500 customers, excluding sales to individual
consumers through direct response channels of distribution. Consistent with
industry practice, the Company generally does not have long-term purchase
agreements or other commitments from its customers as to levels of future
sales. The level of the Company's sales to its large customers depends in
large part on their
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continuing commitment to home fitness products and the success of their
efforts to market and promote the Company's products as well as the Company's
competitiveness in terms of price, quality, product innovation, customer
service and other factors. The Company is not the exclusive supplier of
fitness equipment to any of its major customers. In connection with the
HealthRider Acquisition, the Company intends to offer products directly to
consumers through the acquired kiosks, stores and direct response networks.
The Company's direct sales to consumers, particularly through kiosks and
stores in malls where the Company's existing customers have retail sales
outlets, could adversely affect the Company's sales and its relationship with
existing customers. The loss of, or a substantial decrease in the amount of
purchases by, or a write-off of any significant receivables due from, any of
the Company's major customers or a number of the Company's other customers
would have a material adverse effect on the Company's business. See "Risk
Factors--Reliance on Major Customers; Exposure to the Retail Industry."
PRODUCTS
The Company manufactures and distributes a broad line of aerobic and
anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and fitness accessories. The Company offers
a range of technological features from manual equipment to sophisticated
programmable electronic products at a variety of price ranges. The appeal of
various products in the fitness industry has changed over time, and the
Company has shifted its product mix to meet consumer demand. The Company
intends to continue to adjust its product lines to respond to changes in
market demand.
AEROBIC PRODUCTS.
The Company offers aerobic products, which are designed to promote
cardiovascular fitness, under the Image, ProForm, Weslo and Lifestyler brand
names.
Cardio Family of Upright Rowers. The Company introduced its Cardio family
of upright rowers under the Weslo brand in October 1994. The Cardio family of
upright rowers exercises both the arms and legs while providing both an
aerobic and anaerobic workout through variable resistance. Models retail at
price points ranging from $169-$299.
Motorized Treadmills. The Company is the leading domestic producer of
motorized treadmills. Motorized treadmills allow users to run at speeds of up
to 10 mph. The features offered by the Company's motorized treadmills include
programmable speed and incline, electronic feedback on speed, elapsed time,
distance traveled and calories burned, and cross-training upper body exercise
functions. The Company recently introduced its line of Space Saver treadmills
which fold vertically for easy storage. The retail price points of the
motorized treadmills range from $199 to $2,000.
Manual Treadmills. The Company's manual treadmills allow the user to walk or
run slowly in place, and certain of the Company's manual treadmill models
include electronic feedback on speed, elapsed time and distance traveled. The
retail price points of the Company's manual treadmills range from $149 to
$299.
Exercise Bikes. The Company offers exercise bikes featuring adjustable air
resistance or flywheel resistance, electronic monitors which display elapsed
time, speed, distance and calories burned, and dual or triple action design
which allows the user to exercise upper body, lower body or both
simultaneously. Some units add motivational electronics and programmable
resistance which allow users to design their own workouts. Some higher end
units also contain an electromagnetic drive mechanism which creates less
noise, offers smoother action and requires less maintenance than traditional
motorized drives. Retail price points of the Company's exercise bikes range
from $79 to $799.
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<PAGE>
Stair Steppers. Various stair stepper machines sold by the Company offer
adjustable resistance, self-leveling pedals, motivational fitness monitors,
accessory stations to hold water bottles, books and towels, magnetic
resistance and total body conditioning, which combines upper and lower body
workouts. Other features offered by the Company's stair steppers include the
Speed Link adjustable resistance system, multi-window electronic monitors and
programmable electronics. Retail price points for the Company's stair steppers
range from $99 to $499.
Cross-Country Skiing Machines. The Company's cross-country skiing machines
feature motivational fitness monitors, stowaway design, the Company's patented
INSYNC Dual Action System, adjustable incline and adjustable resistance.
Retail price points for the Company's cross-country skiing machines range from
$99 to $199.
ANAEROBIC PRODUCTS.
Under the Image, ProForm, Weslo and Weider brand names, the Company offers
anaerobic products, which are designed to develop muscle tone and strength.
Home Gyms. The Company's home gyms range from traditional cast iron or vinyl
plate weight stack units to programmable electronic units that use "smart
cards" to store a user's personalized fitness regimen in electronic memory.
New technology and innovation within this category include home gyms which
integrate aerobic crosstraining components such as stair steppers and
electronic adjustability allowing simple adjustment in one pound increments
with digital feedback. Selected units are designed to allow multiple users to
use the equipment simultaneously. The Company's home gyms range in retail
price from $99 to $1,499.
Weights and Benches. The Company offers a range of weight benches to
specialty fitness dealers through the Image brand and markets a complete line
of weights and benches under the Weider and ProForm brand names. Retail price
points of these products range from $79 to $299.
Abdominal Machines. The Company introduced its first abdominal machine in
April 1996. This product is designed for isolation of the abdominal muscle
groups. Retail prices of the Company's abdominal products range from $49 to
$99.
OTHER PRODUCTS.
Recreational Sports Products. JumpKing, Inc., a subsidiary of the Company,
manufactures and markets a trampoline line that includes both mini-trampolines
for indoor home exercise use and full-sized trampolines for outdoor home
recreational use. The mini-trampoline retails at approximately $25; full-sized
trampolines have retail price points ranging from $239 to $399.
Sports Medicine Products. The Company markets a line of sports medicine
products under the WeiderCare brand name, including support wraps, neoprene
supports, back support belts and hot and cold packs. These products are sold
through channels of distribution that are not able to carry large exercise
units due to floor space limitations, such as drugstore chains, supermarkets
and pro shops. These products are also sold to corporate and industrial users.
Exercise Accessories. The Company offers a limited line of back support
belts and workout gloves and has introduced a line of exercise accessories,
including ankle and hand weights, grip devices and aerobic exercise step
decks.
PRODUCT INNOVATION AND DEVELOPMENT
Product and design innovation has contributed significantly to the Company's
growth. On an on-going basis, the Company evaluates new product concepts and
seeks to respond to the desires and
60
<PAGE>
needs of consumers by frequently introducing new products and repositioning
existing products. The Company has 110 full-time employees in the research and
development area, holds 83 patents and has 50 patent applications pending. The
Company had research and development expenses of $2.9 million, $5.2 million,
$6.8 million and $1.6 million in 1994, 1995, 1996 and the first quarter of
1997, respectively, and has budgeted $7.8 million for research and development
for 1997.
The Company conducts most of its research and development in 40,000 square
feet of space in Logan, Utah. This facility includes plastic, mechanical and
electrical engineering capabilities that are used in creating proprietary
designs and features. The Company also augments its internal research and
development effort by selectively evaluating new products with certain of its
key customers, who then provide feedback on acceptance by potential end-users.
This effort has the added benefit of enhancing the Company's relationships
with key customers.
This focus on new products and innovation enables the Company to begin
selling early in a product's lifecycle and, as sales moderate, to extend
product life cycles by introducing new features and repositioning products
within the Company's line of brands (i.e., selling a product, with
modifications, at a different price point). In 1994, 1995 and 1996,
approximately 40%, 42% and 52%, respectively, of the Company's sales were from
products that were new, enhanced or repositioned. Recent examples of the
Company's product developments are the introduction of the Space Saver
treadmill, which folds vertically for easy storage, the development of the
Cardio family of upright rowers, which significantly improved on upright rower
designs first marketed by others, and the introduction of the Company's
abdominal machines, which improved upon existing products manufactured by
others by adding a fold for storage feature. The Company believes that its
ability to take a product from concept to delivery quickly gives it
significant advantages over its competitors.
The Company's research and development teams have helped develop many of the
innovative features that have encouraged consumers to purchase and use fitness
equipment. Results of the Company's product development program include: (i)
various electronics systems, which provide motivational feedback and
personalized fitness routines; (ii) upright rowers with hydraulic shocks;
(iii) treadmills which fold for easy storage; and (iv) treadmills with upper
body resistance. In addition, the Company was the first to market successfully
cross-training home gyms equipped with aerobic stepping functions.
MANUFACTURING AND PURCHASING
In 1996, the Company manufactured or assembled over 80% of its products at
its facilities in Utah, Texas and Colorado. The balance of the Company's
products were manufactured and assembled by third parties, principally in the
Far East and by CanCo, a Canadian affiliate of certain shareholders which
provides the Company with mostly anaerobic products. See "Certain
Relationships and Related Transactions--Purchase Options," "Business--Legal
Proceedings--WHF Litigation" and "--Settlement of WHF Litigation". The Company
has longstanding supply relationships with a number of its offshore vendors,
many of which have exclusive relationships in the fitness industry with the
Company. The combination of internal manufacturing and assembly capacity and
the Company's access to third-party vendors has helped the Company meet
customer demand on a competitive basis. In addition, the use of third party
vendors provides greater flexibility in manufacturing capacity to satisfy
seasonal demands. See "Business--Legal Proceedings" and "Certain Relationships
and Related Transactions" and Note 13 of the Notes to the Consolidated
Financial Statements.
As of August 31, 1996 the Company had open orders of approximately $113.6
million compared to approximately $128.5 million as of September 2, 1995. The
Company expects to ship substantially all of such orders during the second
quarter of 1997.
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The Company follows a dual sourcing strategy on many of its components to
minimize the impact of sourcing disruptions. For example, the Company obtains
steel tubing from two to three vendors. When practical, the Company chooses
vendors that will supply the Company exclusively in the fitness equipment
category. The Company's two primary sources of electronic components, for
example, do not supply any other fitness equipment companies. To further
control manufacturing and delivery problems associated with sourcing delays,
the Company asks its electronics vendors to maintain specified inventory
levels for some long lead-time components, although sourcing delays have been
occasionally experienced in the past with new product introductions. In
addition, the Company has identified alternative sources for many key raw
materials and components. Despite these precautions, however, the Company's
ability to deliver its products on time is susceptible to disruptions in its
supply of raw materials and components, in part because it may take as long as
approximately three months to retool alternative component manufacturers to
produce required components. Since the Company purchases certain components
and finished products from foreign suppliers located in Canada, China, Taiwan
and various other countries, the Company is subject to the general risks of
doing business abroad, particularly with respect to its purchases from China,
including delays in shipment, work stoppages, adverse fluctuations in currency
exchange rates, increases in import duties and tariffs, changes in foreign
regulations, changes in most-favored-nation status and political instability.
In particular, the imposition of trade sanctions on China could have a
material adverse effect on the Company. See "Risk Factors--Reliance on Certain
Suppliers."
Sales to the Company's customers are highly price sensitive. The Company
sets many product prices on an annual basis but purchases raw materials and
components under purchase orders providing components for periods less than
one year. Accordingly, the Company sets prices for many products before it has
complete knowledge of the costs of raw materials and components and sometimes
before product development is complete and production costs have been firmly
established. After it has established prices, the Company may be unable to
pass cost increases along to its customers or to compete as effectively if it
seeks to pass such costs along.
The Company utilizes more than 1,500,000 square feet for manufacturing,
including a 300,000 square foot facility in Logan where the majority of the
Company's treadmills are manufactured or assembled. In the past, the Logan
facility has also manufactured stair steppers, exercise bikes and home gyms.
The Company constructed its Logan plant in 1990 and equipped the facility with
modern manufacturing and assembly features, including fully integrated metal
fabrication, powder coat painting, robotic welding and injection molding
equipment. The facility, like the Company's other manufacturing facilities,
was designed to permit flexible and efficient changes in the products being
manufactured to match customer demand. In 1996, the Company completed the
expansion of its manufacturing facility in Logan, Utah by approximately 40,000
square feet. In 1991, the Company began operating its Smithfield, Utah plant,
which is smaller than but very similar to the Logan facility. In 1994, the
Company began operating its Clearfield, Utah manufacturing facility. In
addition to its facilities in Utah, the Company has manufacturing facilities
in Texas and Colorado.
The Company applies a management system to control and monitor freight,
labor, overhead and material cost components of its finished goods. The
Company emphasizes product quality by monitoring operations according to
uniform quality control standards. In 1994, the Company received ISO 9001
certification for its Logan facilities. ISO is a nonprofit association that
monitors industrial companies' manufacturing processes, quality assurance
controls, personnel management and customer service in order to improve plant
efficiency, product quality, customer satisfaction and company profitability.
HEALTHRIDER ACQUISITION
In keeping with its strategy of pursuing growth opportunities, in August
1996, the Company: (i) purchased substantially all the assets of HealthRider
for approximately $16.8 million and assumed
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(or refinanced) substantially all the liabilities of HealthRider; (ii)
purchased certain related manufacturing assets of Parkway, including Parkway's
contract to manufacture and supply upright rowers to HealthRider for
approximately $10.1 million; and (iii) purchased the minority interest of
HealthRider's European subsidiary for approximately $1.4 million (of which $.7
million was paid by HealthRider, $.6 million was paid by the Company in cash
and $.1 million was paid by the Company in inventory). The liabilities assumed
or refinanced included capital lease obligations of approximately $19.3
million and revolving credit borrowings and other long term debt of
approximately $9.5 million. For a description of certain accounts payable and
other accrued payables the Company assumed in connection with the HealthRider
Acquisition, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." HealthRider, a
designer, marketer and distributor of fitness equipment based in Salt Lake
City, Utah, distributes its products through direct response advertising,
through a national network of over 200 HealthRider kiosks and stores in
shopping malls and through third party retailers. HealthRider had net sales of
$241.4 million and $113.2 million and net income of $13.6 million and net loss
of $3.6 million in calendar 1995 and the first six months of calendar 1996,
respectively. HealthRider was among the first companies to market upright
rowers. Its flagship product is the HealthRider, a brand of upright rower.
HealthRider also markets upright rowers under the aeROBICRider, SportRider and
LifeRider brand names. In aggregate, and excluding related freight revenues,
upright rowers (including the HealthRider) accounted for 94.4% and 93.4% of
HealthRider's net sales in calendar 1995 and the first six months of calendar
1996, respectively. In calendar 1995 and the first six months of 1996,
purchases from Parkway accounted for approximately 73.5% and 54.3%,
respectively, of total upright rower purchases by HealthRider. In connection
with the HealthRider Acquisition, the manufacturing agreement between
HealthRider and Parkway was terminated.
As a result of the HealthRider Acquisition, the Company believes it is the
leading maker and distributor of upright rowers in the United States with its
net sales of upright rowers, calculated on a pro forma basis as if the
HealthRider Acquisition had occurred on December 31, 1994, representing over
76% of all U.S. upright rower sales in calendar 1995. The Company estimates
that its U.S. net sales, calculated on the same pro forma basis represented
approximately 39% of total wholesale domestic home fitness equipment sales in
calendar 1995. The Company believes that the HealthRider Acquisition will
strengthen its position as a leading manufacturer and marketer of fitness
equipment in the United States. The Company's plan for integrating HealthRider
into its business includes: (i) marketing a broad line of products such as
treadmills, stair steppers and cross-country skiing machines under the
HealthRider brand name through HealthRider's established distribution
channels; (ii) altering direct response advertising with respect to
HealthRider products with the goal of enhancing the Company's return on its
advertising investment; and (iii) realizing synergies from the HealthRider
Acquisition by integrating the Company's and HealthRider's operations. The
Company is exploring the possibility of disposing of its interests in the
HealthRider headquarters building which may include a possible sale of such
interests to directors, officers or other affiliates of the Company and may
include a continuing lease of such building by the Company. The Company's
direct sales to consumers, particularly through the acquired kiosks in malls
where the Company's existing customers have retail sales outlets, could
adversely affect the Company's sales and its relationship with its existing
customers.
The Company expects to increase its net sales as a result of the HealthRider
Acquisition, but by substantially less than 100% of HealthRider's net sales.
The Company will recognize a significant, non-recurring, non-cash increase in
cost of goods sold in the first through third quarters of 1997 of
approximately $12.0 million (due to the fact that the Company's purchase
accounting for the HealthRider Acquisition included writing-up the book value
of the acquired HealthRider inventory to fair market value less estimated
sales costs). See "Management's Discussion and Analysis of Operations and
Financial Condition and Results of Operations--HealthRider." In addition, the
HealthRider Acquisition is expected to result in expenses of approximately
$5.0 million in the second and third quarters of 1997 related to the
integration of HealthRider into the Company's business. See "Risk
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<PAGE>
Factors--Expansion Strategy; Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--HealthRider."
The Company funded the HealthRider Acquisition through additional borrowings
under the amended Credit Agreement. See "Description of Certain Indebtedness."
COMPETITION
The fitness equipment market is highly competitive. It is characterized by
frequent introduction of new products, often accompanied by major advertising
and promotional campaigns. The Company believes that the principal competitive
factors affecting its business include price, quality, brand name recognition,
product innovation, marketing resources and customer service.
The Company competes in the U.S. with recreational and exercise activities
offered by health clubs, as well as a number of domestic manufacturers,
domestic direct importers, foreign companies exporting fitness products to the
U.S. and, in its direct sales efforts, with major retailers and distributors.
Competitors in these areas include Precor Inc., CML Group Inc. (under the
NordicTrack(R) brand), LifeFitness, Inc. and DP and Roadmaster, which are
commonly owned. The Company also believes that Reebok International Ltd. will
begin marketing home fitness equipment in the U.S. In Europe, the Company
competes principally with Tunturi, Inc. and Kettler Int'l Inc., a number of
Asian importers and some of its domestic competitors. The Company's products
also indirectly compete with outdoor fitness, sporting goods and other
recreational products. Competitors in these product areas include Huffy
Corporation, Canstar Sports Inc. (a subsidiary of Nike Inc.), and Rollerblade,
Inc. Certain competitors are better capitalized than the Company and may have
greater financial and other resources than those available to the Company. In
addition, there are no significant technological, manufacturing or marketing
barriers to entry into the fitness equipment or the exercise accessory markets,
although many companies in the industry, including the Company, have sought and
received numerous patents in an effort to protect their competitive position.
EMPLOYEES
The Company currently employs approximately 4,300 people, none of whom are
represented by labor unions. Factory employees are compensated through hourly
wages and a targeted incentive system. Managerial employees receive salaries
and bonuses tied to the achievement of performance targets. Approximately 110
employees are engaged in research and development, 130 in sales and marketing,
3,100 in manufacturing, 30 in purchasing and 930 in other areas.
TRADEMARKS AND PATENTS
The Company holds 83 patents and has 50 patent applications pending. The
Company believes that certain of its patents and registered and common law
trademarks and trade names have significant value and that some of its
trademarks enhance its ability to create demand for and market its products.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental and health and safety laws and regulations that impose workplace
standards and limitations on the discharge of pollutants into the environment
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances and
wastes. The nature of the Company's manufacturing and assembly operations
exposes it to the risk of claims with respect to environmental matters and
although compliance with local, state and federal requirements relating to the
protection of the environment has not had and is not expected to have a
material adverse effect on the Company's financial condition or results of
operation, there can be no assurance that material costs or liabilities will
not be incurred in connection with environmental matters. Future events, such
as changes in existing laws and regulations or enforcement policies or the
discovery of contamination
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<PAGE>
on sites owned or operated by the Company, may give rise to additional
compliance costs or operational interruptions which could have a material
adverse effect on the Company's financial condition. See "Risk Factors--
Environmental Considerations."
LEGAL PROCEEDINGS
WHF LITIGATION
The Company and its affiliates are parties to a number of agreements with
WHF and its affiliates. On August 28, 1995, WHF and its affiliates, including
Weider Sports, commenced a number of legal proceedings against the Company,
its affiliates and its customers. WHF instituted legal proceedings against the
Company and Messrs. Watterson, Stevenson, Gay, Mika and Rehnert, members of
the board of directors, in the Court of Chancery of the State of Delaware and
two arbitration proceedings against the Company before the American
Arbitration Association in New York, New York. Weider Sports instituted legal
proceedings against the Company in the U.S. District Court, Southern District
of New York; filed a request for mediation with the International Chamber of
Commerce (the "ICC") in Paris, France; filed three separate legal proceedings
against three of the Company's customers in the U.S. District Court, District
of Utah; and filed a request for reconciliation in advance of arbitration
against the Company before a representative of a "big six accounting firm".
The Company on August 30, 1995, initiated a lawsuit in the U.S. District
Court, Southern District of New York, against Weider Sports seeking a
preliminary injunction forbidding Weider Sports from continuing to market
unlawful copies of the Cardioglide upright rower. The Company also commenced
five separate arbitration proceedings against WHF and certain of its
affiliates and filed a counterclaim in one of the arbitration proceedings
initiated by WHF.
The lawsuits that Weider Sports and the Company filed against one another in
the Southern District of New York, along with respective motions for
preliminary injunction, were resolved and ultimately dismissed pursuant to a
court-approved Stipulation and a related agreement. The Stipulation and
agreement provide, in part, that the Company will not do business through
certain distributors and will require certificates of its other distributors
to the effect that said distributors agree not to sell into certain countries
exclusive to Weider Sports. By this Stipulation, Weider Sports also agreed not
to acquire, develop, make, promote, sell, advertise, shop or distribute the
"Weider Fitness Rider" or any other product substantially similar to the
Cardioglide. The mediation request that Weider Sports filed was ultimately
withdrawn, and WHF and the Company thereafter filed a joint request for
mediation with the ICC.
The Company and WHF settled all of the litigation described above on
September 6, 1996.
SETTLEMENT OF WHF LITIGATION
On September 6, 1996, the Company and WHF and its affiliates settled the
litigation between the parties through a number of agreements (the "WHF
Settlement"). The WHF Settlement includes releases of certain claims
(including all claims asserted in the litigation described above), amendments
to certain of the agreements currently existing between the Company and WHF
and its affiliates and certain new agreements among the Company and WHF and
its affiliates. See "Certain Relationships and Related Transactions." Other
than the releases, the significant terms of the WHF Settlement are outlined
below.
Repurchase of Common Stock. On November 20, 1996, the Company purchased all
of the common stock of IHF Capital and certain warrants to purchase common
stock of IHF Capital held by the WHF Stockholders at a price of approximately
$42.5 million.
Repurchase of Preferred Stock. On November 20, 1996, the Company purchased
the IHF Holdings Preferred Stock held by WHF at a price of $35.8 million.
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<PAGE>
In connection with the repurchase of IHF Holdings Preferred Stock, the Company
purchased the options to purchase IHF Holdings Preferred Stock held by Messrs.
Watterson and Stevenson.
Weider Sports Acquisition and CanCo Acquisition. The Company acquired
certain assets, excluding cash and fixed assets, for $8.7 million and assumed
certain liabilities of the sports equipment business lines of Weider Sports.
In addition, the Company acquired certain assets, excluding cash, cash
equivalents and accounts receivable, for $1.8 million and assumed certain
liabilities of CanCo. As a result of the Weider Sports Acquisition, the
Company reacquired distribution rights originally granted to Weider Sports in
connection with the Recapitalization, subject to certain rights granted by
Weider Sports to third parties. The Company also acquired two CanCo plants
which were leased by other WHF affiliates to CanCo in exchange for the
assumption of the existing $1.5 million Cdn. mortgage on the properties and
the payment of $.5 million.
Settlement Expenses and Intercompany Payables. The Company: (i) paid $12.1
million to terminate the lawsuits; (ii) paid $3.9 million to WHF and its
affiliates as prepayment in full under its brand license agreements with them;
and (iii) received $1.2 million in full payment and settlement of the
Company's intercompany payable to WHF and its affiliates ($1.8 million) and
amounts due the Company under the amended WSG Management Agreement ($3.0
million). The Company also received $.5 million in full payment and settlement
of CanCo's Management fee obligations to the Company under the CanCo
Management and Advisory Agreement.
Ben Weider Payments. The WHF Settlement also provides that Ben Weider will
serve as a consultant to, and ambassador for, the Company for five years, with
an annual compensation of approximately $475,000, and that the Company will
provide office space and three assistants for Mr. Weider.
Payments to Messrs. Watterson and Stevenson. In connection with the WHF
Settlement, WHF and its affiliates (i) paid Messrs. Watterson and Stevenson an
aggregate amount of approximately $4.2 million in exchange for the surrender
of their options to purchase stock of WHF and its affiliates and (ii) paid
Messrs. Watterson and Stevenson an aggregate amount of $.5 million. Messrs.
Watterson and Stevenson also each received $.3 million in full payment and
settlement of CanCo's Management fee obligations to Messrs. Watterson and
Stevenson under the CanCo Management and Advisory Agreements.
The WHF Settlement also contains various miscellaneous provisions that the
Company does not believe are material.
PRODUCT LIABILITY
Due to the nature of the Company's products, the Company is subject to
product liability claims involving personal injuries allegedly related to the
Company's products. As of August 31, 1996, the Company had $1.5 million in
reserves for product liability related losses. The Company currently carries
an occurrence-based product liability insurance policy. The policy provides
coverage for the period from October 1, 1996 to October 30, 1998 of up to $25
million per occurrence and $25 million in the aggregate annually. The current
policy has a deductible on each claim of $250,000 for claims related to
trampolines and $100,000 for claims related to all other products. Previously,
the Company maintained similar occurrence based policies with somewhat lower
coverage limits and higher deductibles. The Company believes that its
insurance is generally adequate to cover product liability claims.
Nevertheless, currently pending claims and any future claims are subject to
the uncertainties related to litigation and the ultimate outcome of any such
proceedings or claims cannot be predicted. Due to uncertainty with respect to
the nature and extent of manufacturers' and distributors' liability for
personal injuries, there is also no assurance that the product liability
insurance of the Company is or will be adequate to cover such claims. In
addition, there can be no assurance that the Company's
66
<PAGE>
insurers will be solvent when required to make payments on claims.
Furthermore, there can be no assurance that insurance will remain available,
or if available, that it will not be prohibitively expensive. The loss of
insurance coverage or claims exceeding that coverage could have a material
adverse effect on the Company's results of operations and financial condition.
See "Risk Factors--Product Liability."
FTC INVESTIGATIONS
The FTC is conducting an investigation to determine whether the Company may
have made excessive advertising claims with respect to its "CrossWalk"
treadmill products (which constitute a substantial portion of the Company's
sales), in violation of the Federal Trade Commission Act. The FTC has asked
the Company to voluntarily provide information and documents on several
occasions, and the Company has responded to these requests.
The Company believes that its advertising for the CrossWalk products was
appropriately substantiated, and therefore that the Company did not make
excessive advertising claims. The FTC has entered into discussions with the
Company to resolve this matter through a consent decree. If these discussions
do not resolve the matter, and if the FTC concludes that the Company made
excessive advertising claims and issues a complaint, it may seek relief in the
form of a cease and desist order, civil monetary penalties and/or consumer
redress in the form of, among other things, refunds to consumers and public
notification respecting the advertisements, if any, which the FTC concludes
were excessive. Management does not believe that this matter will have a
material adverse effect on its results of operations or financial position,
however there can be no assurance in this regard.
The FTC is conducting a preliminary investigation of HealthRider to
determine whether HealthRider may have made excessive advertising claims with
respect to its HealthRider family of products (which constitute virtually all
of HealthRider's sales), in violation of the Federal Trade Commission Act. The
FTC has asked HealthRider to voluntarily provide documents and information on
several occasions, and HealthRider has responded to these requests. If the FTC
were to conclude that HealthRider did violate the Federal Trade Commission
Act, it may seek relief in the form of a consent decree, a cease and desist
order, civil money penalties and/or consumer redress in the form of, among
other things, refunds to consumers and public notification respecting the
advertisements, if any, which the FTC concludes were excessive. The Company
has assumed all of HealthRider's liabilities in connection with this matter.
Management does not believe that this matter will have a material adverse
effect on its results of operations or financial position, however there can
be no assurance in this regard. See "Risk Factors--FTC Investigations."
CONSUMER PRODUCTS SAFETY COMMISSION INQUIRIES
The Consumer Products Safety Commission (the "CPSC") has conducted an
inquiry and made claims relating to defects in certain of HealthRider's
products. Remediation has been undertaken by HealthRider. Although no consumer
litigation has resulted from such defects to date, there can be no assurance
that consumer litigation will not result. The Company assumed all of
HealthRider's liabilities in connection with this matter. On two separate
occasions, the CPSC has requested that the Company provide information and
documents with respect to two types of exercise products manufactured by the
Company in order to assist the CPSC in reaching a preliminary determination
whether defects are present in these products. The Company has responded to
both of these requests.
OTHER
The Company is party to a variety of nonproduct liability commercial suits
involving contract claims and intellectual property claims. The Company
believes that adverse resolution of these suits would not have a material
adverse effect on the Company.
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<PAGE>
The Company is also involved in several patent infringement claims, arising
in the ordinary course of its business. The Company believes that the ultimate
outcome of these matters will not have a material adverse effect on the
Company.
PROPERTIES
The location, square footage, status and primary use of the Company's
principal properties are set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE STATUS PRIMARY USES
-------- ------- ------ ------------
<S> <C> <C> <C>
Logan, UT............... 300,000 Owned Manufacturing, Offices, R&D
Offices, Manufacturing,
Logan, UT............... 150,793 Leased (Month to Month) Warehousing
Smithfield, UT.......... 82,300 Leased (Expires 9/98) Manufacturing
Clearfield, UT.......... 629,000 Leased (Month to Month) Manufacturing, Warehousing
Clearfield, UT.......... 329,075 Leased (Expires 6/99) Manufacturing, Warehousing
Clearfield, UT.......... 282,600 Leased (Expires 12/03) Warehouse
Millville, UT........... 13,000 Owned Manufacturing, Warehousing
Garland, TX............. 95,405 Leased (Expires 9/97) Offices, Manufacturing, Warehousing
Dallas, TX.............. 40,000 Leased (Expires 9/97) Warehousing
Weatherford, TX......... 22,000 Leased (Expires 1/98) Offices, Manufacturing
Denver, CO.............. 61,000 Leased (Expires 4/99) Manufacturing, Warehousing
South Brunswick, NJ..... 181,000 Leased (Month to Month) Warehouse
South Brunswick, NJ..... 25,000 Leased (Month to Month) Warehouse
Englewood, CO........... 10,000 Leased (Expires 6/99) Sales Office
St. Jerome, QC.......... 134,000 Leased (Month to Month) Warehouse
Ste.-Therese, QC........ 10,000 Leased (Month to Month) Warehouse
Logan, UT............... 68,750 Leased (Expires 5/00) Warehouse
Smithfield, UT.......... 108,187 Leased (Expires 1/01) Warehouse
Anzin, France........... 8,097 Leased (Expires 12/96) Warehouse, Offices, Apartment
Carrieres Sur Seine,
France................. 2,966 Leased (Expires 12/98) Warehouse, Office
Neailly Sur Seine,
France................. 262 Leased (Expires 9/98) Apartment
Leeds, UK............... 6,000 Leased (Expires 1/99) Offices
Perugia, Italy.......... 3,360 Leased (Expires 6/01) Offices
Perugia, Italy.......... 6,600 Leased Warehouse
</TABLE>
In addition, in connection with the HealthRider Acquisition, the Company
acquired short term leases for over 200 HealthRider kiosks and stores.
The Company believes that its existing facilities are well maintained, in
good operating condition and adequate for its expected level of operations.
Although a number of the Company's facilities are rented on a month to month
basis, the Company does not anticipate difficulty in maintaining access to
facilities required for the conduct of its business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages as of
December 20, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott R. Watterson............ 41 Chairman of the Board and Chief Executive
Officer
Gary E. Stevenson............. 41 President, Chief Operating Officer and
Director
Robert C. Gay................. 45 Vice Chairman of the Board
Ronald P. Mika................ 35 Director
Geoffrey S. Rehnert........... 39 Director
S. Fred Beck.................. 38 Chief Financial and Accounting Officer,
Vice President and Treasurer
Lynn C. Brenchley............. 50 Vice President, Business Development
David J. Watterson............ 37 Vice President, Marketing and Research and
Development
Jon M. White.................. 48 Vice President, Manufacturing
William T. Dalebout........... 48 Vice President, Design
Brad H. Bearnson.............. 42 General Counsel and Secretary
</TABLE>
SCOTT R. WATTERSON. Mr. Watterson has served as President and Chief
Executive Officer of Weslo since he co-founded Weslo in 1977 and has served as
President and Chief Executive Officer of ProForm since 1988. Effective as of
the Recapitalization Closing, Mr. Watterson became Chairman of the Board and
Chief Executive Officer of the Company. David Watterson is Mr. Watterson's
brother.
GARY E. STEVENSON. Mr. Stevenson has served as Chief Operating Officer of
Weslo since he co-founded Weslo in 1977 and has served as Chief Operating
Officer of ProForm since 1988. Effective as of the Recapitalization Closing,
Mr. Stevenson became President, Chief Operating Officer and a Director of the
Company.
ROBERT C. GAY. Mr. Gay became Vice Chairman of the Board of Directors of the
Company effective as of the Recapitalization Closing. Mr. Gay has been a
Managing Director of Bain Capital since April 1993 and has been a General
Partner of Bain Venture Capital since February 1989. From 1988 through 1989,
Mr. Gay was a principal of Bain Venture Capital. In addition, Mr. Gay is a
director of Alliance Entertainment Corp., American Pad & Paper Company, GT
Bicycles, Inc., GS Industries, Inc. and its subsidiary GS Technologies
Operating Co., Inc., and Physio-Control International Corporation.
RONALD P. MIKA. Mr. Mika became a Director of the Company effective as of
the Recapitalization Closing. Mr. Mika has been a Principal of Bain Capital
since December 1992 and was an associate of Bain Capital from August 1989
through November 1992.
GEOFFREY S. REHNERT. Mr. Rehnert became a Director of the Company effective
as of the Recapitalization Closing. Mr. Rehnert has been a Managing Director
of Bain Capital since April 1993 and has been a General Partner of Bain
Capital since 1986. Mr. Rehnert is also a director of GT Bicycles, Inc.,
Worldcorp, Inc., FTD, Inc., KollMorgen Corporation and U.S. Order, Inc.
S. FRED BECK. Mr. Beck has served as the Chief Financial Officer of Weslo
since 1989. Mr. Beck became Chief Financial and Accounting Officer, Vice
President and Treasurer of the Company as of the Recapitalization Closing.
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<PAGE>
LYNN C. BRENCHLEY. Mr. Brenchley has served as Vice President of Business
Development of Weslo since 1990 and has continued in that position with the
Company since the Recapitalization Closing. Prior to 1990, he was Vice
President and General Manager of Thorn Apple Valley, a meat processor.
DAVID J. WATTERSON. Mr. Watterson has served as Vice President of Marketing
and Research and Development of Weslo since 1992 and has continued in that
position with the Company since the Recapitalization Closing. Prior to 1992,
Mr. Watterson served as Vice President of Sales of Weslo. Scott Watterson is
David Watterson's brother.
JON M. WHITE. Mr. White has served as Vice President of Manufacturing of
Weslo since 1988 and has continued in that position with the Company since the
Recapitalization Closing.
WILLIAM T. DALEBOUT. Mr. Dalebout has served as Vice President of Design of
Weslo since 1987 and has continued in that position with the Company since the
Recapitalization Closing.
BRAD H. BEARNSON. Mr. Bearnson presently serves as General Counsel and
Secretary. Mr. Bearnson first joined the Company in March of 1995 prior to
which he represented the Company and its predecessors, ProForm and Weslo, as
outside counsel since 1983. Prior to March, 1995, Mr. Bearnson was a
shareholder with the law firm of Olson & Hoggan, P.C. Mr. Bearnson is also a
certified public accountant.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal 1996, 1995 and 1994 for Mr. Scott Watterson and the Company's other
four most highly compensated executive officers (collectively, the "named
executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------ COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)(2)
- --------------------------- ---- --------- --------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Scott R. Watterson(3)... 1996 450,000 690,660 469,988(4)(5) 22,791(6)
Chairman of the Board
and Chief 1995 325,000 423,704 447,279 2,402,060(7)
Executive Officer 1994 450,000 1,968,144 900
Gary E. Stevenson(3).... 1996 400,000 690,660 375,251(4)(8) 22,952(6)
President and Chief
Operating Officer 1995 300,000 423,704 368,014 1,901,400(7)
1994 400,000 1,405,817 1,000
S. Fred Beck............ 1996 168,000 149,000 62,285(9)(10) 1,578
Chief Financial and
Accounting Officer 1995 160,000 105,926 52,843 2,981
Vice President and
Treasurer 1994 125,000 71,121 788
David J. Watterson...... 1996 205,000 149,000 62,285(9)(10) 1,547
Vice President,
Marketing and Research 1995 195,000 105,926 52,843 2,450
and Development 1994 167,000 71,121 650
Jon M. White............ 1996 105,000 149,000 37,870(11)(12) 2,237
Vice President,
Manufacturing 1995 100,500 105,926 35,229 2,351
1994 90,500 71,121 409
</TABLE>
- --------
(1) Options to purchase shares of the IHF Capital's Class A Common Stock.
(2) Includes amounts contributed by the Company for the benefit of the named
executive officers under the Company's 401(k) Plan.
(3) The table does not reflect the consulting fees that Scott Watterson and
Gary Stevenson may receive from CanCo equal to an aggregate of 14% of its
pre-tax earnings up to the time that the Company's option to acquire
CanCo's assets is exercised and closed or expires. The Company has given
notice of its intention to exercise this option and may purchase the
assets of CanCo, subject to satisfactory completion of certain
conditions, including due diligence. The purchase of the CanCo assets has
not yet been completed due to complications related to the WHF
Litigation. See "Business--Legal Proceedings," "Certain Relationships and
Related Transactions," and Note 15 of the Notes to the Consolidated
Financial Statements. The Company may terminate its option to purchase
CanCo's assets any time prior to closing. Prior to the Recapitalization,
Scott Watterson and Gary Stevenson owned a 14% aggregate equity interest
in CanCo.
(4) Includes options for 90,588 shares of Class A Common Stock granted in
connection with the Recapitalization at an exercise price of $30.87,
which was substantially above market value. In March 1996 the exercise
price of these options was reset to $8.92, which was the then current
fair market value of the Class A Common Stock.
(5) Includes options to purchase 341,053 shares of Class A Common Stock at
$5.80 per share which were granted in May 1996 when the then current fair
market value of such stock was $8.92.
(6) Includes $19,722 and $19,802 paid on behalf of Scott Watterson and Gary
Stevenson, respectively, for legal fees and expenses.
(7) Includes $2.3 and $1.8 million received by Scott Watterson and Gary
Stevenson, respectively, in connection with a four-year agreement to not
compete with the Company in certain specified businesses and also
includes $99,500 paid to each of Scott Watterson and Gary Stevenson by
the Company as reimbursement for legal fees and expenses incurred by them
in connection with the Recapitalization.
(8) Includes options to purchase 246,316 shares of Class A Common Stock at
$5.80 per share which were granted in May 1996 when the then current fair
market value of such stock was $8.92.
(9) Includes options for 7,549 shares of Class A Common Stock granted in
connection with the Recapitalization at an exercise price of $30.87,
which was substantially above market value. In September 1995 the
exercise price of these options was reset to $5.80, which was the then
current fair market value of the Class A Common Stock.
(10) Includes options to purchase 54,736 shares of Class A Common Stock at
$5.80 per share which were granted in May 1996 when the then current fair
market value of such stock was $8.92.
(11) Includes options for 5,033 shares of Class A Common Stock granted in
connection with the Recapitalization at an exercise price of $30.87,
which was substantially above market value. In September 1995 the
exercise price of these options was reset to $5.80, which was the then
current fair market value of the Class A Common Stock.
(12) Includes options to purchase 32,837 shares of Class A Common Stock at
$5.80 per share which were granted in May 1996 when the then current fair
market value of such stock was $8.92.
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<PAGE>
The following table sets forth information concerning options granted to
each of the named executive officers in the last fiscal year.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
MARKET
PRICE OF POTENTIAL REALIZABLE VALUE AT
CLASS A ASSUMED ANNUAL RATES
% OF TOTAL COMMON OF STOCK PRICE APPRECIATION
OPTIONS GRANTED STOCK ON FOR OPTION TERM($)(4)
OPTIONS TO EMPLOYEES IN EXERCISE DATE OF EXPIRATION --------------------------------
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) GRANT($/SH) DATE 0% 5% 10%
---- ---------- --------------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott R. Watterson 90,588 7.6 8.92(2) 8.92 11/14/04 $ -- $ 445,498 $1,097,313
341,053 28.7 5.80 8.92 5/22/06 1,064,085 2,977,304 5,912,557
38,347 3.2 5.80 5.80 6/13/05 -- 139,874 354,468
Gary E. Stevenson 90,588 7.6 8.92(2) 8.92 11/14/04 -- 445,498 1,097,313
246,316 20.7 5.80 8.92 5/22/06 768,506 2,150,275 4,270,179
38,347 3.2 5.80 5.80 6/13/05 -- 139,874 354,468
S. Fred Beck(1) 7,549 .6 5.80(3) 5.80 11/14/04 -- 24,139 59,458
54,736 4.6 5.80 8.92 5/22/06 170,776 477,831 948,913
David J. Watterson(1) 7,549 .6 5.80(3) 5.80 11/14/04 -- 24,139 59,458
54,736 4.6 5.80 8.92 5/22/06 170,776 477,831 948,913
Jon M. White(1) 5,033 .4 5.80(3) 5.80 11/14/04 -- 16,094 39,641
32,837 2.8 5.80 8.92 5/22/06 102,451 286,658 569,268
</TABLE>
- -------
(1) One third of the options granted to these employees vest each year on
November 14 and all such options will vest upon a change of control. As of
the end of 1996, one third of these options had vested. As of December 20,
1996 two-thirds of these options had vested.
(2) The exercise price with respect to these options was reset in March 1996
from $30.87 to $8.92, which was the then current fair market value of the
Class A Common Stock.
(3) The exercise price with respect to these options was reset in September
1995 from $30.87 to $5.80, which was the then current fair market value of
the Class A Common Stock.
(4) These potential realizable values are based on assumed rates of
appreciation required by applicable regulations of the Commission. The
potential realizable values stated are not discounted to their present
value. As of May 31, 1996 there was no market for IHF Capital's common
stock. There have been no arm's-length sales of IHF Capital's Common Stock
since the closing of the Recapitalization.
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The following table sets forth information as of May 31, 1996, concerning
options of the Company exercised by each of the named executive officers in
fiscal 1996 and year end option values.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS AT
OPTIONS AT FY-END (#) FY-END ($)(2)
-------------------------------------- ---------------------
SHARES ACQUIRED VALUE EXERCISABLE/
ON EXERCISE (#) REALIZED ($)(2) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
--------------- --------------- -------------------------------------- ---------------------
IHF
CLASS A CLASS A HOLDINGS CLASS A CLASS L CLASS A CLASS L
COMMON COMMON SERIES COMMON COMMON COMMON COMMON
NAME STOCK STOCK PREFERRED(2)(3) STOCK STOCK STOCK STOCK
- ---- --------------- --------------- --------------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott Watterson......... -- -- 585.8/0 469,988/0 48,620/0 1,183,728 3,141,017
Gary Stevenson.......... -- -- 455.6/0 375,251/0 37,816/0 888,149 2,443,009
S. Fred Beck............ 15,098 86,059 -- 74,867/17,614 -- 460,658 --
David J. Watterson...... -- -- -- 89,965/17,614 -- 593,822 --
Jon M. White............ 10,065 57,371 -- 46,257/11,743 -- 295,707 --
</TABLE>
- --------
(1) This table includes options issued in connection with the Recapitalization
in exchange for previously outstanding options to purchase stock of the
Recapitalized Companies.
(2) As of May 31, 1996 there was no market for IHF Capital's common stock or
IHF Holdings Preferred Stock. For purposes of the calculations in this
table, the fair value of one share of IHF Capital's Class A Common Stock
was assumed to be $8.92, the fair value of one share of its Class L Common
Stock was assumed to be approximately $68.54, and the fair value of one
share of IHF Holdings Preferred Stock was assumed to be $4,000 at the
close of fiscal 1996. There have been no arm's-length sales of the IHF
Capital's Common Stock or IHF Holding's Preferred Stock since the Closing
of the Recapitalization.
(3) All of Messrs. Watterson's and Stevenson's options on their IHF Holdings
Preferred Stock were redeemed in connection with the Offering.
1994 STOCK OPTION PLAN
In November 1994 the Company adopted the IHF Capital, Inc. 1994 Stock Option
Plan (the "1994 Stock Option Plan") which provides for the grant to certain
eligible employees of either incentive stock options, nonstatutory options or
both. No employee shall be entitled to grants of options in excess of 700,000
shares. A total of 2,110,207 shares of Class A Common Stock have been reserved
for issuance under the Stock Option Plan, which is administered by the Board
of Directors or a committee thereof, of which 686,273 shares have been issued
or cancelled and 1,423,934 represents outstanding stock options as of the
commencement of the Exchange Offer.
1996 STOCK OPTION PLAN
The Company adopted the IHF Capital, Inc. 1996 Stock Option Plan (the "1996
Stock Option Plan") which will provide for the grant to directors and certain
eligible employees of either incentive stock options, non-qualified options or
both. The 1996 Stock Option Plan satisfies the requirements of Rule 16b-3
under the 1934 Act. Subject to adjustment for stock splits and similar events,
a total of 2,070,000 shares of Class A Common Stock has been authorized for
issuance under the 1996 Stock Option Plan, which is administered by the Board
of Directors. The Board of Directors has resolved that, all options issued
pursuant to the 1996 Stock Option Plan are expected to have an exercise price
equal to the then current market value of the Company's Common Stock (or 110%
of current market value in case of incentive stock options granted to an
individual with stock holdings in excess of certain limits).
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The 1996 Stock Option Plan will be administered by the Board of Directors or a
committee thereof, and the 1996 Stock Option Plan provides that no options
will be granted after ten years from its adoption on August 26, 1996.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not maintain a compensation committee during 1996. Messrs.
Scott Watterson's and Stevenson's 1996 compensation was determined prior to
the Recapitalization pursuant to employment contracts that had been in place
since 1989 and after the Recapitalization pursuant to the newly entered into
employment agreements described below. Messrs. Watterson and Stevenson
participated in the deliberations concerning the compensation of other
officers, and Mr. Beck participated in the deliberations concerning the
compensation of officers other than himself and Messrs. Watterson and
Stevenson. See "Certain Relationships and Related Transactions."
COMPENSATION OF DIRECTORS
The Company's directors did not receive any compensation for serving on its
Board of Directors in 1996, and are not entitled to receive compensation in
connection with their current service. Directors are reimbursed for their out-
of-pocket expenses incurred in connection with their service as directors. The
Company also maintains liability insurance policies for the Company's
directors. See "Certain Relationships and Related Transactions--Management
Fees."
EMPLOYMENT AGREEMENTS
Concurrent with the Recapitalization Closing, Scott Watterson and Gary
Stevenson entered into five-year employment agreements with the Company. The
Company and Messrs. Watterson and Stevenson executed amendments to the
employment agreements dated September 6, 1996 (as amended, the "Employment
Agreements"). The Employment Agreements provide for the employment of Mr.
Watterson as Chairman and Chief Executive Officer with a base salary as of
June 1, 1995 of $450,000 and Mr. Stevenson as President and Chief Operating
Officer with a base salary of $400,000 and provide for their respective levels
of participation in the management stock option and deferred compensation
plans. In every other material respect, the contracts are substantially
identical.
Under the Employment Agreements, the executive's salary may be adjusted
upwards at the discretion of the Board of Directors, and the executive is
entitled to the use and cost of operation of a car of his choice and to
participate in the life, welfare and health insurance plans and other fringe
benefit programs made available by the Company to its senior executive
officers (including such deferred compensation plans as may be established by
the Board of Directors for such executives). Each executive is also entitled
to participate in a bonus program providing for a bonus equal to a percentage
of pre-interest (excluding revolving credit interest), pre-tax, pre-bonus
consolidated profits of the Company not taking into account certain changes in
depreciation, amortization, or certain other changes due to the
Recapitalization, which percentage shall equal 1.3% for 1996, 1.4% for 1997
and thereafter a percentage established by the Board of Directors which cannot
be less than 1.4%; provided, however, no bonus will be paid unless the
Company's pre-interest (excluding revolving credit interest), pre-tax, pre-
bonus consolidated profits exceed a level to be set by the Board of Directors
based on budgets prepared by management for periods after 1995 and which level
for 1995 and 1996 is 3% of net sales. The Employment Agreements also provide
for a one time bonus in fiscal 1997 of $700,000 to be divided between Messrs.
Waterson and Stevenson.
Each executive's employment under his Employment Agreement terminates
automatically upon death or bankruptcy of the executive, and is terminable by
the Company for cause as provided in each agreement, upon six months'
disability, or without cause. For these purposes, "cause" includes willful
misconduct, gross negligence, commission of a crime involving material harm,
commission of a crime
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of moral terpitude, willful insubordination and failure to comply with certain
covenants under the Employment Agreements. The provisions providing for
termination upon bankruptcy of the executive may not be enforceable under the
U.S. Bankruptcy Code, however. Each executive may similarly terminate his
employment immediately for cause as provided in his Employment Agreement or
for any reason upon six months' notice. In the event of termination by the
Company for cause or upon death or bankruptcy (if such termination is legally
enforceable), the executive is not entitled to further salary, benefits or
bonus. Upon termination by the executive, the Company may at its option
continue the executive's employment for the notice period or terminate the
executive's employment. Upon termination by the Company without cause or upon
termination by the executive with or without cause, the Company is obligated
to pay the executive his salary and bonus for a period of two years from the
date of termination. Upon termination by the Company upon the executive's
disability, the Company is obligated to pay as severance an amount equal to
one month's base salary then in effect for each calendar year or part thereof
elapsed since January 1, 1988, provided that such severance pay is reduced by
payments under applicable disability insurance.
The Employment Agreements prohibit the executives from engaging in outside
business activity during the term, except that the executive may sit on
outside business and charitable boards approved by the Board of Directors,
make passive investments in noncompeting businesses, as defined in the
Employment Agreement and spend up to five hours per week subject to a maximum
of 100 hours per year counseling noncompeting businesses in which he invests.
The Employment Agreements provide for customary confidentiality obligations
and, in addition, a noncompetition obligation for a period of four years
following termination (two years if the executive quits or is terminated
without cause except that the Company may at its option extend such period for
up to two additional years by paying the executive his salary and bonus during
the extended period). The Employment Agreements also limit each executive's
liability to the Company to the extent of such executive's salary, bonus and
other compensation received by the executive during the fiscal year in which
termination occurs plus any compensation which subsequently accrues to such
executive. This limitation does not apply in the case of an executive's theft,
fraud, embezzlement, violation of the confidentiality, notice, or non-
competition provisions of his Employment Agreement, breach of the executive's
non-competition agreement or certain other matters and is subject in any event
to a maximum liability of $1.24 million in the case of each of Messrs.
Watterson and Stevenson (including any liabilities under the indemnification
provisions of the Master Transaction Agreement, as defined below) for
violation of the confidentiality, notice upon resignation, and non-competition
provisions.
CERTAIN BENEFITS OF RECAPITALIZATION TO SENIOR MANAGEMENT
As a part of the Recapitalization, Mr. Scott Watterson and Mr. Gary
Stevenson received in exchange for their options to purchase Capital Stock of
Weslo and ProForm: (i) the Redeemable Options, which IHF Capital redeemed
after the Recapitalization Closing for $14.83 million in the case of Mr.
Watterson and $11.53 million in the case of Mr. Stevenson; (ii) options to
purchase an additional 486,199 shares of Class A Common Stock (which have
since been exercised) and 48,620 shares of Class L Common Stock of IHF Capital
in the case of Mr. Watterson and 378,155 shares of Class A Common Stock (which
have since been exercised) and 37,815 shares of Class L Common Stock of IHF
Capital in the case of Mr. Stevenson at an exercise price of $0.00397 per
share of Class A Common Stock and $3.93482 per share of Class L Common Stock;
(iii) options to purchase 585.8 shares of Series A-2 IHF Holdings Preferred
Stock in the case of Mr. Watterson and 455.6 shares of Series A-2 IHF Holdings
Preferred Stock in the case of Mr. Stevenson, with each such share of Series
A-2 IHF Holdings Preferred Stock having a liquidation preference as of the
Closing of the Recapitalization of $4,000 per share and each such option
having an exercise price of $158.98 per share; and (iv) Warrants to purchase
25,478 shares of Class A Common Stock of IHF Capital in the case of Mr.
Watterson and Warrants to purchase 19,816 shares of Class A Common Stock of
IHF Capital in the case of Mr. Stevenson, with each Warrant having been
exercised at a strike price of $.10
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<PAGE>
per share. The per share price of Class A Common Stock paid in the
Recapitalization was $0.10, and the per share price of Class L Common Stock
paid in the Recapitalization was $99.00. See "Security Ownership of Certain
Beneficial Owners and Management." Messrs. Watterson and Stevenson also
received employee stock options. The Company reimbursed $199,000 of Messrs.
Watterson's and Stevenson's legal fees and expenses in connection with the
Recapitalization and will maintain certain directors' and officers' liability
insurance policies for the benefit of Messrs. Watterson and Stevenson and the
Company's other directors and officers. Messrs. Watterson and Stevenson also
entered into four-year agreements not to compete with the Company in certain
specified businesses for which they received $2.3 million and $1.8 million,
respectively. Messrs. Watterson and Stevenson received a consulting fee from
CanCo equal to an aggregate of 14% of its pretax earnings until September 6,
1996 when the Company exercised its option to acquire CanCo's assets (and the
purchase was closed). Prior to the Recapitalization, Messrs. Watterson and
Stevenson owned a 14% aggregate equity interest in CanCo. Messrs. Watterson
and Stevenson also entered into the employment agreements with ICON described
above under "Employment Agreements."
In the Recapitalization, each of Messrs. Beck, David Watterson, White and
Dalebout received, in exchange for his common stock in certain of the
Recapitalized Companies, 63,400 shares of Class A Common Stock and 6,340
shares of Class L Common Stock of IHF Capital. Each of Messrs. Beck and David
Watterson also purchased 11,700 shares of Class A Common Stock and 1,170
shares of Class L Common Stock, with the proceeds of loans from IHF Capital in
the amount of $116,987.13 and the par value in cash. Each of Messrs. White and
Dalebout purchased 7,750 shares of Class A Common Stock and 775 shares of
Class L Common Stock, with the proceeds of a loan from IHF Capital in the
amount of $77,491.48 and the par value in cash. The Company received from each
of Messrs. Beck, David Watterson, White and Dalebout an option to purchase
certain of the IHF Capital shares held by these individuals. IHF Capital
exercised these options in January of 1995. Upon exercise, IHF Capital
received from Mr. Beck 45,950 shares of its Class A Common Stock and 4,595
shares of its Class L Common Stock in exchange for $459,500; from Mr.
Watterson 45,100 shares of its Class A Common Stock and 4,510 shares of its
Class L Common Stock in exchange for $451,000; and from each of Messrs. White
and Dalebout 44,900 shares of its Class A Common Stock and 4,490 shares of its
Class L Common Stock in exchange for $449,000. Other members of management
purchased an aggregate of 82,800 shares of Class A Common Stock and 8,280
shares of Class L Common Stock, for an aggregate purchase price of $828,000,
$560,500 of which was payable by these members of senior management in cash,
and the balance with the proceeds of loans from IHF Capital. All members of
the Company's senior management will also participate in IHF Capital's
employee stock option arrangements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary, although subject to, and qualified in its entirety by
reference to, the agreements summarized below, including the definitions
therein of certain terms, is complete in all material respects. A number of
these agreements were amended in connection with the WHF Settlement. See
"Business--Legal Proceedings--WHF Litigation."
MASTER TRANSACTION AGREEMENT. The Original Shareholders, the optionholders
of the Recapitalized Companies and the Company were parties to a First Amended
and Restated Master Transaction Agreement, dated as of October 12, 1994 (the
"Master Transaction Agreement"), providing for certain of the transactions
constituting the Recapitalization. Pursuant to the Master Transaction
Agreement, among other things, the Original Shareholders and the optionholders
of the Recapitalized Companies made certain representations and warranties
regarding themselves and the Recapitalized Companies and provided certain
indemnities in favor of the Company, and the Company made certain
representations and warranties regarding itself and provided certain
indemnities in favor of the Original Shareholders and the optionholders of the
Recapitalized Companies, subject in the case
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<PAGE>
of such indemnities to certain limitations as to time and amount. The Master
Transaction Agreement identifies certain consents of third parties that were
required to consummate the Recapitalization. The Company believes that one
required consent was not obtained, but that the lack of such consent has not
had and will not have a material adverse effect on its financial condition and
results of operation.
WEIDER BRAND NAME. Concurrent with the closing of the Recapitalization, the
Company obtained from Weider Sports, WHF, WSG and Weider Europe certain rights
to use the Weider name pursuant to two separate exclusive license agreements.
Pursuant to the first such license agreement between the Company and Weider
Sports (the "Weider Sports License"), Weider Sports granted the Company the
exclusive worldwide right and license to use the "Weider" trademark and
certain other trademark rights owned by or licensed to Weider Sports in Canada
(the "Canadian Trademark Rights") to identify certain fitness and exercise
equipment and non-ingestive sports medicine products other than "soft goods"
(the "Licensed Products") and certain services related thereto (the "Licensed
Services"). Pursuant to the second such license agreement (the "WHF License")
by and among the Company as licensee, and WSG, WHF, and Weider Europe as
licensors (collectively, the "Licensor"), the Licensor granted the Company the
exclusive worldwide right and license to use the "Weider" trademark and
certain other trademark rights owned by or licensed to the Licensor in all
areas of the world other than Canada (the "U.S. and Other Trademark Rights")
to identify Licensed Products and Licensed Services. Under the WHF License,
the Licensor has represented and warranted, among other things, that it is the
owner or licensee of such trademark rights in the United States, Mexico, the
United Kingdom, France, Germany, the Benelux countries, Italy, Austria and
Switzerland. Weider Sports pursuant to the Weider Sports License, and WHF, WSG
and Weider Europe pursuant to the WHF License, retain the ownership of and
right to exploit the Canadian Trademark Rights and the U.S. and Other
Trademark Rights, respectively, throughout the world to identify all present
or future products other than the Licensed Products and services other than
Licensed Services. Under the Weider Sports License, the Company paid a $5
million license fee at the Recapitalization Closing and has a perpetual, fully
paid-up license with respect to the Canadian Trademark Rights. Under the WHF
License, the Company was required to pay a royalty with respect to the U.S.
and Other Trademark Rights equal to 2% of sales of Licensed Products sold
thereunder until such time as the Company has paid an aggregate royalty with
respect to such U.S. and Other Trademark Rights equal to $12 million plus an
interest factor accruing on the unpaid portion of the royalty at a per annum
rate of 10%. In connection with the WHF Settlement, the Company prepaid this
royalty in full on September 6, 1996. See "Business--Legal Proceedings--WHF
Litigation" and "--Settlement of WHF Litigation."
PURCHASE OPTION. Under the CanCo Option, the Company had the right at any
time within 30 months after the closing of the Recapitalization to purchase
the net fixed assets, inventory and certain other assets of CanCo at a
purchase price equal to aggregate net book value, which was believed by the
parties to be the fair market value of such fixed assets, inventory and other
assets, and the assumption of certain related leases and contracts. These
assets consist primarily of manufacturing facilities (which are leased) which
have supplied products to the Recapitalized Companies and other affiliates of
WHF and Weider Europe and are continuing to supply products to the Company. In
August 1995, the Company gave notice of its intention to exercise the CanCo
Option, subject to various conditions, and consummated the acquisition on
September 6, 1996. For a description of the amendment to the CanCo option
agreement, see "Business--Legal Proceedings--WHF Litigation" and "--Settlement
of WHF Litigation".
In 1994, 1995, and 1996, the Company purchased $7.4 million, $26.4 million
and $50.7 million, respectively, of products from CanCo. Prior the exercise of
the CanCo Option (and the closing thereunder), all such purchases by the
Company were made on an arm's length basis.
In addition, the Company provided management services to CanCo while it had
the right to exercise the CanCo Option and received a management fee equal to
$.5 million in connection with the WHF Settlement. No management fees were
received from CanCo in 1995 or in 1996. Scott Watterson
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<PAGE>
and Gary Stevenson received from CanCo an aggregate of 14% of its adjusted
pre-tax earnings from November 14, 1994 to September 6, 1996.
EUROPEAN OPERATIONS. The Company purchased certain fixed assets for
approximately $.2 million and assumed certain liabilities (primarily real
estate leases) of Weider Europe. It has also hired selected former employees
of Weider Europe and its affiliates. These assets and employees, supplemented
by the Company's domestic resources, have been used in establishing the
Company's presence in targeted European markets. The Company's recently
established European operations continue to obtain products and/or components
from affiliates of WHF and made purchases from such affiliates of $.4 million
in 1996.
INTERNATIONAL DISTRIBUTION ARRANGEMENTS. Prior to the beginning of 1996, the
Company sold products to affiliates of WHF for international distribution,
primarily in Europe. In 1994, 1995 and 1996 sales by the Company to such
affiliates of WHF aggregated $4.9 million, $8.8 million and $9.6 million,
respectively. Since the beginning of 1996, the Company has been selling its
products directly in Europe.
In connection with the Recapitalization, the Company entered into an
agreement with Weider Sports, under which Weider Sports had exclusive,
perpetual, worldwide distribution rights, except as noted below, for certain
of the Company's products on the same terms and conditions as those given to
the Company's most favored customers in countries other than the United
States, the United Kingdom, France, Germany, the Benelux countries, Italy,
Austria, Switzerland and Mexico. Weider Sports did not have distribution
rights with respect to certain of the Company's products, including products
sold under third party brand names.
In connection with the Weider Sports Acquisition in September 1996, the
Company reacquired the distribution rights granted to Weider Sports in
connection with the Recapitalization, subject to certain rights granted by
Weider Sports to third parties. See "Business--Legal Proceedings--Settlement
of WHF Litigation."
WSG AND WEIDER EUROPE MANAGEMENT AGREEMENTS. The Company entered into an
agreement as of June 1, 1994 under which the Company provided certain
management services to WSG and acts as WSG's agent to maintain and liquidate
its inventory and service and collect the accounts receivable of WSG in return
for specified fees. For 1995, the Company was paid a management fee of $2.7
million. Following the Recapitalization, WSG stopped paying fees under to
management agreement and later terminated that agreement. See "Business--Legal
Proceedings."
In connection with the Recapitalization, the Company and Weider Europe
entered into a substantially similar agreement which became effective as of
January 15, 1995 pursuant to which the Company provided management services to
Weider Europe. Since the Recapitalization Closing, the Company acted as Weider
Europe's agent to maintain and liquidate inventory and to service and collect
accounts receivable of Weider Europe. Weider Europe did not pay any fees under
the management agreement.
The WSG and Weider Europe Management Agreements terminated in connection
with the WHF Settlement.
NONCOMPETE AGREEMENT. In connection with the Recapitalization, the Company
entered into a noncompete agreement with WHF and Messrs. Watterson and
Stevenson, which has been subsequently amended in connection with the WHF
Settlement, under which the Company paid (i) WHF $2.4 million for its
agreement not to compete with the Company in certain specified businesses for
a five-year term and (ii) Messrs. Watterson and Stevenson $2.3 million and
$1.8 million, respectively, for their agreement not to compete with the
Company in certain specified businesses for a four year term.
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TAX SHARING AGREEMENT. For federal income tax purposes, the taxable income
of IHF Holdings and Health & Fitness and their subsidiaries has historically
been included in a single consolidated federal income tax return, and IHF
Capital has filed a separate federal income tax return. Such taxable income
may also have been included in certain state and local consolidated, combined
or unitary income tax returns. A tax sharing agreement was entered into in
connection with the Recapitalization among Health & Fitness, IHF Holdings, IHF
Capital and their affiliates to provide that each company included in
consolidated returns would pay its separate company tax liability to IHF
Holdings calculated as if it were not included in consolidated, combined or
unitary returns with its parent. Upon redemption of the IHF Holdings preferred
stock, the taxable income of IHF Capital, IHF Holdings, Health & Fitness and
their affiliates will be included in a single consolidated federal tax return.
The tax sharing agreement previously entered into anticipated this possibility
and provides that tax payments will now be paid to IHF Capital.
ADVERTISING AND MARKETING RELATIONSHIPS. Historically, the Company purchased
advertising space for certain of their products in magazines and other
publications produced by WHF and its affiliates on terms better than or at
least as favorable as those offered to independent parties. In 1994, 1995, and
1996 the Recapitalized Companies purchased $.1 million, $.3 million and less
than $.1 million, respectively, of such advertising.
MANAGEMENT FEES. WHF received aggregate management fees from the Company of
$.4 million in 1994. Since the closing of the Recapitalization, pursuant to a
management agreement (the "Bain Management Agreement"), Bain Capital Partners
IV, L.P. ("Bain IV"), an affiliate of Bain Capital, provides management
consulting services to the Company including providing advice on strategic
planning, development and acquisitions for an annual fee of $.8 million plus
reimbursement of reasonable out-of-pocket expenses. In 1995 and 1996, the
Company paid Bain IV $.4 and $.8 million, respectively, in consulting fees.
The Bain Management Agreement includes customary indemnification provisions in
favor of Bain IV. In addition, if the Company enters into any acquisition
transactions involving at least $10.0 million, Bain IV will receive a fee in
an amount which will approximate 1% of the gross purchase price of the
transaction (including assumed debt).
STRUCTURING FEE. Pursuant to the Bain Management Agreement, on November 14,
1994 the Company paid to Bain IV a structuring fee of $3.5 million plus
reimbursement of out-of-pocket expenses in consideration of Bain IV's
assistance in facilitating certain debt financing for the Recapitalization.
Bain IV is also entitled to receive a fee equal to 1% of the gross purchase
price of the HealthRider Acquisition (including all assumed liabilities). As
of June 30, 1996 such fee would have been approximately $.6 million.
REIMBURSEMENT OF ORIGINAL SHAREHOLDER EXPENSES. In 1995, the Company
reimbursed $2.0 million of expenses incurred by WHF and the other Original
Shareholders in connection with the Recapitalization.
PRIOR RELATIONSHIPS. The Company had a number of relationships with
affiliates which were terminated at or prior to the closing of the
Recapitalization. The Recapitalized Companies paid corporate allocations to
WHF in an aggregate amount of $.4 million in 1994. The Company also made
payments to WHF in lieu of tax payments in amounts equal to the reported
earnings of the Company multiplied by the applicable tax rates for periods
through the Closing. In addition, WHF served as the Company's source of
revolving credit from October 1993 until October 1994, charging interest at
its cost of funds.
LOANS TO EMPLOYEES. In connection with the exercise of options prior to the
Recapitalization, ProForm accepted as partial payment notes in the amount of
$60,000 from each of Mr. Beck and Mr. David Watterson and $57,000 from each of
Mr. White and Mr. Dalebout. Such notes bear interest at prime plus .5% and
remain outstanding. In connection with the purchase of stock in the
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Recapitalization, the Company accepted as partial payments, notes bearing
interest at a per annum rate equal to 7.5% in the amount of approximately
$117,000 from each of Mr. Beck and Mr. David Watterson and $77,500 from Mr.
White, $177,000, $177,000 and $134,500 remain outstanding from Messrs. Beck,
David Watterson and White, respectively.
WESTWIND II. In June 1996, the Company entered into an agreement with FG
Aviation, Inc. ("FG"), a company which is jointly owned by Messrs. Watterson
and Stevenson, whereby the Company will lease an airplane, a Westwind II, from
FG for a minimum of 400 hours per year at a fair market rate (between $1,500
and $1,700 per hour, as adjusted by the Company's costs associated with flight
crews). Scheduled maintenance and insurance will be paid for by FG and non-
scheduled maintenance will be paid for by the Company. Flight crews will be
provided by the Company. In connection with this lease, the Company advanced
$.3 million to officers of the Company to be used as a security deposit on the
aircraft lease. Furthermore, in connection with the acquisition of such
airplane by FG, the Company advanced $2.1 million to officers of the Company
for approximately two months at a fair market rate of interest which advance
has been repaid.
REPURCHASE OF COMMON STOCK. On November 20, 1996, in connection with the WHF
Settlement, the Company purchased all of the common stock of IHF Capital and
certain warrants to purchase common stock of IHF Capital held by the WHF
Stockholders for $42.3 million. See "Business--Legal Proceedings--Settlement
of WHF Litigation."
REPURCHASE OF IHF HOLDINGS PREFERRED STOCK. On November 20, 1996, in
connection with the WHF Settlement, the Company purchased the IHF Holdings
Preferred Stock held by WHF for $32.1 million and the options to purchase IHF
Holdings Preferred Stock held by Messrs. Watterson and Stevenson for $3.7
million. See "Business--Legal Proceedings--Settlement of WHF Litigation."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
IHF Capital owns all of the outstanding common stock of ICON. The following
table and notes thereto set forth certain information with respect to the
beneficial ownership of IHF Capital's outstanding shares of common stock as of
December 20, 1996 by (i) each person known to IHF Capital to beneficially own
more than 5% of the outstanding shares of common stock of IHF Capital, and
(ii) each director and executive officer of IHF Capital individually and (iii)
all directors and executive officers of IHF Capital as a group.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED(1)(2)
-------------------------------------------
CLASS L COMMON STOCK CLASS A COMMON STOCK
--------------------- ---------------------
PERCENT OF PERCENT OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
NAMES SHARES SHARES SHARES SHARES(3)
<S> <C> <C> <C> <C>
Scott R. Watterson+(3)(4).......... 248,620 37.33% 3,338,356 40.55%
Gary E. Stevenson+(5).............. 237,816 36.30 3,050,648 37.49
S. Fred Beck(6).................... 202,915 32.88 2,119,115 27.04
David S. Watterson(7).............. 203,000 32.82 2,119,965 27.00
Jon M. White(8).................... 202,625 32.87 2,082,573 26.67
Robert C. Gay+(9).................. 559,305 90.60 5,593,050 72.06
Ronald P. Mika+(9)................. 559,305 90.60 5,593,050 72.06
Geoffrey S. Rehnert+(9)............ 559,305 90.60 5,593,050 72.06
The Bain Funds (9)................. 559,305 90.60 5,593,050 72.06
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
ICON Fitness Corporation........... 200,000 32.40 2,000,000 25.77
1500 South 1000 West
Logan, Utah 84321
All directors and executive
officers as a group
(10 persons)...................... 654,280 92.97 8,303,707 94.17
</TABLE>
- --------
* Less than one percent.
+ Director of ICON.
(1) The Common Stock of IHF Capital consists of two classes of shares, par
value $.01 per share: Class L Common Stock ("Class L") and Class A Common
Stock ("Class A"). There are 1.3 million authorized shares of Class L and
16 million authorized shares of Class A. At December 20, 1996, 617,350
shares of Class L and 7,761,804.43 shares of Class A were issued and
outstanding. Upon a liquidation of IHF Capital, the Class L are entitled
to a pro rata preference, before anything is paid on the Class A, equal to
$99 per share (the price at which such shares were issued in the
Recapitalization) plus an amount equal to the non-liquidating
distributions to which the holders of such shares would otherwise be
entitled. After such preference has been paid to holders of Class L,
holders of the Class A receive $0.10 per share (the price at which such
shares were issued in the Recapitalization), and thereafter holders of the
Class A and Class L shares share in any remaining amounts to be
distributed based on the number of shares of Class A which would be held
by each shareholder as of the applicable record date upon the conversion
of all shares of
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Class L into shares of Class A. In the event of distributions, other than
those made in connection with a liquidation of IHF Capital, holders of Class
L are entitled to first priority with respect to distributions up to an
amount which would generate an internal rate of return on $99 of 10% per
year, compounded quarterly beginning as of the Closing. After such
preference has been satisfied, holders of Class A and Class L shares share
in any remaining amounts based on the number of shares of Class A which
would be held by each shareholder as of the applicable record date upon the
conversion of all shares of Class L into shares of Class A. Upon a public
offering of shares of Class A, each share of Class L is convertible at the
option of IHF Capital into a number of shares of Class A equal to (a) 1.0
(subject to certain adjustments), plus (b) the quotient obtained by dividing
(x) $99 plus an amount sufficient to generate an internal rate of return on
$99 of 10% per year, compounded quarterly (adjusted downwards to reflect any
distributions actually made to holders of Class L shares between the date of
the Closing and the date of the calculation), by (y) the price per share
received by IHF Capital for its Class A issued in the public offering. The
Class L and Class A vote together as a single class on all matters, with
each share of Class L entitled to a number of votes equal to the number of
shares of Class A which would then be received upon conversion of a share of
Class L (assuming a public offering at a price per share equal to (a) prior
to a public offering, the greater of $0.10 or net book value and (b) after a
public offering, an average of recent market prices). The holders of Class L
and Class A are not entitled to cumulate their votes in the election of
directors, which means that holders of more than half the voting power of
the outstanding Class L and Class A can elect all the directors of IHF
Capital.
(2) Except as otherwise indicated, (i) the named owner has sole voting and
investment power with respect to the shares set forth and (ii) the figures
in this table are calculated in accordance with Rule 13d-3, as amended,
under the Exchange Act. The table includes the ICON Unit Warrants and the
IHF Holdings Unit Warrants (which have an exercise price, subject to
adjustment, of $.01 per share) even though such Warrants are not currently
exercisable. All current shareholders and warrantholders of IHF Capital
are parties to a Stockholders Agreement pursuant to which certain holders
affiliated with management of IHF Capital are entitled to elect two
directors, certain holders affiliated with WHF are entitled to elect two
directors and Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P.,
BCIP Associates and BCIP Trust Associates, L.P. (collectively, the "Bain
Funds") are entitled to fix the number of directors and to elect all
remaining directors. In addition, the Bain Funds are entitled to direct
how these other shareholders will cast their votes with respect to certain
matters, including a public offering of IHF Capital or the disposition of
its assets. The Stockholders Agreement also provides for certain "drag-
along", "tag-along" and registration rights. The shares reported in this
table as owned by a shareholder do not include the shares over which such
shareholder has the right to direct the vote pursuant to such Stockholders
Agreement.
(3) Includes 48,620 shares of Class L Common Stock and 469,988 shares of Class
A Common Stock subject to purchase upon exercise of options that are
exercisable within 60 days after December 20, 1996.
(4) Includes the shares owned by ICON of which the named shareholder is deemed
the beneficial owner by virtue of being a director, an executive officer,
or a controlling shareholder of ICON's parent, IHF Capital.
(5) Includes 37,816 shares of Class L Common Stock and 375,251 shares of Class
A Common Stock subject to purchase upon exercise of options that are
exercisable within 60 days after December 20, 1996.
(6) Excludes 89,965 shares of Class A Common Stock subject to purchase upon
exercise of options that are not exercisable within 60 days after
December 20, 1996.
(7) Excludes 46,258 shares of Class A Common Stock subject to purchase upon
exercise of options that are not exercisable within 60 days after
December 20, 1996.
(8) Excludes 57,323 shares of Class A Common Stock subject to purchase upon
exercise of options that are not exercisable within 60 days after
December 20, 1996.
(9) Includes the shares owned by each of the Bain Funds, of which the named
shareholder is deemed the beneficial owner by virtue of being a general
partner or principal, or a general partner or a principal of the general
partner, of such Bain Fund.
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<PAGE>
DESCRIPTION OF SENIOR DISCOUNT NOTES
GENERAL
The Exchange Notes will be issued pursuant to a 14% Series A Senior Discount
Note Indenture (the "Senior Discount Note Indenture") among the Company and
Fleet National Bank, as Senior Discount Note Trustee (the "Senior Discount
Note Trustee"). The terms of the Exchange Notes include those stated in the
Senior Discount Note Indenture and those made part of the Senior Discount Note
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Senior Discount Notes are subject to all such
terms, and Holders of Exchange are referred to the Senior Discount Note
Indenture and the Trust Indenture Act for a statement thereof. The Original
Notes were also issued under the Senior Discount Notes Indenture. The
following summary of certain provisions of the Senior Discount Notes, the
Senior Discount Note Indenture and the Registration Rights Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Senior Discount Notes, the Senior Discount Note Indenture and the Registration
Rights Agreement, including the definitions therein of certain terms used
below. Copies of the Senior Discount Note Indenture and Registration Rights
Agreement are available from the Initial Purchaser upon request. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes (which they replace) except that (i) the Exchange Notes
bear a Series B designation, (ii) the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of Exchange Notes will not be entitled
to certain rights under the Registration Rights Agreement, including the
provisions providing for liquidated damages in certain circumstances relating
to the timing of the Exchange Offer, which rights will terminate when the
Exchange Offer is consummated.
Original Notes that remain outstanding after the consummation of the
Exchange Offer and Exchange Notes issued in connection with the Exchange Offer
will be treated as a single class of securities under the Senior Discount Note
Indenture. As used herein, the term "Senior Discount Notes" refers
collectively to the Exchange Notes and the Original Notes.
The Senior Discount Notes will rank pari passu in right of payment with all
senior borrowings of the Company and senior in right of payment to all
subordinated Indebtedness of the Company. In addition, the Senior Discount
Notes will be secured by a first priority lien on and security interest in all
of the issued and outstanding Capital Stock of IHF Holdings held by ICON and
intercompany notes, if any, issued by IHF Holdings to ICON. However, the
operations of ICON are conducted through its Subsidiaries and, therefore, ICON
is dependent upon the cash flow of its Subsidiaries to meet its obligations,
including its obligations under the Senior Discount Notes and the Senior
Discount Note Indenture. As a result, the Senior Discount Notes will be
effectively subordinated to all indebtedness and other liabilities of ICON's
Subsidiaries. As of August 31, 1996, on a pro forma basis after giving effect
to the Offering of the Original Notes and the sale of the building at which
HealthRider's headquarters was located prior to the acquisition of certain
assets of HealthRider by a Subsidiary of the Company, the aggregate amount of
indebtedness and other obligations of ICON's Subsidiaries to which the holders
of the Senior Discount Notes would be structurally subordinated would have
been approximately $375.7 million.
PRINCIPAL, MATURITY AND INTEREST
The $162.0 million principal amount of the Senior Discount Notes will mature
on November 15, 2006. Cash interest on the Senior Discount Notes will not
accrue prior to November 15, 2001. Thereafter, cash interest will accrue at
the rate of 14% per annum and will be payable semiannually in arrears on May
15 and November 15, commencing on May 15, 2002, to Holders of record on the
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<PAGE>
immediately preceding November 1 and May 1. Interest on the Senior Discount
Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from November 15, 2001. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
The Senior Discount Notes will be payable as to principal, premium, if any,
interest and Liquidated Damages, if any, at the office or agency of ICON
maintained for such purpose within the City and State of New York or, at the
option of ICON, payment of principal, premium, if any, interest and Liquidated
Damages, if any, may be made by check mailed to the Holders of the Senior
Discount Notes at their respective addresses set forth in the register of
Holders of Senior Discount Notes; provided that all payments with respect to
Global Senior Discount Notes will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by ICON, ICON's office or agency in New York will
be the office of the Senior Discount Note Trustee maintained for such purpose.
The Senior Discount Notes will be issued in registered form, without coupons,
and in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
At any time following the Issue Date, the Senior Discount Notes may be
redeemed (subject to contractual and other restrictions and legal availability
of funds therefor) at the option of ICON upon not less than 30 nor more than
60 days' notice as follows:
(a) in whole but not in part, at the redemption prices (expressed as
percentages of the Accreted Value thereof on the applicable redemption
date) set forth below, plus Liquidated Damages, if any, to the redemption
date, if redeemed during the twelve-month period beginning on November 15
of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR THE ACCRETED VALUE
<S> <C>
1996.................................................... 104.000%
1997.................................................... 106.500%
1998.................................................... 109.000%
1999.................................................... 110.000%
2000.................................................... 110.000%
(b) in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon (plus Liquidated Damages, if any) to the applicable
redemption date, if redeemed during the twelve-month period beginning on
November 15 of the years indicated below:
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
<S> <C>
2001.................................................... 110.000%
2002.................................................... 106.666%
2003.................................................... 103.333%
2004 and thereafter..................................... 100.000%
</TABLE>
Notwithstanding the foregoing, ICON may redeem the Senior Discount Notes in
part as described in clause (b) above only if at least $100 million aggregate
principal amount of the Senior Discount Notes originally issued remains
outstanding immediately after the occurrence of each such partial redemption.
MANDATORY REDEMPTION
ICON will be required to redeem the Senior Discount Notes with the net
proceeds of any Public Equity Offering by ICON, any Parent of ICON or any of
ICON's Subsidiaries as follows:
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<PAGE>
(a) at the redemption prices (expressed as percentages of the Accreted
Value thereof on the applicable redemption date) set forth below, plus
Liquidated Damages, if any, to the redemption date, if redeemed during the
twelve-month period beginning on November 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR THE ACCRETED VALUE
<S> <C>
1996.................................................... 104.000%
1997.................................................... 106.500%
1998.................................................... 109.000%
1999.................................................... 110.000%
2000.................................................... 110.000%
(b) at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (plus
Liquidated Damages, if any) to the applicable redemption date, if redeemed
during the twelve-month period beginning on November 15 of the years
indicated below:
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
<S> <C>
2001.................................................... 110.000%
2002.................................................... 106.666%
2003.................................................... 103.333%
2004 and thereafter..................................... 100.000%
</TABLE>
Any such redemption shall occur within 60 days of the date of the closing of
any such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Discount Notes are to be redeemed at any
time, selection of Senior Discount Notes for redemption will be made by the
Senior Discount Note Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Senior Discount
Notes are listed, or, if the Senior Discount Notes are not so listed, on a pro
rata basis, by lot or by such method as the Senior Discount Note Trustee shall
deem fair and appropriate, provided that no Senior Discount Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Senior Discount Notes to be redeemed at its registered address.
If any Senior Discount Note is to be redeemed in part only, the notice of
redemption that relates to such Senior Discount Note shall state the portion
of the principal amount thereof to be redeemed. A new Senior Discount Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Senior Discount
Note. On and after the redemption date (unless ICON shall default in the
payment of the redemption price, together (as applicable) with accrued and
unpaid interest to the redemption date), interest ceases to accrue on Senior
Discount Notes or portions thereof called for redemption.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior Discount
Notes will have the right to require ICON to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Senior Discount
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the Accreted Value thereof on the date
of purchase plus Liquidated Damages, if any, thereon to the date of purchase
(if prior to November 15, 2001) or 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated
85
<PAGE>
Damages, if any, thereon to the date of purchase (if on or after November 15,
2001) (in either case, the "Change of Control Payment"). Within 30 days
following any Change of Control, ICON will mail a notice to each Holder, with
a copy to the Senior Discount Note Trustee, stating: (1) that the Change of
Control Offer is being made pursuant to the covenant entitled "Change of
Control" and that all Senior Discount Notes tendered will be accepted for
payment; (2) the purchase price and the purchase date, which will be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"); (3) that any Senior Discount
Note not tendered will continue to accrue interest; (4) that, unless ICON
defaults in the payment of the Change of Control Payment, all Senior Discount
Notes accepted for payment pursuant to the Change of Control Offer will cease
to accrue interest after the Change of Control Payment Date; (5) that Holders
electing to have any Senior Discount Notes purchased pursuant to a Change of
Control Offer will be required to surrender the Senior Discount Notes, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Senior Discount Notes completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the fifth Business Day
preceding the Change of Control Payment Date; (6) that Holders will be
entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the third Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holders, the principal amount of Senior Discount
Notes delivered for purchase, and a statement that such Holders are
withdrawing their election to have such Senior Discount Notes purchased; (7)
that Holders whose Senior Discount Notes are being purchased only in part will
be issued new Senior Discount Notes equal in principal amount to the
unpurchased portion of the Senior Discount Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof; and (8) the circumstances and material facts regarding the
Change of Control (including but not limited to information with respect to
the historical consolidated financial information of ICON and pro forma
consolidated financial information of ICON after giving effect to the Change
of Control, information regarding the Person or Persons acquiring control, to
the extent reasonably available, and the business plans of such Person or
Persons with respect to ICON, to the extent reasonably available). The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior
Discount Notes in connection with a Change of Control.
On one business day prior to the Change of Control Payment Date, ICON will,
to the extent lawful, deposit with the Paying Agent an amount equal to the
Change of Control Payment in next day funds in respect of all Senior Discount
Notes or portions thereof so tendered. On the Change of Control Payment Date,
ICON will, to the extent lawful, (1) accept for payment Senior Discount Notes
or portions thereof tendered pursuant to the Change of Control Offer, and (2)
deliver or cause to be delivered to the Senior Discount Note Trustee the
Senior Discount Notes so accepted together with an Officers' Certificate
stating the Senior Discount Notes or portions thereof tendered to ICON. The
Paying Agent will promptly mail to each Holder of Senior Discount Notes so
accepted the Change of Control Payment for such Senior Discount Notes, and the
Senior Discount Note Trustee will promptly authenticate at the written
direction of ICON and mail to each Holder a new Senior Discount Note equal in
principal amount to any unpurchased portion of the Senior Discount Notes
surrendered, if any; provided that each such new Senior Discount Note will be
in a principal amount of $1,000 or an integral multiple thereof. ICON will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that ICON
will have available funds sufficient to pay the Change of Control Payment for
all the Senior Discount Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. The operations of ICON are conducted
through its Subsidiaries and, therefore, ICON is dependent upon the cash flow
of its Subsidiaries to meet its obligations, including its obligations to make
Change of Control Payments. The IHF Holdings Indenture will restrict IHF
Holdings' ability to make distributions to the Company to repurchase the
Senior Discount Notes in the event of a Change of Control. In addition, the
Credit Agreement and the Health & Fitness
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<PAGE>
Indenture will restrict Health & Fitness' ability to make distributions to IHF
Holdings. Any future credit agreements or other financing agreements to which
the Company, IHF Holdings or Health & Fitness becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs
at a time when IHF Holdings is prohibited from making distributions to ICON
and/or Health & Fitness is prohibited from making distributions to IHF
Holdings, such Subsidiaries of ICON could seek the consent of their lenders or
could attempt to refinance the borrowings that contain such prohibition. If
ICON is unable to purchase tendered Senior Discount Notes upon the occurrence
of a Change of Control, such failure to purchase would constitute an Event of
Default under the Senior Discount Note Indenture.
Asset Sales
The Senior Discount Note Indenture will provide that ICON will not, and will
not permit any of its Restricted Subsidiaries to, engage in any Asset Sale,
unless (x) ICON (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Senior Discount Note Trustee) of the
assets sold or otherwise disposed of and (y) at least 75% of the consideration
therefor received by ICON or such Restricted Subsidiary is in the form of
cash; provided, however, that the amount of (A) any liabilities (as shown on
ICON's or such Restricted Subsidiary's most recent balance sheet or in the
notes thereto) of ICON or any Restricted Subsidiary (other than liabilities
that are by their terms subordinated in right of payment to the Senior
Discount Notes) that are assumed by the transferee of any such assets and (B)
any notes or other obligations received by ICON or such Restricted Subsidiary
from such transferee that are immediately converted by ICON or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision. A transfer of assets by ICON to a
Wholly Owned Restricted Subsidiary or by a Restricted Subsidiary to ICON or to
another Wholly Owned Restricted Subsidiary will not be deemed to be an Asset
Sale.
Within 360 days after any Asset Sale, ICON or any of its Restricted
Subsidiaries may apply the Net Proceeds from such Asset Sale to (i) an
investment (or the entering into of a legally binding agreement for an
investment within 360 days after such Asset Sale and segregate such Net
Proceeds from the general funds of ICON or such Restricted Subsidiary, as the
case may be, for that purpose) in another business, capital expenditures or
other long-term tangible assets, in each case, in or used in a Permitted
Business or (ii) permanently reduce Indebtedness of any Restricted Subsidiary
of ICON. Pending the making of any investment contemplated by clause (i) of
the immediately preceding sentence, such Net Proceeds may be used to
temporarily reduce the amount of outstanding Indebtedness under the Credit
Agreement and such reduction shall constitute such a segregation referred to
in such clause (i). In addition, if any such legally binding agreement to
invest such Net Proceeds is terminated, then ICON or such Restricted
Subsidiary, as the case may be, shall, prior to the later of (A) 360 days
after such Asset Sale and (B) 90 days after the date of such termination,
invest such Net Proceeds as provided in clause (i) or (ii) (without regard to
the parenthetical contained in such clause (i) above). Pending the final
application of any Net Proceeds from the Asset Sale, ICON may invest such Net
Proceeds in any manner that is not prohibited by the Senior Discount Note
Indenture. Any Net Proceeds from the Asset Sale that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10 million, ICON shall (subject to IHF Holdings' obligation to make
an "Excess Proceeds Offer" under the IHF Holdings Indenture and Health &
Fitness' obligation to make an "Excess Proceeds Offer" under the Health &
Fitness Indenture) shall make an offer to all Holders of Senior Discount Notes
(an "Asset Sale Offer") to purchase the maximum principal amount of Senior
Discount Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 101% of the Accreted Value thereof on the
date of purchase plus Liquidated Damages, if any, to the date of purchase (if
prior to November 15, 2001) or 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase (if on or after November 15, 2001), in accordance with the procedures
set forth in the Senior
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<PAGE>
Discount Note Indenture. To the extent that the aggregate amount of Senior
Discount Notes tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, ICON may use such deficiency for general corporate purposes.
If the aggregate principal amount of Senior Discount Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Senior Discount
Note Trustee shall select the Senior Discount Notes to be purchased on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero. ICON will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of Senior Discount Notes pursuant to an
Asset Sale Offer.
CERTAIN COVENANTS
Restricted Payments
The Senior Discount Note Indenture will provide that ICON will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any distribution on account of ICON's or
any Restricted Subsidiary's Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
ICON or dividends or distributions payable to ICON or a Wholly Owned
Restricted Subsidiary of ICON); (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of ICON or any Restricted Subsidiary or
other Affiliate of ICON (other than any such Equity Interests owned by ICON or
a Wholly Owned Restricted Subsidiary of ICON); (iii) purchase, redeem or
otherwise acquire or retire for value any Indebtedness (other than the Senior
Discount Notes) that is subordinated to the Senior Discount Notes, except at
final maturity; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) (i) in the case of a Restricted Payment by ICON, ICON would, at the
time of such Restricted Payment, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
(applicable to IHF Holdings but substituting ICON for each reference to IHF
Holdings) set forth in the first paragraph of the covenant described below
under the caption "Incurrence of Indebtedness and Issuance of Preferred
Stock" and (ii) in the case of a Restricted Payment by IHF Holdings, IHF
Holdings would, and in the case of a Restricted Payment by Health & Fitness
or any of its Restricted Subsidiaries, Health & Fitness would, at the time
of such Restricted Payment, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
(applied with respect to IHF Holdings and Health & Fitness, respectively)
set forth in the first paragraph of the covenant described below under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment (the amount of any such payment, if other
than cash, to be determined by the Board of Directors, whose determination
shall be conclusive and evidenced by a resolution in an Officers'
Certificate delivered to the Senior Discount Note Trustee), together with
the aggregate of all other Restricted Payments made by ICON and its
Restricted Subsidiaries after the date of the Senior Discount Note
Indenture (including Restricted Payments permitted by the paragraph
following the next succeeding paragraph other than pursuant to clauses (ii)
or (iii) thereof), shall not exceed the sum of (1) 50% of the Consolidated
Net Income of ICON (if the Restricted payment is made by ICON), IHF
Holdings (if the Restricted Payment is made by IHF Holdings) or Health &
Fitness (if the Restricted Payment is made by ICON or any of its Restricted
Subsidiaries) for the period (taken as one accounting period) commencing
with the first full fiscal quarter after the date of initial issuance of
the Senior Discount Notes and ending on the last day of ICON's, IHF
Holdings' or Healthj & Fitness', as the case may be, most recently ended
fiscal
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quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, 100% of such deficit as a negative number), plus (2)
100% of the aggregate net cash proceeds received by the Company from the
issue or sale since the date of the Senior Discount Note Indenture of
Equity Interests of ICON or of debt securities of ICON that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary of ICON and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (3) the aggregate cash received by the Company as
capital contributions to ICON after the Issue Date plus (4) the amount of
the net reduction in Investments in Unrestricted Subsidiaries resulting
from (x) the payment of cash dividends or the repayment in cash of the
principal of loans or the cash return on any Investment, in each case to
the extent received by the Company or any Wholly Owned Restricted
Subsidiary of ICON from any Unrestricted Subsidiary, (y) to the extent that
any Restricted Investment that was made after the date of the Senior
Discount Note Indenture is sold for cash or otherwise liquidated or repaid
for cash, the after-tax cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (z) the
redesignation of any Unrestricted Subsidiaries as Restricted Subsidiaries
(valued as provided in the definition of "Investment"), in an amount not to
exceed, in the case of any Unrestricted Subsidiary, the amount of
Restricted Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in
the calculation of the amount of Restricted Payments.
Not later than the date of making any Restricted Payment (other than a
Restricted Payment permitted by the immediately following paragraph), ICON
shall deliver to the Senior Discount Note Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments"
were computed, which calculations may be based upon ICON's latest available
financial statements.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Senior
Discount Note Indenture; (ii) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of ICON, or the defeasance, redemption or
repurchase of subordinated Indebtedness in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
the Company) of Equity Interests of ICON (other than any Disqualified Stock)
or out of the proceeds of a substantially concurrent cash capital contribution
received by ICON; (iii) the defeasance, redemption or repurchase of
subordinated Indebtedness with the net proceeds from an incurrence of
Refinancing Indebtedness (as defined below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock") pursuant to a Permitted
Refinancing (as defined below under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock"); (iv) the redemption, repurchase or retiring
for value of any Equity Interests of ICON or IHF Capital held by one or more
employees of ICON, IHF Capital or any of the Company's Subsidiaries in
connection with the termination of such employee's employment with such
employer; (v) the acquisition by a Receivables Subsidiary in connection with a
Qualified Receivables Transaction of Equity Interests of a trust or other
person established by such Receivables Subsidiary to effect such Qualified
Receivables Transaction; (vi) the making of other Restricted Payments of up to
$5 million in the aggregate; (vii) the making of loans to members of
management of any Subsidiary of ICON in the ordinary course of business not to
exceed $1.2 million at any one time outstanding; (viii) the Weider Repurchase;
and (ix) the Principals Repurchase.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such designation, all outstanding Investments by ICON and
its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated shall be deemed to be Restricted Payments at the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Restricted Investments in
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an amount equal to the greatest of (i) the net book value of such Investments
at the time of such designation, (ii) the fair market value of such
Investments at the time of such designation and (iii) the original fair market
value of such Investments at the time they were made. Such designation will
only be permitted if such Restricted Investment would be permitted at such
time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Senior Discount Note Indenture will provide that ICON will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt) and that ICON will not issue any Disqualified Stock
and will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that IHF Holdings may incur Indebtedness
or issue shares of preferred stock if the Fixed Charge Coverage Ratio for IHF
Holdings' most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such preferred stock is issued,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the preferred stock had been issued, as the case may be, at the beginning of
such four-quarter period would have been greater than 1.5 to 1; provided,
further, however, that Health & Fitness or any of its Restricted Subsidiaries
may incur Indebtedness or issue shares of preferred stock if the Fixed Charge
Coverage Ratio for Health & Fitness' most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
preferred stock is issued, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period would have been
greater than 1.75 to 1.
The foregoing limitations will not apply to:
(i) Indebtedness incurred by any of ICON's Restricted Subsidiaries under
the Credit Agreement (including Guarantees by Subsidiaries); provided (a)
that the aggregate principal amount of such Indebtedness at any one time
outstanding shall not exceed the greater of (1) the Borrowing Base of
Health & Fitness and its Subsidiaries plus $60 million and (2) $345
million; and (b) that each of such $60 million and such $345 million shall
be reduced (without duplication) by any amount which the commitment of the
lenders thereunder to lend under the Credit Agreement is permanently
reduced; and provided, further, that any borrowings by any Foreign
Subsidiaries of ICON permitted under this clause (i) shall be reduced by
the amount of Indebtedness then outstanding under clause (x) below;
(ii) Indebtedness incurred by any of ICON's Restricted Subsidiaries in
respect of Capital Lease Obligations or Purchase Money Obligations in an
aggregate principal amount not to exceed $10 million at any time
outstanding;
(iii) Existing Indebtedness outstanding on the date of the Senior
Discount Note Indenture, including Indebtedness under the IHF Holdings
Indenture and the Health & Fitness Indenture and Indebtedness associated
with the building at which HealthRider's headquarters was located;
(iv) Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any Indebtedness that is to be
outstanding without violation of the Senior Discount Note Indenture;
(v) intercompany Indebtedness between or among ICON and any of its Wholly
Owned Restricted Subsidiaries; provided, however, that (a) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than a Wholly Owned Restricted
Subsidiary and (b) any sale or other transfer of any such Indebtedness to a
Person that
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is not either ICON or a Wholly Owned Restricted Subsidiary shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be;
(vi) Indebtedness of ICON's Restricted Subsidiaries attributable to any
Currency Agreement or Commodity Agreement;
(vii) other Indebtedness of ICON's Restricted Subsidiaries in an
aggregate principal amount not to exceed $20 million at any time
outstanding;
(viii) the incurrence by any of ICON's Restricted Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are used to
extend, refinance, renew, replace, defease or refund Indebtedness permitted
to be incurred or outstanding under the Senior Discount Note Indenture in
whole or in part (the "Refinancing Indebtedness"); provided, however, that
(1) the principal amount of such Refinancing Indebtedness shall not exceed
the principal amount of Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded, other than by an amount equal to the lesser
of (A) the stated amount of any premium or other payment required to be
paid in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (B) the amount of premium or other payment
actually paid at such time to refinance the Indebtedness, plus in either
case, the amount of expenses incurred in connection with such refinancing;
(2) the Refinancing Indebtedness shall have a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is pari passu with or subordinated in right
of payment to the Senior Discount Notes, the Refinancing Indebtedness shall
be pari passu with or subordinated, as the case may be, in right of payment
to the Senior Discount Notes on terms at least as favorable to the Holders
of Senior Discount Notes as those contained in the documentation governing
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded (any such extension, refinancing, renewal, replacement, defeasance
or refunding being referred to as a "Permitted Refinancing");
(ix) the incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction that is without recourse to ICON or to
any Restricted Subsidiary of ICON or their assets (other than such
Receivables Subsidiary and its assets), and is not guaranteed by any such
person;
(x) Indebtedness of Foreign Subsidiaries of ICON in an aggregate
principal amount not to exceed the lesser of $15 million or the Borrowing
Base of such Foreign Subsidiaries (after subtracting that portion of the
Borrowing Base of such Foreign Subsidiaries counted towards the Borrowing
Base of Health & Fitness and its Subsidiaries for purposes of clause (i)
above) at any one time outstanding; provided that such $15 million shall be
reduced by the amount by which the Indebtedness of Foreign Subsidiaries of
ICON then outstanding under clause (i) above exceeds $10 million; and
(xi) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees,
letters of credit, surety bonds or performance bonds securing any
obligations of ICON or any of its Subsidiaries pursuant to such agreements,
in any case incurred in connection with the disposition of any business,
assets or Subsidiary of ICON, in a principal amount not to exceed the
proceeds received by ICON or any Subsidiary of ICON in connection with such
disposition.
Liens
The Senior Discount Note Indenture provides that ICON will not, directly or
indirectly, create, incur, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens, unless
the Senior Discount Notes are equally and ratably secured thereby.
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Sale/Leaseback Transactions
The Senior Discount Note Indenture provides that ICON will not, and will not
permit any of its Restricted Subsidiaries to, enter into any Sale/Leaseback
Transaction; provided that a Restricted Subsidiary of ICON may enter into a
Sale/Leaseback Transaction if: (i) such Restricted Subsidiary could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such Sale/Leaseback Transaction pursuant to the covenant described above under
the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and
(b) incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "--Liens", (ii) the gross cash proceeds of
such Sale/Leaseback Transaction are at least equal to the fair market value
(as determined in good faith by the Board of Directors) of the property that
is the subject of such Sale/Leaseback Transaction and (iii) the transfer of
assets in such Sale/Leaseback Transaction is permitted by, and ICON or such
Restricted Subsidiary of ICON, as the case may be, applies the proceeds of
such transaction in compliance with, the covenant described above under the
caption "Repurchase at the Option of Holders--Asset Sales."
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Senior Discount Note Indenture will provide that ICON will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions to ICON or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other
interest or participation in, or measured by, its profits, (b) pay any
indebtedness owed to ICON or any of its Restricted Subsidiaries, (c) make
loans or advances to ICON or any of its Restricted Subsidiaries or (d)
transfer any of its properties or assets to ICON or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or
by reason of (i) Existing Indebtedness as in effect on the date of the Senior
Discount Note Indenture, including Indebtedness under the IHF Holdings
Indenture and the Health & Fitness Indenture, (ii) the Credit Agreement, (iii)
the Senior Discount Note Indenture and the Senior Discount Notes, (iv)
applicable law, (v) any instrument governing Indebtedness or Capital Stock of
a Person acquired by ICON or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, provided that the Consolidated Cash Flow of such
Person is not taken into account in determining whether such acquisition was
permitted by the terms of the Senior Discount Note Indenture, (vi) customary
nonassignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (vii) Purchase Money Obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (d) above on the property so
acquired, (viii) Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are not
materially more restrictive with respect to the provisions set forth in
clauses (a), (b), (c) and (d) above than those contained in the agreements
governing the Indebtedness being refinanced or (ix) Indebtedness or other
contractual requirements of a Receivables Subsidiary in connection with a
Qualified Receivables Transaction, provided that such restrictions apply only
to such Receivables Subsidiary.
Merger, Consolidation or Sale of Assets
The Senior Discount Note Indenture provides that ICON may not consolidate or
merge with or into (whether or not ICON is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another Person unless (i) ICON is the surviving Person or the
Person formed by or surviving any such consolidation or merger (if other than
ICON) or to which such sale, assignment, transfer, lease,
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conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof
or the District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than ICON) or the Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of ICON under the Senior Discount Notes and
the Senior Discount Note Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Senior Discount Note Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) ICON or such other Person formed by or surviving any such consolidation
or merger, or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
(immediately after the transaction) equal to or greater than the Consolidated
Net Worth of ICON immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Senior Discount Note Indenture provides that ICON will not, and will not
permit any of its Restricted Subsidiaries to, sell, lease, license, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into any contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate
Transaction is on terms that are no less favorable to ICON or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction by ICON or such Restricted Subsidiary with an unrelated Person and
(b) ICON delivers to the Senior Discount Note Trustee (i) with respect to any
Affiliate Transaction involving aggregate payments in excess of $2 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (a) above and
such Affiliate Transaction is approved by a majority of the disinterested
members of the Board of Directors and (ii) with respect to any Affiliate
Transaction involving aggregate payments in excess of $25 million, an opinion
as to the fairness to ICON or such Restricted Subsidiary from a financial
point of view issued by an investment banking firm of national standing with
expertise in underwriting non-investment grade debt securities; provided,
however, that (i) any employment agreement or stock option agreement entered
into by ICON or any of its Restricted Subsidiaries in the ordinary course of
business, (ii) transactions between or among ICON and its Restricted
Subsidiaries, (iii) transactions permitted by the provisions of the Senior
Discount Note Indenture described above under the covenant "--Restricted
Payments," (iv) the payment of reasonable fees to directors of ICON or its
Restricted Subsidiaries, (v) any issuance of securities or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, stock options and stock ownership plans of ICON
entered into in the ordinary course of business and approved by the Board of
Directors, (vi) transactions between ICON and/or its Wholly Owned Restricted
Subsidiaries or transactions between a Receivables Subsidiary and any Person
in which the Receivables Subsidiary has an investment, (vii) the Weider
Repurchase, (viii) the Principals Repurchase and (ix) Affiliate Transactions
pursuant to agreements existing on the date of the Senior Discount Note
Indenture or any amendment thereto or any transaction contemplated thereby
(including pursuant to any amendment thereto) in any replacement agreement
thereto, so long as any such amendment or replacement is not more
disadvantageous in the aggregate to the Holders than the original agreement as
in effect on the date of the Senior Discount Note Indenture, in each case,
shall not be deemed Affiliate Transactions.
Line of Business
The Senior Discount Note Indenture provides that for so long as any Senior
Discount Notes are outstanding, ICON and its Restricted Subsidiaries will
engage primarily in a Permitted Business.
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Rule 144A Information Requirement
The Company has agreed to furnish to the Holders of Senior Discount Notes
and prospective purchasers of Senior Discount Notes designated by the Holders
of Transfer Restricted Securities, promptly upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Reports
The Senior Discount Note Indenture provides that whether or not required by
the rules and regulations of the Commission, so long as any Senior Discount
Notes are outstanding, ICON will furnish to the Holders of Senior Discount
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if ICON were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by ICON's
certified independent accountants and (ii) all reports that would be required
to be filed with the Commission on Form 8-K if ICON were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, ICON will file a copy of all such information with the
Commission for public availability.
SECURITY
The Senior Discount Notes will be secured by a pledge of all of the issued
and outstanding Capital Stock and intercompany notes (if any) of IHF Holdings
held by ICON.
Pursuant to the Senior Discount Note Indenture, the Company will grant to
the Senior Discount Note Trustee, for the benefit of the Senior Discount Note
Trustee and the Holders of the Senior Discount Notes, a security interest in
all of the issued and outstanding Capital Stock of IHF Holdings held by ICON
and all notes representing intercompany Indebtedness owing by IHF Holdings to
ICON that may from time to time be outstanding (collectively, the
"Collateral"). Such pledge will secure the payment and performance when due of
all of the Obligations of ICON under the Senior Discount Note Indenture and
the Senior Discount Notes.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Senior Discount Note Indenture,
ICON will be entitled to receive all cash dividends, interest and other
payments made upon or with respect to the Collateral pledged by it and to
exercise any voting and other consensual rights pertaining to the Collateral.
Upon the occurrence and during the continuance of an Event of Default, (a) all
rights of ICON to exercise such voting or other consensual rights shall cease
upon notice from the Senior Discount Note Trustee to ICON, and upon the giving
of such notice all such rights shall become vested in the Senior Discount Note
Trustee, which, to the extent permitted by law, shall have the sole right to
exercise such voting and other consensual rights, (b) all rights of ICON to
receive all cash dividends, interest and other payments made upon or with
respect to the Collateral shall cease and such cash dividends, interest and
other payments shall be paid to the Senior Discount Note Trustee and (c) the
Senior Discount Note Trustee may sell the Collateral or any part thereof in
accordance with the terms of the Senior Discount Note Indenture. All funds
distributed under the Senior Discount Note Indenture and received by the
Senior Discount Note Trustee for the benefit of the Holders of the Senior
Discount Notes shall be distributed by the Senior Discount Note Trustee in
accordance with the provisions of the Senior Discount Note Indenture.
Under the terms of the Senior Discount Note Indenture, the Senior Discount
Note Trustee will determine the circumstances and manner in which the
Collateral shall be disposed of, including, but not limited to, the
determination of whether to release all or any portion of the Collateral from
the Liens created by the Senior Discount Note Indenture and whether to
foreclose on the Collateral following a
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Default or Event of Default. Moreover, upon the full and final payment and
performance of all principal, premium, interest and Liquidated Damages under
the Senior Discount Note Indenture and the Senior Discount Notes, the security
interest created by the Senior Discount Note Indenture shall terminate and the
Collateral shall be released.
EVENTS OF DEFAULT AND REMEDIES
The Senior Discount Note Indenture provides that each of the following
constitutes an Event of Default: (i) default in payment when due of the
principal of or premium, if any, on any of the Senior Discount Notes when the
same become due and payable (upon stated maturity, acceleration, optional or
mandatory redemption, required purchase (whether pursuant to the covenants
entitled "Asset Sales" or "Change of Control" above) or otherwise); (ii)
default for 30 days in the payment of an installment of interest on, or
Liquidated Damages with respect to, any of the Senior Discount Notes, when the
same becomes due and payable; (iii) failure by ICON for 45 days after notice
from the Senior Discount Note Trustee or the Holders of 25% of the aggregate
principal amount of the Senior Discount Notes then outstanding to comply with
the provisions described under the covenants "Mandatory Redemption," "Change
of Control," "Asset Sales," "Restricted Payments," "Incurrence of Indebtedness
and Issuance of Preferred Stock" and "Merger, Consolidation or Sale of
Assets"; (iv) failure by ICON for 60 days after notice from the Senior
Discount Note Trustee or the Holders of 25% of the aggregate principal amount
of the Senior Discount Notes then outstanding to comply with any of its other
agreements in the Senior Discount Note Indenture or the Senior Discount Notes;
(v) default under any other Indebtedness of ICON or any Restricted Subsidiary
of ICON aggregating $10 million or more and either (a) such Indebtedness is
already due and payable in full or (b) such default or defaults have resulted
in the acceleration of the maturity of such Indebtedness; (vi) failure by the
Company or any of its Significant Subsidiaries to pay final judgments
aggregating in excess of $10 million, which judgments are not paid, discharged
or stayed pending appeal for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to ICON or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary; and (viii) the Senior Discount Note
Trustee not having or ceasing to have a valid, perfected and subsisting first
Lien on the Collateral for its benefit and the benefit of the Holders of the
Senior Discount Notes.
If any Event of Default occurs and is continuing, the Senior Discount Note
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Senior Discount Notes by written notice to ICON may declare all
the Senior Discount Notes to be due and payable immediately. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events
of bankruptcy or insolvency with respect to ICON, any Significant Subsidiary
or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Senior Discount Notes will become due
and payable without further action or notice. Holders of the Senior Discount
Notes may not enforce the Senior Discount Note Indenture or the Senior
Discount Notes except as provided in the Senior Discount Note Indenture.
Subject to certain limitations, Holders of a majority in principal amount of
the then outstanding Senior Discount Notes may direct in writing the Senior
Discount Note Trustee in its exercise of any trust or power. The Senior
Discount Note Trustee may withhold from Holders of the Senior Discount Notes
notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of ICON with the
intention of avoiding payment of the premium that ICON would have had to pay
if ICON then had elected to redeem the Senior Discount Notes pursuant to the
optional redemption provisions of the Senior Discount Note Indenture, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law.
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The Holders of a majority in aggregate principal amount of the Senior
Discount Notes then outstanding by written notice to the Senior Discount Note
Trustee may on behalf of the Holders of all of the Senior Discount Notes waive
any existing Default or Event of Default and annul its consequences under the
Senior Discount Note Indenture, except a continuing Default or Event of
Default in the payment of the principal of, premium, if any, or interest on,
or Liquidated Damages with respect to any of the Senior Discount Notes held by
a non-consenting Holder.
ICON is required to deliver to the Senior Discount Note Trustee annually a
statement regarding compliance with the Senior Discount Note Indenture, and
ICON is required upon becoming aware of any Default or Event of Default, to
deliver the Senior Discount Note Trustee a statement specifying such Default
or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, agent, stockholder or controlling person of
the Company shall have any liability for any obligations of ICON under the
Senior Discount Notes or the Senior Discount Note Indenture or for any claim
based on, in respect of, or by reason of, such obligations. Each Holder of
Senior Discount Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Senior Discount Notes. Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
ICON may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Discount Notes
("Legal Defeasance") except for (i) the rights of Holders of outstanding
Senior Discount Notes to receive payments from the trust described below in
respect of the principal of, premium, if any, interest and Liquidated Damages,
if any, on such Senior Discount Notes when such payments are due, (ii) ICON's
obligations with respect to the Senior Discount Notes concerning issuing
temporary Senior Discount Notes, registration of Senior Discount Notes,
mutilated, destroyed, lost or stolen Senior Discount Notes and the maintenance
of an office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the Senior
Discount Note Trustee, and ICON's obligations in connection therewith, and
(iv) the Legal Defeasance provisions of the Senior Discount Note Indenture. In
addition, ICON may, at its option and at any time, elect to have the
obligations of ICON released with respect to certain covenants that are
described in the Senior Discount Note Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Discount Notes. In the
event Covenant Defeasance occurs, certain events (not including nonpayment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Senior Discount Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
ICON must irrevocably deposit with the Senior Discount Note Trustee, in trust,
for the benefit of the Holders of the Senior Discount Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
interest and Liquidated Damages, if any, on the outstanding Senior Discount
Notes on the stated maturity or on the applicable redemption date, as the case
may be; (ii) in the case of Legal Defeasance, ICON shall have delivered to the
Senior Discount Note Trustee an opinion of counsel in the United States
reasonably acceptable to the Senior Discount Note Trustee confirming that (A)
ICON has received from, or there has been published by, the Internal Revenue
Service a ruling or (B) since the date of the Senior Discount Note Indenture,
there has been
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a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Senior Discount Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
ICON shall have delivered to the Senior Discount Note Trustee an opinion of
counsel in the United States reasonably acceptable to the Senior Discount Note
Trustee confirming that the Holders of the outstanding Senior Discount Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Senior Discount Note Indenture) to
which the Company or any of its Subsidiaries is a party or by which ICON or
any of its Subsidiaries is bound; (vi) the Company shall have delivered to the
Senior Discount Note Trustee an opinion of counsel to the effect that after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) ICON shall have delivered to
the Senior Discount Note Trustee an Officers' Certificate stating that the
deposit was not made by ICON with the intent of preferring the Holders of
Senior Discount Notes over the other creditors of ICON with the intent of
defeating, hindering, delaying or defrauding creditors of ICON; and (viii)
ICON shall have delivered to the Senior Discount Note Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Discount Notes in accordance with
the Senior Discount Note Indenture. The Registrar and the Senior Discount Note
Trustee may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and ICON may require a Holder to pay any
taxes and fees required by law or permitted by the Senior Discount Note
Indenture. ICON is not required to transfer or exchange any Senior Discount
Note selected for redemption. Also, ICON is not required to transfer or
exchange any Senior Discount Note for a period of 15 days before a selection
of Senior Discount Notes to be redeemed.
The registered Holder of a Senior Discount Note will be treated as its owner
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraphs, the Senior Discount
Note Indenture or the Senior Discount Notes may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Senior Discount Notes then outstanding (including consents obtained in
connection with a tender offer or exchange offer for Senior Discount Notes),
and any existing default or compliance with any provision of the Senior
Discount Note Indenture or the Senior Discount Notes may be waived with the
consent of the Holders of a majority in principal amount of the then
outstanding Senior Discount Notes (including consents obtained in connection
with a tender offer or exchange offer for Senior Discount Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Discount Notes held by a non-consenting Holder of
Senior Discount Notes): (i) reduce the principal amount of Senior Discount
Notes whose Holders must consent to an amendment, supplement or waiver, (ii)
reduce the principal of or change the fixed maturity of any Senior Discount
Note or alter
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the provisions with respect to the redemption of the Senior Discount Notes
(other than provisions relating to the covenants described above under the
caption "Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest or Liquidated Damages, if any,
including default interest, on any Senior Discount Note, (iv) waive a Default
or Event of Default in the payment of principal of or premium, if any,
interest or Liquidated Damages, if any, on the Senior Discount Notes (except a
rescission of acceleration of the Senior Discount Notes by the Holders of at
least a majority in aggregate principal amount of the Senior Discount Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Senior Discount Note payable in money other than that stated in the
Senior Discount Notes, (vi) make any change in the provisions of the Senior
Discount Note Indenture relating to waivers of past Defaults or the rights of
Holders of Senior Discount Notes to receive payments of principal of or
premium, if any, interest or Liquidated Damages, if any, on the Senior
Discount Notes, or (vii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Discount Notes, ICON and the Senior Discount Note Trustee may amend or
supplement the Senior Discount Note Indenture or the Senior Discount Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated
Senior Discount Notes in addition to or in place of certificated Senior
Discount Notes, to provide for the assumption of the Company's obligations to
Holders of the Senior Discount Notes in the case of a merger or consolidation,
to make any change that would provide any additional rights or benefits to the
Holders of the Senior Discount Notes or that does not adversely affect the
legal rights under the Senior Discount Note Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain
the qualification of the Senior Discount Note Indenture under the Trust
Indenture Act.
THE SENIOR DISCOUNT NOTE TRUSTEE
Fleet National Bank is the Senior Discount Note Trustee under the Senior
Discount Note Indenture and has been appointed by the Company as Registrar and
Paying Agent with respect to the Senior Discount Notes.
The Senior Discount Note Indenture contains certain limitations on the
rights of the Senior Discount Note Trustee, should it become a creditor of
ICON, to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Senior Discount Note Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Discount Notes will have the right to direct in writing the time, method and
place of conducting any proceeding for exercising any remedy available to the
Senior Discount Note Trustee, subject to certain exceptions. The Senior
Discount Note Indenture provides that in case an Event of Default shall occur
(which shall not be cured), the Senior Discount Note Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in
the conduct of his own affairs. Subject to such provisions, the Senior
Discount Note Trustee will be under no obligation to exercise any of its
rights or powers under the Senior Discount Note Indenture at the request of
any Holder of Senior Discount Notes, unless such Holder shall have offered to
the Senior Discount Note Trustee security and indemnity satisfactory to it
against any potential claim, loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Discount Note
Indenture. Reference is made to the Senior Discount Note Indenture for a full
disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
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"Accreted Value" means, as of any date of determination prior to November
15, 2001, the sum of (a) the initial offering price of each Senior Discount
Note and (b) that portion of the excess of the principal amount of each Senior
Discount Note over such initial offering price as shall have been accreted
thereon through such date, such amount to be so accreted on a daily basis at
the rate of 14% per annum of the initial offering price of the Senior Discount
Notes, compounded semi-annually on each May 15 and November 15 from the Issue
Date through the date of determination.
"Acquired Debt" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (ii) Indebtedness encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided, however, that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
(collectively, "dispositions") of any assets (including by way of a
Sale/Leaseback Transaction) other than dispositions of inventory in the
ordinary course of business, (ii) the issuance by any Restricted Subsidiary of
Equity Interests of such Restricted Subsidiary and (iii) the disposition by
ICON or any of its Restricted Subsidiaries of Equity Interests of any
Restricted Subsidiary of ICON, in the case of either clause (i), (ii) or
(iii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $2 million or (b) for net proceeds
in excess of $2 million. Notwithstanding the foregoing, the following will not
be deemed to be Asset Sales: (i) a disposition of assets by ICON to a Wholly
Owned Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to ICON or to another Wholly Owned Restricted
Subsidiary, (iii) a disposition consisting of a Restricted Payment permitted
by the covenant described above under the caption "--Certain Covenants--
Restricted Payments", (iv) the disposition of all or substantially all of the
assets of ICON and its Subsidiaries taken as a whole permitted by the covenant
described above under the caption "--Certain Covenants--Merger, Consolidation
or Sale of Assets", (v) sales of accounts receivable and related assets of the
type specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including cash in an
amount at least equal to 75% of the book value thereof as determined in
accordance with GAAP, (vi) transfers of accounts receivable and related assets
of the type specified in the definition of "Qualified Receivables Transaction"
(or a fractional undivided interest therein) by a Receivables Subsidiary in a
Qualified Receivables Transaction or (vii) the sale by Health & Fitness of the
building at which HealthRider's headquarters was located and the related
mortgage, including a sale, if any, of all of Health & Fitness' interest in
Boyer Old Mill LLC and any related options to purchase interests therein. For
the purposes of clauses (v) and (vi), notes received in exchange for the
transfer of accounts receivable and related assets shall be deemed cash if the
Receivables Subsidiary or other payor is required to repay said notes as soon
as practicable from available cash collections less amounts required to be
established as reserves pursuant to contractual agreements with entities that
are not Affiliates of ICON entered into as part of a Qualified Receivables
Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, at the
time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP or, in the
event that such rate of interest is not reasonably
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determinable, discounted at the rate of interest borne by the Senior Discount
Notes) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Bain" means Bain Capital, Inc.
"Banks" means General Electric Capital Corporation, as agent for the
lenders, and the banks and other financial institutions from time to time that
are lenders under the Credit Agreement.
"Borrowing Base" of any Person means, as of any date, an amount equal to the
sum of (a) 85.0% of the book value of all accounts receivable owned by such
Person and its Subsidiaries (excluding any accounts receivable from an
Affiliate of such Person or that are more than 90 days past due, less (without
duplication) the allowance for doubtful accounts attributable to current trade
accounts receivable) and (b) 60.0% of the book value of all inventory owned by
such Person and its Subsidiaries as of such date (with a seasonal increase to
70.0% of inventory in effect from July 1 through November 30 of each year),
all calculated on a consolidated basis and in accordance with GAAP. To the
extent that information is not available as to the amount of accounts
receivable as of a specific date, such Person may utilize the most recent
available information for purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including,
without limitation, with respect to partnerships, partnership interests
(whether general or limited) and any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, such partnership.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, demand deposits, certificates of
deposit, Eurodollar time deposits or Eurodollar certificates of deposit of any
domestic commercial bank of recognized standing (i) having capital and surplus
in excess of $100.0 million and (ii) whose short-term commercial paper rating
from S&P is at least A-1 or the equivalent thereof or from Moody's is at least
P-1 or the equivalent thereof (any such bank being an "Approved Lender"), in
each case with maturities of not more than twelve months from the date of
acquisition, (c) commercial paper and variable or fixed rate notes issued by
any Approved Lender (or by the parent company thereof) or any variable rate
notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the
equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or
better by Moody's and maturing within twelve months of the date of
acquisition, (d) repurchase agreements with a bank or trust company or
recognized securities dealer having capital and surplus in excess of $100.0
million for direct obligations issued by or fully guaranteed by the United
States of America in which ICON shall have a perfected first priority security
interest subject to no other Liens and having, on the date of purchase
thereof, a fair market value of at least 100% of the amount of repurchase
obligations, and (e) interests in money market mutual funds which invest
solely in assets or securities of the type described in subparagraphs (a),
(b), (c) or (d) hereof.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Bain or
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its Affiliates, is or becomes the "beneficial owner" (as defined in Rules 13d-
3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have "beneficial ownership" of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of ICON or IHF Capital, as the case may be; (ii)
during any period of two consecutive years, individuals who constituted
Continuing Directors of ICON or IHF Capital cease for any reason to constitute
a majority of the Board of Directors of ICON or IHF Capital, as the case may
be, then in office; (iii) ICON or IHF Capital, as the case may be,
consolidates or merges with or into another Person or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, or any Person consolidates or merges into or with the
Company or IHF Capital, as the case may be, in any such event pursuant to a
transaction in which the outstanding Voting Stock of ICON or IHF Capital, as
the case may be, is changed into or exchanged for cash, securities or other
property, other than any such transaction where the outstanding Voting Stock
of ICON or IHF Capital, as the case may be, is not changed or exchanged at all
(except to the extent necessary to reflect a change in the jurisdiction of
incorporation of ICON or IHF Capital, as the case may be) or where (A) the
outstanding Voting Stock of ICON or IHF Capital, as the case may be, is
changed into or exchanged for (x) Voting Stock of the surviving corporation
which is not Disqualified Stock or (y) cash, securities and other property
(other than Capital Stock of the surviving corporation) in an amount which
could be paid by ICON or IHF Capital, as the case may be, as a Restricted
Payment under the covenant described above under the caption "--Certain
Covenants--Restricted Payments" (and such amount shall be treated as a
Restricted Payment subject to the provisions of such covenant) and (B) no
"person" or "group" other than Bain or its Affiliates owns immediately after
such transaction, directly or indirectly, more than 50% of the total
outstanding Voting Stock of the surviving corporation; (iv) ICON or IHF
Capital, as the case may be, is liquidated or dissolved or adopts a plan of
liquidation or dissolution (other than as permitted under the caption "--
Certain Covenants--Merger, Consolidation or Sale of Assets"); or (v) ICON or
IHF Capital, as the case may be, shall directly or indirectly hold less than
100% of the outstanding Capital Stock of Health & Fitness.
"Commodity Agreement" means any commodity futures contract, commodity option
or other similar agreement or arrangement entered into by ICON or any
Subsidiary designed to protect ICON or any of its Subsidiaries against
fluctuations in the price of commodities actually used in the ordinary course
of business of ICON and its Subsidiaries.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period, plus (a) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an asset sale, to the extent such losses were deducted in computing
Consolidated Net Income, plus (b) provision for taxes based on income or
profits of such Person for such period, to the extent such provision for taxes
was deducted in computing Consolidated Net Income, plus (c) the Fixed Charges
for such period, to the extent such amount was deducted in computing
Consolidated Net Income, plus (d) depreciation and amortization (including
amortization of goodwill and other intangibles and amortization of deferred
compensation in respect of non-cash compensation but excluding amortization of
prepaid cash expenses that were paid in a prior period) of such Person for
such period, to the extent such depreciation and amortization were deducted in
computing Consolidated Net Income, in each case, for such period without
duplication on a consolidated basis and determined in accordance with GAAP
plus (e) non-cash cost of goods sold as a result of any purchase accounting
adjustments.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of cash dividends or cash
distributions paid to the referent
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Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the Net Income of
any Person that is a Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (which has not been
obtained) or, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) all extraordinary gains and extraordinary losses and
any unusual or non-recurring charges recorded or accrued in connection with
the Refinancing shall be excluded and (v) the cumulative effect of a change in
accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Senior Discount Note Indenture in the book value of any asset owned by such
Person or a consolidated Subsidiary of such Person, (y) all investments as of
such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of ICON or IHF Capital who (i) was a member of the
Board of Directors of ICON or IHF Capital, as the case may be, at the
beginning of the two-year period referenced in clause (ii) of the definition
of "Change of Control", (ii) was nominated for election or elected to the
Board of Directors of ICON or IHF Capital, as the case may be, with the
affirmative vote of a 66 2/3% majority of the Continuing Directors who were
members of the applicable Board at the time of such nomination or election or
(iii) was nominated for election or elected to the Board of Directors of ICON
or IHF Capital, as the case may be, by the directors of ICON or IHF Capital,
as the case may be, nominated by Bain or its Affiliates.
"Credit Agreement" means the Amended and Restated Credit Agreement among
Health & Fitness and the Banks, as in effect as at the date of the Senior
Discount Note Indenture, providing for a revolving credit facility and term
loans to Health & Fitness, as such agreement may be amended, renewed,
extended, substituted, refinanced, restructured, replaced, supplemented or
otherwise modified from time to time, including, without limitation,
amendments and modifications that provide for loans for Foreign Subsidiaries
and for sub-facilities (including, without limitation, any successive
renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplementations or other modifications of any of the
foregoing), together with the security agreements and other agreements in
favor of the Banks entered into from time to time in connection with such
Credit Agreement as such security agreements and other agreements may be
amended, supplemented or otherwise modified from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect ICON
or any of its Subsidiaries in the ordinary course of business against
fluctuation in the values of the currencies of the countries (other than the
United States) in which ICON or its Restricted Subsidiaries conduct business.
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"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to
November 15, 2006.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Notes" means the Series B Senior Discount Notes due 2000 issued by
ICON in exchange for the Original Notes pursuant to the Exchange Offer.
"Exchange Offer" means the offer by ICON to the Holders of all outstanding
Transfer Restricted Securities to exchange all such outstanding Transfer
Restricted Securities held by such Holders for Series B Senior Discount Notes,
in an aggregate principal amount equal to the aggregate principal amount of
the Transfer Restricted Securities tendered in such exchange offer by such
Holders.
"Exchange Offer Registration Statement" means the registration statement
under the Securities Act relating to the Exchange Offer, including the related
prospectus.
"Existing Indebtedness" means Indebtedness of IHF Holdings and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Senior Discount Note Indenture, until such amounts are
repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that ICON or
any of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems any
preferred stock, in each case subsequent to the commencement of the period for
which the Fixed Charge Coverage Ratio is being calculated but prior to the
date of the event for which the calculation of the Fixed Charge Coverage Ratio
is made (the "Transaction Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
Guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter period. For purposes of making the computation
referred to above, acquisitions (including all mergers and consolidations),
dispositions and discontinuance of operations that have been made by ICON or
any of its Subsidiaries during the four-quarter reference period or subsequent
to such reference period and on or prior to the Transaction Date shall be
calculated on a pro forma basis assuming that all such acquisitions,
dispositions and discontinuance of operations had occurred on the first day of
the four-quarter reference period; provided, however, that Fixed Charges shall
be reduced by amounts attributable to operations that are so disposed of or
discontinued only to the extent that the obligations giving rise to such Fixed
Charges would no longer be obligations contributing to ICON's Fixed Charges
subsequent to the Transaction Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount, non-
cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and
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charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations but
excluding amortization of deferred financing fees) and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Subsidiaries
or secured by a Lien on assets of such Person or one of its Subsidiaries
(whether or not such Guarantee or Lien is called upon) and (iv) the product of
(a) all cash dividend payments (and non-cash dividend payments in the case of
a Person that is a Restricted Subsidiary) on any series of preferred stock of
such Person payable to a party other than ICON or a Wholly Owned Restricted
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, on a
consolidated basis and in accordance with GAAP.
"Foreign Subsidiary" means any Subsidiary that is organized in a
jurisdiction outside of the U.S. and its territories.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect in the United States on the date of the Senior
Discount Note Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HealthRider" means HealthRider, Inc., a Delaware corporation.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"ICON" means ICON Fitness Corporation, a Delaware corporation.
"Health & Fitness Indenture" means the Indenture dated as of November 14,
1994, as amended by a First Supplemental Indenture dated as of March 20, 1995,
between ICON and Fleet National Bank (formerly known as Fleet Bank of
Massachusetts, N.A.), as Trustee, relating to ICON's 13% Senior Subordinated
Notes due 2002.
"IHF Capital" means IHF Capital, Inc., a Delaware corporation.
"IHF Holdings" means IHF Holdings, Inc., a Delaware corporation.
"IHF Holdings Indenture" means the Indenture dated as of November 14, 1994,
as amended by a First Supplemental Indenture dated as of March 20, 1995,
between IHF Holdings and Fleet National Bank (formerly known as Fleet Bank of
Massachusetts, N.A.), as Trustee, relating to IHF Holdings' 15% Senior Secured
Discount Notes due 2004.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar
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instruments or letters of credit (or reimbursement agreements in respect
thereof) or representing Capital Lease Obligations or the balance deferred and
unpaid of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, as well
as all indebtedness of others secured by a Lien on any asset of such Person
(whether or not such indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee of items that would be included
within this definition.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans
(including guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or
other securities and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
an acquisition of assets, Equity Interests or other securities by ICON for
consideration consisting of common equity securities of the Company shall not
be deemed to be an Investment.
"Issue Date" means the date on which the Senior Discount Notes are
originally issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all liquidated damages then owing pursuant to the
Registration Rights Agreement.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (i) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), or (ii)
the disposition of any securities or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries, and (b) any extraordinary
gain (but not loss), together with any related provision for taxes on such
extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by ICON or any of
its Restricted Subsidiaries in respect of any Asset Sale, net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets the
subject of such Asset Sale, any reserve for adjustment in respect of the sale
price of such asset or assets and any reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by ICON
or any of its Restricted Subsidiaries, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale, all as
reflected in an Officer's Certificate.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary)
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would permit (upon notice, lapse time or both) any holder of any other
Indebtedness of ICON or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated to payable prior to its stated maturity; and (ii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of ICON or any of its Restricted Subsidiaries.
"Notes" means ICON's Series A Senior Discount Notes and Series B Senior
Discount Notes.
"Obligations" means any principal, premium, interest (including post-
petition interest), penalties, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documentation governing any
Indebtedness.
"Officer's Certificate" means a certificate signed by (i) the Chairman, the
Chief Executive Officer, the President or a Vice President and (ii) the
Treasurer, the Chief Financial Officer, the Director of Finance, an Assistant
Treasurer, the Secretary or an Assistant Secretary of ICON, and delivered to
the Trustee.
"Original Notes" means the Series A Senior Discount Notes.
"Parent" means IHF Capital, and also means any other Person which holds
directly, or indirectly, more than 50% of the total outstanding Voting Stock
of ICON, other than Bain and other than any Bain Affiliate whose assets do not
principally consist (directly or indirectly) of Equity Interests in the
Company.
"Permitted Business" means a business in which ICON and its Subsidiaries was
engaged on the date of the Senior Discount Note Indenture or a business that
is reasonably related thereto.
"Permitted Investments" means (a) any Investments in ICON or in a Wholly
Owned Subsidiary of ICON; (b) any Investment by ICON or a Wholly Owned
Restricted Subsidiary in a Receivables Subsidiary or an Investment by a
Receivables Subsidiary in any other Person in connection with a Qualified
Receivables Transaction; provided that the foregoing Investment is in the form
of a note that the Receivables Subsidiary or other Person is required to pay
as soon as practicable from available cash collections less amounts required
to be established as reserves pursuant to contractual arrangements with
entities that are not Affiliates of ICON entered into as part of a Qualified
Receivables Transaction; (c) any Investments in Cash Equivalents; (d)
Investments by ICON or any Restricted Subsidiary of ICON in a Person, if as a
result of such Investment (i) such Person becomes a Wholly Owned Restricted
Subsidiary of ICON or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Wholly Owned Subsidiary of ICON; and
(e) Investments in any Person engaged in a Permitted Business in an aggregate
amount not to exceed $5 million at any time outstanding.
"Permitted Liens" means (a) Liens in favor of ICON; (b) Liens securing
Indebtedness that was permitted to be incurred pursuant to clauses (i), (iii)
and (viii) under the caption entitled "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; (c) Liens on property of a
Person existing at the time such Person is merged into or consolidated with
ICON or any Restricted Subsidiary of ICON, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do
not extend to any assets other than those of the Person merged into or
consolidated with the Company; (d) Liens on property existing at the time of
acquisition thereof by ICON or any Restricted Subsidiary of ICON; provided
that such Liens were in existence prior to the contemplation of such
acquisition; (e) Liens to secure surety or appeal bonds, performance bonds or
other obligations of a like nature incurred in the ordinary course of
business; (f) Liens existing on the date of the Senior Discount Note
Indenture; (g) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate
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proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (h) Liens imposed by law, such as
mechanics', carriers', warehousemen's, materialmen's, and vendors' Liens,
incurred in good faith in the ordinary course of business with respect to
amounts not yet delinquent or being contested in good faith by appropriate
proceedings if a reserve or other appropriate provisions, if any, as shall be
required by GAAP shall have been made therefor; (i) zoning restrictions,
easements, licenses, covenants, reservations, restrictions on the use of real
property or minor irregularities of title incident thereto that do not, in the
aggregate, materially detract from the value of the property or the assets of
ICON or impair the use of such property in the operation of ICON's business;
(j) judgment Liens to the extent that such judgments do not cause or
constitute a Default or an Event of Default; and (k) Liens to secure the
payment of all or a part of the purchase price of property or assets acquired
or constructed in the ordinary course of business on or after the date of the
Senior Discount Note Indenture, provided that (i) such property or assets are
used in a Permitted Business, (ii) at the time of incurrence of any such Lien,
the aggregate principal amount of the obligations secured by such Lien shall
not exceed the lesser of the cost or fair market value of the assets or
property (or portions thereof) so acquired or constructed, (iii) each such
Lien shall encumber only the assets or property (or portions thereof) so
acquired or constructed and shall attach to such property within 120 days of
the purchase or construction thereof, (iv) any Indebtedness secured by such
Lien shall have been permitted to be incurred under the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, (l) Liens of landlords
or of mortgagees of landlords arising by operation of law, provided that the
rentals payments secured thereby are not yet due and payable; (m) Liens
incurred in the ordinary course of business of ICON or any Restricted
Subsidiary of ICON with respect to obligations that do not exceed $5 million
at any one time outstanding and that (1) are not incurred in connection with
the borrowing of money or the obtaining of advances or credit (other than
trade credit in the ordinary course of business) and (2) do not in the
aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by ICON or such Restricted
Subsidiary; (n) Liens incurred or deposits made in the ordinary course of
business in connection with workers compensation, unemployment insurance and
other types of social security; (o) Liens securing reimbursement obligations
with respect to letters of credit which encumber only documents and other
property relating to such letters of credit and the products and proceeds
thereof; (p) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements; (q) Liens
arising out of consignment or similar arrangements for the sale of goods in
the ordinary course of business; (r) any interest or title of a lessor in
property subject to any capital lease obligation or operating lease; and (s)
Liens on the assets of a Receivables Subsidiary incurred in connection with a
Qualified Receivables Transaction.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
"Principals" means Scott Watterson and Gary Stevenson.
"Principals Repurchase" means the repurchase of all of the outstanding
options to purchase preferred stock of IHF Holdings held by the Principals
pursuant to that certain Key Executive Preferred Stock Option Agreement dated
as of September 6, 1996 between IHF Capital and the Principals.
"Public Equity Offering" with respect to any Person means a bona fide
underwritten sale to the public of common stock of such Person pursuant to a
registration statement (other than on Form S-8 or any other form relating to
securities issuable under any benefit plan of ICON) that is declared effective
by the Securities and Exchange Commission.
"Purchase Money Obligations" of any Person means any obligations of such
Person or any of its subsidiaries to any seller or any other Person incurred
or assumed in connection with the purchase of
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real or personal property to be used in the business of such Person or any of
its Subsidiaries within 180 days of such incurrence or assumption.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by ICON or any of its Subsidiaries
pursuant to which ICON or any of its Subsidiaries may sell, convey or
otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer
by the Company or any of its Subsidiaries) and (ii) any other Person (in the
case of a transfer by a Receivables Subsidiary), or may grant a security
interest in, any accounts receivable (whether now existing or arising in the
future) of ICON or any of its Subsidiaries, and any assets related thereto
including, without limitation, all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations in respect
of such accounts receivable, proceeds of such accounts receivable and other
assets which are customarily transferred or in respect of which security
interests are customarily granted in connection with asset securitization
transactions involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of ICON which
engages in no activities other than in connection with the financing of
accounts receivable and which is designated by the Board of Directors of ICON
(as provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise), of which (i)
is guaranteed by ICON or any Restricted Subsidiary of ICON (excluding
guarantees of Obligations (other than the principal of, and interest on,
Indebtedness) pursuant to representations, warranties, covenants and
indemnities entered into in the ordinary course of business in connection with
a Qualified Receivables Transaction), (ii) is recourse to or obligates ICON or
any Restricted Subsidiary of ICON in any way other than pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction or (iii) subjects any property or asset of ICON or any Restricted
Subsidiary of ICON, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction, (b) with which neither
ICON nor any Restricted Subsidiary of ICON has any material contract,
agreement, arrangement or understanding other than on terms no less favorable
to ICON or such Subsidiary than those that might be obtained at the time from
persons who are not Affiliates of ICON, other than fees payable in the
ordinary course of business in connection with servicing accounts receivable
and (c) with which neither ICON nor any Restricted Subsidiary of ICON has any
obligation to maintain or preserve such Subsidiary's financial condition or
cause such Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of ICON shall be evidenced to the Senior
Discount Trustee by filing with the Senior Discount Note Trustee a certified
copy of the resolution of the Board of Directors of ICON giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"Registration Rights Agreement" means that certain Registration Rights
Agreement, dated as of the date of the Senior Discount Note Indenture, among
ICON and the Initial Purchaser.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a person means any Subsidiary of such Person that
is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property owned
on the Issue Date or thereafter acquired whereby ICON or a Restricted
Subsidiary transfers such property to a Person and leases it back from such
Person, other than (i) any such arrangement (a) the term of which is not more
than one year and (b) the Attributable Debt associated with which is less than
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$1.0 million (aggregating any series of related transactions), (ii) any such
arrangement between ICON and a Wholly Owned Restricted Subsidiary or between
Wholly Owned Restricted Subsidiaries and (iii) a lease by ICON or a Restricted
Subsidiary of the Company of a portion of the building at which HealthRider's
headquarters was located.
"Senior Discount Notes" means the ICON's Series A Senior Discount Notes and
Series B Senior Discount Notes.
"Series A Senior Discount Notes" means ICON's 14% Series A Senior Discount
Notes due 2006 to be issued pursuant to the Senior Discount Note Indenture.
"Series B Senior Discount Notes" means ICON's 14% Series B Senior Discount
Notes due 2006 to be issued pursuant to the Senior Discount Note Indenture in
the Exchange Offer.
"Significant Subsidiary" means any Subsidiary of ICON that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a
combination thereof.
"Transfer Restricted Securities" means each Original Note, until the
earliest to occur of (a) the date on which such Original Note is exchanged in
the Exchange Offer and entitled to be resold to the public by the Holder
thereof without complying with the prospectus delivery requirements of the
Act, (b) the date on which such Original Note has been disposed of in
accordance with a Shelf Registration Statement, (c) the date on which such
Original Note is disposed of by a broker-dealer pursuant to the "Plan of
Distribution" contemplated by the Exchange Offer Registration Statement
(including delivery of the Prospectus contained therein) or (d) the date on
which such Original Note is distributed to the public pursuant to Rule 144
under the Act.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with ICON or any Restricted Subsidiary
of ICON unless the terms of such agreement, contract, arrangement or
understanding are no less favorable to ICON or such Restricted Subsidiary than
those that might be obtained at the time from Persons who are not Affiliates
of ICON, (iii) is a Person with respect to which neither ICON nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe
for additional Equity Interests or (b) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (iv) has not guaranteed or otherwise, directly or
indirectly, provided credit support for any Indebtedness of ICON or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall
be evidenced to the Senior Discount Note Trustee by filing with the Senior
Discount Note Trustee a certified copy of the Board Resolution giving effect
to such designation and certifying that such designation complied with the
foregoing conditions and was permitted by the covenant captioned "Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Senior Discount
Note Indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of ICON as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant captioned "Incurrence of Indebtedness and Issuance of Preferred
Stock" ICON shall be in default of
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such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the
Company; provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of ICON of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
captioned "Incurrence of Indebtedness and Issuance of Preferred Stock" and
(ii) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers, general
partners or trustees of any Person (irrespective of whether or not, at the
time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency) or, with respect
to a partnership (whether general or limited), any general partner interest in
such partnership.
"Weider Repurchase" means the repurchase, pursuant to that certain Stock and
Warrants Purchase Agreement dated as of September 6, 1996 among IHF Capital,
IHF Holdings, Weider Health and Fitness, a Nevada corporation, and the other
parties thereto, of (i) all of the shares of common stock of IHF Capital and
certain warrants to purchase such stock held by the Weider Investors (as
defined in such purchase agreement) and (ii) all of the shares of preferred
stock of IHF Holdings held by Weider Health and Fitness.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form, without coupons. Except as described below, the Exchange
Notes will be deposited with, or on behalf of, The Depository Trust Company,
New York, New York (the "Depository"), and registered in the name of Cede &
Co., as the Depositary's nominee (such nominee being referred to herein as the
"Global Senior Discount Note Holder") in the form of a global Exchange Note
certificate (the "Global Senior Discount Note") or will remain in the custody
of the Trustee pursuant to a FAST Balance Certificate Agreement between the
Depositary and the Trustee.
Except as set forth below, the Global Senior Discount Note may be
transferred, in whole and not in part, only by the Depositary to its nominee
or by its nominee to such Depositary or another nominee of the Depositary or
by the Depositary or its nominee to a successor of the Depositary or a nominee
of such successor.
]Senior Discount Notes that were (i) originally issued to or transferred to
"foreign purchasers" or "institutional accredited investors" who are not
"qualified institutional buyers" (as such terms are defined under "Notice to
Investors" elsewhere herein) (the "Non-Global Purchasers") or (ii) issued as
described below under "Certificated Securities," will be issued in registered
form (the "Certificated
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Securities"). Upon the transfer to a qualified institutional buyer of
Certificated Securities initially issued to a Non-Global Purchaser, such
Certificated Securities will, unless the Global Senior Discount Note has
previously been exchanged for Certificated Securities, be exchanged for an
interest in the Global Senior Discount Note representing the principal amount
of Senior Discount Notes being transferred.]
The Depositary is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through the Depositary's Participants or the
Depositary's Indirect Participants.
ICON expects that pursuant to procedures established by the Depositary (i)
upon deposit of the Global Senior Discount Note, the Depositary will credit
the accounts of Participants designated by the Senior Discount Note Trustee
with portions of the principal amount of the Global Senior Discount Note and
(ii) ownership of the Senior Discount Notes will be shown on, and the transfer
of ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of the Depositary's Participants),
the Depositary's Participants and the Depositary's Indirect Participants. The
laws of some states require that certain Persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Senior Discount Notes will be limited to such extent.
So long as the Global Senior Discount Note Holder is the registered owner of
any Exchange Notes, the Global Senior Discount Note Holder will be considered
the sole owner or Holder of such Exchange Notes outstanding under the Senior
Discount Note Indenture. Except as provided below, owners of Exchange Notes
will not be entitled to have Exchange Notes registered in their names, will
not receive or be entitled to receive physical delivery of Exchange Notes in
definitive form, and will not be considered the owners or holders thereof
under the Senior Discount Note Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Senior Discount Note Trustee thereunder. As a result, the ability of a Person
having a beneficial interest in Exchange Notes represented by the Global
Senior Discount Note to pledge such interest to Persons or entities that do
not participate in the Depositary's system or to otherwise take actions in
respect of such interest, may be affected by the lack of a physical
certificate evidencing such interest.
Neither ICON, the Senior Discount Note Trustee nor any paying agent will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of Senior Discount Notes by the Depositary, or for
maintaining, supervising or reviewing any records of the Depositary relating
to such Exchange Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Exchange Notes registered in the name of a Global Senior Discount Note
Holder on the applicable record date will be made by ICON through a paying
agent to or at the direction of such Global Senior Discount Note Holder in its
capacity as the registered holder under the Senior Discount Note Indenture.
Under the terms of the Senior Discount Note Indenture, ICON and the Senior
Discount Note Trustee may treat the Persons in whose names the Exchange Notes,
including the Global Senior Discount Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither the Senior Discount Note Trustee
nor any paying agent has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Exchange Notes.
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ICON believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such
payment, in accounts proportionate to their respective holdings in principal
amount of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Exchange Notes
will be governed by standing instructions and customary practice and will be
the responsibility of the Depositary's Participants or the Depositary's
Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
the Global Senior Discount Note may, upon request to ICON or the Senior
Discount Note Trustee, exchange such beneficial interest for Senior Discount
Notes in the form of Certificated Securities. Upon any such issuance, the
Senior Discount Note Trustee is required to register such Exchange Notes in
the name of, and cause the same to be delivered to, such Person or Persons (or
the nominee of any thereof). In addition, if (i) the Depositary or ICON
notifies the Senior Discount Note Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and ICON is unable to locate a
qualified successor within 90 days or (ii) ICON, at its option, notifies the
Senior Discount Note Trustee in writing that they elect to cause the issuance
of Notes in the form of Certificated Securities under the Senior Discount Note
Indenture, then, upon surrender by the relevant Global Senior Discount Note
Holder of its Global Senior Discount Note, Senior Discount Notes in such form
will be issued to each Person that such Global Senior Discount Note Holder and
the Depositary identifies as the beneficial owner of the related Senior
Discount Notes.
Neither ICON nor the Senior Discount Note Trustee shall be liable for any
delay by the related Global Senior Discount Note Holder or the Depositary in
identifying the beneficial owners or the related Senior Discount Notes and
each such Person may conclusively rely on, and shall be protected in relying
on, instructions from such Global Senior Discount Note Holder or of the
Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Senior Discount Notes
to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
The Senior Discount Note Indenture requires that payments in respect of the
Senior Discount Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Security Holders. Secondary
trading in long-term Senior Discount Notes and debentures of corporate issuers
is generally settled in clearing-house or next-day funds. In contrast, the
Senior Discount Notes are expected to be eligible to trade in the PORTAL
Market and to trade in the Depositary's Next-Day Funds Settlement System, and
any permitted secondary market trading activity in the Senior Discount Notes
will therefore be required by the Depositary to be settled in immediately
available funds. The Company expects that secondary trading in the
Certificated Senior Discount Notes also will be settled in immediately
available funds.
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THE EXCHANGE OFFER
REGISTRATION RIGHTS
At the Closing, ICON entered into the Registration Rights Agreement with the
Initial Purchaser pursuant to which ICON agreed, at its cost, (i) within 30
days after the date of the original issue of the Original Notes, to file the
Exchange Offer Registration Statement with the Commission with respect to the
Exchange Offer for the Exchange Notes, (ii) to use its best efforts to cause
the Exchange Offer Registration Statement to be declared effective under the
Securities Act within 150 days after the date of original issuance of the
Original Notes, and (iii) unless the Exchange Offer is not then permitted by a
policy of the Commission, to use its best efforts to issue within 90 business
days of the effective date (the "Effective Date") of the Exchange Offer
Registration Statement, Exchange Notes in exchange for surrender of Original
Notes. ICON agreed to keep its Exchange Offer open for not less than 20
Business Days (or longer if required by applicable law) after the date on
which notice of the Exchange Offer is mailed to the holders of the Original
Notes. For each Original Note surrendered to ICON pursuant to the Exchange
Offer, the holder of such Original Note will receive an Exchange Note having a
principal amount at maturity equal to that of the surrendered Original Note.
Cash interest will not accrue on the Exchange Notes prior to November 15,
2001. The Registration Rights Agreement also provides an agreement to include
in the prospectus for the Exchange Offer certain information necessary to
allow broker-dealers who hold Original Notes (other than Original Notes
acquired directly from ICON) to exchange such Original Notes pursuant to the
Exchange Offer and to satisfy the prospectus delivery requirements in
connection with resales of Exchange Notes received by such broker-dealers in
the Exchange Offer and to maintain the effectiveness of the Registration
Statement for such purposes for 180 days from the Expiration Date.
This Prospectus covers the offer and sale of the Exchange Notes pursuant to
the Exchange Offer made hereby and the resale of Exchange Notes received in
the Exchange Offer by any Participating Broker-Dealer who held Original Notes
(other than Original Notes acquired directly from ICON or one of its
affiliates).
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in
general be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Original
Notes who is an "affiliate" of ICON or who intends to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) will not
be able to rely on the interpretation of the staff of the Commission, (ii)
will not be able to tender its Original Notes in the Exchange Offer and (iii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Original Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements.
Each holder of the Original Notes (other than certain specified holders) who
wishes to exchange Original Notes for Exchange Notes in the Exchange Offer
will be required to make certain representations, including that (i) it is not
an affiliate of ICON (ii) any Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. If the Holder is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Transfer Restricted Securities that were acquired as a result of market-
making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
In the event that (i) any changes in law or the applicable interpretations
of the staff of the Commission do not permit ICON to effect its Exchange
Offer, (ii) any Holder of Transfer Restricted Securities shall notify ICON
within 20 Business Days following the consummation of the Exchange Offer that
(A) such Holder was prohibited by law or Commission policy from participating
in the Exchange Offer or (B) such Holder may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and this prospectus is not appropriate
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or available for such resales by such Holder or (C) such Holder is a broker-
dealer and holds Original Notes acquired directly from ICON or one of its
affiliates, ICON will, at its cost, (a) within 30 days after such filing
obligation arises file a Shelf Registration Statement (which may be an
amendment of the Exchange Offer Registration Statement of which this
Prospectus is a part) covering resales of the Original Notes (provided that if
ICON has not consummated the Exchange Offer within 180 days after November 20,
1996, ICON shall file the Shelf Registration Statement on or prior to the
181st day after November 20, 1996), (b) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
within 150 days after such filing obligation arises and (c) use all reasonable
efforts to keep effective the Shelf Registration Statement for three years
after its effective date or such shorter period that will terminate when all
securities covered by the Shelf Registration Statement have been sold pursuant
to the Shelf Registration Statement. ICON will, in the event of the filing of
a Shelf Registration Statement, provide to each holder of the Original Notes
eligible to participate in such Shelf Registration Statement copies of the
prospectus which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement for the Original Notes has
become effective and take certain other actions as are required to permit
resales of the Original Notes. A holder of Original Notes that sells such
Original Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement which
are applicable to such a holder (including certain indemnification
obligations). In addition, each such holder will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Original Notes included in the Shelf Registration Statement and to benefit
from the provisions regarding liquidated damages set forth in the following
paragraph.
If (a) the Company fails to file any of the Registration Statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements are not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter, subject to certain exceptions, ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "Registration Default"), then
the Company will pay Liquidated Damages to each Holder of Transfer Restricted
Securities, with respect to the first 90-day period immediately following the
occurrence of such Registration Default in an amount equal to $0.05 per week
for each $1,000 principal amount of Senior Discount Notes held by such Holder.
The amount of the Liquidated Damages will increase by an additional $0.05 per
week with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of
$0.30 per week for each $1,000 principal amount of Senior Discount Notes.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease. Liquidated Damages will be paid by the Company on each
interest payment date and in connection with a redemption, Change in Control
or certain Asset Sales as described under the captions "Description of Senior
Discount Notes--Optional Redemption", "Description of Senior Discount Notes--
Mandatory Redemption" and "Description of Senior Discount Notes--Repurchase at
the Option of Holders--Change in Control and--Asset Sales." Notwithstanding
any of the foregoing, registration defaults relating to any particular
Transfer Restricted Securities may be waived by the holders thereof.
For purposes of the foregoing, "Transfer Restricted Securities" has the
meaning ascribed to such term under the caption "Description of Senior
Discount Notes--Certain Definitions."
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The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Exchange Offer
Registration Statement.
Except as set forth above, after consummation of the Exchange Offer, holders
of Original Notes have no registration or exchange rights under the
Registration Rights Agreement. See""--Consequences of Failure to Exchange,"
and "--Resales of Exchange Notes; Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Original Notes which are not exchanged for Exchange Notes pursuant to an
Exchange Offer and are not included in a resale prospectus will remain
restricted securities. Accordingly, such Original Notes may be offered, sold
or otherwise transferred prior to the date which is three years after the
later of the date of original issue and the last date that ICON or any
affiliate of ICON was the owner of such securities (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (a) to ICON (b)
pursuant to a registration statement which has been declared effective under
the Securities Act, (c) for so long as the Original Notes are eligible for
resale pursuant to Rule 144A, to a person the owner reasonably believes is a
qualified institutional buyer that purchases for its own account or for the
account of a qualified institutional buyer to whom notice is given that the
transfer is being made in reliance on Rule 144A, (d) to an "accredited
investor" within the meaning of subparagraph (1), (2), (3) or (7) of paragraph
(a) of Rule 501 under the Securities Act that is purchasing for his own
account or for the account of such an "accredited investor" in each case in a
minimum of Original Notes with a purchase price of $500,000 or (c) pursuant to
any other available exemption from the registration requirements of the
Securities Act, subject in each of the foregoing cases to any requirement of
law that the disposition of its property or the property of such investor
account or accounts be at all times within its or their control. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Original Notes is
proposed to be made pursuant to clause (d) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from the
transferee to ICON and the Trustee, which shall provide, among other things,
that the transferee is an "accredited investor" within the meaning of
subparagraph (1), (2), (3) or (7) of paragraph (a) of Rule 501 under the
Securities Act and that it is acquiring such Securities for investment
purposes and not for distribution in violation of the Securities Act. Prior to
any offer, sale or other transfer of Original Notes prior to the Resale
Restriction Termination Date pursuant to clauses (d) or (e) above, the issuer
and the Trustee may require the delivery of an opinion of counsel,
certifications and/or other information satisfactory to each of them.
TERMS OF THE EXCHANGE OFFERS
Upon the terms and subject to the conditions set forth in the Prospectus and
in the Letter of Transmittal, a copy of which is attached to this Prospectus
as Annex A, ICON will accept any and all Original Notes validly tendered and
not withdrawn prior to the applicable Expiration Date. ICON will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal
amount of Original Notes accepted in the Exchange Offer. Holders may tender
some or all of their Original Notes pursuant to the Exchange Offer. However,
Original Notes may be tendered only in integral multiples of $1,000 principal
amount at final maturity.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes, except that (i) the Exchange Notes bear a Series B
designation, (ii) the Exchange Notes have been registered under the Securities
Act and therefore will generally not bear legends restricting their transfer
pursuant to the Securities Act, and (iii) the holders of Exchange Notes will
generally not be entitled to rights under the Registration Rights Agreement.
The Exchange Notes will evidence the same debt as the Original Notes (which
they replace), and will be issued under, and be entitled to the benefits of,
the Indenture.
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Solely for reasons of administration (and for no other purpose) ICON has
fixed the close of business on , 1997 as the record date for the Exchange
Offer for purpose of determining the persons to whom this Prospectus and the
Letter of Transmittal will be mailed initially. Only a registered holder of
Original Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the trustee under the governing indenture may
participate in the Exchange Offer. There will be no fixed record date for
determining registered holders of the Original Notes entitled to participate
in the relevant Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or under the Indenture in
connection with the Exchange Offer. ICON intends to conduct the Exchange Offer
in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
ICON shall be deemed to have accepted validly tendered Original Notes when,
as and if it has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of the Original
Notes for the purposes of receiving the Exchange Notes.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be
returned without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of the
Original Notes pursuant to the Exchange Offer. ICON will pay all charges and
expenses, other than certain applicable taxes, in connection with their
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on ,
1997, unless ICON extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which such Exchange
Offer is extended.
In order to extend the Exchange Offer, ICON will notify the Exchange Agent
of any extension by oral or written notice and will make a public announcement
thereof, prior to 9:00 a.m., New York City time, on the next Business Day
after the previously scheduled Expiration Date.
ICON reserves the right, in its sole discretion, (i) to delay accepting any
Original Notes, (ii) extend the Exchange Offer, (iii) if any of the conditions
set forth below under "--Conditions of the Exchange Offers" shall not have
been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by ICON to
constitute a material change, it will promptly disclose such amendment by
means of a prospectus supplement that will be distributed to the registered
holders of the Original Notes and the Exchange Offer will be extended for a
period of five to 10 business days, as required by law, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to 10
business day period.
Without limiting the manner in which ICON may choose to make public
announcement of any delay, extension, termination or amendment of its Exchange
Offer, ICON shall not have an obligation
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to publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release thereof to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, have the signatures thereon
guaranteed if required by such Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal to the Exchange Agent at the address set
forth below under "--Exchange Agent" for receipt prior to the applicable
Expiration Date. In addition, either (i) certificates for such Original Notes
must be received by the Exchange Agent along with the Letter of Transmittal,
or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Original Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
applicable Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. To be tendered effectively,
the Letter of Transmittal and all other required documents must be received by
the Exchange Agent at the address set forth below under "--Exchange Agent"
prior to the applicable Expiration Date.
The tender by a holder will constitute an agreement between such holder and
ICON in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal applicable to such Exchange Offer.
THE METHOD OF DELIVERY OF THE ORIGINAL NOTES AND THE APPLICABLE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE APPLICABLE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR
ORIGINAL NOTES SHOULD BE SENT TO ICON. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal designated for such Original Notes,
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a participant
in a recognized signature guarantee medallion program within the meaning of
Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes listed therein, such Original Notes must be
endorsed or accompanied by a properly completed
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bond power, signed by such registered holder as such registered holder's name
appears on such Original Notes, with signature guaranteed by an Eligible
Institution.
If a Letter of Transmittal or any Original Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to
ICON, as applicable, of their authority to so act must be submitted with the
Letter of Transmittal designated for such Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by ICON in its sole discretion, which determination will be final
and binding. ICON reserves the absolute right to reject any and all Original
Notes not properly tendered or any Original Notes the issuer's acceptance of
which would, in the opinion of counsel for such issuer, be unlawful. ICON also
reserves the right to waive any defects, irregularities or conditions of
tender as to particular Original Notes. The interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) by ICON will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Original Notes
must be cured within such time as ICON shall determine. Although ICON intends
to notify holders of defects or irregularities with respect to tenders of
Original Notes issued by it, neither ICON, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Original Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Original Notes
received by the Exchange Agent that are not validly tendered and as to which
the defects or irregularities have not been cured or waived, or if Original
Notes are submitted in a principal amount greater than the principal amount of
Original Notes being tendered by such tendering holder, such unaccepted or
non-exchanged Original Notes will be returned by the Exchange Agent to the
tendering holders (or, in the case of Original Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
unaccepted or non-exchanged Original Notes will be credited to an account
maintained with such Book-Entry Transfer Facility), unless otherwise provided
in the Letter of Transmittal designated for such Original Notes, as soon as
practicable following the applicable Expiration Date.
By tendering Original Notes in the Exchange Offer, each registered holder
will represent to the issuer of such Original Notes that, among other things,
(i) the Exchange Notes to be acquired by the holder and any beneficial
owner(s) of such Original Notes ("Beneficial Owner(s)") in connection with the
Exchange Offer are being acquired by the holder and any Beneficial Owner(s) in
the ordinary course of business of the holder and any Beneficial Owner(s),
(ii) the holder and each Beneficial Owner are not participating, do not intend
to participate, and have no arrangement or understanding with any person to
participate, in a distribution of the Exchange Notes, (iii) the holder and
each Beneficial Owner acknowledge and agree that (x) any person participating
in an Exchange Offer for the purpose of distributing the Exchange Notes must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction with respect
to the Exchange Notes acquired by such person and cannot rely on the position
of the Staff of the Commission set forth in no-action letters that are
discussed herein under "--Resales of the Exchange Notes", and (y) any
Participating Broker-Dealer that receives Exchange Notes for its own account
in exchange for Original Notes pursuant to an Exchange Offer must deliver a
prospectus in connection with any resale of such Exchange Notes, but by so
acknowledging, the holder shall not be deemed to admit that, by delivering a
prospectus, it is an "underwriter" within the meaning of the Securities Act,
(iv) neither the holder nor any Beneficial Owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of ICON except as otherwise disclosed to
ICON in writing, and (v) the holder and each Beneficial Owner understands that
a secondary resale transaction described in clause (iii) above should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 of Regulation S-K of the
Commission.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Book-Entry Transfer Facility, for purposes of the
Exchange Offers, within two business days after the date of this Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Original Notes by causing
the Book-Entry Transfer Facility to transfer such Original Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for transfer. However,
although delivery of Original Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the applicable Letter of
Transmittal, with any required signature guarantees and any other documents,
must be transmitted to and received by the Exchange Agent at the address set
forth below under "--Exchange Agent" on or prior to the applicable Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available, or (ii) who cannot deliver their Original
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent prior to the applicable Expiration Date, may effect a tender
if:
(1) The tender is made through an Eligible Institution;
(2) Prior to the applicable Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by mail, hand delivery or facsimile
transmission) setting forth the name and address of the holder, the
certificate number(s) of such Original Notes and the principal amount of
the Original Notes being tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the
applicable Expiration Date, the applicable Letter of Transmittal together
with the certificate(s) representing the Original Notes (or a Book-Entry
Confirmation) and any other documents required by the applicable Letter of
Transmittal will be delivered by the Eligible Institution to the Exchange
Agent; and
(3) Such properly completed and executed Letter of Transmittal, as well
as the certificate(s) representing all tendered Original Notes in proper
form for transfer (or a Book-Entry Confirmation) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within five business days after the applicable Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes pursuant to
an Exchange Offer may be withdrawn, unless theretofore accepted for exchange
as provided in the applicable Exchange Offer, at any time prior to the
Expiration Date of that Exchange Offer.
To be effective, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior
to the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Notes to be withdrawn (including the
certificate number or numbers and aggregate principal amount of such Original
Notes), and (iii) be signed by the holder in the same manner as the original
signature on the applicable Letter of Transmittal (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by ICON in its
sole respective discretion, which determination shall be final and binding on
all parties. Any Original Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Original Notes so withdrawn are
retendered. Properly withdrawn Original Notes may be retendered by following
one of the procedures described above under""--Procedures for Tendering" at
any time prior to the applicable Expiration Date.
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Any Original Notes which have been tendered but which are not accepted for
exchange due to the rejection of the tender due to uncured defects or the
prior termination of the applicable Exchange Offer, or which have been validly
withdrawn, will be returned to the holder thereof (unless otherwise provided
in the Letter of Transmittal), as soon as practicable following the applicable
Expiration Date or, if so requested in the notice of withdrawal, promptly
after receipt by the issuer of the Original Notes of notice of withdrawal
without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFERS
The Exchange Offers shall not be subject to any conditions, other than that
(a) the Commission has issued an order or orders declaring the Indenture
qualified under the Trust Indenture Act, (b) the Exchange Offers, or the
making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the Commission, (c) no action or
proceeding shall have been instituted or threatened in any court or by or
before any governmental agency with respect to an Exchange Offer, which, in
the judgment of ICON might impair the ability of ICON to proceed with the
Exchange Offer, (d) there shall not have been adopted or enacted any law,
statute, rule or regulation which, in ICON's judgment would materially impair
its ability to proceed with the Exchange Offer or (e) there shall not have
occurred any material change in the financial markets in the United States or
any outbreak of hostilities or escalation thereof or other calamity or crisis
the effect of which on the financial markets of the United States, in ICON's
judgment would materially impair its ability to proceed with the Exchange
Offer.
If ICON determines in its sole discretion that any of the conditions to the
Exchange Offer are not satisfied, it either may (i) refuse to accept any
Original Notes and return all tendered Original Notes to the tendering
holders, (ii) extend the Exchange Offer and retain all Original Notes tendered
prior to the Expiration Date, subject, however, to the rights of holders to
withdraw such Original Notes (see "--Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
validly tendered Original Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, ICON will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and will extend an Exchange Offer for a
period of five to 10 business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to 10 business day period.
EXCHANGE AGENT
Fleet National Bank has been appointed as "Exchange Agent" for the Exchange
Offer. Questions and request for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and other documents should be
directed to the Exchange Agent addressed as follows:
By Mail: By Hand:
Fleet National Bank Fleet National Bank
Corporate Trust Department 101 Federal Corporate Trust Department 101 Federal
Street MA BO F04B Boston, MA 02110 Street Boston, MA 02110
By Facsimile: (617) 346-1679
For Information: (617) 346-1641
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by ICON. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
ICON and its affiliates.
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No dealer-manager has been retained in connection with the Exchange Offer
and no payments will be made to brokers, dealers or others soliciting
acceptance of the Exchange Offer. However, reasonable and customary fees will
be paid to the Exchange Agent for its service and it will be reimbursed for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by ICON and are estimated in the aggregate to be approximately $[ ].
Such expenses include fees and expenses of the Exchange Agent and the Trustee
under the Indenture, accounting and legal fees and printing costs, among
others.
ICON will pay all transfer taxes, if any, applicable to the exchange of the
Original Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Original Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering
holder.
ACCOUNTING TREATMENT
The carrying values of the Original Notes are not expected to be materially
different from the fair value of the Exchange Notes at the time of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of each Exchange Offer will be amortized over the
term of the Exchange Notes.
RESALES OF THE EXCHANGE NOTES; PLAN OF DISTRIBUTION
Based on no-action letters issued by the staff of the Commission to third
parties, ICON believes the Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Original Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than (i) a broker-dealer
who purchased such Original Notes directly from ICON to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an "affiliate" of ICON within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that the holder is
acquiring the Exchange Notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Original
Notes wishing to accept the Exchange Offer must represent to ICON that such
conditions have been met. In the event that ICON's belief is inaccurate,
holders of Exchange Notes who transfer Exchange Notes in violation of the
prospectus delivery provisions of the Securities Act and without an exemption
from registration thereunder may incur liability under the Securities Act.
ICON does not assume or indemnify holders against such liability, although
ICON does not believe that any such liability should exist.
Each affiliate of ICON must acknowledge that such person will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable. Each Participating Broker-Dealer that receives Exchange
Notes in exchange for Original Notes held for its own account, as a result of
market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
Although a Participating Broker-Dealer may be an "underwriter" within the
meaning of the Securities Act, the Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Original Notes. ICON has
agreed that, for a period of 180 days after the date of this Prospectus, it
will make this Prospectus and any amendment or supplement to this Prospectus
available to any Participating Broker-Dealer for use in connection with any
such resale.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
At August 31, 1996, Health & Fitness had $142.0 million of revolving credit
borrowings under the Credit Agreement. Advances under the revolving credit
facility provided under the Credit Agreement are subject to the amount of
Eligible Accounts and Eligible Inventory (each as defined in the Credit
Agreement) of Health & Fitness and may not at any time exceed the lesser of
(i) $310 million or (ii) 85% of Eligible Accounts plus 60% of Eligible
Inventory (with a seasonal increase to 70% of Eligible Inventory in effect
during the months of June through November of each year) plus the Over Advance
Amount (as defined in the Credit Agreement) (the "Borrowing Base"). The Over
Advance Amount equals the lesser of (i) $15 million in the first year after
the closing of the Recapitalization (the "Recapitalization Closing"), $10
million in the second year after the Recapitalization Closing, $5 million in
the third year after the Recapitalization Closing and zero thereafter; (ii)
Health & Fitness' EBITDA for the trailing 12-month period ending as of the
last day of the preceding month; and (iii) 85% of Health & Fitness' book value
of accounts (which are not Eligible Accounts) plus 60% of the book value of
inventory (which is not Eligible Inventory) (with a seasonal increase to 70%
of such inventory in effect during the months of June through November of each
year). Health & Fitness' ability to make revolving credit borrowings under the
Credit Agreement expires on November 14, 1999. At August 31, 1996, Health &
Fitness had $47.4 million of additional indebtedness available to be drawn on
a revolving credit basis under the Credit Agreement. Health & Fitness also has
two term loan facilities under the Credit Agreement. The Term Loan A Facility
provides for borrowings of $17,500,000 advanced at closing of the
Recapitalization, with a final maturity date of November 14, 1999. The
amortization schedule for the Term Loan A Facility calls for quarterly
payments of $625,000 commencing March 31, 1996, $937,500 commencing March 31,
1997, $1,250,000 commencing March 31, 1998 and $1,562,500 commencing March 31,
1999. The Term Loan B Facility provides for borrowings of $17,500,000 advanced
at closing of the Recapitalization, with a final maturity date of November 14,
2001. The amortization schedule for the Term Loan B Facility calls for
quarterly installments of $62,500 commencing March 31, 1996 and $1,562,500
commencing March 31, 2000 with the balance of $5,562,500 due at maturity. The
Credit Agreement contains a number of covenants. At May 31, 1996, the Company
was in compliance with all its financial covenants except for the capital
expenditure limitation for the year ended May 31, 1996 with respect to which
its lender waived compliance. Management believes that the Company will be in
compliance with its financial covenants through 1997 and, therefore,
borrowings under the Credit Agreement have been classified as long-term,
exclusive of amounts due within one year under the Term Loan A Facility and
Term Loan B Facility. The Company amended the Credit Agreement as of August
23, 1996 to permit the application of a portion of the proceeds of the
Offering as described herein prior to the repayment of debt under the Credit
Agreement and to permit total borrowings of up to $310 million in order to
meet the Company's long term needs.
Health & Fitness has outstanding $101.25 million (face value) of Senior
Subordinated Notes which are unsecured senior subordinated obligations of
Health & Fitness. The Senior Subordinated Notes mature on July 15, 2002 and
bear interest at the rate of 13.00% per annum. IHF Holdings has outstanding
$123.7 million (face value) of Holdings Discount Notes which are secured by
all of the issued and outstanding capital stock of Health & Fitness. The
Holdings Discount Notes mature on November 15, 2004 and bear interest at the
rate of 15.00% per annum. The Senior Subordinated Notes Indenture [and the
Holdings Discount Notes Indenture] contain certain customary covenants,
including, but not limited to, covenants with respect to the following
matters: limitation on indebtedness; limitation on other senior subordinated
indebtedness; limitation on restricted payments; limitation on issuance and
sale of capital stock of subsidiaries; limitation on dividends and other
payment restrictions affecting subsidiaries; additional guarantees; limitation
on guarantees by subsidiaries; limitation on transactions with affiliates;
limitation on sale of assets; limitation on sale and leaseback transactions;
limitation on liens, change of control offer; and consolidation, merger and
sale of assets.
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CERTAIN FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal United States federal
income tax consequences of the purchase, ownership and disposition of the
Senior Discount Notes to the initial purchasers thereof who are United States
Holders (as defined below) and the principal United States federal income and
estate tax consequences of the ownership of the Senior Discount Notes to
initial purchasers who are Non-United States Holders (as defined below). This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and
all of which are subject to change, possibly with retroactive effect, or
different interpretations. In particular, the discussion is based in part on
Treasury regulations relating to original issue discount (the "OID
Regulations") and on recently promulgated Treasury regulations concerning the
tax treatment of exchanges and modifications of debt instruments (the "Section
1001 Regulations"). This discussion does not address the tax consequences to
any subsequent purchasers of Senior Discount Notes, and is limited to
purchasers who hold the Senior Discount Notes as capital assets within the
meaning of Section 1221 of the Code. This discussion also does not address the
tax consequences to nonresident aliens or foreign corporations that are
subject to United States federal income tax on a net basis on income realized
with respect to a Senior Discount Note because such income is effectively
connected with the conduct of a U.S. trade or business. Such holders are
generally taxed in a similar manner to United States Holders; however, certain
special rules apply. Moreover, the discussion is for general information only,
and does not address all of the tax consequences that may be relevant to
particular purchasers in light of their personal circumstances, or to certain
types of purchasers (such as certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities or persons who have
hedged a risk of ownership of a Senior Discount Note).
No opinion of counsel or ruling from the Internal Revenue Service ("IRS")
will be requested with respect to any of the matters discussed herein. There
can be no assurance that the IRS will not take a different position concerning
the tax consequences of the purchase, ownership, or disposition of the Senior
Discount Notes, or that any such position would be sustained. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH PROSPECTIVE PURCHASER OF SENIOR
DISCOUNT NOTES IS STRONGLY URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO HIS OR HER PARTICULAR SITUATION, AND AS TO ANY FEDERAL, FOREIGN,
STATE, LOCAL OR OTHER TAX CONSIDERATIONS (INCLUDING ANY POSSIBLE CHANGES IN
TAX LAW OR INTERPRETATIONS THEREOF) AFFECTING THE PURCHASE, HOLDING, AND
DISPOSITION OF THE SENIOR DISCOUNT NOTES.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of Senior
Discount Notes that is for United States federal income tax purposes (a) an
individual who is a citizen or resident of the United States, (b) a
corporation or partnership created or organized in or under the laws of the
United States or of any state therein, (c) an estate the income of which is
subject to United States federal income taxation regardless of source, or (d)
a trust, if (i) a court within the United States is able to exercise primary
supervision over the administration of the trust, and (ii) one or more United
States fiduciaries have the authority to control all substantial decisions of
the Trust.
Classification of the Senior Discount Notes. Under applicable authorities,
the Senior Discount Notes should be treated as indebtedness of the Company for
federal income tax purposes. In the event that the Senior Discount Notes are
treated as equity, the amount treated as a distribution on any such instrument
would be treated as ordinary dividend income to the extent of the current or
accumulated earnings and profits of the Company.
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The Company intends to characterize the Senior Discount Notes as debt for
federal income tax purposes. Pursuant to Section 385(c) of the Code, this
characterization is binding on Holders of Senior Discount Notes unless such
Holder discloses any inconsistent treatment on such Holder's tax return.
Section 385(c) is not binding on the IRS.
Original Issue Discount and Liquidated Damages on Senior Discount Notes. The
Senior Discount Notes will be issued with original issue discount ("OID").
Because the amount of OID is expected to be greater than the de minimis amount
( 1/4 of 1 percent of the stated redemption price at maturity, multiplied by
the weighted average maturity of the Senior Discount Notes), the Senior
Discount Notes will be considered to be issued with OID for United States
federal income tax purposes. As a result, Holders of Senior Discount Notes
will be required to recognize such OID as ordinary income in advance of the
receipt of the cash payments related to such income.
The amount of OID with respect to a Senior Discount Note will be equal to
the difference between the instrument's stated redemption price at maturity
and its issue price (defined below). For this purpose, the stated redemption
price at maturity of a Senior Discount Note will equal the sum of all amounts
payable pursuant to the Note, regardless of whether denominated as principal
or interest. The issue price of the Senior Discount Notes is the first price
at which a substantial amount of the Senior Discount Notes are sold (other
than to brokers, underwriters, placement agents, etc.).
A United States Holder of a Senior Discount Note will be required to include
in income, as interest, OID on the instrument, but will not be required to
include in income any cash payments received by such Holder on the instrument.
The amount required to be included in a Holder's income as OID in a taxable
year will be determined by allocating to each day during such taxable year on
which such Holder holds the Senior Discount Note, a pro rata portion of the
OID on the instrument attributable to the "accrual period" (i.e., generally,
the period that ends on May 15 and November 15 of each calendar year) in which
such day is included. The amount of OID attributable to an accrual period will
be the product of (i) the "adjusted issue price" at the beginning of such
accrual period (i.e., the issue price plus OID attributable to prior accrual
periods, less any cash payments on the instrument during such prior accrual
periods) multiplied by (ii) the yield to maturity of the instrument (generally
determined by semiannual compounding). Special rules will apply for
calculating OID for initial short or final accrual periods.
Holders of the Senior Discount Notes may be entitled to Liquidated Damages
if certain steps are not taken at specified times towards either the Exchange
Offer or the effectiveness of the Shelf Registration Statement with respect to
the Senior Discount Notes. According to the OID Regulations, the possibility
of a payment from the borrower to the lender will not affect the yield to
maturity of the Senior Discount Notes unless, based on all the facts and
circumstances as of the issue date, it is more likely than not that such
payment will occur. The Company does not intend to treat the possibility of a
Liquidated Damages payment as affecting the computation of the yield to the
maturity of any Senior Discount Notes. If a Holder of the Senior Discount
Notes becomes entitled to a Liquidated Damages payment, then solely for
purposes of determining the amount of OID, such instrument will be treated as
reissued on such date for an amount equal to its adjusted issue price.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of a
Senior Discount Note, a United States Holder will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement and such Holder's adjusted tax basis in the Senior Discount
Note. A United States Holder's adjusted tax basis in a Senior Discount Note
will generally equal the cost of the Senior Discount Note to such holder,
increased by the amounts of any OID and market discount previously included in
income by such holder with respect to such Senior Discount Note, and decreased
by the amounts of any payments actually received by such Holder with respect
to such Senior Discount Note.
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Subject to the exception discussed below for market discount, gain or loss
recognized on the sale, exchange or retirement of a Senior Discount Note
generally will be capital gain or loss and will be long-term capital gain or
loss if at the time of the sale, exchange or retirement the Senior Discount
Note has been held for more than one year.
Acquisition Premium and Market Discount. A United States Holder who acquires
a Senior Discount Note at an acquisition premium will generally be entitled to
a reduction in the amount of OID includable in such Holder's income in each
year. Acquisition premium is any amount paid by the Holder for a Discount Note
in excess of its adjusted issue price at the time of the acquisition.
A United States Holder who acquires a Senior Discount Note at original
issuance for less than its issue price will generally be subject to the
"market discount" rules. Market discount, with respect to a Senior Discount
Note, is the excess of the adjusted issue price of the Senior Discount at the
time of its acquisition over the amount paid by the Holder for the Senior
Discount Note. However, the amount of market discount will be considered zero
if it would otherwise be less than 1/4 of 1 percent of the stated redemption
price of the note at maturity multiplied by the number of complete years to
maturity (after the Holder acquired the note). If a note is subject to the
market discount rules, a United States Holder will generally be required
(unless the election described below is made) to (i) treat any gain realized
with respect to the note as ordinary income to the extent market discount
accrued during the period such Holder held the note and (ii) defer the
deduction of all or a portion of the interest expense on any indebtedness
incurred or maintained by such Holder to purchase or carry the note until the
note is disposed of in a taxable transaction. If such note is disposed of in a
nontaxable transaction (other than a nonrecognition transaction described in
Section 1276(c) of the Code), accrued market discount will be includable as
ordinary income to the United States Holder as if such Holder had sold the
note at its then fair market value. Market discount will be considered to
accrue ratably during the period from the date of acquisition to the maturity
date of the note, unless the United States Holder irrevocably elects (on an
instrument-by-instrument basis) to accrue market discount on the basis of a
constant interest rate. A United States Holder may elect to include market
discount in income currently as it accrues (on either a ratable or constant
yield basis), in which case the rule described above regarding deferral of
interest deductions will not apply. An election to include market discount
currently, once made, will apply to all market discount obligations acquired
by the United States Holder on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS.
BECAUSE OF THE COMPLEXITY OF THE RULES RELATING TO OID, ACQUISITION PREMIUM,
AND MARKET DISCOUNT, UNITED STATES HOLDERS SHOULD CONSULT THEIR TAX ADVISORS
AS TO THE APPLICATION OF THE RULES TO THEIR PARTICULAR CIRCUMSTANCES AND AS TO
THE MERIT OF MAKING ANY ELECTIONS IN CONNECTION THEREWITH.
Exchange for Registered Securities. The exchange by a United States Holder
of an Original Note for an Exchange Note will not constitute a taxable
exchange of the Original Note if the economic terms of the Exchange Note
(including the interest rate) are identical to the economic terms of the
Original Note. Under the Section 1001 Regulations relating to modifications
and exchanges of debt instruments, even if Liquidated Damages were payable
with respect to the Exchange Note but not with respect to the Original Note,
as a result of a Registration Default as described under The Exchange Offer;
Registration Rights," the exchange of the Original Note for an Exchange Note
would not be treated as a taxable exchange, as such Liquidated Damages
payments would occur pursuant to the original terms of the Original Note.
Accordingly, the Company intends to take the position that in the
circumstances described in the preceding sentence, the exchange will not
constitute a taxable exchange of the Senior Discount Notes.
Classification of Senior Discount Notes as Applicable High Yield Discount
Obligations. Section 163 of the Code provides that all of the OID with respect
to certain "applicable high yield discount
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obligations" generally issued after July 10, 1989, will be bifurcated into two
elements: (i) an interest element that is deductible by the issuer only when
paid and (ii) a disqualified portion for which the issuer receives no
deduction (the "disqualified portion"). The United States Holder of an
applicable high yield discount obligation must continue to include OID on the
obligation as it accrues. A corporate United States Holder of the high yield
obligation, however, is allowed a dividends-received deduction for the part of
the disqualified portion of the OID that would have been treated as a dividend
had it been distributed by the issuing corporation with respect to its stock.
The deduction by the Company of OID on the Senior Discount Notes will be
limited because the Senior Discount Notes constitute applicable high yield
discount obligations. Further, since the Senior Discount Notes are applicable
high yield discount obligations, the disqualified portion of OID will equal
the product of the total OID under the Senior Discount Notes times the ratio
of (a) the excess of the yield to maturity over 12.90% to (b) the yield to
maturity.
Corporate United States Holders will generally be eligible for the 70%
dividends-received deduction with respect to the disqualified portion of OID
on a Senior Discount Note to the extent of ICON Fitness Corporation's
accumulated or current earnings and profits. Although not totally clear, any
amount qualifying as a dividend should not be subject to extraordinary
dividend treatment under Section 1059 of the Code.
Backup Withholding. Certain Holders of Senior Discount Notes may be subject
to backup withholding at the rate of 31% with respect to interest (including
OID) and cash received in certain circumstances upon the disposition of such
securities. Generally, backup withholding is applied only when the taxpayer
fails to furnish its correct taxpayer identification number (social security
number or employer identification number) in the prescribed manner, to certify
that such holder is not subject to backup withholding, or to otherwise comply
with the applicable requirements of the backup withholding rules. Any amounts
withheld under the backup withholding rules will be allowed as a refund or
credit against a United States Holder's United States federal income tax
liability, provided that such United States Holder furnished the required
information to the IRS. Certain Holders (including, among others,
corporations) are not subject to the backup withholding requirements.
UNITED STATES FEDERAL TAXATION OF NON-UNITED STATES HOLDERS
This section discusses special rules applicable to a Holder of Senior
Discount Notes that is a Non-United States Holder. For purposes of this
discussion, a "Non-United States Holder" means a Holder that is not a United
States Holder.
Interest and OID. In general, payments of interest received or of OID
accrued by any Non-United States Holder will not be subject to a United States
federal withholding tax, provided that (a) any such income is effectively
connected with the conduct of a trade or business within the United States and
the Company or its paying agent receives a properly completed Form 4224 in
advance of the payments, (b)(i) the Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote, (ii) the Holder is not a "bank" within the
meaning of Section 881(c)(3)(A), (iii) the Holder is not a controlled foreign
corporation that is related to the Company actually or constructively through
stock ownership, and (iv) either (x) the beneficial owner of the note, under
penalties of perjury, provides the Company or its agent with the beneficial
owner's name and address and certifies that it is not a United States Holder
on Form W-8 (or a suitable substitute form) or (y) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") holds the Senior Discount Note and certifies to the Company or
its agent under penalties of perjury that such a Form W-8 (or a suitable
substitute) has been received by it from the beneficial owner of the Senior
Discount Note or a qualifying intermediary and furnishes the payor a copy
thereof, or (c)
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the Holder is entitled to the benefits of an income tax treaty under which the
interest is exempt from United States withholding tax and the Holder or such
Holder's agent provides a properly executed Form 1001 in the name of the
beneficial owner claiming the exemption. Payments of interest not exempt from
U.S. federal withholding tax as described above will be subject to such
withholding tax rate at the rate of 30% (subject to reduction under an
applicable income tax treaty).
Gain on Disposition of Senior Discount Notes. A Non-United States Holder
generally will not be subject to United States federal withholding tax with
respect to gain recognized on disposition of the Senior Discount Notes unless
(i) in the case of a Non-United States Holder that is an individual, such Non-
United States Holder is present in the United States for 183 or more days in
the taxable year of the disposition and certain other requirements are met;
(ii) the Non-United States Holder is an individual who is a former citizen of
the United States whose loss of citizenship within the preceding ten-year
period had as one of its principal purposes the avoidance of United States
tax; or (iii) in the case of gain representing accrued OID, such OID on the
Senior Discount Note does not qualify for any of the exemptions described in
the preceding paragraph.
Information Reporting and Backup Withholding. Under current Treasury
regulations, backup withholding and information reporting on Form 1099 do not
apply to payments made by the Company or a paying agent to Non-United States
Holders if the certification described under "Interest and OID" is received,
provided that the payor does not have actual knowledge that the Holder is a
United States Holder. If any payments of principal and interest are made to
the beneficial owner of a Senior Discount Note by or through the foreign
office of a foreign custodian, foreign nominee or other foreign agent of such
beneficial owner, or if the foreign office of a foreign "broker" (as defined
in applicable United States Treasury Department regulations) pays the proceeds
of the sale of a Senior Discount Note or a coupon to the seller thereof,
backup withholding and information reporting will not apply. Information
reporting requirements (but not backup withholding) will apply, however, to a
payment by a foreign office of a broker that is a United States person, that
derives 50% or more of its gross income for certain periods from the conduct
of a trade or business in the United States, or that is a "controlled foreign
corporation" (generally, a foreign corporation controlled by certain United
States shareholders) with respect to the United States, unless the broker has
documentary evidence in its records that the Holder is a Non-United States
Holder and certain other conditions are met, or the Holder otherwise
establishes an exemption. Payment by a United States office of a broker is
subject to both backup withholding at a rate of 31% and information reporting
unless the Holder certifies under penalties of perjury that it is a Non-United
States Holder, or otherwise establishes an exemption. A Non-United States
Holder may obtain a refund or a credit against such Holder's U.S. federal
income tax liability of any amounts withheld under the backup withholding
rules, provided the required information is furnished to the IRS.
In addition, in certain circumstances, interest on a Senior Discount Note
owned by a Non-United States Holder will be required to be reported annually
on Form 1042S, in which case such form will be filed with the IRS and
furnished to the Non-United States Holder.
Proposed Regulations. The Internal Revenue Service released proposed
regulations on April 22, 1996 that would revise the procedures for withholding
tax on interest and the associated backup withholding and information
reporting rules described above. In particular, the regulations propose to
modify the requirements imposed on a Non-United States Holder or certain
intermediaries for establishing the recipient's status as a Non-United States
Holder eligible for exemption from withholding tax and backup withholding. The
regulations are generally proposed to be effective for payments of income made
after December 31, 1997, although the effective date could be extended under
proposed transition rules in particular circumstances. Non-United States
Holders should consult their tax advisors to determine the effects of the
potential application of the proposed regulations to their particular
circumstances.
127
<PAGE>
United States Federal Estate Taxes. Subject to applicable treaty provisions,
the Senior Discount Notes held at the time of death (or treated as owned under
United States federal estate tax laws or previously transferred subject to
certain retained rights or powers) by an individual who at the time of death
is not a citizen or domiciliary of the United States, will not be included at
the time of death in such person's gross estate for United States federal
estate tax purposes provided that (a) the decedent does not own, actually or
constructively, 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, and (b) the decedent does not hold
the Senior Discount Notes in connection with a trade or business within the
United States.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a
result of market-making activities or other trading activities. ICON has
agreed that for a period of [90] days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1997, all dealers effecting transactions in the Exchange Notes may be
required to deliver a prospectus.
ICON will not receive any proceeds from any sales of the Exchange Notes by
Participating Broker-Dealers. Exchange Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offers may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes
or a combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to the purchaser or to
or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such Participating Broker-Dealer and/or
the purchasers of any such Exchange Notes. Any Participating Broker-Dealer
that resells the Exchange Notes that were received by it for its own account
pursuant to the Exchange Offers and any broker or dealer that participates in
a distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, ICON will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any Participating Broker-Dealer that requests such documents in
the Letter of Transmittal.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby and certain other legal
matters will be passed upon for the Company by Ropes & Gray, Boston,
Massachusetts.
EXPERTS
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows of the Company and subsidiaries for the year ended May 31, 1994
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein
128
<PAGE>
and elsewhere in the Registration Statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting
and auditing.
In May 1995 the Board replaced Deloitte & Touche LLP as the independent
auditors for the Company. Deloitte & Touche LLP's reports on the Company's
financial statements for the past two years prior to the change in auditors
did not contain any adverse opinion or disclaimer of opinion and have not been
qualified in any way. During the Company's two most recent fiscal years and
the subsequent interim periods prior to the change in auditors, there have
been no disagreements with Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure and no event has occurred that is required to be disclosed by Item
304(a)(1)(iv) of Regulation S-K. During the Company's two most recent fiscal
years and the subsequent interim periods prior to the change in auditors, the
Company consulted with Price Waterhouse LLP regarding the accounting treatment
of the Recapitalization. Deloitte & Touche LLP agreed with the Company's
accounting treatment of the Recapitalization.
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows of the Company and its subsidiaries for each of the two years
in the period ended May 31, 1996 and the consolidated balance sheet of the
Company and its subsidiaries as of May 31, 1995 and 1996 included in this
Prospectus and the financial statement schedule included in the Registration
Statement have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, appearing elsewhere herein, given on the
authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of HealthRider and subsidiaries as of
December 31, 1994 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto and are
included in this Prospectus in reliance upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-4, including amendments thereto, relating
to the Exchange Notes offered hereby has been filed by the Company with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement and the exhibits and schedules thereto may be inspected by anyone
without charge and copies may be obtained at prescribed rates at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any
part of these materials may be obtained from the Commission upon the payment
of certain fees prescribed by the Commission by writing to the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a World Wide Web site (http://www.sec.gov.)
that contains reports, proxy and information statements and other information
regarding registrants that submit electronic filings to the Commission.
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and a report thereon by the
Company's independent accountants and quarterly reports containing unaudited
consolidated financial data for the first three quarters of each fiscal year.
129
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ICON FITNESS CORPORATION
Report of Price Waterhouse LLP ............................................ F-2
Report of Deloitte & Touche LLP ........................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets ............................................. F-4
Consolidated Statements of Operations ................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) ............... F-6
Consolidated Statements of Cash Flows ................................... F-7
Notes to Consolidated Financial Statements .............................. F-8
HEALTHRIDER, INC. AND SUBSIDIARIES
Report of Arthur Andersen LLP.............................................. F-26
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................. F-27
Consolidated Statements of Income........................................ F-28
Consolidated Statements of Stockholders' Equity.......................... F-29
Consolidated Statements of Cash Flows.................................... F-30
Notes to Consolidated Financial Statements............................... F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of ICON Fitness Corporation
In our opinion, the accompanying consolidated balance sheet, and related
consolidated statements of operations, of stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of ICON Fitness Corporation (formerly known as Weslo, Inc., ProForm Fitness
Products, Inc., and American Physical Therapy, Inc. and subsidiaries (the
"Recapitalized Companies")) and its subsidiaries, at May 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 18, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
IHF Capital, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and of cash flows of ICON Fitness Corporation
(formerly known as Weslo, Inc., ProForm Fitness Products, Inc. and American
Physical Therapy, Inc.) and its subsidiaries for the year ended May 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated results of operations and cash flows
of ICON Fitness Corporation and its subsidiaries for the year ended May 31,
1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
July 15, 1994
(December 23, 1994 as to Note 1)
F-3
<PAGE>
ICON FITNESS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
---------------------------------
MAY 31, AUGUST 31,
1995 1996 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................ $ 4,099 $ 19,313 $ 4,587
Accounts receivable, net.................... 114,325 126,869 129,685
Inventories................................. 95,635 95,922 163,705
Deferred income taxes....................... 7,588 5,240 5,240
Other assets................................ 5,600 4,770 8,877
Prepaid income taxes........................ -- 882 9,476
--------- --------- ---------
Total current assets...................... 227,247 252,996 321,570
Property and equipment, net.................. 23,144 32,312 71,484
Deferred income taxes........................ 3,121 5,489 5,629
Other assets................................. 36,673 25,930 26,685
--------- --------- ---------
$ 290,185 $316,727 $ 425,368
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFI-
CIT)
Current liabilities:
Current portion of long-term debt........... $ 688 $ 3,065 $ 4,581
Accounts payable............................ 73,968 73,652 98,954
Interest payable............................ 5,035 5,815 2,794
Accrued expenses............................ 9,739 11,424 20,502
Income taxes payable........................ 130 -- --
--------- --------- ---------
Total current liabilities................. 89,560 93,956 126,831
--------- --------- ---------
Long-term debt............................... 267,427 279,693 361,515
Minority interest in cumulative redeemable
preferred stock of subsidiary............... 42,804 47,904 49,179
Stockholders' equity (deficit):
Common stock and additional paid-in
capital.................................... 74,957 77,730 77,730
Receivable from officers for purchase of
equity..................................... (758) (758) (758)
Cumulative translation adjustment........... -- 386 152
Accumulated deficit......................... (183,805) (182,184) (189,281)
--------- --------- ---------
Total stockholders' equity (deficit)...... (109,606) (104,826) (112,157)
--------- --------- ---------
Commitments and contingencies (Notes 12, 13
and 14)..................................... -- -- --
--------- --------- ---------
$ 290,185 $ 316,727 $ 425,368
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ICON FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES
(NOTE 1) COMPANY
------------- --------------------------------------------
YEAR ENDED THREE MONTHS ENDED
MAY 31, YEAR ENDED MAY 31, SEPTEMBER 2, AUGUST 31,
------------- ------------------- ------------ ---------------
1994 1995 1996 1995 1996
------------- --------- -------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $403,016 $ 530,774 $747,577 $124,839 $125,810
-------- --------- -------- -------- --------
Cost of sales........... 288,208 378,322 541,443 90,932 90,581
Revaluation of
HealthRider inventory.. -- -- -- -- 1,865
-------- --------- -------- -------- --------
Total cost of sales..... 288,208 378,322 541,443 90,932 92,446
-------- --------- -------- -------- --------
Gross profit............ 114,808 152,452 206,134 33,907 33,364
-------- --------- -------- -------- --------
Operating expenses:
Selling................ 52,116 68,706 93,924 15,829 18,813
Research and
development........... 2,863 5,163 6,759 1,546 1,639
General and
administrative........ 28,578 31,097 48,055 10,091 10,887
Compensation expense
attributable to
options............... -- 39,046 2,769 -- --
-------- --------- -------- -------- --------
Total operating
expenses........... 83,557 144,012 151,507 27,466 31,339
-------- --------- -------- -------- --------
Income from operations.. 31,251 8,440 54,627 6,441 2,025
Interest expense........ 6,224 21,495 36,527 8,382 8,773
Dividends on cumulative
redeemable preferred
stock of a subsidiary
held by minority
interest............... -- 2,804 5,100 1,275 1,275
Amortization of deferred
financing fees......... -- 1,741 3,483 861 949
-------- --------- -------- -------- --------
Income (loss) before
income taxes........... 25,027 (17,600) 9,517 (4,077) (8,972)
Provision for (benefit
from) income taxes..... 9,766 (4,719) 7,896 (687) (1,875)
-------- --------- -------- -------- --------
Net income (loss)....... $ 15,261 $ (12,881) $ 1,621 $ (3,390) $ (7,097)
======== ========= ======== ======== ========
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ICON FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE RECEIVABLE
PREFERRED FROM RETAINED TOTAL
STOCK COMMON STOCK ADDITIONAL OFFICERS FOR CUMULATIVE EARNINGS STOCKHOLDERS'
---------------- --------------- PAID-IN PURCHASE TRANSLATION (ACCUMULATED EQUITY
SHARES VALUE SHARES VALUE CAPITAL OF EQUITY ADJUSTMENT DEFICIT) (DEFICIT)
------- ------- -------- ----- ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RECAPITALIZED COMPA-
NIES
Balance, May 31,
1993................. 65,492 $ 6,549 741,753 $ 2 $ 1,076 $ -- $-- $ 32,175 $ 39,802
Preferred stock divi-
dends................ -- -- -- -- -- -- -- (531) (531)
Exercise of stock op-
tions................ -- -- 7,408 -- 101 (101) -- -- --
Net income........... -- -- -- -- -- -- -- 15,261 15,261
------- ------- -------- --- ------- ----- ---- --------- ---------
COMPANY
Balance, May 31,
1994................. 65,492 6,549 749,161 2 1,177 (101) -- 46,905 54,532
Preferred stock divi-
dends................ -- -- -- -- -- -- -- (243) (243)
Equity exchanges and
distributions to
stockholders......... (65,492) (6,549) (749,161) (2) (1,177) -- -- (217,586) (225,314)
Issuance of common
stock and contribu-
tion of capital by
IHF Capital, Inc..... -- -- 1,000 -- 74,957 (657) -- -- 74,300
Net loss............. -- -- -- -- -- -- -- (12,881) (12,881)
------- ------- -------- --- ------- ----- ---- --------- ---------
Balance, May 31,
1995................. -- -- 1,000 -- 74,957 (758) -- (183,805) (109,606)
Proceeds from exer-
cise of common stock
options and contribu-
tion of capital by
IHF Capital, Inc..... -- -- -- -- 4 -- -- -- 4
Issuance of options
to management and
contribution of capi-
tal by IHF Capital,
Inc.................. -- -- -- -- 2,769 -- -- -- 2,769
Foreign currency
translation ......... -- -- -- -- -- -- 386 -- 386
Net income .......... -- -- -- -- -- -- -- 1,621 1,621
------- ------- -------- --- ------- ----- ---- --------- ---------
Balance, May 31,
1996................. -- -- 1,000 -- 77,730 (758) 386 (182,184) (104,826)
Foreign currency
translation (unau-
dited)............... -- -- -- -- -- -- (234) -- (234)
Net loss (unaudited). -- -- -- -- -- -- -- (7,097) (7,097)
------- ------- -------- --- ------- ----- ---- --------- ---------
Balance, August 31,
1996 (unaudited)..... -- $ -- 1,000 -- $77,730 $(758) $152 $(189,281) $(112,157)
======= ======= ======== === ======= ===== ==== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ICON FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES
(NOTE 1) COMPANY
------------- --------------------------------------------
THREE MONTHS ENDED
YEAR ENDED YEAR ENDED
MAY 31, MAY 31, SEPTEMBER 2, AUGUST 31,
------------- ------------------ ------------ -----------
1994 1995 1996 1995 1996
------------- -------- -------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....... $15,261 $(12,881) $ 1,621 $(3,390) $(7,097)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activi-
ties:
Benefit from deferred
taxes................. (1,153) (9,493) (20) (687) (140)
Depreciation and amor-
tization.............. 4,010 5,561 7,205 1,750 2,284
Amortization of de-
ferred financing fees
and debt discount..... -- 6,018 12,458 2,691 3,607
Compensation expense
attributable to op-
tions................. -- 12,303 2,769 -- --
Interest expense
attributable to
dividends on preferred
stock held by minority
interest.............. -- 2,804 5,100 1,275 1,275
Changes in operating as-
sets and liabilities:
Accounts receivable.... (32,559) (14,106) (12,544) (5,824) 12,152
Inventories............ 726 (41,429) (287) (25,884) (37,004)
Other assets........... 1,217 (5,837) 7,073 5,520 387
Accounts payable and
accrued expenses...... 25,844 30,350 2,149 (3,379) (7,079)
Income taxes........... -- 130 (1,012) -- --
Payable to Weider...... 919 (4,697) -- -- --
------- -------- -------- ------- -------
Net cash provided by
(used in) operating
activities............ 14,265 (31,277) 24,512 (27,928) (31,615)
------- -------- -------- ------- -------
INVESTING ACTIVITIES:
HealthRider Acquisition. -- -- -- -- (28,203)
Purchases of property
and equipment.......... (6,924) (7,977) (15,356) (3,831) (6,598)
Payment for non-compete
agreements............. -- (4,070) -- -- --
------- -------- -------- ------- -------
Net cash used in in-
vesting activities.... (6,924) (12,047) (15,356) (3,831) (34,801)
------- -------- -------- ------- -------
FINANCING ACTIVITIES:
Borrowings (payments) on
revolving loans and
lines of credit, net... (68,925) 66,400 6,355 32,756 51,924
Proceeds from long-term
debt................... 105,197 194,999 -- -- --
Payments on long-term
debt................... (43,222) (58,197) (687) -- --
Proceeds from issuance
of common stock........ -- 40,422 4 -- --
Repurchase of common
stock.................. -- (1,808) -- -- --
Payments of dividends... (531) (243) -- -- --
Distributions to stock-
holders................ -- (166,737) -- -- --
Payment of debt financ-
ing fees............... -- (27,508) -- -- --
------- -------- -------- ------- -------
Net cash provided by
(used in) financing
activities............ (7,481) 47,328 5,672 32,756 51,924
------- -------- -------- ------- -------
Effect of exchange rate
changes on cash........ -- -- 386 -- (234)
------- -------- -------- ------- -------
Net (decrease) increase
in cash................ (140) 4,004 15,214 997 (14,726)
Cash, beginning of peri-
od..................... 235 95 4,099 4,099 19,313
------- -------- -------- ------- -------
Cash, end of period..... $ 95 $ 4,099 $ 19,313 $ 5,096 $ 4,587
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
BASIS OF PRESENTATION--The consolidated May 31, 1995 and 1996 financial
statements include the accounts of ICON Fitness Corporation ("ICON"), its
subsidiary IHF Holdings, Inc. ("IHF Holdings"), IHF Holdings' wholly-owned
subsidiary, ICON Health & Fitness, Inc. ("Health & Fitness"), and Health &
Fitness' wholly-owned subsidiaries (collectively, the "Company"). The minority
interest in IHF Holdings represents cumulative redeemable preferred stock held
by certain shareholders of ICON's parent, IHF Capital, Inc. ("IHF Capital")
(Note 8). Prior to the incorporation of ICON on November 12, 1996 and the
concurrent contribution of IHF Capital's investment in IHF Holdings to ICON in
exchange for all of the outstanding common stock of ICON, IHF Holdings was a
wholly-owned subsidiary of IHF Capital. The Company's financial statements
carry over the historical financial position and results of operations of IHF
Capital, adjusted to reflect the fact that the company is a wholly-owned
subsidiary of IHF Capital. Other than the Senior Discount Notes (Note 7) and
related deferred financing fees and deferred income tax benefit and the
redeemable preferred stock (Note 8) issued by IHF Holdings, all assets and
liabilities of the Company are those of Health & Fitness.
The consolidated May 31, 1994 financial statements of Weslo, Inc. and its
wholly-owned subsidiaries, ProForm Fitness Products, Inc. and its wholly-owned
subsidiaries, and American Physical Therapy, Inc., (collectively, the
"Recapitalized Companies") all of which were majority-owned subsidiaries of
Weider Health and Fitness, Inc. ("WHF"), reflect the results of operations as
if they had been combined since inception on a basis similar to a pooling of
interests.
DESCRIPTION OF BUSINESS--The Company is principally involved in the
development, manufacturing and distribution of home fitness equipment
throughout the United States. For the years ended May 31, 1995 and 1996, the
majority of the Company's revenues were derived from the sale of aerobic
fitness equipment. The Company primarily sells its products to retailers and,
to a limited extent, to end-users through direct response advertising efforts.
THE RECAPITALIZATION--On November 14, 1994 the recapitalization (the
"Recapitalization") took place as follows: (1) the existing shareholders of
the Recapitalized Companies contributed their capital stock of the
Recapitalized Companies to IHF Capital and IHF Holdings in exchange for $21.9
million of Class A and Class L Common Stock of IHF Capital, $36.0 million of
IHF Holdings Preferred Stock, warrants to purchase Class A Common Stock of IHF
Capital, and $159.3 million of demand promissory notes of Health & Fitness
(the "Shareholder Notes"); (2) certain senior executives of the Company
exchanged their options to purchase capital stock of the Recapitalized
Companies for $34.7 million of replacement options and warrants to purchase
Class A and Class L Common Stock of IHF Capital and $4.0 million of options to
purchase preferred stock of IHF Holdings; (3) affiliates of Bain Capital, Inc.
("Bain Capital") and certain other parties purchased $40.4 million of Class A
and Class L Common Stock of IHF Capital, (4) the 13% Senior Subordinated Notes
and 15% Senior Secured Discount Notes were issued (Note 7), the proceeds of
which were used to repay the Shareholder Notes; and (5) Health & Fitness
caused the Recapitalized Companies to be merged with and into itself. As a
result of the Recapitalization, IHF Holdings owns all of the outstanding
capital stock of Health & Fitness, and IHF Capital owns all of the outstanding
common stock of IHF Holdings.
Concurrent with the closing of the Recapitalization, the Company obtained
exclusive licenses to market certain fitness equipment and certain non-
ingestive sports medicine products under the "Weider" and related brand names
(Note 13).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All significant intercompany accounts and
transactions have been eliminated in the consolidation of the Company.
CASH--Substantially all of the Company's cash is held by two banks at May
31, 1996. The Company does not believe that as a result of this concentration
it is subject to any unusual credit risk beyond the normal risk associated
with commercial banking relationships.
F-8
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES--Inventories include freight-in, materials, labor, and
manufacturing overhead costs and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the respective assets. Expenditures for renewals and improvements are
capitalized, and maintenance and repairs are charged to operations.
NON-COMPETE AGREEMENTS--Included in long-term other assets are capitalized
costs associated with non-compete agreements the Company entered into with
certain key executives of the Company for a four year term. These assets are
being amortized using the straight-line method over the life of the agreements
(Note 6).
DEFERRED FINANCING COSTS--As part of the Recapitalization, the Company
deferred certain debt issuance costs relating to the establishment of the
Credit Agreement (Note 7) and the issuance of the 13% Senior Subordinated
Notes and the 15% Senior Secured Discount Notes (collectively referred to as
the "Notes"). These costs are capitalized in long-term other assets and are
being amortized using the straight-line method for costs associated with the
Credit Agreement and the effective interest method for costs associated with
the Notes (Note 6).
ADVERTISING COSTS--The Company expenses the costs of advertising as
incurred, except for direct response advertising, which is capitalized and
amortized over its expected period of future benefit, generally twelve months.
Direct response advertising costs consist primarily of costs to produce
infomercials for the Company's products. At May 31, 1995 and 1996, $1,651,000
and $1,422,000, respectively, were included in other current assets. For the
years ended May 31, 1994, 1995 and 1996, total advertising expense was
approximately $14,646,000, $23,846,000 and $22,537,000, respectively. In
addition, cooperative advertising and discount allowances given to the
Company's customers were approximately $12,907,000, $14,114,000 and
$34,585,000 for the years ended May 31, 1994, 1995 and 1996, respectively.
REVENUE RECOGNITION--The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs, and warranty costs associated with these
sales.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially expose
the Company to concentration of credit risk include trade accounts receivable.
To minimize this risk, ongoing credit evaluations of customers' financial
condition are performed and reserves are maintained; however, collateral is
not required. A significant portion of the Company's sales in the retail
sector are made to two customers, Sears Roebuck ("Sears") and Sam's Wholesale
Clubs ("Sam's"). Sears accounted for approximately 34%, 31% and 34% of total
sales for the years ended May 31, 1994, 1995 and 1996, respectively. Sam's
accounted for approximately 13% and 12% of total sales for the years ended May
31, 1994 and 1995, respectively. Accounts receivable from these two customers
accounted for approximately 27% of total gross accounts receivable at May 31,
1995. Accounts receivable from Sears accounted for 32% of total gross accounts
receivable at May 31, 1996, and accounts receivable from a third customer,
Service Merchandise Company, Inc., accounted for 11% of gross accounts
receivable at May 31, 1996.
RESEARCH AND DEVELOPMENT COSTS--Research and product development costs are
expensed as incurred. Research and development activities include the design
of new products and product enhancements and are performed by both internal
and external sources.
F-9
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES--The Company accounts for income taxes utilizing the asset and
liability method as prescribed by Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the
Company to record in its balance sheet deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in
different periods for financial statements versus tax returns.
Prior to the Recapitalization, the Recapitalized Companies were included as
part of the consolidated tax return filed by WHF. Taxes otherwise due to or
refundable from the taxing authorities calculated on a separate company basis
have been reflected as due to or from WHF. Subsequent to the Recapitalization,
and prior to the redemption of the IHF Holdings Preferred Stock (Note 14) and
incorporation of ICON, IHF Capital filed a separate return and Health &
Fitness was included as part of the consolidated tax return filed by IHF
Holdings.
FOREIGN CURRENCY HEDGES--The Company enters into foreign currency forward
exchange contracts to hedge foreign currency transactions on a continuing
basis for periods consistent with its anticipated or committed foreign
currency exposures on purchases in Canadian dollars. The effect of this
practice is to minimize the impact of foreign exchange rate movements on the
Company's operating results. The Company's hedging activities do not subject
the Company to significant exchange rate risk because gains and losses on
these contracts partially offset losses and gains on the assets and
transactions being hedged. Unrealized gains and losses on these contracts are
deferred and accounted for as part of the hedged transactions. Cash flows from
these contracts are classified in the Statement of Cash Flows in the same
category as the hedged transactions. As of May 31, 1995 and 1996 the Company
had approximately $19 million Canadian and $25 million Canadian, respectively,
of open forward exchange contracts to sell Canadian dollars throughout fiscal
years May 31, 1996 and 1997, respectively. The fair value of these forward
exchange contracts are based on quoted market prices. At May 31, 1995 and 1996
the estimated unrealized gain on outstanding forward exchange contracts was
$210,000 and $163,000, respectively. For the years ended May 31, 1994, 1995
and 1996, the Company recognized gains of $0, $160,000 and $169,000,
respectively, upon the settlement of foreign currency transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial instruments
including cash, accounts receivable, accounts payable, accrued liabilities and
long-term debt approximate book values at May 31, 1995 and 1996, except for
the long-term debt included in the following table. The carrying amount for
the Senior Subordinated Notes and the Senior Secured Discount Notes was
established based on market conditions at the time the debt was issued. The
estimated fair value for the long-term notes is based on quoted market prices
(in thousands).
<TABLE>
<CAPTION>
MAY 31, 1995 MAY 31, 1996
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
13% Senior Subordinated Notes........ $99,123 $112,388 $99,298 $112,894
15% Senior Secured Discount Notes.... 60,347 70,014 69,147 85,353
</TABLE>
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses for the periods presented. Actual results could differ
from those estimates.
F-10
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--The unaudited consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. All such adjustments are, in the opinion of management, of
a normal recurring nature. Results for the three months ended September 2,
1995 and August 31, 1996 are not necessarily indicative of results to be
expected for a full year.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
has not yet decided how it will adopt SFAS 123 during 1997.
RECLASSIFICATIONS--Reclassifications have been made to the 1994 and 1995
financial statements to conform to the 1996 presentation. These
reclassifications had no effect on net income for 1994 or 1995.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------
1995 1996
-------- --------
<S> <C> <C> <C>
Accounts receivable......................... $119,633 $134,464
Less allowances............................. (5,308) (7,595)
-------- --------
$114,325 $126,869
======== ========
4. INVENTORIES
Inventories consist of the following (table in thousands):
<CAPTION>
MAY 31, AUGUST 31,
------------------ -----------
1995 1996 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials, principally parts and sup-
plies...................................... $ 36,472 $ 26,264 $ 32,475
Finished goods.............................. 59,163 69,658 $131,230
-------- -------- --------
$ 95,635 $ 95,922 $163,705
======== ======== ========
</TABLE>
Inventories are net of allowances of $787,000 and $2,122,000 at May 31, 1995
and 1996, respectively. These allowances are established based on management's
estimates of inventory, held at year end, that is potentially obsolete or for
which its market value is below cost.
5. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (table in thousands):
F-11
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED MAY 31,
USEFUL LIFE ------------------
(YEARS) 1995 1996
----------- -------- --------
<S> <C> <C> <C>
Land......................................... -- $ 1,230 $ 1,230
Building and improvements.................... up to 31 9,683 11,235
Equipment.................................... 3-7 25,784 37,191
Construction in progress..................... -- -- 2,397
-------- --------
36,697 52,053
Less accumulated depreciation................ (13,553) (19,741)
-------- --------
$ 23,144 $ 32,312
======== ========
</TABLE>
For the years ended May 31, 1994, 1995 and 1996, the Company recorded
depreciation expense of $4,010,000, $5,052,000, and $6,188,000, respectively.
6. OTHER ASSETS
Other assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Non-compete agreements...................................... $ 3,561 $ 2,544
Deferred financing costs.................................... 25,767 22,284
Other....................................................... 7,345 1,102
------- -------
$36,673 $25,930
======= =======
</TABLE>
At May 31, 1995 and 1996, capitalized non-compete payments made to the
Company's key executives are net of accumulated amortization of $509,000 and
$1,526,000, respectively.
At May 31, 1995 and 1996 capitalized deferred financing costs are net of
accumulated amortization of $1,741,000 and $5,224,000, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
----------------- -----------
1995 1996 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving Credit Facility..................... $ 73,645 $ 80,000 $142,037
Term Loan A Facility.......................... 17,500 16,875 16,250
Term Loan B Facility.......................... 17,500 17,438 17,376
13% Senior Subordinated Notes, face amount
$101,250 net of unamortized discount of
$2,127 at May 31, 1995, $1,952 at May 31,
1996 and $1,901 at August 31, 1996........... 99,123 99,298 99,349
15% Senior Secured Discount Notes, face amount
$123,700 net of unamortized discount of
$63,353 at May 31, 1995, $54,553 at May 31,
1996 and $51,947 at August 31, 1996 ......... 60,347 69,147 71,753
Capital lease obligation...................... -- -- 19,331
-------- -------- --------
268,115 282,758 366,096
Less current portion.......................... 688 3,065 4,581
-------- -------- --------
Total long-term debt...................... $267,427 $279,693 $361,515
======== ======== ========
</TABLE>
F-12
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CREDIT AGREEMENT
In connection with the Recapitalization (Note 1), the Company, through
Health & Fitness, entered into a Credit Agreement with a syndicate of banks.
Borrowings under the Credit Agreement, consist of the Revolving Credit
Facility, the Term Loan A Facility, and the Term Loan B Facility, and are
secured by a perfected first priority security interest in the assets of the
Company's subsidiaries. Under the terms of the Credit Agreement, Health &
Fitness must comply with certain restrictive covenants, which include the
requirement that Health & Fitness maintain minimum amounts of profitability,
solvency, and liquidity. In addition, the Credit Agreement restricts Health &
Fitness from making certain payments, including dividend payments, to its
shareholders. At May 31, 1996, the Company was in compliance with all its
financial covenants except for the capital expenditure limitation for the year
ended May 31, 1996 with respect to which its lender waived compliance.
Management believes that the Company will be in compliance with its financial
covenants through 1997 and, therefore, borrowings under the Credit Agreement
have been classified as long-term, exclusive of amounts due within one year
under the Term Loan A Facility and Term Loan B Facility.
Revolving Credit Facility
The agreement provides for borrowings of up to $160.0 million based upon a
percentage of eligible accounts receivable and inventories and expires on
November 14, 1999. Advances under the Revolving Credit Facility bear interest,
at Health & Fitness's option, at either (1) 2.75% plus the rate at which
certain Eurodollar deposits are offered in the interbank Eurodollar market
(the "LIBOR Rate") or (2) 1.75% plus the higher of (a) the highest of the most
recently published or announced prime corporate base, reference or similar
benchmark rate announced by Bankers Trust Company or (b) the published rate
for ninety-day dealer placed commercial paper (the "Index Rate") (8.25% as of
May 31, 1996 under the LIBOR rate option). The Company is required to pay a
fee of 0.5% per annum on the average unused commitment under the Credit
Agreement. For the years ended May 31, 1995 and 1996, the Company paid an
unused commitment fee of $42,000 and $196,000, respectively. As of May 31,
1996, $48.8 million was available to be borrowed under the Revolving Credit
Facility.
Term Loan A Facility
Under the Term Loan A Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $625,000 became due beginning March 31, 1996.
Quarterly payments increase to $937,500 beginning March 31, 1997, to
$1,250,000 beginning March 31, 1998, and to $1,562,500 beginning March 31,
1999, with the balance of $1,562,500 due at maturity on November 14, 1999.
Advances under the Term Loan A Facility bear interest, at the Company's
option, at a rate equal to either (1) 3.00% per annum plus the LIBOR Rate or
(2) 2.25% per annum plus the Index Rate (8.5% as of May 31, 1996 under the
LIBOR rate option).
Term Loan B Facility
Under the Term Loan B Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $62,500 became due beginning March 31, 1996.
Quarterly payments increase to $1,562,500 beginning March 31, 2000 through
September 30, 2001, and the balance of $5,562,500 is due at maturity on
November 14, 2001. Advances under the Term Loan B Facility bear interest, at
the Company's option, at a rate equal to either (1) 3.50% per annum plus the
LIBOR Rate or (2) 2.75% per annum plus the Index Rate (9.0% as of May 31, 1996
under the LIBOR rate option).
A portion of the proceeds from the Credit Agreement were used to repay the
long-term debt outstanding prior to the Recapitalization.
F-13
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SENIOR SUBORDINATED NOTES
In conjunction with the Recapitalization (Note 1), the Company issued
warrants to purchase 200,000 shares of Class A and 20,000 shares of Class L
Common Stock of IHF Capital and $101,250,000 face amount (net proceeds of
$100.0 million) of 13% Senior Subordinated Notes of Health & Fitness (the
"Senior Subordinated Notes") through Health & Fitness. The Senior Subordinated
Notes are unsecured and bear interest at 13%, payable January 15 and July 15
through the maturity date of July 15, 2002. The warrants have an exercise
price of $0.01 per share and expire on November 14, 1999. In conjunction with
the sale, $968,000 of the issuance price was ascribed to the warrants and is
included in the total discount on the notes. This discount is being amortized
using the effective interest method.
Upon certain asset sales, the Company may be obligated to purchase the
Senior Subordinated Notes with the net cash proceeds of the asset sales at a
redemption price of 100% of principal plus accrued and unpaid interest. Prior
to November 15, 1997, up to $35 million of principal of the Senior
Subordinated Notes may be redeemed at the Company's option with the proceeds
of the sale in public offerings of common stock of IHF Holdings, IHF Capital
or ICON at a redemption price equal to 112.25% of the principal, together with
accrued and unpaid interest at the redemption date. On or after November 15,
1998, the Senior Subordinated Notes may be redeemed at the Company's option,
in whole or in part, at redemption prices ranging from 110% of principal
amount in the year ended November 14, 1999, to 100% of principal amount
subsequent to November 14, 2001, plus accrued and unpaid interest.
SENIOR SECURED DISCOUNT NOTES
In conjunction with the Recapitalization (Note 1), the Company issued
warrants to purchase 800,000 shares of Class A and 80,000 shares of Class L
Common Stock of IHF Capital and $123,700,000 face amount (net proceeds of
$60.0 million) of 15% Senior Secured Discount Notes of IHF Holdings (the
"Discount Notes") through IHF Holdings. The Discount Notes are senior secured
obligations of IHF Holdings that begin bearing cash interest of 15% at
November 15, 1999, payable each May 15 and November 15 thereafter, through the
maturity date of November 15, 2004. The warrants have an exercise price of
$0.01 per share and expire on November 14, 1999. In conjunction with the sale,
$3,838,000 of the issuance price was ascribed to the warrants and is included
in the total discount on the notes. This discount is being amortized using the
effective interest method.
Upon certain asset sales, the Company may be obligated to purchase the
Discount Notes with the net cash proceeds of those sales at a redemption price
of 100% of the accreted value plus accrued and unpaid interest. The accreted
value increases from the initial discount price through November 15, 1999 to
100% of the face amount of the discount notes at that date. Prior to November
15, 1996, the Discount Notes may be redeemed at the Company's option, in whole
or in part, with the proceeds of the sale in a public offering of common stock
of IHF Capital, IHF Holdings or ICON, at a redemption price of 114% of the
accreted value, as defined in the note agreement. The Company is required to
use at least 50% of the net proceeds of any such public offering for such
redemption. On or after November 15, 1999, the Discount Notes may be redeemed
at the Company's option, in whole or in part, at redemption prices ranging
from 107.5% of principal amount in the year ended November 14, 2000, to 100%
of principal amount subsequent to November 14, 2001, plus accrued and unpaid
interest.
CHANGE IN CONTROL
Upon a change in control, as defined in the indentures with respect to the
Notes, each holder of the Senior Subordinated Notes and Discount Notes may
require the Company to repurchase all or a portion of such holder's notes at a
cash purchase price equal to 101% of the principal amount, plus
F-14
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accrued and unpaid interest, if any, to the date of repurchase. The Credit
Agreement provides that the occurrence of a change of control, as defined
therein, constitutes an event of default under the Credit Agreement, which
could require immediate payment of the Revolving Credit Facility, Term Loan A
Facility and Term Loan B Facility.
FUTURE PAYMENTS
As of May 31, 1996, the scheduled future principal payments of long-term
debt (excluding the Revolving Credit Facility) are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDED MAY 31
1997.............................................................. $ 3,065
1998.............................................................. 4,312
1999.............................................................. 5,562
2000.............................................................. 6,438
2001.............................................................. 6,250
Thereafter........................................................ 233,636
</TABLE>
8. MINORITY INTEREST IN CUMULATIVE REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
Authorization and Issuance of Series A Cumulative Redeemable Preferred Stock
As part of the Recapitalization (Note 1), IHF Holdings authorized 8,000
shares of Series A-1 Cumulative Redeemable Preferred Stock ("Series A-1
Preferred") and 2,042 shares of Series A-2 Cumulative Redeemable Preferred
Stock ("Series A-2 Preferred"). The Series A-1 Preferred and Series A-2
Preferred (referred to collectively as the "Series A Preferred") are
equivalent in all respects, except with respect to voting rights. In exchange
for common stock and options in the Recapitalized Companies, 8,000 shares of
Series A-1 Preferred and 1,000 shares of Series A-2 Preferred were issued to
WHF at a stated issue price of $4,000 per share, and options to purchase 1,042
shares of Series A-2 Preferred were issued to certain officers of the Company.
The options have an exercise price of $158.98 per share, subject to adjustment
as defined in the option agreement, and expire on May 31, 2004. Compensation
expense and a corresponding credit to the Series A Preferred carrying value of
$4.0 million was recorded at the date such options were granted.
Voting Rights
Holders of Series A-1 Preferred are entitled to vote in the election of
directors of IHF Holdings. All holders of Series A Preferred are entitled to
vote in the approval of amendments to the terms of the Series A Preferred and
in the approval of new indebtedness of the Company. Except as otherwise
required by law or the Certificate of Incorporation of IHF Holdings, holders
of Series A Preferred shares are not entitled to other voting rights.
Liquidation Rights
The Series A Preferred retains a liquidation preference over the common
stock at a rate of $4,000 per share plus accrued but unpaid dividends.
Dividends
The Series A Preferred bears dividends at the rate of 12.75% per year
through the 12th anniversary of issuance, at the rate of 15% during the
following year and increasing by 1% for each succeeding year thereafter.
Dividends also accrue on the shares of Series A Preferred which are subject to
the options held by certain officers of the Company.
F-15
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Redemption
The Company has the option to redeem the Series A Preferred at any time
after the fifth anniversary of the issue date or earlier upon: (1) a public
offering of the common stock of the Company; (2) sale of substantially all the
assets of IHF Holdings; (3) payment of a dividend or distribution on the
Common Stock of IHF Holdings which would not otherwise be permitted under IHF
Holdings' certificate of incorporation; or (4) any other similar event. In
addition, the Company is required to redeem the Series A Preferred upon
certain changes in control.
The redemption price of the Series A Preferred is $4,000 per share plus
accrued and unpaid dividends, if any. Under certain conditions, the redemption
price may be fully or partially satisfied by shares of common stock of the
entity effecting the public offering.
In connection with the WHF Settlement (Notes 12 and 14), the Series A
Preferred and options to purchase Series A Preferred were redeemed in November
1996.
Management anticipates that the option to redeem the Series A Preferred will
be exercised and for the years ended May 31, 1995 and 1996 has accrued
dividends of $2.8 million and $5.1 million, respectively on the issued and
outstanding preferred shares and outstanding options. Dividends accrued to the
minority shareholders of IHF Holdings are charged to the Company's current
operations.
9. STOCKHOLDERS' EQUITY
Preferred Stock
For the year ended May 31, 1994 and through November 14, 1994, the
Recapitalized Companies had issued and outstanding preferred stock held by WHF
on which dividends cumulated quarterly at $2.50 per share. Dividends of
$531,000 were accrued and payable to WHF at May 31, 1994. For the period from
June 1, 1994 to November 14, 1994, $243,000 of dividends had accrued and were
paid in conjunction with the Recapitalization (Note 1). In conjunction with
the Recapitalization, the preferred stock was exchanged for stock of IHF
Holdings and IHF Capital.
Common Stock and Additional Paid-in Capital
In conjunction with the Recapitalization, IHF Holdings issued 1,000 shares
of common stock, received a capital contribution of $74.7 million from its
parent, IHF Capital (net of IHF Capital's $657,000 receivable from officers
related to the Recapitalization), and contributed capital of $163.1 million
(net of the $657,000 receivable) to Health Fitness. Health Fitness exchanged
all common and preferred stock in the Recapitalized Companies (Note 1),
issuing 1,000 shares of new common stock to IHF Holdings. All of the common
stock of the Recapitalized Companies that was issued and outstanding prior to
the recapitalization was retired as part of that transaction.
On November 12, 1996, IHF Capital contributed its investment in IHF Holdings
to ICON in exchange for 1,000 shares of common stock of ICON.
Stock Options and Warrants
Prior to the Recapitalization, certain officers held options to purchase
shares of the Recapitalized Companies. The exercise prices were based upon the
fair market value of the Recapitalized Companies on the date the options were
granted. The options became fully vested during the year ended May 31, 1994.
During the year ended May 31, 1994, a portion of these options were exercised
in exchange for receivables from officers. As part of the Recapitalization
(Note 1), all remaining options
F-16
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to purchase shares in the Recapitalized Companies were exchanged for options
to purchase shares of Series A Preferred (Note 8), and options and warrants to
purchase common stock of IHF Capital.
Compensation charges, including related payroll taxes, totaling $39.0
million were recorded in the year ended May 31, 1995, relating to the exchange
of options and warrants (including $4.0 million related to the issuance of the
Series A-2 Preferred options (Note 8)).
1994 Stock Option Plan
In November 1994, the 1994 Stock Option Plan (the "1994 Plan") was adopted
by the Company and approved by the Board of Directors. The 1994 Plan
originally provided for the granting of options to purchase up to 1,200,000
shares of Class A Common of IHF Capital. The Board of Directors determines
which individuals shall receive options, the time period during which the
options may be exercised, the exercise price (which cannot be less than the
fair market value of the Class A Common of IHF Capital on the date of grant),
and whether or not the options are incentive stock options as defined in
section 422 of the Internal Revenue Code of 1986. Expired and cancelled
options are not made available for future grant. In 1996, the plan was
amended, subject to certain waivers of notice and shareholder approval, to
provide for the granting of up to 2,110,207 shares of Class A Common of IHF
Capital.
Activity under the 1994 Plan is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF
OPTIONED EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Granted............................................ 1,146,331 $0.10-8.92
Exercised.......................................... (634,117) $0.10
---------
Outstanding at May 31, 1995........................ 512,214 $0.10-8.92
Granted............................................ 963,876 $5.80-8.92
Cancelled.......................................... (7,617) $.10-$5.80
Exercised.......................................... (44,539) $0.10
---------
Outstanding at May 31, 1996........................ 1,423,934 $.10-$8.92
=========
</TABLE>
Of the total options outstanding under the 1994 Plan, 1,210,859 are
exercisable at May 31, 1996. All options under the 1994 Plan become
exercisable upon an initial public offering, subject to the approval of the
Board of Directors. At May 31, 1996, there were no options available for
future grant under the 1994 Plan.
In September 1995 and March 1996, the exercise price of all performance
options granted in 1995 under the 1994 Plan with an original exercise price
per share of $30.87 were reset to exercise prices per share ranging from $5.80
to $8.92 which represented the fair value on the date of the reset with no
change in the number of option share grants or vesting periods. The original
exercise price of $30.87 per share for these performance options was
established by the Board of Directors at the time of the Recapitalization to
provide incentives to key members of management.
During the year ended May 31, 1996, the Company recorded compensation
expense of $2,769,000 equivalent to the difference between the fair market
value of the underlying securities and the exercise price of related options
granted. Such option grants were fully vested upon grant.
F-17
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- ---------------
YEAR ENDED MAY
31,
YEAR ENDED ---------------
MAY 31,1994 1995 1996
------------- ------- ------
<S> <C> <C> <C>
Current:
Federal income taxes........................ $ 9,193 $ 4,277 $6,946
State income taxes.......................... 1,726 497 595
Foreign income taxes........................ -- -- 375
------- ------- ------
Total current............................. 10,919 4,774 7,916
------- ------- ------
Deferred:
Federal income taxes........................ (1,005) (8,466) (18)
State income taxes.......................... (148) (1,027) (2)
------- ------- ------
Total deferred............................ (1,153) (9,493) (20)
------- ------- ------
$ 9,766 $(4,719) $7,896
======= ======= ======
</TABLE>
The provision for (benefit from) income taxes differs from the amount
computed by applying the statutory federal income tax rate to income (loss)
before taxes as follows:
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- ---------------------
YEAR ENDED MAY 31,
YEAR ENDED ---------------------
MAY 31,1994 1995 1996
------------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate....... 35% (35)% 35%
State tax provision (benefit)........... 5 (3) 6
Dividends on preferred stock............ -- 5 19
Other non-deductible items.............. -- 6 8
Foreign losses for which no benefit has
been recognized........................ -- -- 15
Other................................... (1) -- --
--- --------- --------
Provision for (benefit from) income tax-
es..................................... 39% (27)% 83%
=== ========= ========
</TABLE>
As of May 31, 1995 and 1996, the Company recorded gross deferred tax assets
and deferred tax liabilities as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Gross deferred tax assets.................................. $13,579 $15,506
Gross deferred tax liabilities............................. (2,870) (3,972)
------- -------
10,709 11,534
Valuation allowance........................................ ( -- ) (805)
------- -------
$10,709 $10,729
======= =======
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets
related to foreign net operating loss carryforwards since realization of these
future benefits is not sufficiently assured.
F-18
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net deferred tax assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Domestic net operating loss carryforward................... $ 3,767 $ --
Foreign net operating loss carryforward.................... -- 805
Stock compensation expense................................. 4,642 5,694
Future deductible interest................................. 1,211 3,766
Depreciation............................................... (1,786) (2,730)
Reserves and allowances.................................... 2,942 3,770
Contribution of land....................................... (500) (500)
Uniform capitalization of inventory........................ 879 937
Other, net................................................. (446) (208)
------- -------
10,709 11,534
Valuation allowance........................................ ( -- ) (805)
------- -------
$10,709 $10,729
======= =======
</TABLE>
In the year ended May 31, 1996, the Company realized income tax benefits of
$3,470,000 and $297,000 for the use of federal and state net operating loss
carryforwards, respectively. At May 31, 1996, the Company had approximately
$2.4 million of foreign net operating loss carryforwards available to reduce
future foreign taxable income.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
COMPANY
---------------
RECAPITALIZED YEAR ENDED
COMPANIES MAY 31,
------------- ---------------
YEAR ENDED
MAY 31, 1994 1995 1996
------------- ------- -------
<S> <C> <C> <C>
Cash paid during the period for (in thou-
sands):
Interest.................................. $ 5,259 $12,188 $25,191
Income taxes.............................. 10,237 5,286 8,928
</TABLE>
For the year ended May 31, 1994 and the period from June 1, 1994 through
November 14, 1994, income tax payments were made to WHF.
Non-cash investing and financing activities
As part of the Recapitalization (Note 1): (1) the existing shareholders of
the Recapitalized Companies contributed their capital stock of these Companies
(recorded value of $7.7 million) to IHF Capital, IHF Holdings, and Health &
Fitness in exchange for common stock of IHF Capital, preferred stock of IHF
Holdings, warrants to purchase common stock of IHF Capital (aggregate fair
value of $58.8 million), and the Shareholder Notes ($159.3 million), and (2)
certain senior executives of the Company exchanged their options to purchase
capital stock of the Recapitalized Companies for $34.7 million of replacement
options to purchase common stock of IHF Capital and $4.0 million of warrants
to purchase preferred stock of IHF Holdings. Subsequent to the closing of the
Recapitalization, the Company redeemed certain of the options exchanged by the
executives as part of the Recapitalization for $26.4 million.
F-19
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the issuance of the Senior Subordinated Notes and the
Discount Notes (Note 8), the Company issued warrants to purchase common stock
of IHF Capital. These warrants were ascribed values of $968,000 and
$3,838,000, respectively, and were recorded as additional discounts on the
Notes with an offsetting credit to additional paid-in capital.
12. COMMITMENTS AND CONTINGENCIES
LEASES--The Company has noncancelable operating leases, primarily for
computer and production equipment, that expire over the next five years. These
leases generally contain renewal options for periods ranging from three to
five years and require the Company to pay all executory costs such as
maintenance and insurance. Future minimum payments under noncancelable
operating leases consist of the following at May 31, 1996 (table in
thousands):
<TABLE>
<S> <C>
FOR YEAR ENDED MAY 31:
1997............................................................... $ 6,009
1998............................................................... 4,945
1999............................................................... 2,936
2000............................................................... 1,189
2001............................................................... 426
Thereafter ........................................................ --
-------
Total............................................................ $15,505
=======
</TABLE>
Rental expense for operating leases was approximately $1,767,000, $2,890,000
and $2,513,000 for the years ended May 31, 1994, 1995 and 1996, respectively.
WEIDER LITIGATION--On August 28, 1995, WHF and its affiliates commenced a
number of legal proceedings against the Company, its affiliates and all of the
non-WHF directors and commenced arbitration proceedings against the Company.
WHF and its affiliates claim, among other things: (i) they are entitled to
various economic adjustments under agreements related to the Recapitalization,
(ii) the Company has intentionally violated territorial limitations and
various other terms of the distribution agreement under which WHF was granted
exclusive rights to distribute the Company's products in certain international
territories, (iii) the directors and executive officers of the Company have
breached their fiduciary duties to IHF Capital, IHF Holdings and Health &
Fitness and to IHF Capital's minority stockholders, and (iv) the Company has
violated its duties to WHF under the Management Agreement (Note 13). In
addition, WHF and its affiliates seek to recover compensatory damages of at
least $25 million, punitive damages of $35 million and injunctive relief
requiring the Company to honor its alleged obligations. On August 28, 1995,
WHF sought, and was denied, a temporary restraining order relating to alleged
violations of the Distribution Agreement (Note 13). The Company intends to
defend vigorously against the claims of WHF and its affiliates. The Company,
based in part on discussions with legal counsel, does not believe the outcome
of the WHF litigation will have material adverse effect upon the Company's
results of operations and financial position.
The Company, on August 28, 1995, initiated a lawsuit against WHF and its
affiliates seeking a preliminary injunction forbidding WHF to continue
production and marketing of illicit copies of one of the Company's most
significant product lines. The Company intends to assert all claims that it
may have against WHF and its affiliates, including claims that: (i) WHF and
its affiliates have improperly sourced products (including WHF branded
products), (ii) WHF and its affiliates have infringed the
F-20
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's rights to the "WHF" trademark, (iii) the Company is entitled to
economic adjustments under the agreements related to the Recapitalization and
(iv) WHF has violated territorial limits and other terms of the Distribution
Agreement (Note 13).
The Weider Litigation was settled in September 1996 (Note 14).
OTHER LITIGATION--The Company is one of several named defendants in legal
matters involving product liability claims, several insured and one uninsured.
The plaintiff in each case seeks general and specific damages in various
specified and unspecified amounts. Since many of these matters are in the
initial discovery stage, it is not possible to predict, with any certainty,
the outcome or range of potential loss. However, management, based in part on
discussions with legal counsel, believes that the Company has meritorious
defenses and that resolution of these matters should not result in uninsured
liability, if any, that would be materially greater than the estimated
liability included in accrued expenses of $900,000, $1,500,000 and $1,500,000
at May 31, 1995 and 1996 and August 31, 1996 (unaudited), respectively.
The Company is involved in various other claims, potential unasserted
claims, and legal actions, including several patent infringement claims,
arising in the ordinary course of business. In the opinion of management, the
ultimate outcome of these matters will not have a material adverse effect on
the Company's financial position and results of operations and, accordingly,
no amounts have been accrued in the financial statements.
WARRANTY--The Company warrants its products against defects in materials and
workmanship for a period of 90 days after sale to the end-user. As of May 31,
1995 and 1996, the Company had an accrual for estimated warranty costs on
products sold of approximately $2,470,000 and $3,200,000, respectively, which
is included in accrued expenses in the accompanying balance sheet.
RETIREMENT PLANS--All employees who have met minimum age and service
requirements are eligible to participate in one of two 401(k) savings plans.
Participants may make tax deferred contributions up to 15% of total salary.
Company contributions to the two plans for the years ended May 31, 1994, 1995
and 1996 were $48,000, $220,000 and $233,000, respectively.
13. RELATED PARTY TRANSACTIONS
RECAPITALIZATION EXPENSES--The Company reimbursed $2.0 million of expenses
incurred by Weider, Bain Capital, and other shareholders in connection with
the financing related to the Recapitalization. In addition, the Company paid
Bain Capital a fee of $3.5 million for services provided in structuring the
Recapitalization (Note 1).
MANAGEMENT FEES--The Company received $2.7 million in the year ended May 31,
1995 as a fee for administrative services provided to WHF in the management of
one of its subsidiaries (the "Management Agreement") which was recorded as a
reduction of general and administrative expense for the period. Subsequent to
the Recapitalization, the Management Agreement requires the Company, to the
extent applicable, to source WHF products, or products substantially the same
as those sold by WHF, from WHF prior to seeking sources of those products from
outside vendors. During the years ended May 31, 1994, 1995 and 1996, the
Company purchased approximately $7.4 million, $26.4 million and $50.7 million,
respectively, of products from WHF and had a trade payable of $1.3 million
and $.7 million at May 31, 1995 and 1996, respectively.
F-21
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the Recapitalization, the Company executed an agreement
with a majority shareholder who provides management and advisory services.
Total annual fees due under this agreement are $800,000, and, for the years
ended May 31, 1995 and 1996, the Company recorded management fee expense of
$333,000 and $800,000, respectively. In addition, if the Company enters into
any acquisition transactions involving at least $10 million, the Company must
pay a fee to this majority shareholder of approximately 1% of the gross
purchase price, including liabilities assumed, of the transaction.
NON-COMPETE AGREEMENTS--In November 1994, the Company entered into non-
compete agreements with certain key executives of the Company in connection
with the Recapitalization (Note 2).
LICENSE FEES--Concurrent with the closing of the Recapitalization, the
Company obtained certain rights to use the WHF name pursuant to two separate
exclusive license agreements. Under the Weider Sports License, the Company
paid a $5 million license fee for a perpetual license with respect to Weider
Canadian Trademark Rights. Under the Weider Health and Fitness license, the
Company is required to pay a royalty with respect to Weider U.S. and other
trademark rights equal to 2% of sales of licensed products sold thereunder
until such time as the Company has paid an aggregate royalty equal to $12
million plus an interest factor accruing on the unpaid portion of the royalty
at a per annum rate of 10%. If the royalty has not been paid in full by the
tenth anniversary of the Recapitalization, or if the sales of WHF product fall
below a certain level and the royalty is not paid in full at that time, the
Company's rights under the license agreement will terminate. The Company
recorded license fees of approximately $500,000 and $549,000 during the years
ended May 31, 1995 and 1996, respectively, under this agreement. The Company
had accrued license fees payable to WHF of $503,000 and $81,000 at May 31,
1995 and 1996.
DISTRIBUTION AGREEMENT--The Company has appointed a Canadian WHF affiliate
to be the exclusive distributor of Health & Fitness products worldwide,
excluding the United States, Mexico and certain countries in Europe. Under the
terms of this agreement, the Company sells its products directly to WHF
affiliates for resale in the agreed-upon territory. In conjunction with this
agreement, the Company recorded revenue of $9.6 million for the year ended May
31, 1996 and had a trade receivable from WHF affiliates of $2.0 million at May
31, 1996. In addition, for the fiscal years ended May 31, 1995 and 1994, the
Company recorded revenue from sales to WHF of $8.8 million and $4.9 million,
respectively, and, at May 31, 1995, the Company had a trade receivable from
WHF affiliates of $2.6 million.
AIRCRAFT LEASE. In June 1996, the Company entered into an oral agreement
with FG Aviation, Inc. ("FG"), a company which is jointly owned by officers of
the Company, whereby the Company will lease an airplane from FG for a minimum
of 400 hours per year at a fair market rate (between $1,500 and $1,700 per
hour, as adjusted by the Company's costs associated with flight crews).
Scheduled maintenance and insurance will be paid for by FG and non-scheduled
maintenance will be paid for by the Company. Flight crews will be provided by
the Company. In connection with this lease the Company advanced $280,000 to
officers of the Company to be used as a security deposit on the aircraft
lease.
CANADIAN AND EUROPEAN OPTIONS--At any time prior to May 15, 1997, the
Company has an option to acquire the net fixed assets, inventory, and certain
other assets and to assume certain related leases and contracts of a Canadian
manufacturing business affiliated with WHF ("CanCo") and certain
F-22
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
other parties at a purchase price equal to one half of the historical net book
value of its inventory, fixed assets and equipment. In addition, the Company
had an option to acquire certain property and to assume certain related leases
of several European operations owned by WHF at any time prior to May 15, 1997.
In August 1995, the Company gave notice of its intention to exercise its
option to purchase the assets of CanCo. The Company may terminate this notice
at any time prior to executing a final purchase and sale agreement. The
purchase of the CanCo assets was completed as part of the settlement of the
WHF Litigation (Notes 12 and 14).
In July 1995 and December 1995, the Company exercised its options to
purchase certain fixed assets of the WHF European affiliates in conjunction
with the establishment of its own sales operations in Europe. The total
purchase price for these assets was approximately $200,000 and approximated
the net book value of the assets at the date of purchase.
14. SUBSEQUENT EVENTS
HEALTHRIDER ACQUISITION--On August 16, 1996, the Company: (i) purchased
substantially all the assets of HealthRider for approximately $16.8 million
and assumed (or refinanced) substantially all of the liabilities of
HealthRider; (ii) purchased certain related manufacturing assets of Parkway
Manufacturing, Inc., ("Parkway"), including Parkway's contract to manufacture
and supply upright rowers to HealthRider, for approximately $10.1 million
(includes the repayment of $1.0 million of trade payables owed to Parkway by
HealthRider); and (iii) purchased the minority interest of HealthRider's
European subsidiary for approximately $1.4 million; (of which $.7 million was
paid by HealthRider, $.6 million was paid by the Company in cash and $.1
million was paid by the Company in inventory)(together, the "HealthRider
Acquisition").
The HealthRider Acquisition was funded through additional borrowings under
the Credit Agreement.
The HealthRider Acquisition has been accounted for under the purchase method
of accounting. Accordingly, the purchase price plus direct costs of the
acquisition have been allocated to the assets acquired and liabilities assumed
based on their relative fair values as of the closing date. The final
allocation to each of the Company's assets acquired and liabilities assumed is
preliminary as the Company is in the process of determining the fair value of
certain significant assets acquired in the HealthRider Acquisition.
Accordingly, the final allocations may be different from those initially
recorded.
The following unaudited pro forma summary presents the consolidated results
of operations assuming that the HealthRider Acquisition had occurred on June
1, 1995. The historical results for the Company for the quarter ended August
31, 1996 have been combined with the HealthRider results for the three months
ending June 30, 1996, and the historical results for the Company for the
quarter ending September 2, 1995 have been combined with the HealthRider
results for the three months ending June 30, 1995. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the transaction been effected on
the date indicated above or of results which may occur in the future. The
Company expects that HealthRider revenues in the periods subsequent to the
HealthRider Acquisition will decline substantially. In addition, the pro
formas exclude certain non-recurring charges related to the HealthRider
Acquisition, including a significant non-recurring, non-cash charge resulting
from the fact
F-23
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
that the Company's purchase accounting included writing-up the book value of
the HealthRider inventory to fair market value less estimated sales costs.
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
1996
-----------------------------
(UNAUDITED)
COMPANY(1) HEALTHRIDER TOTAL
---------- ----------- ------
<S> <C> <C> <C>
Revenues.................................... $123.0 $38.1 $161.1
Net Income (Loss)........................... $ (6.0) $ 1.6 $ (4.4)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 2, 1995
-------------------------------------------
(UNAUDITED)
COMPANY HEALTHRIDER TOTAL
------------ --------------- ------------
<S> <C> <C> <C>
Revenues........................ $ 124.8 $ 59.1 $ 183.9
Net Income (Loss)............... $ (3.4) $ 8.7 $ 5.3
</TABLE>
- --------
(1) Excludes operating results of HealthRider for the period from August 16,
1996 through August 31, 1996.
1996 STOCK OPTION PLAN--In August 1996, the Company adopted the 1996 Stock
Option Plan (the "1996 Stock Option Plan") which provides for the grant to
directors and certain eligible employees of the Company either incentive stock
options, non-qualified options or both. The 1996 Stock Option Plan satisfies
the requirements of Rule 16b-3 under the 1934 Act. Subject to adjustment for
stock splits and similar events, a total of 2,070,000 shares of Class A Common
Stock of IHF Capital has been authorized for issuance under the 1996 Stock
Option Plan, which is administered by the Board of Directors.
SETTLEMENT OF WHF LITIGATION--On September 6, 1996, the Company and Weider
Health and Fitness ("WHF") and its affiliates settled the litigation between
WHF and certain of its affiliates and the Company and certain of its officers
and directors parties through a number of agreements (the "WHF Settlement")
(Note 12). The WHF Settlement includes releases of certain claims previously
asserted by WHF and its affiliates, amendments to certain of the agreements
currently existing between the Company and WHF and its affiliates and certain
new agreements among the Company and WHF and its affiliates. Other than the
releases, the significant terms of the WHF Settlement are outlined below.
Repurchase of Common Stock. The Company purchased all of the common stock of
IHF Capital and certain warrants to purchase common stock of IHF Capital held
by the WHF Stockholders at an aggregate price of $42.3 million.
Repurchase the Preferred Stock. The Company purchased the IHF Holdings
preferred stock held by WHF and certain other stockholders for $32.1 million
which reflectd a discount of $3.9 million from face value and the foregiveness
of all accrued dividends. In connection with the purchase of the IHF Holdings
preferred stock, the Company purchased the options to purchase IHF Holdings
preferred stock for $3.7 million which reflected a discount of $.3 million and
the foregiveness of all accrued dividends. Upon the purchase of the WHF
Preferred Stock, WHF's representation on the Company's board of directors
ceased.
Settlement Expenses and Intercompany Payables. The Company: (i) paid $12.1
million to terminate the lawsuits: (ii) paid $3.9 to WHF and its affiliates as
prepayment in full under its brand license agreements with them; and (iii)
received $1.2 million in full payment and settlement of the Company's
intercompany payable to WHF and its affiliates ($1.8 million) and amounts due
the Company under the amended WSG Management Agreement ($3.0). The Company
also received $.5
F-24
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million in full payment and settlement of CanCo's Management fee obligations
to the Company under the CanCo Management and Advisory Agreement.
Ben Weider Payments The WHF Settlement also provides that Ben Weider will
serve as a consultant to, and ambassador for, the Company for five years, with
an annual compensation of approximately $475,000, and that the Company will
provide office space and three assistants for Mr. Weider.
The WHF Settlement also contains various miscellaneous provisions that the
Company does not believe are material.
WEIDER SPORTS ACQUISITION AND CANCO ACQUISITION--In conjunction with the
settlement of the litigation described above, the Company acquired certain
assets, excluding cash and fixed assets, for $8.7 million and assumed certain
liabilities of the sports equipment business lines of Weider Sports (the
"Weider Sports Acquisition"). As a result of the Weider Sports Acquisition,
the Company acquired distribution rights originally granted to Weider Sports
in connection with the Recapitalization on November 14, 1994, subject to
certain rights granted by Weider Sports to third parties (Note 13). In
addition, the Company acquired certain assets, excluding cash, cash
equivalents and accounts receivable, for $1.7 million and assumed certain
liabilities of CanCo (the "CanCo Acquisition"). In connection with the CanCo
Acquisition the Company acquired two CanCo plants which were leased by other
WHF affiliates in exchange for the assumption of the existing $1.5 million
Cdn. mortgage on the properties and the payment of $.5 million. The Weider
Sports and CanCo Acquisitions will be accounted for under the purchase method
of accounting and do not represent acquisitions of significant businesses by
the Company.
AMENDMENT OF CREDIT AGREEMENT--The Credit Agreement (Note 7) was amended as
of August 23, 1996 to permit total borrowing of up to $310 million under the
Company's revolving credit facility, in order to fund the HealthRider
Acquisition and to meet the Company's other long term working capital needs.
ISSUANCE OF SENIOR DISCOUNT NOTES--On November 20, 1996, the Company issued
$162,000,000 face amount (net proceeds of $82.5 million) of 14% Series A
Senior Discount Notes of ICON (the "Senior Discount Notes"). The Senior
Discount Notes are secured by the capital stock of IHF Holdings and begin
bearing cash interest of 14% at May 15, 2002, payable each May 15 and November
15, thereafter, through the maturity date of November 15, 2006. The proceeds
from the issuance of the Senior Discount Notes was used to fund the purchase
of IHF Capital common stock and IHF Holdings preferred stock in connection
with the WHF Settlement.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HealthRider, Inc.:
We have audited the accompanying consolidated balance sheets of HealthRider,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthRider, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Salt Lake City, Utah
July 22, 1996 (except with respect to the consummation of the asset purchase
agreement discussed in Notes 1, 7 and 13, as to which the date is August 16,
1996)
F-26
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................... $ 1,156,000 $ 532,000 $ 867,000
Accounts receivable, less allowance
for doubtful accounts of $348,000,
$3,783,000 and $2,756,000 (unau-
dited)................................ 10,608,000 29,944,000 22,877,000
Inventories............................ 2,091,000 14,937,000 23,082,000
Prepaid expenses and other............. 1,913,000 6,301,000 3,280,000
Income tax receivable.................. -- -- 2,128,000
Deferred income tax asset, net......... 416,000 5,310,000 7,204,000
----------- ----------- -----------
Total current assets................. 16,184,000 57,024,000 59,438,000
Property and equipment, net............. 5,373,000 6,058,000 27,329,000
Other assets, net....................... 136,000 1,649,000 1,648,000
----------- ----------- -----------
$21,693,000 $64,731,000 $88,415,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 4,165,000 $22,149,000 21,072,000
Accrued expenses....................... 5,240,000 17,485,000 17,022,000
Line of credit......................... -- -- 11,567,000
Income taxes payable................... 2,199,000 1,206,000 --
Current portion of capital lease obli-
gations............................... 315,000 298,000 1,158,000
Current portion of long-term debt...... 59,000 45,000 43,000
Other liabilities...................... 333,000 411,000 --
----------- ----------- -----------
Total current liabilities............ 12,311,000 41,594,000 50,862,000
Capital lease obligations, net of cur-
rent portion........................... 480,000 247,000 18,149,000
Long-term debt, net of current portion.. 213,000 193,000 173,000
----------- ----------- -----------
Total liabilities.................... 13,004,000 42,034,000 69,184,000
----------- ----------- -----------
Commitments and contingencies (Notes 1,
6, 7 and 10)
Stockholders' equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized; none is-
sued.................................. -- -- --
Common stock, $.01 par value;
25,000,000 shares authorized;
9,272,335, 10,057,001 and 10,077,030
(unaudited) shares issued and out-
standing.............................. 93,000 101,000 101,000
Additional paid-in capital............. 291,000 699,000 729,000
Notes receivable from officers......... (110,000) (110,000) (35,000)
Retained earnings...................... 8,415,000 22,002,000 18,393,000
Cumulative translation adjustments..... -- 5,000 43,000
----------- ----------- -----------
Total stockholders' equity........... 8,689,000 22,697,000 19,231,000
----------- ----------- -----------
$21,693,000 $64,731,000 $88,415,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $21,181,000 $106,587,000 $241,415,000 $117,006,000 $113,156,000
Cost of goods sold...... 7,066,000 37,483,000 84,465,000 40,334,000 43,481,000
----------- ------------ ------------ ------------ ------------
Gross profit......... 14,115,000 69,104,000 156,950,000 76,672,000 69,675,000
----------- ------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing.. 12,049,000 48,403,000 119,310,000 53,320,000 65,811,000
General and adminis-
trative............... 1,074,000 4,976,000 15,877,000 6,812,000 8,497,000
----------- ------------ ------------ ------------ ------------
Total operating ex-
penses.............. 13,123,000 53,379,000 135,187,000 60,132,000 74,308,000
----------- ------------ ------------ ------------ ------------
Income (loss) from oper-
ations................. 992,000 15,725,000 21,763,000 16,540,000 (4,633,000)
----------- ------------ ------------ ------------ ------------
Other income (expense),
net:
Interest expense....... (645,000) (1,127,000) (119,000) (55,000) (1,341,000)
Minority interest in
loss of subsidiary.... -- -- 95,000 -- --
Other income (loss),
net................... 50,000 745,000 1,991,000 943,000 1,121,000
----------- ------------ ------------ ------------ ------------
Total other income
(expense), net...... (595,000) (382,000) 1,967,000 888,000 (220,000)
----------- ------------ ------------ ------------ ------------
Income (loss) before
provision for income
taxes.................. 397,000 15,343,000 23,730,000 17,428,000 (4,853,000)
(Provision) benefit for
income taxes........... (99,000) (6,405,000) (10,143,000) (7,494,000) 1,244,000
----------- ------------ ------------ ------------ ------------
Net income (loss)....... $ 298,000 $ 8,938,000 $ 13,587,000 $ 9,934,000 $ (3,609,000)
=========== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL
-------------------- PAID-IN FROM RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL OFFICERS EARNINGS ADJUSTMENTS EQUITY
---------- -------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 6,805,001 $ 68,000 $ -- $ -- $ (821,000) $ -- $ (753,000)
Purchase and
cancellation of common
shares................ (40,000) -- (20,000) -- -- -- (20,000)
Issuance of common
shares for services... 150,000 1,000 29,000 -- -- -- 30,000
Issuance of common
shares for cash....... 1,100,500 11,000 207,000 -- -- -- 218,000
Issuance of common
shares pursuant to
antidilutive right.... 1,004,334 10,000 (10,000) -- -- -- --
Net income............. -- -- -- -- 298,000 -- 298,000
---------- -------- -------- --------- ----------- ------- -----------
Balance at December 31,
1993................... 9,019,835 90,000 206,000 -- (523,000) -- (227,000)
Purchase and
cancellation of common
shares................ (100,000) (1,000) (74,000) -- -- -- (75,000)
Exercise of stock
options............... 352,500 4,000 159,000 (110,000) -- -- 53,000
Net income............. -- -- -- -- 8,938,000 -- 8,938,000
---------- -------- -------- --------- ----------- ------- -----------
Balance at December 31,
1994................... 9,272,335 93,000 291,000 (110,000) 8,415,000 -- 8,689,000
Exercise of stock
options............... 536,500 5,000 381,000 -- -- -- 386,000
Issuance of common
shares pursuant to
antidilutive right.... 245,666 3,000 (3,000) -- -- -- --
Issuance of common
shares for services... 2,500 -- 30,000 -- -- -- 30,000
Cumulative translation
adjustments........... -- -- -- -- -- 5,000 5,000
Net income............. -- -- -- -- 13,587,000 -- 13,587,000
---------- -------- -------- --------- ----------- ------- -----------
Balance at December 31,
1995................... 10,057,001 101,000 699,000 (110,000) 22,002,000 5,000 22,697,000
Issuance of common
shares for services
(unaudited)........... 25,000 -- 38,000 -- -- -- 38,000
Receipt of common
shares as payment of
note receivable from
officer (unaudited)... (4,971) -- (8,000) 75,000 -- -- 67,000
Cumulative translation
adjustments
(unaudited)........... -- -- -- -- -- 38,000 38,000
Net loss (unaudited)... -- -- -- -- (3,609,000) -- (3,609,000)
---------- -------- -------- --------- ----------- ------- -----------
Balance at June 30, 1996
(unaudited)............ 10,077,030 $101,000 $729,000 $ (35,000) $18,393,000 $43,000 $19,231,000
========== ======== ======== ========= =========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income (loss)....... $ 298,000 $ 8,938,000 $ 13,587,000 $ 9,934,000 $(3,609,000)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and amor-
tization.............. 142,000 570,000 2,167,000 735,000 1,824,000
Provision for losses on
accounts receivable... 256,000 649,000 4,882,000 3,053,000 3,690,000
Deferred income tax
provision (benefit)... 21,000 (437,000) (4,894,000) (2,341,000) (1,894,000)
Loss on disposition of
assets................ -- -- 417,000 -- 156,000
Issuance of common
shares for services... 30,000 -- 30,000 30,000 105,000
Changes in operating
assets and liabili-
ties--
Accounts receivable... (2,018,000) (9,455,000) (24,218,000) (6,199,000) 3,377,000
Inventories........... (576,000) (1,465,000) (12,846,000) (3,430,000) (8,145,000)
Prepaid expenses and
other................ (134,000) (1,297,000) (4,388,000) (2,775,000) 3,021,000
Other assets.......... -- -- (129,000) (70,000) 1,000
Accounts payable...... 2,025,000 2,085,000 17,984,000 1,786,000 (1,077,000)
Accrued expenses...... 837,000 4,131,000 12,245,000 5,392,000 (463,000)
Income taxes payable.. 78,000 2,121,000 (993,000) 923,000 (3,334,000)
Other liabilities..... 326,000 (42,000) 78,000 (283,000) (411,000)
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities.......... 1,285,000 5,798,000 3,922,000 6,755,000 (6,759,000)
----------- ----------- ------------ ----------- -----------
CASH FLOWS USED IN IN-
VESTING ACTIVITIES:
Purchase of property and
equipment.............. (645,000) (4,410,000) (4,636,000) (2,442,000) (4,009,000)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Net borrowings on line
of credit.............. -- -- -- -- 11,567,000
Proceeds from issuance
of long-term debt...... 397,000 461,000 35,000 35,000 --
Principal payments on
long-term debt......... (238,000) (822,000) (69,000) (37,000) (22,000)
Principal payments on
capital lease obliga-
tions.................. -- (62,000) (267,000) (129,000) (480,000)
Proceeds from notes pay-
able to stockholders... 97,000 84,000 -- -- --
Principal payments on
notes payable to stock-
holders................ (178,000) (820,000) -- -- --
Purchase of common
shares................. (20,000) (75,000) -- -- --
Net proceeds from issu-
ance of common stock... 218,000 53,000 386,000 353,000 --
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) financing
activities.......... 276,000 (1,181,000) 85,000 222,000 11,065,000
----------- ----------- ------------ ----------- -----------
Effect of changes in ex-
change rates on cash... -- -- 5,000 -- 38,000
----------- ----------- ------------ ----------- -----------
Net increase (decrease)
in cash................ 916,000 207,000 (624,000) 4,535,000 335,000
Cash at beginning of pe-
riod................... 33,000 949,000 1,156,000 1,156,000 532,000
----------- ----------- ------------ ----------- -----------
Cash at end of period... $ 949,000 $ 1,156,000 $ 532,000 $ 5,691,000 $ 867,000
=========== =========== ============ =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the pe-
riod for:
Interest............... $ 554,000 $ 1,234,000 $ 107,000 $ 80,000 $ 1,232,000
Income taxes........... -- 4,721,000 16,230,000 8,912,000 4,234,000
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996, capital lease obligations totaling $857,000, $17,000 and
$19,242,000 (unaudited), respectively, were entered into for the acquisition
of a new corporate office building, office furniture, and computer, telephone
and other equipment.
During the year ended December 31, 1995 and the six months ended June 30,
1995, the Company contributed $1,600,000 of land to a limited liability
company (LLC) in return for a 50 percent ownership interest in the LLC (see
Note 7).
During the year ended December 31, 1994, certain officers of the Company
exercised stock options with promissory notes to the Company in the amount of
$110,000.
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
NATURE OF OPERATIONS
The Company designs, markets and distributes innovative fitness equipment
designed primarily for use at home. The Company markets and distributes its
products through a variety of distribution channels, including direct-response
advertising (television infomercials and other forms of electronic and print
media) and a nationwide network of company-owned retail locations in regional
shopping malls, as well as large and small independent retailers, including
specialty retail stores.
DEPENDENCE ON THE HEALTHRIDER AND OTHER SIMILAR PRODUCTS
The Company's growth in sales and profitability through December 31, 1995
was attributable primarily to the demand for the Company's principal product,
the HealthRider, as well as other similar products based on the HealthRider
which are sold at other price points and through other distribution channels.
The HealthRider and the other similar products, consisting principally of the
aeROBICRider and SportRider, have accounted for 100%, 99% and 98% of the
Company's net sales during the years ended December 31, 1993, 1994 and 1995,
respectively, and accounted for 95% (unaudited) of the Company's net sales
during the six months ended June 30, 1996. Any significant decline in demand
for the HealthRider and other related products, would have a material adverse
effect on the Company's business and results of operations (see Recent
Developments below).
RECENT DEVELOPMENTS
Subsequent to December 31, 1995, the Company began to experience a liquidity
crisis caused by a build-up of inventory which was exacerbated by the terms of
a manufacturing agreement (see Note 7), by lower than expected revenues,
higher selling expenses related to infomercials and lower margins as well as
more lenient payment terms with certain wholesale customers and longer
deferred payment plans with retail customers.
During the six months ended June 30, 1996, the Company's sales levels
declined in all distribution channels and the Company experienced a loss from
operations of $4,633,000 (unaudited). As discussed in Note 6, as a result of
the operating losses and other covenant violations, the Company was in default
under its line of credit agreement. The liquidity crisis resulted in legal
actions being taken by certain principal suppliers (see Note 7). As discussed
in Note 13, the Company entered into a definitive agreement to sell the
Company's assets in exchange for approximately $16.8 million of cash and the
assumption of the majority of the Company's liabilities by the buyer. The sale
was consummated on August 16, 1996 and the Company's operations have been
transferred to the Buyer.
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The Company was originally organized and incorporated in the State of Utah
on March 13, 1991 as ExerHealth, Inc. HealthRider, Inc. was incorporated in
the state of Delaware on May 10, 1995 for the purpose of reincorporating
ExerHealth, Inc. as a Delaware corporation. Effective June 30, 1995,
ExerHealth, Inc. was merged into HealthRider, Inc. and each share of common
stock of ExerHealth, Inc. was converted into one share of common stock of
HealthRider, Inc.
The accompanying consolidated financial statements include the accounts of
HealthRider, Inc. and its subsidiaries (collectively, the "Company")--
HealthRider International, Inc., HealthRider Canada, Inc., BodyHealth,
Incorporated, wholly owned U.S. Corporations, and HealthRider International
Limited (a UK corporation) which is 76 percent owned by HealthRider
International, Inc. HealthRider Inc. has entered into an agreement with
HealthRider International Limited whereby HealthRider International Limited
has the rights to market the Company's products outside of the U.S.,
F-31
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
except for Canada and certain Pacific Rim countries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of HealthRider International Limited are translated
into U.S. dollars at the applicable rates of exchange at each period end.
Transactions with foreign entities that result in income and expense for the
Company are translated at the average rate of exchange during the periods.
Translation gains and losses are reflected as a separate component of
stockholders' equity. Transaction gains and losses are recorded in the
consolidated statements of income.
ACCOUNTS RECEIVABLE
The Company allows its retail customers to purchase its products under
various monthly installment payment plans ranging from four to ten months.
INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of
cost or market, using the first-in, first-out (FIFO) method.
ADVERTISING COSTS
The Company generally expenses advertising costs at the time the
advertisement takes place. Most direct response advertising using the
Company's infomercials requires advance payments which are recorded as prepaid
advertising costs until the infomercials are aired. The Company capitalizes
the production costs of its direct response advertising and amortizes them
over the expected airing periods which typically range from six months to one
year. The Company periodically reviews the carrying amounts for impairment and
during the six months ended June 30, 1996 the Company recognized a $1,600,000
(unaudited) charge related to the Company's 1996 infomercial.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization,
which includes amortization of assets recorded under capital leases, are
computed using the straight-line method over the estimated useful lives of the
assets or the terms of the leases. The Company's corporate building is
amortized over the lease term of 15 years and furniture and equipment are
depreciated based on lives ranging from three to five years. Leasehold
improvements are amortized over the terms of the respective leases, ranging
from one to fifteen years. Expenditures for maintenance and repairs are
charged to expense as incurred. Gains and losses on sale or abandonment of
property and equipment are reflected in current operations.
F-32
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheets for cash,
accounts receivable, and accounts payable approximate fair values because of
the immediate or short-term maturities of these financial instruments. The
fair value of the Company's long-term debt also approximates fair value based
on current rates for similar debt.
REVENUE RECOGNITION
Sales are recognized at the time products are shipped to the customer.
Allowances are recognized for estimated returns and discounts associated with
these sales. Payments received for products that have not been shipped by the
end of the period are recorded as unearned revenue.
WARRANTY COSTS
The Company provides for estimated warranty costs as products are sold and
periodically adjusts the estimates to reflect actual experience. The accrued
liability for warranty costs is included in accrued expenses in the
accompanying consolidated balance sheets.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred tax assets or liabilities are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to potential concentrations
of credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides unsecured credit terms to its customers.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121. "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121).
The Company adopted SFAS No. 121 during the three months ended March 31, 1996.
The adoption did not have a material impact on the Company's financial
position or results of operations.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet at June 30, 1996, the
consolidated statements of income and cash flows for the six months ended June
30, 1995 and 1996 and the consolidated statement of stockholders' equity for
the six months ended June 30, 1996 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of the interim periods. The data disclosed in the
notes to consolidated financial statements for these periods are also
unaudited. Results for the unaudited six-month period ended June 30, 1996 are
not necessarily indicative of the results to be expected for the Company's
full fiscal year.
F-33
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RECLASSIFICATIONS
Certain minor reclassifications have been made to the 1993 and 1994
consolidated financial statements to be consistent with the 1995 and 1996
presentations.
(3) PREPAID EXPENSES AND OTHER
Prepaid expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid advertising costs............... $1,137,000 $3,907,000 $ 602,000
Other prepaid expenses.................. 776,000 2,394,000 2,678,000
---------- ---------- ----------
$1,913,000 $6,301,000 $3,280,000
========== ========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land..................................... $2,512,000 $ 912,000 $ 912,000
Building................................. -- -- 18,228,000
Computer and telephone equipment......... 1,641,000 3,264,000 4,473,000
Furniture and fixtures................... 907,000 1,439,000 4,241,000
Leasehold improvements................... 520,000 1,950,000 2,259,000
Machinery and equipment.................. 319,000 210,000 359,000
Vehicles................................. 110,000 147,000 147,000
---------- ----------- -----------
6,009,000 7,922,000 30,619,000
Less accumulated depreciation and amorti-
zation.................................. (636,000) (1,864,000) (3,290,000)
---------- ----------- -----------
$5,373,000 $ 6,058,000 $27,329,000
========== =========== ===========
</TABLE>
Depreciation and amortization of property and equipment totaled $107,000,
$526,000 and $1,797,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $1,222,000 for the six months ended June 30, 1996
(unaudited).
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related taxes................... $2,020,000 $ 5,040,000 $ 2,475,000
Royalties................................... 1,281,000 2,891,000 2,589,000
Sales taxes................................. 754,000 1,489,000 1,234,000
Returns allowance........................... 510,000 2,260,000 1,810,000
Warranty.................................... 200,000 1,486,000 1,596,000
Other....................................... 475,000 4,319,000 7,318,000
---------- ----------- -----------
$5,240,000 $17,485,000 $17,022,000
========== =========== ===========
</TABLE>
F-34
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) DEBT
LINE OF CREDIT AGREEMENTS
As of December 31, 1995, the Company had a line of credit agreement with a
bank (the Bank) whereby a maximum of $10,000,000 was available for working
capital and letters of credit. Borrowings on the line of credit were limited
to 80 percent of eligible wholesale accounts receivable, 50 percent of
eligible consumer accounts receivable and eligible inventories, as defined,
and bore interest at the bank's variable base rate. At December 31, 1995, the
variable base rate was 8.50 percent. The line of credit agreement required the
maintenance of certain financial ratios, and was secured by accounts
receivable and inventory. There were no outstanding amounts drawn under this
agreement at December 31, 1994 and 1995; however, there were $3,608,000 of
letters of credit outstanding as of December 31, 1995.
On March 7, 1996, the maximum amount available under the agreement was
increased to $15,000,000. In conjunction with the negotiation of the new
credit facility described below, this line of credit was terminated in April
1996.
On April 16, 1996, the Company entered into a new credit agreement (the
Agreement) with General Electric Capital Corporation (the Lender). The
Agreement provides for a maximum commitment of up to $25,000,000 to be used
for working capital and letters of credit. Borrowings under the Agreement are
limited to 80 percent of eligible wholesale accounts receivable, 60 percent of
eligible inventories and 50 percent of eligible consumer accounts receivable,
as defined. Borrowings under the Agreement bear interest at either (1) the
prime or base rates of certain banks less an applicable margin ranging from .5
percent to 1 percent, as defined (7.75 percent at June 30, 1996); or (2) the
LIBOR rate plus an applicable margin ranging from 2 to 2.5 percent, as defined
(8.31 percent at June 30, 1996). Borrowings are secured by substantially all
assets of the Company. The Agreement expires on April 16, 1999, at which date
all outstanding balances related to the Agreement are due. As of June 30,
1996, the total outstanding amount under this Agreement included $11,567,000
in loans and $2,976,000 in letters of credit. The Company had no additional
borrowings available under the Agreement at June 30, 1996.
The Company pays a monthly commitment fee based on an annual rate of .5
percent of the average unused portion of the borrowing limit under the
Agreement. Letter of credit fees equal 1.5 percent per annum of the amount of
all outstanding letter of credit obligations. In addition, in the event that
the Company terminates the Agreement prior to the first anniversary of the
Agreement, whether voluntarily or by reason of default, a prepayment fee of
$250,000 will be charged.
The Agreement requires, among other covenants, that the Company maintain a
certain tangible net worth, fixed charge coverage ratio, inventory turnover
ratio and that the Company shall not suffer any quarterly operating losses for
any fiscal quarter through the commitment maturity date. Upon the occurrence
of any event of default and so long as any event of default continues, the
Lender may increase the interest rate applicable to the Agreement by 2 percent
per annum above the rate otherwise applicable. In addition, the Lender may
accelerate the due date of all amounts outstanding under the Agreement.
As of June 30, 1996, the Company was not in compliance with the tangible net
worth, the fixed charge coverage ratio nor the quarterly operating loss
covenants. The Company had not obtained any waivers of the above covenants;
however, the Lender agreed to forbear any action through August 16, 1996,
subject to certain conditions. Accordingly, the balance outstanding under the
agreement as of June 30, 1996 of $11,567,000 has been classified as a current
liability in the accompanying consolidated financial statements. In connection
with the consummation of the asset purchase agreement discussed in Note 13,
the balance outstanding under the agreement was assumed by the buyer.
F-35
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to an individual, interest at 12
percent, due in monthly installments of
$3,000, unsecured, guaranteed by majority
stockholders (see Note 12).................... $190,000 $176,000 $168,000
Notes payable to banks and financing companies,
interest ranging from 7 to 11 percent, due in
monthly installments, secured by office
equipment and vehicles........................ 54,000 62,000 48,000
Other, paid in full during 1995................ 28,000 -- --
-------- -------- --------
272,000 238,000 216,000
Less current portion........................... (59,000) (45,000) (43,000)
-------- -------- --------
$213,000 $193,000 $173,000
======== ======== ========
</TABLE>
Future maturities of long-term debt as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996......................................................... $ 45,000
1997......................................................... 40,000
1998......................................................... 30,000
1999......................................................... 23,000
2000......................................................... 28,000
Thereafter..................................................... 72,000
--------
$238,000
========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
MARKETING AND PROMOTIONAL COMMITMENTS
As of December 31, 1995, the Company had a commitment of approximately $3.9
million for marketing and promotional efforts during 1996. Subsequent to
December 31, 1995, the Company reduced the commitment by approximately $2.8
million.
PURCHASE COMMITMENTS
As of December 31, 1995, the Company was obligated under a manufacturing
agreement with its principal supplier to purchase approximately $110,000,000
of HealthRider units (see discussion below) and was obligated under other
purchase commitments for inventory of approximately $3,920,000.
BUILDING LEASE
During March 1995, the Company entered into an agreement with a real estate
developer to form a limited liability company (the LLC). The Company
contributed $1,600,000 of land to the LLC in return for a 50 percent ownership
interest. The LLC was formed to construct a building for use by the Company.
Construction of the building was completed subsequent to December 31, 1995 and
the Company became a tenant in February 1996.
F-36
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases the building from the LLC under an agreement which is
classified as a capital lease (see Note 10). The lease has a 15 year term with
a base annual rent commitment of approximately $2,405,000 payable in 12 equal
monthly installments. As discussed in Note 10, the Company has subleased a
portion of the building for a three year term. Annual rent will escalate at
the beginning of the sixth and eleventh years using a three percent annually
compounded rate or the change in the Consumer Price Index, whichever is less.
The lease also provides for the lessee to pay taxes, maintenance, insurance
and certain other operating costs of the leased property. In addition, the
Company has an option to purchase the building at cost, as defined, until
permanent financing has been secured. After permanent financing is in place
the Company may purchase the building at fair market value.
LEGAL MATTERS
In May 1995, certain stockholders of the Company filed a complaint in the
United States District Court for the District of Utah naming the Company and
two of the Company's principal officers as defendants. The complaint contains
five claims against both the Company and the two officers alleging breach of
various contracts for royalty payments (see Note 12) and for the issuance of
stock. Because of ongoing settlement discussions, the parties have stipulated
a stay of the litigation. An agreement has been reached which provides for the
Company to pay approximately $300,000, which has been accrued in the accompany
consolidated balance sheets, and the officers to transfer certain shares of
the Company's common stock held by the officers to the plaintiffs.
The Company was the subject of certain other legal matters related to its
operations for which settlements were negotiated pending consummation of the
asset purchase agreement discussed in Note 13 which occured on August 16,
1996. Under the asset purchase agreement, the Buyer of the Company's assets
agreed to assume all obligations with respect to the following matters.
In June 1996, the Company's advertising agency filed a complaint in the
United States District Court for the Southern District of New York naming
the Company as a defendant. The complaint alleges that the Company had not
paid plaintiff for services rendered. The complaint seeks damages in the
amount of approximately $5,500,000, as well as punitive damages and
prejudgment interest. An agreement has been reached which provides for
payments of approximately $2,600,000, which have been accrued in the
accompanying financial statements.
Parkway Manufacturing, Inc. (Parkway), one of the Company's principal
suppliers, has informed the Company that they believe the Company is in
breach of a manufacturing agreement between the Company and Parkway which
was most recently amended on November 1, 1995. Under the manufacturing
agreement, in exchange for certain purchase price reductions, the Company
agreed to purchase its domestic HealthRider unit requirements, as defined,
exclusively from Parkway subject to certain quantity limits. The Company
agreed to purchase a minimum of 10,000 units each week for a three year
period or until the Company had purchased 1,200,000 units. The weekly
purchase order quantities could vary a maximum of up 3 percent or down 2
percent from the preceding week.
Parkway asserted that the Company had not complied with the terms of the
contract by not paying for units produced in accordance with payment terms
and not complying with the weekly purchase order quantities. Parkway
alleged damages which could have exceeded $10,000,000 and threatened to
pursue remedies provided under the Uniform Commercial Code relating to
repossessing certain items of inventory and proceeding with the private
sale of HealthRider and aeROBICRider units; however, no formal lawsuit was
filed. The Company also asserted a breach of the agreement by Parkway for
not meeting production requirements.
In connection with the asset purchase agreement, the Buyer purchased
certain of Parkway's assets, including Parkway's interest in the
manufacturing agreement with the Company.
F-37
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is the subject of various other legal matters, which it
considers generally incidental to its business activities. It is the opinion
of management, after dicussions with legal counsel, that the ultimate
dispositions of these legal matters will not have a material impact on the
financial position, liquidity or results of operations of the Company.
However, no assurance can be given with respect to the ultimate resolution of
these matters.
SOURCES OF SUPPLY
The Company buys a large majority of its products from one domestic supplier
and one foreign supplier. A loss of any one of these suppliers could result in
a shortage of inventory and a loss of sales, which would affect operating
results adversely.
(8) CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company's articles of incorporation authorize the Board of Directors to
fix the rights, preferences, privileges and restrictions of one or more series
out of the authorized shares of preferred stock.
COMMON STOCK ISSUED PURSUANT TO ANTIDILUTIVE RIGHT
During 1993 and 1995, the Company issued 1,004,334 and 245,666 shares of
common stock to a stockholder whose previous share purchase and debt
agreements with the Company provided for a 25 percent antidilutive right to
the Company's issued and outstanding common shares.
STOCK OPTIONS
Prior to the adoption of the 1995 Stock Option/Issuance Plan discussed
below, the Company had granted nonqualified stock options for common stock in
connection with the procurement of debt and equity, professional services
received and inducement for employment. In each case, the exercise price of
the nonqualified options equaled or exceeded the estimated fair maket value of
common stock on the date of grant. Most options have been immediately
exercisable upon issuance and have expiration periods ranging from 2.5 to 10
years from the date of grant.
On February 15, 1995, the Company's Board of Directors adopted, and on March
15, 1995, the Company's stockholders approved the 1995 Incentive Stock Option
Plan. In May 1995 the Company's Board of Directors adopted, and the Company's
stockholders approved in June 1995, the 1995 Stock Option/Issuance Plan (the
Plan). The Plan supersedes the Company's 1995 Incentive Stock Option Plan (the
Prior Plan) effective in May 1995, and assumes the options granted under the
Prior Plan. The Plan is divided into three components: the discretionary
option grant program, the automatic option grant program and the stock
issuance program. The discretionary option grant program provides for the
grant of options to purchase shares of the Company's common stock to key
employees (including officers and employee directors) and consultants of the
Company. The automatic option grant program provides for the grant of options
to purchase shares of the Company's common stock to non-employee Board
members. The stock issuance program allows key employees (including officers
and directors) and consultants of the Company to effect immediate purchases of
the Company's common stock.
Under the Plan, 1,500,000 shares of common stock have been reserved for
issuance. The Plan provides for the grant of incentive stock options which
qualify for favorable tax treatment under the Federal tax laws and non-
statutory options which do not so qualify. Only employees may be granted
incentive stock options. The exercise price of incentive stock options and of
automatic option grants
F-38
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
may not be less than 100 percent of the fair market value of the common stock
on the date of grant while the exercise price of nonstatutory options may not
be less than 85 percent of the fair market value on the date of grant. Stock
issuances under the stock issuance program may be made at fair market value or
at discounts of up to 15 percent. The Board of Directors presently intends to
grant any options under the Plan at current market value. As of December 31,
1995 and June 30, 1996 (unaudited), the unoptioned shares available for
granting under the Plan is 810,000 shares.
The following is a summary of nonqualified and incentive stock option
activity:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1992................. 1,475,000 $ .10- 1.00
Granted.......................................... 314,000 .25- 1.00
Exercised........................................ (950,000) .21
---------
Outstanding at December 31, 1993................. 839,000 .10- 1.00
Granted.......................................... 230,000 .75
Exercised........................................ (352,500) .10- 1.00
---------
Outstanding at December 31, 1994................. 716,500 .10- 1.00
Granted.......................................... 690,000 10.00-12.50
Exercised........................................ (536,500) .50- 1.00
---------
Outstanding at December 31, 1995................. 870,000 .10-12.50
Forfeited (unaudited)............................ (440,000) 10.00
---------
Outstanding at June 30, 1996 (unaudited)......... 430,000 .10-12.50
=========
</TABLE>
The stock options exercised during 1993 were granted in 1992 at an exercise
price of $0.45 per share; however, the Company negotiated with the stockholder
to exercise the options early and reduced the exercise price to $0.21 per
share. The reduced exercise price represented the estimated fair market value
at that date. At December 31, 1995 and June 30, 1996, 81,500 and 112,500
(unaudited); respectively, of the stock options outstanding were exercisable.
(9) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
--------- ---------- -----------
<S> <C> <C> <C>
Current tax provision:
Federal............................. $ 68,000 $5,560,000 $12,178,000
State............................... 10,000 1,282,000 2,859,000
--------- ---------- -----------
78,000 6,842,000 15,037,000
--------- ---------- -----------
Deferred tax provision (benefit):
Federal............................. 125,000 (359,000) (4,037,000)
State............................... 17,000 (78,000) (857,000)
--------- ---------- -----------
142,000 (437,000) (4,894,000)
--------- ---------- -----------
220,000 6,405,000 10,143,000
Valuation allowance................. (121,000) -- --
--------- ---------- -----------
$ 99,000 $6,405,000 $10,143,000
========= ========== ===========
</TABLE>
F-39
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In applying the provisions of SFAS 109, the Company recorded a valuation
allowance for the net deferred tax asset as of December 31, 1992. As of
December 31, 1993, no valuation allowance was necessary as a result of the
Company's profitable operations.
The components of the net deferred tax assets and liabilities as of December
31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts............................... $ 389,000 $ 1,568,000
Warranty and sales returns allowances................. 281,000 1,383,000
Other accrued expenses and reserves................... 451,000 4,412,000
---------- -----------
Total deferred tax assets.............................. 1,121,000 7,363,000
---------- -----------
Deferred tax liabilities:
Prepaid advertising costs............................. (450,000) (1,684,000)
Other................................................. (255,000) (369,000)
---------- -----------
Total deferred tax liabilities......................... (705,000) (2,053,000)
---------- -----------
Net deferred tax asset................................. $ 416,000 $ 5,310,000
========== ===========
</TABLE>
The differences between the statutory federal income tax rate and the
effective rate, which is derived by dividing the provision for income taxes by
income before provision for income taxes, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate............................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............. 4.6 4.9 4.9
Change in valuation allowance.......................... (30.5) -- --
Other.................................................. 15.9 1.8 2.8
----- ---- ----
25.0% 41.7% 42.7%
===== ==== ====
</TABLE>
F-40
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) LEASE OBLIGATIONS
The Company leases certain office, warehouse, and retail store spaces under
noncancelable operating lease agreements. Total rent expense under all
operating leases for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996 (unaudited) was $46,000, $2,339,000,
$8,994,000, and $5,584,000, respectively.
Future minimum lease payments under capital and operating leases with
noncancelable lease terms greater than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES AS OF OPERATING
------------------------- LEASES AS OF
DECEMBER 31, JUNE 30, DECEMBER 31,
YEAR ENDING DECEMBER 31, 1995 1996 1995
- ------------------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
1996................................... $ 336,000 $ 1,659,000 $1,638,000
1997................................... 254,000 3,236,000 1,634,000
1998................................... 4,000 2,933,000 1,217,000
1999................................... -- 2,924,000 496,000
2000................................... -- 2,916,000 328,000
Thereafter............................. -- 24,296,000 --
--------- ------------ ----------
594,000 37,964,000 $5,313,000
==========
Less amounts representing interest..... (49,000) (18,657,000)
--------- ------------
Present value of future minimum lease
payments.............................. 545,000 19,307,000
Less current portion................... (298,000) (1,158,000)
--------- ------------
Capital lease obligations, net of cur-
rent portion.......................... $ 247,000 $ 18,149,000
========= ============
</TABLE>
With respect to the lease on the Company's corporate building (see Note 7),
the Company has subleased a portion of the building for $640,000 a year for a
period of three years ending in February 1999. The sublease payments will
effectively reduce the future minimum lease payments included in the above
table.
Assets recorded under capital leases consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment and furniture................. $857,000 $ 717,000 $ 2,856,000
Building................................ -- -- 17,103,000
-------- --------- -----------
857,000 717,000 19,959,000
Less accumulated depreciation........... (45,000) (236,000) (972,000)
-------- --------- -----------
$812,000 $ 481,000 $18,987,000
======== ========= ===========
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
In January 1995, the Company established a defined contribution savings plan
which qualifies under Section 401(k) of the Internal Revenue Code covering all
employees meeting minimum age and service requirements. Participants may
contribute up to 12 percent of their gross wages, subject to certain
limitations. The Company matches 50 percent of the first 3 percent of employee
contributions. During the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited), the Company made contributions of $54,000,
and $30,000, respectively, to the plan.
F-41
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) RELATED PARTY TRANSACTIONS
LOAN AGREEMENTS WITH RELATED COMPANY
In October 1992, the Company entered into a factoring loan agreement with a
son-in-law of the Chairman of the Company's Board of Directors and majority
stockholders, acting on behalf of U.S. Funding, whereby U.S. Funding loaned
$50,000 to the Company to finance the production of certain HealthRider units.
The loan was collateralized by the units produced. Under the agreement, the
Company paid a factoring charge of $1.11 for each of the units when sold. The
agreement also provided an option for U.S. Funding to extend the $50,000 loan
until a total of $203,000 of factoring charges were received. As of December
31, 1994, the Company had paid the $203,000 of factoring charges and
terminated the agreement by repaying the principal amount of the loan. In
connection with the agreement, the Company also granted U.S. Funding options
to purchase 50,000 shares of the Company's common stock at $1.00 per share.
The stock options were exercised in full during December 1994.
During 1994, the Company entered into another agreement with U.S. Funding
under which U.S. Funding agreed to provide debt financing for certain retail
locations to be opened by the Company at the rate of $7,000 per location. The
loans bear interest at 24 percent per annum with interest and principal due
monthly at $25 per HealthRider unit sold from the specific retail locations.
The agreement also provides for the Company to continue to pay $25 per
HealthRider unit sold from the specific retail locations after the principal
and interest has been repaid. During the years ended December 31, 1994 and
1995 and the six months ended June 30, 1996 (unaudited), loans of $77,000, $0,
and $0, respectively, were made to the Company and $100,000, $204,000, and
$57,225, respectively, were paid to U.S. Funding under the agreement.
NOTES PAYABLE TO MAJORITY STOCKHOLDERS
During 1991 and 1992, the Company entered into three promissory notes with
the Company's majority stockholders in an aggregate amount of $348,000 as
consideration for services provided to the Company and for the sale of shares
of common stock back to the Company. The promissory notes provided for monthly
payments and interest at an annual rate of 12 percent. In January 1992, the
majority stockholders assigned $222,000 of the proceeds due them under the
promissory notes to an unrelated third party and personally guaranteed the
payment. As of December 31, 1995 and June 30, 1996 (unaudited), the balance
owing the unrelated third party was $176,000 and $168,000, respectively, which
is included in long-term debt in the accompanying financial statements. The
remaining balance due to the majority stockholders was paid in full in
December 1993.
DISTRIBUTION AGREEMENT
During September 1994, the Company entered into an agreement with AxTan, of
which a former director of the Company and a son-in-law of the Company's
Chairman and majority stockholders own interests, pursuant to which the
Company granted exclusive rights to sell the HealthRider machine in retail
outlets within the states of Arizona, Oregon and Washington. The agreement
provides that AxTan must pay a fee of $5,000 to the Company for each retail
location opened in exchange for the Company providing one kiosk unit, carpet,
signs, fixtures, general start-up supplies and two HealthRider machines. Fees
paid to the Company pursuant to this agreement during the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1996 (unaudited)
were $90,000, $0, and $0, respectively, and sales of the HealthRider to AxTan
were $2,077,000, $3,243,000, and $1,308,000, respectively. On June 18, 1996,
the Company negotiated a termination of this agreement.
F-42
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCKHOLDER ROYALTY AGREEMENT
On May 14, 1992, the Company entered into an agreement with the then current
stockholders of the Company whereby an ongoing quarterly royalty of $5 per
HealthRider unit sold would be made to these stockholders on a pro rata basis.
The majority stockholders' royalty was apportioned to the other stockholders
on a pro rata basis until the latter received $2 for each share of common
stock held on May 14, 1992; thereafter, the majority stockholders began to
receive their proportionate share of the royalty. During the years ended
December 31, 1993, 1994, and 1995 and the six months ended June 30, 1996
(unaudited), the Company recorded royalty expense of $179,000, $699,000,
$1,780,000, and $790,000, respectively, related to this agreement.
NOTES RECEIVABLE FROM OFFICERS
During 1994, the Company loaned $110,000 in total to three of its executive
officers in connection with the exercise of certain stock options. The notes
bear interest at 8 percent, are payable upon demand, and are collateralized by
the stock purchased. The notes are presented as an offset to common stock in
the accompanying consolidated balance sheets. During the six months ended June
30, 1996, the Company received 4,971 shares of common stock from one of the
officers in payment of his $75,000 note receivable and related interest of
$12,000.
AGREEMENTS WITH T6-G LIMITED PARTNERSHIP
T6-G Limited Partnership (T6-G), a significant stockholder of the Company,
loaned the Company $590,000 in the aggregate pursuant to various agreements
and promissory notes. The balances due under the agreements were paid in full
in July 1994. The agreements also provided for grants of options to purchase
950,000 shares of common stock at a price of $.45 per share. The Company
subsequently agreed to reduce the exercise price of the stock options to $.21
per share as an inducement for T6-G to exercise the options (see Note 8). The
agreements with T6-G provide for antidilution protection such that T6-G has
the ability to maintain a 25 percent equity interest in the Company (see Note
8).
(13) ASSET PURCHASE AGREEMENT
On July 3, 1996, the Company entered into a definitive agreement with IHF
Capital, Inc. and HealthRider Acquisition Corp., an indirect subsidiary of IHF
Capital, Inc. (the "Buyer") whereby the Buyer agreed to purchase substantially
all the assets of the Company for approximately $16.8 million and assume
substantially all of the Company's liabilities, with certain exclusions. The
liabilities excluded from the sale principally include all liabilities and
obligations relating to ownership, or claims to ownership of any equity
interest in the Company including the lawsuit filed by certain stockholders
against the Company described in Note 7, the stockholder royalty agreements
described in Note 12, as well as any other ownership related claims. On August
16, 1996 the sale was consummated, and the Company's operations have been
transferred to the Buyer.
In conjunction with the asset acquisition, the Company and the Buyer entered
into a definitive agreement to buy out the minority interest of HealthRider
International Limited. The buyout agreement required the Company to make a
payment of $.7 million and the Buyer to make a payment of $.6 million and
provide inventory of $.1 million to the minority interest holder.
F-43
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 15
Capitalization............................................................ 25
Background................................................................ 26
Unaudited Pro Forma Financial Data........................................ 27
Selected Consolidated Financial Data...................................... 37
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 40
Business.................................................................. 53
Management................................................................ 69
Certain Relationships and Related Transactions............................ 76
Security Ownership of Certain Beneficial Owners and Management............ 81
Description of Senior Discount Notes...................................... 83
The Exchange Offer........................................................ 113
Description of Certain Indebtedness....................................... 122
Certain Federal Tax Considerations........................................ 123
Plan of Distribution...................................................... 128
Legal Matters............................................................. 128
Experts................................................................... 128
Additional Information.................................................... 129
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ICON FITNESS CORPORATION
EXCHANGE OFFER
$162,000,000 14% SERIES B
SENIOR DISCOUNT NOTES DUE 2006
-----------
LOGO
-----------
-----------
PROSPECTUS
-----------
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrants in
connection with the sale of the securities being registered. All amounts are
estimates except for the fees payable to the Securities and Exchange
Commission ("SEC").
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee................................................ $25,002.50
Printing and engraving expenses..................................... $
Legal fees and expenses of the Company.............................. $
Accounting fees and expenses........................................ $
Trustee's fees and expenses......................................... $
Miscellaneous....................................................... $
----------
TOTAL............................................................. $
==========
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by
or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses actually and
reasonably incurred in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or such other court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (relating to unlawful payment of dividends and unlawful stock
purchase and redemption) or (iv) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE>
ICON's Certificate of Incorporation provides that its Directors shall not be
liable to the Registrant or its stockholders for monetary damages for breach
of fiduciary duty as a director except to the extent that exculpation from
liabilities is not permitted under the DGCL as in effect at the time such
liability is determined. ICON's Certificate further provides that respective
Registrant shall indemnify its directors and officers to the fullest extent
permitted by the DGCL.
The directors and officers of each of the Company are covered under
directors' and officers' liability insurance policies maintained by the
Company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
As noted, the following exhibits (i) were previously filed as part of either
the Registration Statement on Form S-1 of Health & Fitness and IHF Holdings,
as amended, (Registration No. 33-87930-01) or as part of the Registration
Statement on Form S-1 of IHF Capital, Inc. as amended (Registration No. 333-
04279) with the Securities and Exchange Commission under the Securities Act
and are referred to and incorporated herein by reference to such filings or
(ii) are filed herewith or are to be filed by amendment.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
1.1(1) Purchase Agreement dated November 15, 1996 regarding the issuance
and sale of the Senior Discount Notes between ICON and Donaldson,
Lufkin & Jenrette Securities Corporation.
3.1(1) Certificate of Incorporation.
3.1A(1) Amendment to Certificate of Incorporation.
3.2(1) By-laws.
4.2(1) Indenture dated as of November 20, 1996 between ICON as Issuer,
and Fleet National Bank as Trustee, with respect to the
$162,000,000 in aggregate principal amount at maturity of Senior
Discount Notes due 2006, including the form of the Senior Discount
Note.
4.3(1) Registration Rights Agreement dated as of November 20, 1996 by and
between ICON and Donaldson Lufkin & Jennette Securities
Corporation. (to be filed by amendment)
5(2) Opinion of Ropes & Gray re legality.
10.1(3) Amended and Restated Credit Agreement dated as of November 14,
1994 among Health & Fitness, the lenders named therein, and
General Electric Capital Corporation.
10.1A(3) Agreement of IHF Holdings, Inc. and IHF Capital, dated November
14, 1994 in favor of General Electric Capital Corporation, as
agent.
10.2(3) First Amended and Restated Master Transaction Agreement dated as
of October 12, 1994 among Health & Fitness and each of Weider
Health and Fitness and Weider Sporting Goods, Inc. and each of
Hornchurch Investments Limited, Bayonne Settlement, The Joe Weider
Foundation, Ronald Corey, Jon White, William Dalebout, David
Watterson, S. Fred Beck, Gary Stevenson and Scott Watterson.
10.3(3) Adjustment Agreement dated as of November 14, 1994 between Weider
Health and Fitness and Health & Fitness.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
10.4(3) Stockholders Agreement dated as of November 14, 1994 by and
among Health & Fitness, IHF Holdings each of the Bain Funds
named therein and certain other persons named therein.
10.4A(4) Registration Rights Agreement dated November 14, 1994 among
Health & Fitness and IHF Holdings and Donaldson, Lufkin &
Jenrette Securities Corporation and Bear, Stearns & Co.
10.5(3) Non-Competition Agreement dated as of November 14, 1994 among
Health & Fitness, Weider Health and Fitness, Gary E. Stevenson
and Scott R. Watterson.
10.6(3) Management and Advisory Agreement dated as of November 14, 1994
among Health & Fitness, IHF Holdings, the Company, and Bain
Capital Partners IV, L.P.
10.7(3) Distribution Agreement dated as of September 26, 1994, as
amended by letter of Ben Weider dated October 12, 1994 between
Health & Fitness and Weider Sports Equipment Co., Ltd.
10.8(3) Exclusive License Agreement dated as of November 14, 1994 among
Weider Health and Fitness, Weider Sporting Goods, Inc., Weider
Europe B.V., and Health & Fitness.
10.9(3) Canada Exclusive License Agreement dated as of November 14, 1994
between Weider Sports Equipment Co., Ltd. and Health & Fitness.
10.10(3) Employment Agreement dated as of November 14, 1994 among the
Company, Health & Fitness, IHF Holdings and Gary E. Stevenson.
10.11(3) Employment Agreement dated as of November 14, 1994 among the
Company, Health & Fitness, IHF Holdings and Scott R. Watterson.
10.12(3) Asset Option Agreement dated as of November 14, 1994 among
Health & Fitness, Weider Sporting Goods, Inc. and Weider Europe
B.V., including Health & Fitness' assignment of its rights
thereunder.
10.13(3) Asset Option Agreement dated as of November 14, 1994 between
Health & Fitness and each of Athletimonde Inc., Les Industries
Rickbend Inc. and Fitquip International Inc., including Health &
Fitness' assignment of its rights thereunder.
10.14(3) Canco Management and Advisory Agreement dated as of November 14,
1994 by and among Health & Fitness, Scott Watterson, Gary E.
Stevenson and Les Industries Rickbend Inc., Athletimonde Inc.,
and Fitquip International Inc., including Health & Fitness'
assignment of its rights thereunder.
10.15(3) Weider Europe Management Agreement dated as of November 14, 1994
among Health & Fitness and Weider Europe B.V., including Health
& Fitness' assignment of its rights thereunder.
10.16(3) Amended and Restated WSG Management Agreement dated as of June
1, 1994 among Health & Fitness, Weider Health and Fitness and
Weider Sporting Goods, Inc.
10.17(3) Advertising Space Contract dated as of November 14, 1994 between
Health & Fitness and Weider Publications, Inc.
10.18(3) Trade Payables Agreement dated as of November 14, 1994 between
Health & Fitness and IHF Holdings.
10.19(3) Tax Agreement dated as of November 14, 1994 among the Company
and its subsidiaries.
10.20(3) The Company's Stock Subscription and Exchange Agreement dated as
of November 14, 1994 among the Company and each of the Existing
Stockholders named therein.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<C> <S>
10.21(3) Warrant Agreement dated as of November 14, 1994 among IHF
Capital, Weider Health and Fitness, Scott Watterson and Gary
Stevenson.
10.22(3) Bain Stock Subscription Agreement dated as of November 14, 1994
among the Company and each of the Bain Funds and other
subscribers named therein.
10.23(3) IHF Capital's Stock Subscription and Purchase Agreement dated as
of November 14, 1994 among IHF Capital and the Subscribers named
therein.
10.24(3) IHF Holdings Stock Subscription and Exchange Agreement dated as
of November 14, 1994 among IHF Holdings and each of the persons
named therein.
10.25(3) IHF Capital's Option Exchange Agreement dated as of November 14,
1994, among the Company, Scott Watterson and Gary Stevenson.
10.26(3) IHF Holdings Option Exchange Agreement dated as of November 14,
1994 among IHF Holdings, Scott Watterson and Gary Stevenson.
10.27(3) IHF Capital's Employee Stock Option Plan dated as of November
14, 1994.
10.27.1(3) Form of Option Certificate for Management Options.
10.27.2(3) Form of Option Certificate for Performance Options.
10.28(3) Agreement and Plan of Merger dated as of November 14, 1994 among
Health & Fitness, American Physical Therapy, Inc., Weslo, Inc.
and ProForm Fitness Products, Inc.
10.29(3) Promissory Note dated December 30, 1993 and allonge, made by
David Watterson in favor of ProForm Fitness Products, Inc. in
the amount of $60,000.
10.30(3) Promissory Note dated December 30, 1993 and allonge, made by
William Dalebout in favor of ProForm Fitness Products, Inc. in
the amount of $57,000.
10.31(3) Promissory Note dated December 30, 1993 and allonge, made by
Fred Beck in favor of ProForm Fitness Products, Inc. in the
amount of $60,000.
10.32(3) Promissory Note dated December 30, 1993 and allonge, made by Jon
White in favor of ProForm Fitness Products, Inc. in the amount
of $57,000.
10.33(3) Sublease dated as of June 1, 1994 between Weider Health and
Fitness and ProForm Fitness Products, Inc.
10.34(5) Indenture dated as of November 14, 1994 between Health &
Fitness, as Issuer, and Fleet Bank of Massachusetts, N.A., as
Trustee, with respect to the $101,250,000 in aggregate principal
amount of Senior Subordinated Notes due 2002, including the form
of Senior Subordinated Note.
10.34A(5) Supplemental Indenture dated as of March 20, 1995 between Health
& Fitness, as Issuer, and Fleet Bank of Massachusetts, N.A., as
Trustee, with respect to the $101,250,000 in aggregate principal
amount of Senior Subordinated Notes due 2002.
10.35(5) Indenture dated as of November 14, 1994 between IHF Holdings, as
Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $123,700,000 in aggregate principal amount at
maturity of Discount Notes due 2004, including the form of
Discount Note.
10.35A(5) Supplemental Indenture dated as of March 20, 1995 between IHF
Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A., as
Trustee, with respect to the $123,700,000 in aggregate principal
amount at maturity of Discount Notes due 2004.
10.36(5) Registration Rights Agreement dated November 14, 1994 between
Health & Fitness and Weider Health and Fitness with respect to
the Senior Subordinated Notes due 2002.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
10.37(6) Asset Purchase Agreement dated as of July 3, 1996 by and among IHF
Capital, Inc. HealthRider Acquisition Corp. and HealthRider, Inc.
10.38(6) Asset Purchase Agreement for the purchase of certain assets of
Parkway Manufacturing, Inc. dated July 3, 1996.
10.39(6) Buy-Out Agreement between HealthRider Acquisition Corp. and
Parkway Manufacturing, Inc. dated August 26, 1996.
10.40(6) IHF Capital's 1996 Stock Option Plan.
10.41(6) WSE Asset Purchase Agreement, dated September 6, 1996 between
Weider Sports Equipment Co. Ltd. and ICON Health & Fitness Inc.
10.42(6) Canco Asset Purchase Agreement, dated September 6, 1996 among ICON
of Canada Inc., ICON Health & Fitness Inc., ALLFITNESS, Inc, Scott
Watterson and Gary Stevenson.
10.43(6) Stock and Warrants Purchase Agreement, dated September 6, 1996
among IHF Capital, Inc., IHF Holdings, Inc., Weider Health &
Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch
Investments Limited, Ronald Corey, Bernard Cartoon, Ronald Novak,
Eric Weider, Richard Bizarro, Robert Reynolds, Michael Carr,
Thomas Deters, Barbara Harris and Zbigniew Kindella.
10.44(6) Amendment No. 1 to Stockholders Agreement, dated September 6, 1996
among IHF Holdings, Inc., Weider Health & Fitness, Greyfriars
Limited, Bayonne Settlement, Hornchurch Investments Limited, the
Fund Investors, DLJ Capital Corporation, General Electric Capital
Corporation, and certain other signatories named therein.
10.45(6) Amendment and Restatement of Stockholders Agreement, dated as of
September 6, 1996 among IHF Holdings, Inc., Weider Health &
Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch
Investments Limited, the Fund Investors, DLJ Capital Corporation,
General Electric Capital Corporation, and certain other
signatories named therein.
10.46(6) Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and
Scott Watterson.
10.47(6) First Amendment to Stevenson Employment Agreement, dated September
6, to the Employment Agreement dated November 14, 1994 among ICON
Health & Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Gary
Stevenson.
10.48(6) First Amendment to Watterson Employment Agreement, dated September
6, to the Employment Agreement dated November 14, 1994 among ICON
Health & Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Scott
Watterson.
10.49(6) Weider Release, dated September 6, 1996 by Weider Health &
Fitness, Weider Sports Equipment Co., Ltd., Weider Sporting Goods,
Inc., Weider Europe, B.V., CANCO, Ben Weider, Eric Weider, Richard
Renaud and the Weider Releasors.
10.50(6) Icon Release, dated September 6, 1996 made by ICON Health &
Fitness, IHF Capital, Inc., IHF Holdings, Inc., Scott Watterson,
Gary Stevenson and the ICON Releasors.
10.51(6) Settlement Agreement, dated September 6, 1996 among ICON Health &
Fitness, IHF Capital, Inc., the Fund Investors, IHF Holdings,
Inc., Weider Health & Fitness, Weider Sports Equipment, CANCO,
Weider Sporting Goods, Inc., Weider Europe, B.V., and each of Ben
Weider, Eric Weider, Richard Renaud, Gary Stevenson and Scott
Watterson.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
10.52(6) Escrow Agreement, dated September 6, 1996 among ICON Health &
Fitness, ICON of Canada, Inc., CANCO, Lapointe Rosenstein and
Goodman Phillips of Vineberg.
10.53(6) Representation Agreement, dated September 6, 1996 between ICON
Health & Fitness, Inc. and Ben Weider.
10.54(6) Letter Agreement regarding advertising space, dated September 6,
1996 between Weider Publications, Inc. and ICON Health & Fitness,
Inc.
10.55(6) Letters of Credit issued by Royal Bank of Canada to ICON Health &
Fitness, Inc. dated September 5, 1996.
10.56(6) Letters of Credit issued by Royal Bank of Canada to ICON Health &
Fitness, Inc. and ICON of Canada, Inc., dated September 5, 1996.
10.57(6) Letter from Royal Bank of Canada to ICON of Canada, Inc., dated
September 5, 1996, outlining terms of financing by Royal Bank of
Canada in favor of ICON of Canada, Inc.
10.58(6) Letter Agreement dated September 6, 1996 among ICON Health &
Fitness, Inc., Ben Weider and Eric Weider regarding charitable
contributions.
10.59(6) Deed of Sale.
12(1) Statement regarding computation of ratio of earnings to fixed
charges.
16(6) Letter of Deloitte & Touche LLP regarding change in certifying
accountant.
21(2) Subsidiaries of the Company.
23.1(1) Consent and report on schedule of Deloitte & Touche LLP.
23.2(1) Consent of Price Waterhouse LLP.
23.3(1) Consent of Arthur Andersen LLP.
23.4 Consent of Ropes & Gray (included in Exhibit 5).
24 Powers of Attorney (included on signature page).
25(2) Statement of Eligibility of Fleet National Bank, Trustee.
27(1) Financial Data Schedule.
99.1(2) Form of Letter of Transmittal used in connection with the Exchange
Offer.
99.2(2) Form of Notice of Guaranteed Delivery used in connection with The
Exchange Offer.
</TABLE>
- --------
(1) Filed herewith.
(2) To be filed by amendment.
(3) Filed as part of the Registration Statement on Form S-1 of Health &
Fitness and IHF Holdings, as amended (Registration No. 33-87930-01) and
are referred to and incorporated herein by reference to the
correspondingly numbered exhibit filed as part of such filing.
(4) Filed as Exhibit 4.3 to the Registration Statement on Form S-1 of Health &
Fitness and IHF Holdings, as amended (Registration No. 33-87930-01) and is
incorporated herein by reference.
(5) Filed as part of Exhibit 4 to the Registration Statement on Form S-1 of
Health & Fitness and IHF Holdings, as amended (Registration No. 33-87930-
01) and is incorporated herein by reference.
(6) Filed as part of the Registration Statement on Form S-1 of IHF Capital, as
amended (Registration No. 333-04279) and are referred to and incorporated
herein by reference to the correspondingly numbered exhibit filed as part
of such filing.
II-6
<PAGE>
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES OF THE COMPANY FOR THE THREE
YEARS ENDED MAY 31, 1996 ARE INCLUDED IN THIS REGISTRATION STATEMENT:
Schedule VIII Valuation and qualifying accounts for the years ended May 31,
1994, 1995 and 1996.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether or not such indemnification is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, IHF Capital, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 20th day of December, 1996.
ICON FITNESS CORPORATION
/s/ Scott R. Watterson
By: __________________________________
Name: Scott R. Watterson
Title: Chairman of the Board and
ChiefExecutive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 20th day of December, 1996. Each person whose signature
appears below hereby authorizes Scott R. Watterson, Gary E. Stevenson, Robert
C. Gay, Ronald P. Mika and S. Fred Beck and each of them, with full power of
substitution, to execute in the name and on behalf of such person any amendment
or any post-effective amendment to this Registration Statement and to file the
same, with any exhibits thereto and other documents in connection therewith,
making such changes to this Registration Statement as the Registrant deems
appropriate, and appoints each of Scott R. Watterson, Gary E. Stevenson,
Robert C. Gay, Ronald P. Mika and S. Fred Beck and each of them, with full
power of substitution, attorney-in-fact to sign any amendment and any post-
effective amendment to this Registration Statement and to file the same, with
any exhibits thereto and other documents in connection therewith.
SIGNATURE TITLE
--------- -----
/s/ Scott R. Watterson Chairman of the Board of Directors and
- ------------------------------------ Chief Executive Officer (principal
SCOTT R. WATTERSON executive officer)
/s/ S. Fred Beck Vice President, Chief Financial and
- ------------------------------------ Accounting Officer and Treasurer
S. FRED BECK (principal financial and accounting
officer)
/s/ Gary E. Stevenson Director, President and Chief Operating
- ------------------------------------ Officer
GARY E. STEVENSON
/s/ Robert C. Gay Vice Chairman of the Board of Directors
- ------------------------------------
ROBERT C. GAY
/s/ Ronald P. Mika Director
- ------------------------------------
RONALD P. MIKA
/s/ Geoffrey S. Rehnert Director
- ------------------------------------
GEOFFREY S. REHNERT
II-8
<PAGE>
ICON FITNESS CORPORATION
CONSOLIDATED SUPPLEMENTAL SCHEDULE VIII
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- --------------------------
YEARS ENDED
MAY 31, YEAR ENDED MAY 31,
------------- --------------------------
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
ALLOWANCES FOR DOUBTFUL ACCOUNTS,
ADVERTISING AND CREDIT MEMOS:
Balance at Beginning of year......... $ 2,146,000 $ 3,279,000 $5,308,000
Additions
Charged to Costs and Expenses (Al-
lowance for Doubtful Accounts and
Credit Memos)..................... 1,864,000 3,792,000 3,662,000
Charged to Costs and Expenses (Dis-
counts and Advertising)........... 12,907,000 14,114,000 34,585,000
Recoveries on Accounts Charged Off. -- -- 74,000
Deductions
Accounts Charged Off (Allowance for
Doubtful Accounts and Credit
Memos)............................ (1,163,000) (2,666,000) (3,569,000)
Accounts Charged Off (Discounts and
Advertising)...................... (12,475,000) (13,211,000) (32,465,000)
------------ ------------ ------------
Balance at End of Year............... $ 3,279,000 $ 5,308,000 $ 7,595,000
============ ============ ============
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
1.1(1) Purchase Agreement dated November 15, 1996 regarding the
issuance and sale of the Senior Discount Notes between ICON
and Donaldson, Lufkin & Jenrette Securities Corporation.
3.1(1) Certificate of Incorporation.
3.1A(1) Amendment to Certificate of Incorporation.
3.2(1) By-laws.
4.2(1) Indenture dated as of November 20, 1996 between ICON as
Issuer, and Fleet National Bank as Trustee, with respect to
the $162,000,000 in aggregate principal amount at maturity of
Senior Discount Notes due 2006, including the form of the
Senior Discount Note.
4.3(1) Registration Rights Agreement dated as of November 20, 1996 by
and between ICON and Donaldson Lufkin & Jennette Securities
Corporation. (to be filed by amendment)
5(2) Opinion of Ropes & Gray re legality.
10.1(3) Amended and Restated Credit Agreement dated as of November 14,
1994 among Health & Fitness, the lenders named therein, and
General Electric Capital Corporation.
10.1A(3) Agreement of IHF Holdings, Inc. and IHF Capital, dated
November 14, 1994 in favor of General Electric Capital
Corporation, as agent.
10.2(3) First Amended and Restated Master Transaction Agreement dated
as of October 12, 1994 among Health & Fitness and each of
Weider Health and Fitness and Weider Sporting Goods, Inc. and
each of Hornchurch Investments Limited, Bayonne Settlement,
The Joe Weider Foundation, Ronald Corey, Jon White, William
Dalebout, David Watterson, S. Fred Beck, Gary Stevenson and
Scott Watterson.
10.3(3) Adjustment Agreement dated as of November 14, 1994 between
Weider Health and Fitness and Health & Fitness.
10.4(3) Stockholders Agreement dated as of November 14, 1994 by and
among Health & Fitness, IHF Holdings each of the Bain Funds
named therein and certain other persons named therein.
10.4A(4) Registration Rights Agreement dated November 14, 1994 among
Health & Fitness and IHF Holdings and Donaldson, Lufkin &
Jenrette Securities Corporation and Bear, Stearns & Co.
10.5(3) Non-Competition Agreement dated as of November 14, 1994 among
Health & Fitness, Weider Health and Fitness, Gary E. Stevenson
and Scott R. Watterson.
10.6(3) Management and Advisory Agreement dated as of November 14,
1994 among Health & Fitness, IHF Holdings, the Company, and
Bain Capital Partners IV, L.P.
10.7(3) Distribution Agreement dated as of September 26, 1994, as
amended by letter of Ben Weider dated October 12, 1994 between
Health & Fitness and Weider Sports Equipment Co., Ltd.
10.8(3) Exclusive License Agreement dated as of November 14, 1994
among Weider Health and Fitness, Weider Sporting Goods, Inc.,
Weider Europe B.V., and Health & Fitness.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
10.9(3) Canada Exclusive License Agreement dated as of November 14,
1994 between Weider Sports Equipment Co., Ltd. and Health &
Fitness.
10.10(3) Employment Agreement dated as of November 14, 1994 among the
Company, Health & Fitness, IHF Holdings and Gary E. Stevenson.
10.11(3) Employment Agreement dated as of November 14, 1994 among the
Company, Health & Fitness, IHF Holdings and Scott R.
Watterson.
10.12(3) Asset Option Agreement dated as of November 14, 1994 among
Health & Fitness, Weider Sporting Goods, Inc. and Weider
Europe B.V., including Health & Fitness' assignment of its
rights thereunder.
10.13(3) Asset Option Agreement dated as of November 14, 1994 between
Health & Fitness and each of Athletimonde Inc., Les Industries
Rickbend Inc. and Fitquip International Inc., including Health
& Fitness' assignment of its rights thereunder.
10.14(3) Canco Management and Advisory Agreement dated as of November
14, 1994 by and among Health & Fitness, Scott Watterson, Gary
E. Stevenson and Les Industries Rickbend Inc., Athletimonde
Inc., and Fitquip International Inc., including Health &
Fitness' assignment of its rights thereunder.
10.15(3) Weider Europe Management Agreement dated as of November 14,
1994 among Health & Fitness and Weider Europe B.V., including
Health & Fitness' assignment of its rights thereunder.
10.16(3) Amended and Restated WSG Management Agreement dated as of June
1, 1994 among Health & Fitness, Weider Health and Fitness and
Weider Sporting Goods, Inc.
10.17(3) Advertising Space Contract dated as of November 14, 1994
between Health & Fitness and Weider Publications, Inc.
10.18(3) Trade Payables Agreement dated as of November 14, 1994 between
Health & Fitness and IHF Holdings.
10.19(3) Tax Agreement dated as of November 14, 1994 among the Company
and its subsidiaries.
10.20(3) The Company's Stock Subscription and Exchange Agreement dated
as of November 14, 1994 among the Company and each of the
Existing Stockholders named therein.
10.21(3) Warrant Agreement dated as of November 14, 1994 among IHF
Capital, Weider Health and Fitness, Scott Watterson and Gary
Stevenson.
10.22(3) Bain Stock Subscription Agreement dated as of November 14,
1994 among the Company and each of the Bain Funds and other
subscribers named therein.
10.23(3) IHF Capital's Stock Subscription and Purchase Agreement dated
as of November 14, 1994 among IHF Capital and the Subscribers
named therein.
10.24(3) IHF Holdings Stock Subscription and Exchange Agreement dated
as of November 14, 1994 among IHF Holdings and each of the
persons named therein.
10.25(3) IHF Capital's Option Exchange Agreement dated as of November
14, 1994, among the Company, Scott Watterson and Gary
Stevenson.
10.26(3) IHF Holdings Option Exchange Agreement dated as of November
14, 1994 among IHF Holdings, Scott Watterson and Gary
Stevenson.
10.27(3) IHF Capital's Employee Stock Option Plan dated as of November
14, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
---------- ----------- ----
<C> <S> <C>
10.27.1(3) Form of Option Certificate for Management Options.
10.27.2(3) Form of Option Certificate for Performance Options.
10.28(3) Agreement and Plan of Merger dated as of November 14, 1994
among Health & Fitness, American Physical Therapy, Inc.,
Weslo, Inc. and ProForm Fitness Products, Inc.
10.29(3) Promissory Note dated December 30, 1993 and allonge, made by
David Watterson in favor of ProForm Fitness Products, Inc.
in the amount of $60,000.
10.30(3) Promissory Note dated December 30, 1993 and allonge, made by
William Dalebout in favor of ProForm Fitness Products, Inc.
in the amount of $57,000.
10.31(3) Promissory Note dated December 30, 1993 and allonge, made by
Fred Beck in favor of ProForm Fitness Products, Inc. in the
amount of $60,000.
10.32(3) Promissory Note dated December 30, 1993 and allonge, made by
Jon White in favor of ProForm Fitness Products, Inc. in the
amount of $57,000.
10.33(3) Sublease dated as of June 1, 1994 between Weider Health and
Fitness and ProForm Fitness Products, Inc.
10.34(5) Indenture dated as of November 14, 1994 between Health &
Fitness, as Issuer, and Fleet Bank of Massachusetts, N.A.,
as Trustee, with respect to the $101,250,000 in aggregate
principal amount of Senior Subordinated Notes due 2002,
including the form of Senior Subordinated Note.
10.34A(5) Supplemental Indenture dated as of March 20, 1995 between
Health & Fitness, as Issuer, and Fleet Bank of
Massachusetts, N.A., as Trustee, with respect to the
$101,250,000 in aggregate principal amount of Senior
Subordinated Notes due 2002.
10.35(5) Indenture dated as of November 14, 1994 between IHF
Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A.,
as Trustee, with respect to the $123,700,000 in aggregate
principal amount at maturity of Discount Notes due 2004,
including the form of Discount Note.
10.35A(5) Supplemental Indenture dated as of March 20, 1995 between
IHF Holdings, as Issuer, and Fleet Bank of Massachusetts,
N.A., as Trustee, with respect to the $123,700,000 in
aggregate principal amount at maturity of Discount Notes due
2004.
10.36(5) Registration Rights Agreement dated November 14, 1994
between Health & Fitness and Weider Health and Fitness with
respect to the Senior Subordinated Notes due 2002.
10.37(6) Asset Purchase Agreement dated as of July 3, 1996 by and
among IHF Capital, Inc. HealthRider Acquisition Corp. and
HealthRider, Inc.
10.38(6) Asset Purchase Agreement for the purchase of certain assets
of Parkway Manufacturing, Inc. dated July 3, 1996.
10.39(6) Buy-Out Agreement between HealthRider Acquisition Corp. and
Parkway Manufacturing, Inc. dated August 26, 1996.
10.40(6) IHF Capital's 1996 Stock Option Plan.
10.41(6) WSE Asset Purchase Agreement, dated September 6, 1996
between Weider Sports Equipment Co. Ltd. and ICON Health &
Fitness Inc.
10.42(6) Canco Asset Purchase Agreement, dated September 6, 1996
among ICON of Canada Inc., ICON Health & Fitness Inc.,
ALLFITNESS, Inc, Scott Watterson and Gary Stevenson.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
10.43(6) Stock and Warrants Purchase Agreement, dated September 6, 1996
among IHF Capital, Inc., IHF Holdings, Inc., Weider Health &
Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch
Investments Limited, Ronald Corey, Bernard Cartoon, Ronald
Novak, Eric Weider, Richard Bizarro, Robert Reynolds, Michael
Carr, Thomas Deters, Barbara Harris and Zbigniew Kindella.
10.44(6) Amendment No. 1 to Stockholders Agreement, dated September 6,
1996 among IHF Holdings, Inc., Weider Health & Fitness,
Greyfriars Limited, Bayonne Settlement, Hornchurch Investments
Limited, the Fund Investors, DLJ Capital Corporation, General
Electric Capital Corporation, and certain other signatories
named therein.
10.45(6) Amendment and Restatement of Stockholders Agreement, dated as
of September 6, 1996 among IHF Holdings, Inc., Weider Health &
Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch
Investments Limited, the Fund Investors, DLJ Capital
Corporation, General Electric Capital Corporation, and certain
other signatories named therein.
10.46(6) Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and
Scott Watterson.
10.47(6) First Amendment to Stevenson Employment Agreement, dated
September 6, to the Employment Agreement dated November 14,
1994 among ICON Health & Fitness, IHF Capital, Inc., IHF
Holdings, Inc. and Gary Stevenson.
10.48(6) First Amendment to Watterson Employment Agreement, dated
September 6, to the Employment Agreement dated November 14,
1994 among ICON Health & Fitness, IHF Capital, Inc., IHF
Holdings, Inc. and Scott Watterson.
10.49(6) Weider Release, dated September 6, 1996 by Weider Health &
Fitness, Weider Sports Equipment Co., Ltd., Weider Sporting
Goods, Inc., Weider Europe, B.V., CANCO, Ben Weider, Eric
Weider, Richard Renaud and the Weider Releasors.
10.50(6) Icon Release, dated September 6, 1996 made by ICON Health &
Fitness, IHF Capital, Inc., IHF Holdings, Inc., Scott
Watterson, Gary Stevenson and the ICON Releasors.
10.51(6) Settlement Agreement, dated September 6, 1996 among ICON
Health & Fitness, IHF Capital, Inc., the Fund Investors, IHF
Holdings, Inc., Weider Health & Fitness, Weider Sports
Equipment, CANCO, Weider Sporting Goods, Inc., Weider Europe,
B.V., and each of Ben Weider, Eric Weider, Richard Renaud,
Gary Stevenson and Scott Watterson.
10.52(6) Escrow Agreement, dated September 6, 1996 among ICON Health &
Fitness, ICON of Canada, Inc., CANCO, Lapointe Rosenstein and
Goodman Phillips of Vineberg.
10.53(6) Representation Agreement, dated September 6, 1996 between ICON
Health & Fitness, Inc. and Ben Weider.
10.54(6) Letter Agreement regarding advertising space, dated September
6, 1996 between Weider Publications, Inc. and ICON Health &
Fitness, Inc.
10.55(6) Letters of Credit issued by Royal Bank of Canada to ICON
Health & Fitness, Inc. dated September 5, 1996.
10.56(6) Letters of Credit issued by Royal Bank of Canada to ICON
Health & Fitness, Inc. and ICON of Canada, Inc., dated
September 5, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
10.57(6) Letter from Royal Bank of Canada to ICON of Canada, Inc.,
dated September 5, 1996, outlining terms of financing by Royal
Bank of Canada in favor of ICON of Canada, Inc.
10.58(6) Letter Agreement dated September 6, 1996 among ICON Health &
Fitness, Inc., Ben Weider and Eric Weider regarding charitable
contributions.
10.59(6) Deed of Sale.
12(1) Statement regarding computation of ratio of earnings to fixed
charges.
16(6) Letter of Deloitte & Touche LLP regarding change in certifying
accountant.
21(2) Subsidiaries of the Company.
23.1(1) Consent and report on schedule of Deloitte & Touche LLP.
23.2(1) Consent of Price Waterhouse LLP.
23.3(1) Consent of Arthur Andersen LLP.
23.4 Consent of Ropes & Gray (included in Exhibit 5).
24 Powers of Attorney (included on signature page).
25(2) Statement of Eligibility of Fleet National Bank, Trustee.
27(1) Financial Data Schedule.
99.1(2) Form of Letter of Transmittal used in connection with the
Exchange Offer.
99.2(2) Form of Notice of Guaranteed Delivery used in connection with
The Exchange Offer (to be filed by amendment).
</TABLE>
- --------
(1) Filed herewith.
(2) To be filed by amendment.
(3) Filed as part of the Registration Statement on Form S-1 of Health &
Fitness and IHF Holdings, as amended (Registration No. 33-87930-01) and
are referred to and incorporated herein by reference to the
correspondingly numbered exhibit filed as part of such filing.
(4) Filed as Exhibit 4.3 to the Registration Statement on Form S-1 of Health &
Fitness and IHF Holdings, as amended (Registration No. 33-87930-01) and is
incorporated herein by reference.
(5) Filed as part of Exhibit 4 to the Registration Statement on Form S-1 of
Health & Fitness and IHF Holdings, as amended (Registration No. 33-87930-
01) and is incorporated herein by reference.
(6) Filed as part of the Registration Statement on Form S-1 of IHF Capital, as
amended (Registration No. 333-04279) and are referred to and incorporated
herein by reference to the correspondingly numbered exhibit filed as part
of such filing.
<PAGE>
Exhibit 1.1
ICON FITNESS CORPORATION
14% SERIES A SENIOR DISCOUNT
NOTES DUE 2006
PURCHASE AGREEMENT
------------------
November 15, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
277 Park Avenue
New York, New York 10172
Ladies & Gentlemen:
Icon Fitness Corporation, a Delaware corporation (the "Company")
-------
agrees with you as follows:
1. Issuance of Securities. The Company proposes to issue and sell to
----------------------
Donaldson, Lufkin & Jenrette Securities Corporation (the "Purchaser") an
---------
aggregate of $162,000,000 principal amount of 14% Series A Senior Discount Notes
due 2006 (the "Series A Notes" or the "Securities"). The Series A Notes are to
-------------- ----------
be issued pursuant to an indenture (the "Note Indenture") to be dated as of
--------------
November 15, 1996 between the Company and Fleet National Bank, as trustee (the
"Trustee").
-------
Capitalized terms used but not defined herein shall have the meanings
given to such terms in the Note Indenture.
The Series A Notes will be offered and sold to you pursuant to an
exemption from the registration requirements under the Securities Act of 1933,
as amended (the "Act"). The Company has prepared a preliminary offering
memorandum, dated November 12, 1996 (the "Preliminary Offering Memorandum"),
-------------------------------
and a final offering memorandum, dated November 15, 1996 (the "Offering
Memorandum"), relating to the Company and the Series A Notes.
Upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Act, the Series A Notes
(and all securities issued in exchange therefor or in substitution thereof)
shall bear the following legend:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUERS THAT (A)
SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a)
TO A PERSON
<PAGE>
WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144, OR IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF
THE COMPANY SO REQUESTS), (b) TO THE COMPANY, (c) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (d) TO A FOREIGN PERSON
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES
ACT, AND (2) IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION
AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY
ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A) ABOVE."
You have advised the Company that you will make offers (the "Exempt
------
Resales") of the Series A Notes purchased hereunder on the terms set forth in
- -------
the Offering Memorandum, as amended or supplemented, solely to persons whom you
reasonably believe to be "qualified institutional buyers," as defined in Rule
144A under the Act ("QIBs"), and to a limited number of institutional
----
"Accredited Investors" referred to in Rule 501(a)(1), (2), (3) or (7) under the
Act (each, an "Accredited Investor"). The QIBs and the Accredited Investors are
-------------------
referred to herein as the "Eligible Purchasers." You will offer the Series A
-------------------
Notes to such QIBs and Accredited Investors initially at a price equal to
50.931% of the principal amount thereof. Such price may be changed at any time
without notice.
Holders (including subsequent transferees) of the Series A Notes will
have the registration rights set forth in the registration rights agreement
relating thereto (the "Registration Rights Agreement"), to be dated the Closing
-----------------------------
Date (as hereinafter defined), in substantially the form of Exhibit A hereto,
for so long as such Series A Notes constitute "Transfer Restricted Securities"
(as defined in the Registration Rights Agreement). Pursuant to the Registration
Rights Agreement, the Company will agree to file with the Securities and
Exchange Commission (the "Commission"), under the circumstances set forth
----------
therein, (i) a registration statement under the Act (the "Exchange Offer
--------------
Registration Statement") relating to the 14% Series B Senior Discount Notes due
- ----------------------
2006 (the "Series B Notes") to be offered in exchange for the Series A Notes
--------------
(the "Exchange Offer"), and (ii) a shelf registration statement pursuant to Rule
--------------
415 under the Act (the "Shelf Registration Statement") relating to the resale by
----------------------------
certain holders of the Series A Notes, and to use their best efforts to cause
such Registration Statements to be declared effective. This Purchase Agreement
(this "Agreement"), the Securities, the Note Indenture and the Registration
---------
Rights Agreement are hereinafter sometimes referred to collectively as the
"Operative Documents."
- --------------------
2. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell to you, and Purchaser
agrees to purchase from the Company, $162,000,000 principal amount of the Series
A Notes. The purchase price for the the Series A Notes shall be $79,207,891.20
in the aggregate.
3. Delivery and Payment. Delivery to the Purchasers of and payment
--------------------
for the Series A Notes shall be made at 9:00 a.m., New York City time, on
November 20, 1996 (the "Closing Date") at the offices of Ropes & Gray, located
------------
in New York, NY, or such other time or place as you and the Company shall
designate.
2
<PAGE>
One or more of the Series A Notes in definitive form, registered in
the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"),
---
having an aggregate principal amount corresponding to the aggregate principal
amount of the Series A Notes sold pursuant to Exempt Resales to QIBs
(collectively, the "Master Note") and one or more Series A Notes in definitive
-----------
form registered in such other names as you may request upon at least two
business days' notice to the Company (the "Definitive Securities"), having an
---------------------
aggregate principal amount corresponding to the aggregate principal amount of
the Series A Notes sold pursuant to Exempt Resales to Accredited Investors,
shall be delivered by the Company to you (or as you direct), against payment by
you of the purchase price therefor by wire transfer payable in immediately
available (same day) funds to the order of the Company or as the Company may
direct. The Master Note and Definitive Securities shall be made available to
you for inspection not later than 9:30 a.m. on the business day immediately
preceding the Closing Date.
4. Agreements of the Company. The Company agrees with you as
-------------------------
follows:
(a) To advise you promptly and, if requested by the Purchaser,
confirm such advice in writing, (i) of the issuance by any state securities
commission of any stop order suspending the qualification or exemption from
qualification of any of the Series A Notes for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by any
state securities commission or other regulatory authority, and (ii) of the
happening of any event that makes any statement of a material fact made in
the Offering Memorandum untrue or that requires the making of any additions
to or changes in the Offering Memorandum in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of any
of the Series A Notes under any state securities or Blue Sky laws, and if
at any time any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption of any of
the Series A Notes under any state securities or Blue Sky laws, the Company
shall use its best efforts to obtain the withdrawal or lifting of such
order at the earliest possible time.
(b) To furnish you, without charge, as many copies of the Preliminary
Offering Memorandum and the Offering Memorandum, and any amendments or
supplements thereto, as you may reasonably request. The Company consents
to the use of the Preliminary Offering Memorandum and the Offering
Memorandum, and any such amendments and supplements thereto, by you in
connection with Exempt Resales.
(c) Not to amend or supplement the Preliminary Offering Memorandum or
the Offering Memorandum prior to the Closing Date unless you shall
previously have been advised thereof and shall not have reasonably objected
thereto after being furnished a copy thereof. The Company shall promptly
prepare, upon your request, any amendment or supplement to the Preliminary
Offering Memorandum or the Offering Memorandum that may be necessary or
advisable in connection with Exempt Resales.
(d) If, after the date hereof and prior to consummation of any Exempt
Resales, any event shall occur as a result of which, in the judgment of the
Company or in the reasonable opinion of your counsel, it becomes necessary
to amend or supplement the Offering Memorandum in order to make the
statements therein, in the light of the circumstances when the Offering
Memorandum is delivered to an Eligible Purchaser which is a prospective
purchaser, not misleading, or if it is necessary to amend or supplement the
Offering Memorandum to comply with applicable law, forthwith to prepare an
appropriate amendment or supplement to the Offering Memorandum so that the
statements therein as so amended or supplemented will not, in the light of
the circumstances
3
<PAGE>
when it is so delivered, be misleading, or so that the Offering Memorandum
will comply with applicable law. The cost of preparing any such amendment
or supplement required more than six months after the Closing Date shall be
borne by you.
(e) To cooperate with you and your counsel in connection with the
qualification of the Series A Notes under the securities or Blue Sky laws
of such jurisdictions as you may request and to continue such qualification
in effect so long as required for the Exempt Resales; provided, however,
that the Company shall not be required in connection therewith to register
or qualify as a foreign corporation where it is not now so qualified or to
take any action that would subject it to the service of process in suits or
taxation, other than as to matters and transactions relating to the Exempt
Resales, in any jurisdiction where it is not now so subject.
(f) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement becomes effective or is terminated, to
pay all costs, expenses, fees and taxes incident to and in connection with:
(i) the preparation, printing, filing and distribution of the Preliminary
Offering Memorandum and the Offering Memorandum (including, without
limitation, financial statements and exhibits) and, except as provided in
Section 4(d), all amendments and supplements thereto, (ii) the preparation
(including, without limitation, word processing and duplication costs) and
delivery of this Agreement and the other Operative Documents and all
preliminary and final Blue Sky memoranda and all other agreements,
memoranda, correspondence and other documents prepared and delivered in
connection herewith and with the Exempt Resales, (iii) the issuance and
delivery by the Company of the Securities, (iv) the qualification of the
Securities for offer and sale under the securities or Blue Sky laws of the
several states (including, without limitation, the reasonable fees and
disbursements of your counsel relating to such registration or
qualification), (v) furnishing such copies of the Preliminary Offering
Memorandum and the Offering Memorandum, and all amendments and supplements
thereto, as may be reasonably requested for use in connection with Exempt
Resales, (vi) the preparation of certificates for the Securities
(including, without limitation, printing and engraving thereof), (vii) the
fees, disbursements and expenses of the Company's counsel and accountants,
(viii) all expenses and listing fees in connection with the application for
quotation of the Series A Notes in the National Association of Securities
Dealers, Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"),
---- ------
(ix) all fees and expenses (including fees and expenses of counsel) of the
Company in connection with approval of the Securities by DTC for "book-
entry" transfer and (x) the performance by the Company of its other
obligations under this Agreement and the other Operative Documents.
(g) To use the proceeds from the sale of the Series A Notes in the
manner described in the Offering Memorandum under the caption "Use of
Proceeds."
(h) Not to voluntarily claim, and to resist actively any attempts to
claim, the benefit of any usury laws against the holders of any Securities.
(i) [Intentionally Omitted]
(j) Not to sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Act) that would be
integrated with the sale of the Series A Notes in a manner that would
require the registration under the Act of the sale to you or Eligible
Purchasers of the Series A Notes.
4
<PAGE>
(k) For so long as any of the Securities remain outstanding and
during any period in which the Company is not subject to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
--------
Act"), to make available to any QIB or beneficial owner of Series A Notes
---
in connection with any sale thereof and any prospective purchaser of such
Series A Notes from such QIB or beneficial owner, the information required
by Rule 144A(d)(4) under the Act.
(l) To cause the Exchange Offer to be made in the appropriate form to
permit registration of the Series B Notes to be offered in exchange for the
Series A Notes and to comply with all applicable federal and state
securities laws in connection with the Exchange Offer.
(m) To comply with all of its agreements set forth in the
Registration Rights Agreement, and all agreements set forth in the
representation letter of the Company to DTC relating to the approval of the
Securities by DTC for "book-entry" transfer.
(n) To use its best efforts to effect the inclusion of the Series A
Notes in PORTAL.
(o) During a period of five years following the date of this
Agreement, to deliver to you promptly upon their becoming available, copies
of all current, regular and periodic reports filed by the Company with the
Commission or any securities exchange or with any governmental authority
succeeding to any of the Commission's functions.
5. Representations and Warranties. (a) The Company represents and
------------------------------
warrants to you that:
(i) The Preliminary Offering Memorandum and the Offering
Memorandum have been prepared in connection with the Exempt Resales.
The Preliminary Offering Memorandum and the Offering Memorandum do
not, and any supplement or amendment to them will not, contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
the representations and warranties contained in this paragraph (i)
shall not apply to statements in or omissions from the Preliminary
Offering Memorandum and the Offering Memorandum (or any supplement or
amendment thereto) made in reliance upon and in conformity with
information relating to you furnished to the Company in writing by you
expressly for use therein. No stop order preventing the use of the
Preliminary Offering Memorandum or the Offering Memorandum, or any
amendment or supplement thereto, or any order asserting that any of
the transactions contemplated by this Agreement are subject to the
registration requirements of the Act, has been issued.
(ii) When the Series A Notes are issued and delivered pursuant
to this Agreement, none of the Series A Notes will be of the same
class (within the meaning of Rule 144A under the Act) as securities of
the Company that are listed on a national securities exchange
registered under Section 6 of the Exchange Act or that are quoted in a
United States automated interdealer quotation system.
(iii) The Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation, has
all requisite corporate power and authority to carry on its business
as it is currently being conducted and as described in the Offering
Memorandum
5
<PAGE>
and is duly qualified and in good standing as a foreign corporation
authorized to do business in each other jurisdiction in which the
nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the current or
future consolidated financial position, stockholders' equity (deficit)
or results of operation of the Company and its subsidiaries taken as
one enterprise (a "Material Adverse Effect").
-----------------------
(iv) Each "significant subsidiary" of the Company, as defined
in Rule 1-01 of Regulation S-X of the Act, is listed on Schedule I
hereto. The Company directly owns all of the issued and outstanding
capital stock and other securities evidencing equity ownership of IHF
Holdings, Inc. and owns, directly or indirectly through other
subsidiaries, 100% of the outstanding capital stock or other
securities evidencing equity ownership of each such significant
subsidiary, free and clear of any security interest, claim, lien,
limitation on voting rights or encumbrance (other than as described in
the Offering Memorandum), except for directors' qualifying shares and
shares of preferred stock of IHF Holdings, Inc. ("Holdings Preferred
------------------
Stock") which would have an aggregate liquidation preference of
-----
approximately $45.4 million at November 30, 1996 and options to
purchase shares of Holdings Preferred Stock which would have an
aggregate liquidation preference of approximately $5.1 million at
November 30, 1996, which shares of Holdings Preferred Stock and
options will be acquired by the Company with a portion of the proceeds
of the sale of the Series A Notes; and all of such securities have
been duly authorized, validly issued, are fully paid and nonassessable
and were not issued in violation of any preemptive or similar rights.
Except as described in the preceding sentence, there are no
outstanding subscriptions, rights, warrants, calls, commitments of
sale or options to acquire, or instruments convertible into or
exchangeable for, any such shares of capital stock or other equity
interest of such subsidiaries. There are no outstanding advances to
IHF Holdings, Inc. made by the Company, and IHF Holdings, Inc. does
not have any indebtedness owing to the Company.
(v) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, the Note Indenture, the Registration Rights Agreement and
the other Operative Documents to which it is a party and to consummate
the transactions contemplated hereby and thereby, including, without
limitation, the corporate power and authority to issue, sell and
deliver the Series A Notes as provided herein and therein.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is the legally valid and
binding agreement of the Company, enforceable against it in accordance
with its terms.
(vii) The Note Indenture has been duly and validly authorized
by the Company and, when duly executed and delivered by the Company,
will be the legally valid and binding obligation of the Company,
enforceable against it in accordance with its terms. The Note
Indenture, when executed and delivered, will conform to the
description thereof in the Offering Memorandum.
(viii) The Series A Notes have been duly and validly
authorized for issuance and sale to you by the Company pursuant to
this Agreement and, when issued and authenticated in accordance with
the terms of the Note Indenture and delivered against payment therefor
6
<PAGE>
in accordance with the terms hereof, will be the legally valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Note
Indenture. The Series A Notes, when issued, authenticated and
delivered, will conform to the description thereof in the Offering
Memorandum.
(ix) The Series B Notes have been duly and validly authorized
for issuance by the Company, and when issued and authenticated in
accordance with the terms of the Note Indenture, the Registration
Rights Agreement and the Exchange Offer, will be the legally valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Note
Indenture.
(x) The Registration Rights Agreement has been duly and validly
authorized by the Company and, when duly executed and delivered by the
Company, will be the legally valid and binding obligation of the
Company, enforceable against it in accordance with its terms. The
Registration Rights Agreement, when executed and delivered, will
conform to the description thereof in the Offering Memorandum.
(xi) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or bylaws or is in default in the
performance of any bond, debenture, note, indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties is subject, or is
in violation of any law, statute, rule, regulation, judgment or court
decree applicable to the Company, any of its subsidiaries or their
assets or properties, except for such violations or defaults that
would not individually or in the aggregate have a Material Adverse
Effect. There exists no condition that, with notice, the passage of
time or otherwise, would constitute such a default under any such
document or instrument.
(xii) The execution, delivery and performance by the Company of
this Agreement and the other Operative Documents to which it is a
party, the issuance and sale of the Series A Notes, and the
consummation of the transactions contemplated hereby and thereby will
not violate, conflict with or constitute a breach of any of the terms
or provisions of, or a default under (or an event that with notice or
the lapse of time, or both, would constitute a default), or require
consent under, or result in the imposition of a lien or encumbrance on
any properties of the Company or any of its subsidiaries, or an
acceleration of indebtedness pursuant to, (i) the charter or bylaws of
the Company or any of its subsidiaries, (ii) any bond, debenture,
note, indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which any of them or their property is or may be bound, (iii)
any statute, rule or regulation applicable to the Company, any of its
subsidiaries or any of their assets or properties, or (iv) any
judgment, order or decree of any court or governmental agency or
authority having jurisdiction over the Company, any of its
subsidiaries or their assets or properties, except for such conflicts,
breaches, violations or defaults that would not have a Material
Adverse Effect, and other than under the Credit Agreement (as defined
in the Note Indenture), with respect to which the Company agrees to
obtain all necessary consents or waivers prior to the Closing Date. No
consent, approval, authorization or order of, or filing, registration,
qualification, license or permit of or with, any court or governmental
agency, body or administrative agency is required for the execution,
delivery and performance of this Agreement and the other Operative
Documents and the consummation of the transactions contemplated hereby
and thereby, except such as have been obtained and made (or, in the
7
<PAGE>
case of the Registration Rights Agreement, will be obtained and made)
under the Act, the Trust Indenture Act of 1939, as amended (the "Trust
-----
Indenture Act") and state securities or Blue Sky laws and regulations
-------------
or such as may be required by the NASD. No consents or waivers from
any other person are required for the execution, delivery and
performance of this Agreement and the other Operative Documents and
the consummation of the transactions contemplated hereby and thereby,
other than such consents and waivers as have been obtained (or, in the
case of the Registration Rights Agreement, will be obtained).
(xiii) Other than as set forth in the Offering Memorandum, there
is (i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or
foreign, now pending or, to the best of the Company's knowledge,
threatened or contemplated to which the Company or any of its
subsidiaries is or may be a party or to which the business or property
of the Company or any of its subsidiaries is or may be subject, (ii)
no statute, rule, regulation or order that has been enacted, adopted
or issued by any governmental agency or that has been proposed by any
governmental body, (iii) no injunction, restraining order or order of
any nature by a federal or state court or foreign court of competent
jurisdiction to which the Company or any of its subsidiaries is or may
be subject issued that, in the case of clauses (i), (ii) and (iii)
above, (x) could reasonably be expected to be determined adversely to
the Company or any of its subsidiaries, and singly or in the
aggregate, would, if so determined, have a Material Adverse Effect,
(y) would interfere with or adversely affect the issuance of the
Series A Notes or (z) in any manner draw into question the validity of
this Agreement, the Note Indenture, the Registration Rights Agreement
or any other Operative Document.
(xiv) Other than as set forth in the Offering Memorandum, no
action has been taken and no statute, rule or regulation or order has
been enacted, adopted or issued by any governmental agency that
prevents the issuance of the Securities; no injunction, restraining
order or order of any nature by a federal or state court of competent
jurisdiction has been issued that prevents the issuance of the Series
A Notes or suspends the sale of the Series A Notes in any jurisdiction
referred to in Section 4(e) hereof; and no action, suit or proceeding
is pending against or affecting or, to the best knowledge of the
Company and any of its subsidiaries, threatened against, the Company
or any of its subsidiaries before any court or arbitrator or any
governmental body, agency or official which, if adversely determined,
would prohibit, interfere with or adversely affect the issuance or
marketability of the Series A Notes or in any manner draw into
question the validity of any Operative Document; and every request of
any securities authority or agency of any jurisdiction for additional
information has been complied with in all material respects.
(xv) The Company and its subsidiaries have obtained all
permits, consents and authorizations required to be obtained by them
under laws or regulations relating to the protection of the
environment or concerning the handling, storage, disposal or discharge
of toxic materials (collectively, "Environmental Laws") except where
------------------
the failure to do so would not individually or in the aggregate
reasonably be expected to have a Material Adverse Effect, and any such
permits, consents and authorizations remain in full force and effect.
The Company and its subsidiaries are in compliance with the
Environmental Laws in all respects except where the failure to be in
such compliance would not individually or in the aggregate reasonably
be expected to have a Material Adverse Effect, and there is no pending
or, to the Company's or its subsidiaries' knowledge, threatened,
action or
8
<PAGE>
proceeding against the Company or its subsidiaries alleging violations
of the Environmental Laws.
(xvi) Each of the Company and its subsidiaries has good and
marketable title to all of the properties and assets owned by them as
reflected in the Company's financial statements as described in the
Offering Memorandum as owned by it, free and clear of all liens,
charges, encumbrances and restrictions, except such as are described
in the Offering Memorandum or are not material and do not interfere
with the use made or proposed to be made of such property by the
Company and its subsidiaries. Any real property and buildings held
under lease by the Company or any of its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made or proposed to
be made of such property and buildings by the Company and its
subsidiaries.
(xvii) Each of the Company and its subsidiaries owns or
possesses adequate licenses or rights to use patents, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names
(collectively, the "Intellectual Property") necessary to conduct the
---------------------
business now or proposed to be conducted by them as described in the
Offering Memorandum, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing
which could reasonably be expected to have a Material Adverse Effect.
The use of the Intellectual Property in connection with the business
and operations of the Company and its subsidiaries does not, to the
knowledge of the Company or its subsidiaries, infringe on the rights
of any person, which infringement or conflict could result in a
Material Adverse Effect.
(xviii) Neither the Company nor any of its subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), or (ii) a "holding company" or
----------------------
a "subsidiary company" or an "Affiliate" of a holding company within
the meaning of the Public Utility Holding Company Act of 1935, as
amended, or analogous foreign laws or regulations.
(xix) There are no holders of securities of the Company who, by
reason of the execution by the Company of this Agreement or any other
Operative Document to which it is a party or the consummation of the
transactions contemplated hereby and thereby, have the right to
request or demand that the Company register under the Act or analogous
foreign laws and regulations securities held by them.
(xx) The authorized, issued and outstanding capital stock of
the Company has been duly and validly authorized and issued, is fully
paid and nonassessable and was not issued in violation of or subject
to any preemptive or similar rights. The Company and its subsidiaries
had at August 31, 1996, on a pro forma basis giving effect only to the
incorporation of the Company, an authorized and outstanding
capitalization as set forth in the Offering Memorandum.
(xxi) Neither the Company nor any of its subsidiaries has (i)
taken, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result
9
<PAGE>
in stabilization or manipulation of the price of any security of the
Company or any of its subsidiaries to facilitate the sale or resale of
the Series A Notes or (ii) since the date of the Preliminary Offering
Memorandum (A) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, the Series A Notes or (B)
paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company or any of its
subsidiaries, other than as contemplated by this Agreement.
(xxii) No registration under the Act of the Series A Notes is
required for the sale of the Series A Notes to the Purchaser as
contemplated hereby or for the Exempt Resales assuming (i) that the
purchasers who buy the Series A Notes in the Exempt Resales are either
QIBs or Accredited Investors (up to a maximum of 35 such Accredited
Investors) and (ii) the accuracy of the Purchasers' representations
regarding the absence of general solicitation in connection with the
sale of Series A Notes to the Purchaser and the Exempt Resales
contained herein. No form of general solicitation or general
advertising was used by the Company or any of its representatives in
connection with the offer and sale of any of the Series A Notes or in
connection with Exempt Resales, including, but not limited to,
articles, notices or other communications published in any newspaper,
magazine, or similar medium or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising. No securities of the same
class as the Series A Notes have been issued and sold by the Company
within the six-month period immediately prior to the date hereof.
(xxiii) Set forth on Schedule II hereto is a list of each
employee pension or benefit plan with respect to which the Company or
any corporation considered an affiliate of the Company within the
meaning of Section 407(d)(7) of ERISA (an "Affiliate") is a party in
---------
interest or disqualified person. The execution and delivery of this
Agreement, the other Operative Documents and the sale of the Series A
Notes to be purchased by the Eligible Purchasers will not involve any
prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986. The representation
made by the Company in the preceding sentence is made in reliance upon
and subject to the accuracy of, and compliance with, the
representations and covenants made or deemed made by the Eligible
Purchasers as set forth in the Offering Memorandum under the Section
entitled "Notice to Investors."
(xxiv) Each of the Preliminary Offering Memorandum and the
Offering Memorandum, as of its date, and each amendment or supplement
thereto, as of its date, contains all the information specified in,
and meets the requirements of, Rule 144A(d)(4) under the Act.
(xxv) Subsequent to the respective dates as of which
information is given in the Offering Memorandum and up to the Closing
Date, except as set forth in the Offering Memorandum, neither the
Company nor any of its subsidiaries has incurred any liabilities or
obligations, direct or contingent, which are material to the Company
and its subsidiaries taken as a whole, nor entered into any
transaction not in the ordinary course of business, there has not
been, singly or in the aggregate, any material adverse change, or any
development which may reasonably be expected to involve a material
adverse change, in the properties, business, results of operations,
condition (financial or otherwise), affairs or prospects of the
Company and its subsidiaries, taken as a whole (a "Material Adverse
----------------
10
<PAGE>
Change") and there have not been dividends or distributions of any
------
kind declared, paid or made by Company or any of its subsidiaries on
any class of its capital stock.
(xxvi) Neither the Company, nor any agent thereof acting on the
behalf of any of them has taken, and none of them will take, any
action that might cause this Agreement or the issuance or sale of the
Series A Notes to violate Regulation G (12 C.F.R. Part 207),
Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221)
or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the
Federal Reserve System or analogous foreign laws and regulations.
(xxvii) The accountants who have certified or shall certify the
financial statements and supporting schedules included or to be
included as part of the Offering Memorandum are independent
accountants as required by the Act and the rules and regulations of
the Commission thereunder. The consolidated historical financial
statements of the Company and its subsidiaries and Healthrider, Inc.
and its subsidiaries, respectively, fairly present the consolidated
financial condition and results of operations of the Company and its
subsidiaries and Healthrider, Inc. and its subsidiaries, respectively,
at the respective dates and for the respective periods indicated, in
accordance with generally accepted accounting principles consistently
applied throughout such periods, except as stated therein. Subject to
the qualifications stated in the Offering Memorandum, the pro forma
financial statements have been prepared on a basis consistent with
such historical statements, except for the pro forma adjustments
specified therein, and give effect to assumptions made on a reasonable
basis and present fairly the historical and proposed transactions
contemplated by this Agreement and the other Operative Documents.
Subject to the qualifications stated in the Offering Memorandum, other
financial and statistical information and data included in the
Offering Memorandum, historical and pro forma, are accurately
presented and prepared on a basis consistent with such financial
statements and the books and records of the Company and its
subsidiaries and Healthrider, Inc. and its subsidiaries.
(xxviii) The present fair saleable value of the assets of the
Company exceeds the amount that will be required to be paid on or in
respect of the existing debts and other liabilities (including
contingent liabilities) of each such person as they become absolute
and matured. The assets of the Company do not constitute unreasonably
small capital to carry out its business as conducted or as proposed to
be conducted. The Company does not intend to, nor does it believe that
it will, incur debts beyond its ability to pay such debts as they
mature. Upon the issuance of the Series A Notes, the present fair
saleable value of the assets of the Company will exceed the amount
that will be required to be paid on or in respect of the existing
debts and other liabilities (including contingent liabilities) of such
person as they become absolute and matured. The assets of the Company,
upon the issuance of the Series A Notes, will not constitute
unreasonably small capital to carry out its business as now conducted,
including the capital needs of the Company, taking into account the
projected capital requirements and capital availability of the
Company.
(xxix) There are no contracts, agreements or understandings
between the Company or any of its subsidiaries and any person that
would give rise to a valid claim against the Company, its subsidiaries
or the Purchaser for a brokerage commission, finder's fee or like
payment in connection with the issuance, purchase and sale of the
Series A Notes.
11
<PAGE>
(xxx) The provisions of the Note Indenture are sufficient to
create a valid and enforceable security interest in favor of the
Trustee, for the benefit of the holders of the Series A Notes and the
Series B Notes, in all of the Company's right, title and interest in
the Collateral (as defined in the Note Indenture) that is of the type
in which a security interest can be created under Article 9 of the
Uniform Commercial Code, as in effect in all applicable jurisdictions
(the "Applicable UCC"), to the extent the Applicable UCC is applicable
to the creation of such security interests. The delivery of the
Collateral in which a security interest may be perfected by possession
pursuant to the Applicable UCC to (and provided the same remains in
the possession of) the Trustee will cause the Trustee to have a
perfected security interest in such Collateral.
(xxxi) When the Note Indenture is executed and delivered and
the Collateral is delivered in connection therewith, the Trustee will
have an enforceable and perfected security interest for the benefit of
the Trustee and the holders of the Series A Notes and the Series B
Notes, in the collateral consisting of "certificated securities" (as
defined in Section 8-102 of the Applicable UCC) in which a security
interest can be created under Article 8 (the "Pledged Securities"), to
the extent the Applicable UCC is applicable to the creation and
perfection of such security interests as a result of the delivery
thereof to (and retention of possession thereof by) the Trustee.
Assuming the Trustee takes the actions described in this paragraph,
and takes the Collateral in good faith and without notice of any
adverse claim as defined in Section 8-302(2) of the Applicable UCC,
the Trustee will acquire an enforceable and perfected security
interest in the Pledged Securities free of adverse claims for the
benefit of the Trustee and the holders of the Series A Notes and
Series B Notes.
The Company acknowledges that the Purchaser and, for purposes of the
opinions to be delivered to the Purchaser pursuant to Section 7 hereof, counsel
to the Company and counsel to the Purchaser will rely upon the accuracy and
truth of the foregoing representations and hereby consent to such reliance.
(b) The Purchaser represents and warrants to the Company and agrees
that:
(i) Such Purchaser is a QIB, with such knowledge and
experience in financial and business matters as are necessary in order
to evaluate the merits and risks of an investment in the Series A
Notes.
(ii) Such Purchaser (A) is not acquiring the Series A Notes
with a view to any distribution thereof that would violate the Act or
the securities laws of any state of the United States or any other
applicable jurisdiction and (B) will be reoffering and reselling the
Series A Notes only to QIBs in reliance on the exemption from the
registration requirements of the Act provided by Rule 144A and to
Accredited Investors in a private placement exempt from the
registration requirements of the Act.
(iii) No form of general solicitation or general advertising has
been or will be used by such Purchaser or any of its representatives
in connection with the offer and sale of any of the Series A Notes,
including, but not limited to, articles, notices or other
communications published in any newspaper, magazine, or similar medium
or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising.
12
<PAGE>
(iv) Such Purchaser agrees that, in connection with the Exempt
Resales, it will solicit offers to buy the Series A Notes only from,
and will offer to sell the Series A Notes only to, QIBs and a total of
no more than 35 Accredited Investors. Such Purchaser further agrees
(A) that it will offer to sell the Series A Notes only to, and will
solicit offers to buy the Series A Notes only from (1) QIBs who in
purchasing such Series A Notes will be deemed to have represented and
agreed that they are purchasing the Series A Notes for their own
accounts or accounts with respect to which they exercise sole
investment discretion and that they or such accounts are QIBs and (2)
Accredited Investors who make the representations contained in, and
execute and return to the Purchaser, a certificate in the form of
Annex A attached to the Offering Memorandum and (B) that, in the case
-------
of such QIBs and Accredited Investors, acknowledges and agrees that
such Series A Notes will not have been registered under the Act and
may be resold, pledged or otherwise transferred only (x)(I) to a
person who the seller reasonably believes is a QIB in a transaction
meeting the requirements of Rule 144A, (II) in a transaction meeting
the requirements of Rule 144, (III) to a foreign person in a
transaction meeting the requirements of Rule 904 under the Act or (IV)
in accordance with another exemption from the registration
requirements of the Act (and based upon an opinion of counsel if the
Company so requests), (y) to the Company, (z) pursuant to an effective
registration statement under the Act and, in each case, in accordance
with any applicable securities laws of any state of the United States
or any other applicable jurisdiction and (C) that the holder will, and
each subsequent holder is required to, notify any purchaser from it of
the security evidenced thereby of the resale restrictions set forth in
(B) above.
(v) Such Purchaser also understands that the Company and, for
purposes of the opinions to be delivered to you pursuant to Section 7
hereof, counsel to the Company and counsel to the Purchaser will rely
upon the accuracy and truth of the foregoing representations and
hereby consents to such reliance.
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless (i) the
Purchaser and (ii) each person, if any, who controls (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) the Purchaser (any of
the persons referred to in this clause (ii) being hereinafter referred to as a
"controlling person"), and (iii) the respective officers, directors, partners,
employees, representatives and agents of the Purchaser or any controlling person
(any person referred to in clause (i), (ii) or (iii) may hereinafter be referred
to as an "Indemnified Person") to the fullest extent lawful, from and against
------------------
any and all losses, claims, damages, liabilities, judgments, actions and
expenses (including without limitation and as incurred, reimbursement of all
reasonable costs of investigating, preparing, pursuing or defending any claim or
action, or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to any Indemnified Person) directly or indirectly caused by, related to, based
upon, arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Offering
Memorandum or the Offering Memorandum (or any amendment or supplement thereto),
or any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses are
caused by an untrue statement or omission or alleged untrue statement or
omission that is made in reliance upon and in conformity with information
relating to such Purchaser furnished in writing to the Company by such Purchaser
expressly for use therein; provided that the foregoing indemnity agreement with
respect to the Preliminary Offering Memorandum shall not inure to the benefit of
the Purchaser from whom the person
13
<PAGE>
asserting any such losses, claims, damages or liabilities purchased Series A
Notes, or any person controlling such Purchaser, if a copy of the Offering
Memorandum (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
the Purchaser to such person, at or prior to the written confirmation of the
sale of the Series A Notes to such person, and if the Offering Memorandum (as so
amended or supplemented) would have cured the defect giving rise to such loss,
claim, damage, liability or expense. The Company shall notify you promptly of
the institution, threat or assertion of any claim, proceeding (including any
governmental investigation) or litigation in connection with the matters
addressed by this Agreement which involves the Company or an Indemnified Person.
(b) Promptly after receipt by an Indemnified Person under paragraph
(a) above of notice of the commencement of any action or proceeding (including
any governmental investigation or inquiry), such Indemnified Person shall, if a
claim in respect thereof is to be made against the Company under such paragraph,
promptly notify the Company in writing of the commencement thereof; but the
omission so to notify the Company shall not relieve it from any liability that
it may have to such Indemnified Person except to the extent that the omission to
give such notice actually and materially prejudices the rights of the Company.
In case any such action shall be brought against any Indemnified Person, and it
shall notify the Company of the commencement thereof, the Company shall be
entitled to participate in, and, to the extent that it shall wish, to assume the
defense thereof, with counsel satisfactory to the Indemnified Person, and after
notice from the Company to such Indemnified Person of its election so to assume
the defense thereof, the Company shall not be liable to such Indemnified Person
under such paragraph for any legal or other expenses subsequently incurred by
such Indemnified Person in connection with the defense thereof (other than
reasonable costs of investigation) unless (a) the Company has agreed to pay such
fees and expenses or (b) the named parties to any such action or proceeding
(including any impleaded parties) include both the Indemnified Person and the
Company, and the Indemnified Person shall have been advised in writing by
counsel that there may be one or more legal defenses available to such
Indemnified Person which are different from or additional to those available to
the Company (in which case, if such Indemnified Person notifies the Company in
writing that it elects to employ separate counsel at the expense of the Company,
the Company shall not have the right to assume the defense of such action or
proceeding on behalf of such Indemnified Person, it being understood, however,
that the Company shall not, in connection with any one such action or proceeding
or separate but substantially similar or related actions or proceeding in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) at any time for such Indemnified
Person and any other Indemnified Person, which firm (and local counsel if any)
shall be designated in writing by such Indemnified Person). The Company shall
not be liable for any settlement of any such action or proceeding effected
without its prior written consent, which consent will not be unreasonably
withheld, but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, the Company agrees
to indemnify and hold harmless such Indemnified Person from and against any loss
or liability by reason of such settlement or judgment. The Company shall not,
without the prior written consent of an Indemnified Person, settle or compromise
or consent to the entry of judgement in or otherwise seek to terminate any
pending or threatened action, claim, litigation or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether or not
any Indemnified Person is a party thereto), unless such settlement, compromise,
consent or termination includes an unconditional release of such Indemnified
Person from all liability arising out of such action, claim, litigation or
proceeding.
(c) The Purchaser agrees to indemnify and hold harmless the Company,
and its directors, officers and any person controlling (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) the Company and the
respective officers, directors, partners, employees, representatives
14
<PAGE>
and agents of each such person, to the same extent as the foregoing indemnity
from the Company to each of the Indemnified Persons, but only with respect to
claims and actions based on information relating to such Purchaser furnished in
writing by such Purchaser to the Company expressly for use in the Offering
Memorandum.
The statements in the Offering Memorandum in "Plan of Distribution"
and in "Notice to Investors" constitute the only information heretofore
furnished to the Company in writing by the Purchaser expressly for use in the
Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or
supplement thereto.
(d) If the indemnification provided for in this Section 6 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one hand
and the indemnified party on the other hand from the offering of the Series A
Notes or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party and the indemnified party, as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand, and the Purchaser, on the other hand, shall be deemed to be in the
same proportion as the total proceeds from the offering of the Series A Notes
(net of commissions but before deducting expenses) received by the Company and
the total commissions received by the Purchaser bear to the total price of the
Series A Notes paid in the Exempt Resales, in each case as set forth in the
table on the cover page of the Offering Memorandum. The relative fault of the
Company, on the one hand, and the Purchaser, on the other hand, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact related to information supplied by the Company, on the one hand,
and the Purchaser, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The indemnity set forth herein shall be in addition to
any liability or obligation the Company may otherwise have to any Indemnified
Person.
The Company, and the Purchaser agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6, neither the Purchaser nor any
related Indemnified Persons shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the total discounts and commissions
received by the Purchaser with respect to the Series A Notes, exceeds the amount
of any damages which the Purchaser has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(e) The Company hereby designates the Corporation Service Company as
their authorized agent upon whom process may be served in any action, suit or
proceeding that may be instituted in any state or federal court in the State of
New York by the Purchaser or any person controlling the
15
<PAGE>
Purchaser asserting a claim for indemnification or contribution under or
pursuant to this Section 7, and the Company will accept the jurisdiction of such
court in such action, and waive, to the fullest extent permitted by applicable
law, any defense based upon lack of personal jurisdiction or venue. A copy of
any such process shall be sent or given to the Company at the address for
notices specified in Section 10 hereof.
7. Conditions of Purchaser's Obligations. The obligations of the
-------------------------------------
Purchaser under this Agreement are subject to the satisfaction of each of the
following conditions:
(a) All of the representations and warranties of the Company
contained in this Agreement shall be true and correct on the date hereof
and on the Closing Date with the same force and effect as if made on and as
of the date hereof and the Closing Date, respectively. The Company shall
have performed or complied with all of the agreements herein contained and
required to be performed or complied with by it at or prior to the Closing
Date.
(b) The Offering Memorandum shall have been printed and copies
distributed to the Purchaser not later than 5:00 p.m., New York City time,
on the date of this Agreement or at such later date and time as to which
you may agree, and no stop order suspending the qualification or exemption
from qualification of any of the Series A Notes in any jurisdiction
referred to in Section 4(e) shall have been issued and no proceeding for
that purpose shall have been commenced or shall be pending or threatened.
(c) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental
agency which would, as of the Closing Date, prevent the issuance of any of
the Series A Notes; no action, suit or proceeding shall be pending against
or affecting or, to the knowledge of the Company, threatened against, the
Company or any of its subsidiaries before any court or arbitrator or any
governmental body, agency or official that, if adversely determined, would
prohibit, interfere with or adversely affect the issuance of the Series A
Notes or would have a Material Adverse Effect, or in any manner draw into
question the validity of this Agreement, the Note Indenture, the Series A
Notes or the Registration Rights Agreement; and no stop order preventing
the use of the Offering Memorandum, or any amendment or supplement thereto,
or any order asserting that any of the transactions contemplated by this
Agreement are subject to the registration requirements of the Act shall
have been issued.
(d) Since the dates as of which information is given in the Offering
Memorandum, (i) there shall not have been any material change, or any
development that is reasonably likely to result in a material change, in
the capital stock or the long-term debt, or material increase in the short-
term debt, of the Company and its subsidiaries considered as a whole from
that set forth in the Offering Memorandum, (ii) no dividend or distribution
of any kind shall have been declared, paid or made by the Company or any of
its subsidiaries on any class of its capital stock, and (iii) neither the
Company nor any of its subsidiaries shall have incurred any liabilities or
obligations, direct or contingent, that are material, individually or in
the aggregate, to the Company and its subsidiaries, taken as a whole, and
that are required to be disclosed on a balance sheet in accordance with
generally accepted accounting principles and are not disclosed on the
latest balance sheet included in the Offering Memorandum. Since the date
hereof and since the dates as of which information is given in the Offering
Memorandum, there shall not have been any Material Adverse Change.
(e) You shall have received certificates, dated the Closing Date,
signed by (i) the President or any Vice President and (ii) a principal
financial or accounting officer of the Company
16
<PAGE>
confirming, as of the Closing Date, the matters set forth in paragraphs
(a), (b), (c) and (d) of this Section 7.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and your counsel), dated the Closing Date, of Ropes &
Gray, counsel for the Company, in the form of Exhibit A hereto. You shall
also have received an opinion (reasonably satisfactory to you and your
counsel), dated the Closing Date, of Reboul, MacMurray, Maynard & Kristol
with respect to all matters involving New York law.
(g) You shall have received an opinion (satisfactory to you and your
counsel), dated the Closing Date, of Brad Bearnson, Esq., General Counsel
for the Company, to the effect that:
(i) To the best of such General Counsel's knowledge, the
Company and its subsidiaries own or possess adequate licenses or other
rights to use all trademarks, service marks and trade names necessary
to conduct the business now or proposed to be conducted by them as
described in the Offering Memorandum and the Company and its
subsidiaries have not received any notice of infringement of or
conflict with (and know of no such infringement of or conflict with)
asserted rights of others with respect to any trademarks, service
marks or trade names which could reasonably be expected to result in
any material adverse effect upon the Company and its subsidiaries
taken as one enterprise;
(ii) To the best of such General Counsel's knowledge, the
Company and its subsidiaries have obtained all permits, consents and
authorizations required to be obtained by them under the Environmental
Laws except where the failure to do so would not individually or in
the aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity (deficit) or
results of operations of the Company and its subsidiaries taken as one
enterprise, and any such permits, consents and authorizations remain
in full force and effect. To the best of such General Counsel's
knowledge, the Company and its subsidiaries are in compliance with the
Environmental Laws in all respects except where the failure to be in
compliance would not individually or in the aggregate have a material
adverse effect on the current or future consolidated financial
position, stockholders' equity (deficit) or results of operations of
the Company and its subsidiaries taken as one enterprise, and there is
no pending or, to the Company's or its subsidiaries' knowledge,
threatened, action or proceeding against the Company and its
subsidiaries alleging violations of the Environmental Laws; and
(iii) To the best of such General Counsel's knowledge,
neither the Company nor ICON Health & Fitness, Inc. is in default in
the performance or observance of any obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound except for
such violations or defaults that would not individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity (deficit) or
results of operation of the Company and its subsidiaries taken as one
enterprise.
(h) You shall have received an opinion, dated the Closing Date, of
Kaye, Scholer, Fierman, Hays & Handler, LLP, your counsel, in form and
substance reasonably satisfactory to you, covering such matters as are
customarily covered in such opinions.
17
<PAGE>
(i) At the time this Agreement is executed and delivered by the
Company and on the Closing Date, you shall have received letters,
substantially in the form previously approved by you, from Price Waterhouse
LLP, Deloitte & Touche LLP and Arthur Andersen LLP, independent public
accountants, with respect to the financial statements and certain financial
information contained in the Offering Memorandum.
(j) Kaye, Scholer, Fierman, Hays & Handler, LLP, shall have been
furnished with such documents and opinions, in addition to those set forth
above, as they may reasonably require for the purpose of enabling them to
review or pass upon the matters referred to in this Section 7 and in order
to evidence the accuracy, completeness or satisfaction in all material
respects of any of the representations, warranties or conditions herein
contained.
(k) Prior to the Closing Date, the Company shall have furnished to
you such further information, certificates and documents as you may
reasonably request.
(l) The Company shall have entered into the Note Indenture and you
shall have received counterparts, conformed as executed, thereof.
(m) The Company shall have entered into the Registration Rights
Agreement and you shall have received counterparts, conformed as executed,
thereof.
(n) The Purchaser shall have received a solvency opinion, dated the
Closing Date, of American Appraisal Associates, in form satisfactory to the
Purchaser and such opinion shall be accompanied by a letter addressed to
the Purchaser entitling it to rely on such opinion.
(o) The Company shall have obtained a consent under the Credit
Agreement (as defined in the Note Indenture) in form and substance
reasonably satisfactory to the Purchaser and the Company.
All opinions, certificates, letters and other documents required by
this Section 7 to be delivered by the Company will be in compliance with the
provisions hereof only if they are reasonably satisfactory in form and substance
to you. The Company will furnish the Purchaser with such conformed copies of
such opinions, certificates, letters and other documents as they shall
reasonably request.
8. [Intentionally Omitted]
9. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the execution hereof.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by notice to the Company if any of the following has
occurred: (i) subsequent to the date information is provided in the Offering
Memorandum, any Material Adverse Change which, in your judgment, materially
impairs the investment quality of any of the Series A Notes, (ii) any outbreak
or escalation of hostilities or other national or international calamity or
crisis or material adverse change in the financial markets of the United States
or elsewhere, or any other substantial national or international calamity or
emergency if the effect of such outbreak, escalation, calamity, crisis, material
adverse change or emergency would, in your judgment, make it impracticable or
inadvisable to market any of the Series A Notes or to enforce contracts for the
sale of any of the Series A Notes, (iii) any suspension or limitation of trading
generally in securities on the New York Stock Exchange or in the over-the-
counter markets or any setting of minimum prices for
18
<PAGE>
trading on such exchange or markets, (iv) any declaration of a general banking
moratorium by either federal or New York authorities, (v) the taking of any
action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs that in your judgment has a material adverse effect
on the financial markets in the United States, and would, in your judgment, make
it impracticable or inadvisable to market any of the Series A Notes or to
enforce contracts for the sale of any of the Series A Notes, (vi) the enactment,
publication, decree, or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which, in
your judgment, would have a Material Adverse Effect, or (vii) any securities of
the Company or any of its subsidiaries shall have been downgraded or placed on
any "watch list" for possible downgrading by any nationally recognized
statistical rating organization.
The indemnities and contribution provisions and the other agreements,
representations and warranties of the Company, its officers and directors and of
the Purchaser set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Series A Notes, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of either of the Purchaser or by or on
behalf of the Company, the officers or directors of the Company or controlling
person of the Company, (ii) acceptance of the Series A Notes and payment for
them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Purchasers pursuant to
clauses (i) or (vii) of the second paragraph of this Section 9 or because of the
failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
you for all out-of-pocket expenses (including the fees and disbursements of
counsel) incurred by you. Notwithstanding any termination of this Agreement, the
Company shall be liable for all expenses which it has agreed to pay pursuant to
Section 4(f) hereof.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Purchaser,
any Indemnified Person referred to herein and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
terms "successors and assigns" shall not include a purchaser of any of the
Series A Notes from any Purchaser merely because of such purchase.
10. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, 1500 South 1000
West, Logan, Utah 84321-8206, Attention: President, with a copy to Ropes & Gray,
One International Place, Boston, Massachusetts 02110, Attention: Winthrop Minot,
Esq., and (b) if to the Purchaser, 277 Park Avenue, New York, New York 10172,
Attention: Mr. Kirk Wortman, with a copy to Kaye, Scholer, Fierman, Hays &
Handler, LLP, Attention: Emanuel Cherney, Esq., or in any case to such other
address as the person to be notified may have requested in writing.
19
<PAGE>
This Agreement shall be governed and construed in accordance with the
internal laws of the State of New York. This Agreement may be signed in various
counterparts which together shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the Agreement
among the Company and the Purchaser.
Very truly yours,
ICON FITNESS CORPORATION
By: /s/ S. Fred Beck
-------------------------------------
Name: S. Fred Beck
Title: Treasurer
Accepted and agreed to as of
the date first above written:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Kirk B. Wortman
-------------------------------
Name: Kirk B. Wortman
Title: Vice President
20
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
----------------------------
of
--
ICON FITNESS CORPORATION II
---------------------------
1. The name of this corporation is ICON Fitness Corporation II.
2. The registered office of this corporation in the State of Delaware is
located at 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is Corporation Service Company.
3. The purpose of this corporation is to engage in any, lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
4. The total number of shares of stock that this corporation shall have
authority to issue is 3,000 shares of Common Stock, $.01 par value per share.
Each share of Common Stock shall be entitled to one vote.
5. The name and mailing address of the incorporator is: Denise M.
Annunciata, c/o Ropes & Gray, One International Place, Boston, MA 02110-2624.
6. Except as otherwise provided in the provisions establishing a class of
stock, the number of authorized shares of any class of stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the voting power of the
corporation entitled to vote irrespective of the provisions of Section 242(b)(2)
of the General Corporation Law of the State of Delaware.
7. The election of directors need not be by written ballot unless the
by-laws shall so require.
8. In furtherance and not in limitation of the power conferred upon the
board of directors by law, the board of directors shall have power to make,
adopt, alter, amend and repeal from time to time by-laws of this corporation,
subject to the right of the stockholders entitled to vote with respect thereto
to alter and repeal by-laws made by the board of directors.
9. A director of this corporation shall not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that exculpation from liability is not permitted
under the General Corporation Law of the State of Delaware as in effect at the
time such liability is determined. No amendment or
<PAGE>
repeal of this paragraph 9 shall apply to or have any effect on the liability or
alleged liability of any director of the corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
10. This corporation shall, to the maximum extent permitted from time to
time under the law of the State of Delaware, indemnify and upon request advance
expenses to any person who is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit, proceeding or claim,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was or has agreed to be a director or officer of this
corporation or while a director or officer is or was serving at the request of
this corporation as a director, officer, partner, trustee, employee or agent of
any corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, against expenses
(including attorney's fees and expenses), judgments, fines, penalties and
amounts paid in settlement incurred (and not otherwise recovered) in connection
with the investigation, preparation to defend or defense of such action, suit,
proceeding or claim; provided, however, that the foregoing shall not require
-------- -------
this corporation to indemnify or advance expenses to any person in connection
with any action, suit, proceeding, claim or counterclaim initiated by or on
behalf of such person. Such indemnification shall not be exclusive of other
indemnification rights arising under any by-law, agreement, vote of directors or
stockholders or otherwise and shall inure to the benefit of the heirs and legal
representatives of such person. Any person seeking indemnification under this
paragraph 10 shall be deemed to have met the standard of conduct required for
such indemnification unless the contrary shall be established. Any repeal or
modification of the foregoing provisions of this paragraph 10 shall not
adversely affect any right or protection of a director or officer of this
corporation with respect to any acts or omissions of such director or officer
occurring prior to such repeal or modification.
11. The books of this corporation may (subject to any statutory
requirements) be kept outside the State of Delaware as may be designated by the
board of directors or in the by-laws of this corporation.
12. If at any time this corporation shall have a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, for so long
as such class is so registered, any action by the stockholders of such class
must be taken at an annual or special meeting of stockholders and may not be
taken by written consent.
-2-
<PAGE>
THE UNDERSIGNED, the sole incorporator named above, hereby certifies that
the facts stated above are true as of this 12th day of November, 1996.
/s/ Denise M. Annunciata
-----------------------------------
Denise M. Annunciata
c/o Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
<PAGE>
Exhibit 3.1A
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ICON FITNESS CORPORATION II
ICON Fitness Corporation II, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does hereby
certify:
FIRST: That the Board of Directors of said corporation, at a duly noticed
special meeting at which a quorum was present and acting at all times, adopted
the following resolution:
RESOLVED That the Board of Directors hereby declares it advisable and in
the best interest of the Corporation that Article 1 of the Certificate of
Incorporation be amended to read as follows:
"1. The name of this Corporation is ICON Fitness Corporation."
SECOND: That the said amendment has been consented to and authorized by
the holders of a majority of the issued and outstanding stock entitled to vote
thereon by written consent given in accordance with the provisions of Section
228 of the General Corporation Law of the State of Delaware and that prompt
notice of the taking of the foregoing action without a meeting has been given to
those stockholders who have not consented in writing pursuant to Section 228(d)
thereof.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, said corporation has caused this Certificate to be
signed by Brad H. Bearnson, its Secretary, this 15th day of November, 1996.
/s/ Brad H. Bearnson
----------------------------------------
Secretary
<PAGE>
Exhibit 3.2
BY-LAWS
OF
ICON FITNESS CORPORATION II
Section 1. LAW, CERTIFICATE OF INCORPORATION AND BY-LAWS
1.1. These by-laws are subject to the certificate of incorporation of the
corporation. In these by-laws, references to law, the certificate of
incorporation and by-laws mean the law, the provisions of the certificate of
incorporation and the by-laws as from time to time in effect.
Section 2. STOCKHOLDERS
2.1. Annual Meeting. The annual meeting of stockholders shall be held at
--------------
10:00 a.m. on the second Tuesday in May in each year, unless that day be a legal
holiday at the place where the meeting is to be held, in which case the meeting
shall be held at the same hour on the next succeeding day not a legal holiday,
or at such other date and time as shall be designated from time to time by the
board of directors and stated in the notice of the meeting, at which they shall
elect a board of directors and transact such other business as may be required
by law or these by-laws or as may properly come before the meeting.
2.2. Special Meetings. A special meeting of the stockholders may be
----------------
called at any time by the chairman of the board, if any, the president or the
board of directors. A special meeting of the stockholders shall be called by
the secretary, or in the case of the death, absence, incapacity or refusal of
the secretary, by an assistant secretary or some other officer, upon application
of a majority of the directors. Any such application shall state the purpose or
purposes of the proposed meeting. Any such call shall state the place, date,
hour, and purposes of the meeting.
2.3. Place of Meeting. All meetings of the stockholders for the election
----------------
of directors or for any other purpose shall be held at such place within or
without the State of Delaware as may be determined from time to time by the
chairman of the board, if any, the president or the board of directors. Any
adjourned session of any meeting of the stockholders shall be held at the place
designated in the vote of adjournment.
2.4. Notice of Meetings. Except as otherwise provided by law, a written
------------------
notice of each meeting of stockholders stating the place, day and hour thereof
and, in the case of a special meeting, the purposes for which the meeting is
called, shall be given not less then ten nor more than sixty days before the
meeting, to each stockholder entitled to vote thereat, and
<PAGE>
to each stockholder who, by law, by the certificate of incorporation or by these
by-laws, is entitled to notice, by leaving such notice with him or at his
residence or usual place of business, or by depositing it in the United States
mail, postage prepaid, and addressed to such stockholder at his address as it
appears in the records of the corporation. Such notice shall be given by the
secretary, or by an officer or person designated by the board of directors, or
in the case of a special meeting by the officer calling the meeting. As to any
adjourned session of any meeting of stockholders, notice of the adjourned
meeting need not be given if the time and place thereof are announced at the
meeting at which the adjournment was taken except that if the adjournment is for
more than thirty days or if after the adjournment a new record date is set for
the adjourned session, notice of any such adjourned session of the meeting shall
be given in the manner heretofore described. No notice of any meeting of
stockholders or any adjourned session thereof need be given to a stockholder if
a written waiver of notice, executed before or after the meeting or such
adjourned session by such stockholder, is filed with the records of the meeting
or if the stockholder attends such meeting without objecting at the beginning of
the meeting to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any meeting of the stockholders or any adjourned session thereof
need be specified in any written waiver of notice.
2.5. Quorum of Stockholders. At any meeting of the stockholders a quorum
----------------------
as to any matter shall consist of a majority of the votes entitled to be cast on
the matter, except where a larger quorum is required by law, by the certificate
of incorporation or by these by-laws. Any meeting may be adjourned from time to
time by a majority of the votes properly cast upon the question, whether or not
a quorum is present. If a quorum is present at an original meeting, a quorum
need not be present at an adjourned session of that meeting. Shares of its own
stock belonging to the corporation or to another corporation, if a majority of
the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of any corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
2.6. Action by Vote. When a quorum is present at any meeting, a plurality
--------------
of the votes properly cast for election to any office shall elect to such office
and a majority of the votes properly cast upon any question other than an
election to an office shall decide the question, except when a larger vote is
required by law, by the certificate of incorporation or by these by-laws. No
ballot shall be required for any election unless requested by a stockholder
present or represented at the meeting and entitled to vote in the election.
2.7. Action without Meetings. Unless otherwise provided in the
-----------------------
certificate of incorporation, any action required or permitted to be taken by
stockholders for or in connection with any corporate action may be taken without
a meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes
-2-
<PAGE>
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in Delaware by
hand or certified or registered mail, return receipt requested, to its principal
place of business or to an officer or agent of the corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Each
such written consent shall bear the date of signature of each stockholder who
signs the consent. No written consent shall be effective to take the corporate
action referred to therein unless written consents signed by a number of
stockholders sufficient to take such action are delivered to the corporation in
the manner specified in this paragraph within sixty days of the earliest dated
consent so delivered.
If action is taken by consent of stockholders and in accordance with the
foregoing, there shall be filed with the records of the meetings of stockholders
the writing or writings comprising such consent.
If action is taken by less than unanimous consent of stockholders, prompt
notice of the taking of such action without a meeting shall be given to those
who have not consented in writing and a certificate signed and attested to by
the secretary that such notice was given shall be filed with the records of the
meetings of stockholders.
In the event that the action which is consented to is such as would have
required the filing of a certificate under any provision of the General
Corporation Law of the State of Delaware, if such action had been voted upon by
the stockholders at a meeting thereof, the certificate filed under such
provision shall state, in lieu of any statement required by such provision
concerning a vote of stockholders, that written consent has been given under
Section 228 of said General Corporation Law and that written notice has been
given as provided in such Section 228.
2.8. Proxy Representation. Every stockholder may authorize another person
--------------------
or persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, objecting to
or voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. The authorization of a proxy may but
need not be limited to specified action, provided, however, that if a proxy
limits its authorization to a meeting or meetings of stockholders, unless
otherwise specifically provided such proxy shall entitle the holder thereof to
vote at any adjourned session but shall not be valid after the final adjournment
thereof.
-3-
<PAGE>
2.9. Inspectors. The directors or the person presiding at the meeting
----------
may, and shall if required by applicable law, appoint one or more inspectors of
election and any substitute inspectors to act at the meeting or any adjournment
thereof. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors, if any, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at the
meeting, the existence of a quorum, the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request
of the person presiding at the meeting, the inspectors shall make a report in
writing of any challenge, question or matter determined by them and execute a
certificate of any fact found by them.
2.10. List of Stockholders. The secretary shall prepare and make, at
--------------------
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at such meeting, arranged in alphabetical order
and showing the address of each stockholder and the number of shares registered
in his name. The stock ledger shall be the only evidence as to who are
stockholders entitled to examine such list or to vote in person or by proxy at
such meeting.
Section 3. BOARD OF DIRECTORS
3.1. Number. The corporation shall have one or more directors, the number
------
of directors to be determined from time to time by vote of a majority of the
directors then in office. Except in connection with the election of directors
at the annual meeting of stockholders, the number of directors may be decreased
only to eliminate vacancies by reason of death, resignation or removal of one or
more directors. No director need be a stockholder.
3.2. Tenure. Each director shall hold office until the next annual
------
meeting and until his successor is elected and qualified, or until he sooner
dies, resigns, is removed or becomes disqualified.
3.3. Powers. The business and affairs of the corporation shall be managed
------
by or under the direction of the board of directors who shall have and may
exercise all the powers of the corporation and do all such lawful acts and
things as are not by law, the certificate of incorporation or these by-laws
directed or required to be exercised or done by the stockholders.
3.4. Vacancies. Vacancies and any newly created directorships resulting
---------
from any increase in the number of directors may be filled by vote of the
holders of the particular class or series of stock entitled to elect such
director at a meeting called for the purpose, or by a majority of the directors
then in office, although less than a quorum, or by a sole remaining
-4-
<PAGE>
director, in each case elected by the particular class or series of stock
entitled to elect such directors. When one or more directors shall resign from
the board, effective at a future date, a majority of the directors then in
office, including those who have resigned, who were elected by the particular
class or series of stock entitled to elect such resigning director or directors
shall have power to fill such vacancy or vacancies, the vote or action by
writing thereon to take effect when such resignation or resignations shall
become effective. The directors shall have and may exercise all their powers
notwithstanding the existence of one or more vacancies in their number, subject
to any requirements of law or of the certificate of incorporation or of these
by-laws as to the number of directors required for a quorum or for any vote or
other actions.
3.5. Committees. The board of directors may, by vote of a majority of the
----------
whole board, (a) designate, change the membership of or terminate the existence
of any committee or committees, each committee to consist of one or more of the
directors; (b) designate one or more directors as alternate members of any such
committee who may replace any absent or disqualified member at any meeting of
the committee; and (c) determine the extent to which each such committee shall
have and may exercise the powers of the board of directors in the management of
the business and affairs of the corporation, including the power to authorize
the seal of the corporation to be affixed to all papers which require it and the
power and authority to declare dividends or to authorize the issuance of stock;
excepting, however, such powers which by law, by the certificate of
incorporation or by these by-laws they are prohibited from so delegating. In
the absence or disqualification of any member of such committee and his
alternate, if any, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the board of directors to act at the meeting in the
place of any such absent or disqualified member. Except as the board of
directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the board or such rules, its
business shall be conducted as nearly as may be in the same manner as is
provided by these by-laws for the conduct of business by the board of directors.
Each committee shall keep regular minutes of its meetings and report the same to
the board of directors upon request.
3.6. Regular Meetings. Regular meetings of the board of directors may be
----------------
held without call or notice at such places within or without the State of
Delaware and at such times as the board may from time to time determine,
provided that notice of the first regular meeting following any such
determination shall be given to absent directors. A regular meeting of the
directors may be held without call or notice immediately after and at the same
place as the annual meeting of stockholders.
3.7. Special Meetings. Special meetings of the board of directors may be
----------------
held at any time and at any place within or without the State of Delaware
designated in the notice of the meeting, when called by the chairman of the
board, if any, the president, or by one-third or more in number of the
directors, reasonable notice thereof being given to each director by the
-5-
<PAGE>
secretary or by the chairman of the board, if any, the president or any one of
the directors calling the meeting.
3.8. Notice. It shall be reasonable and sufficient notice to a director
------
to send notice by mail at least forty-eight hours or by telegram at least
twenty-four hours before the meeting addressed to him at his usual or last known
business or residence address or to give notice to him in person or by telephone
at least twenty-four hours before the meeting. Notice of a meeting need not be
given to any director if a written waiver of notice, executed by him before or
after the meeting, is filed with the records of the meeting, or to any director
who attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him. Neither notice of a meeting nor a waiver of a notice
need specify the purposes of the meeting.
3.9. Quorum. Except as may be otherwise provided by law, by the
------
certificate of incorporation or by these by-laws, at any meeting of the
directors a majority of the directors then in office shall constitute a quorum;
a quorum shall not in any case be less than one-third of the total number of
directors constituting the whole board. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
3.10. Action by Vote. Except as may be otherwise provided by law, by the
--------------
certificate of incorporation or by these by-laws, when a quorum is present at
any meeting the vote of a majority of the directors present shall be the act of
the board of directors.
3.11. Action Without a Meeting. Any action required or permitted to be
------------------------
taken at any meeting of the board of directors or a committee thereof may be
taken without a meeting if all the members of the board or of such committee, as
the case may be, consent thereto in writing, and such writing or writings are
filed with the records of the meetings of the board or of such committee. Such
consent shall be treated for all purposes as the act of the board or of such
committee, as the case may be.
3.12. Participation in Meetings by Conference Telephone. Members of the
-------------------------------------------------
board of directors, or any committee designated by such board, may participate
in a meeting of such board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other or by any other means permitted by law. Such
participation shall constitute presence in person at such meeting.
3.13. Compensation. In the discretion of the board of directors, each
------------
director may be paid such fees for his services as director and be reimbursed
for his reasonable expenses incurred in the performance of his duties as
director as the board of directors from time to time may determine. Nothing
contained in this section shall be construed to preclude any director from
serving the corporation in any other capacity and receiving reasonable
compensation therefor.
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<PAGE>
3.14. Interested Directors and Officers.
---------------------------------
(a) No contract or transaction between the corporation and one or more of
its directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of the
corporation's directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the board of directors
or the committee, and the board or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the board of directors, a
committee thereof, or the stockholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
Section 4. OFFICERS AND AGENTS
4.1. Enumeration; Qualification. The officers of the corporation shall be
--------------------------
a president, a treasurer, a secretary and such other officers, if any, as the
board of directors from time to time may in its discretion elect or appoint
including without limitation a chairman of the board, one or more vice
presidents and a controller. The corporation may also have such agents, if any,
as the board of directors from time to time may in its discretion choose. Any
officer may be but none need be a director or stockholder. Any two or more
offices may be held by the same person. Any officer may be required by the
board of directors to secure the faithful performance of his duties to the
corporation by giving bond in such amount and with sureties or otherwise as the
board of directors may determine.
4.2. Powers. Subject to law, to the certificate of incorporation and to
------
the other provisions of these by-laws, each officer shall have, in addition to
the duties and powers
-7-
<PAGE>
herein set forth, such duties and powers as are commonly incident to his office
and such additional duties and powers as the board of directors may from time to
time designate.
4.3. Election. The officers may be elected by the board of directors at
--------
their first meeting following the annual meeting of the stockholders or at any
other time. At any time or from time to time the directors may delegate to any
officer their power to elect or appoint any other officer or any agents.
4.4. Tenure. Each officer shall hold office until the first meeting of
------
the board of directors following the next annual meeting of the stockholders and
until his respective successor is chosen and qualified unless a shorter period
shall have been specified by the terms of his election or appointment, or in
each case until he sooner dies, resigns, is removed or becomes disqualified.
Each agent shall retain his authority at the pleasure of the directors, or the
officer by whom he was appointed or by the officer who then holds agent
appointive power.
4.5. Chairman of the Board of Directors, President and Vice President.
----------------------------------------------------------------
The chairman of the board, if any, shall have such duties and powers as shall be
designated from time to time by the board of directors. Unless the board of
directors otherwise specifies, the chairman of the board, or if there is none
the chief executive officer, shall preside, or designate the person who shall
preside, at all meetings of the stockholders and of the board of directors.
Unless the board of directors otherwise specifies, the president shall be
the chief executive officer and shall have direct charge of all business
operations of the corporation and, subject to the control of the directors,
shall have general charge and supervision of the business of the corporation.
Any vice presidents shall have such duties and powers as shall be set forth
in these by-laws or as shall be designated from time to time by the board of
directors or by the president.
4.6. Treasurer and Assistant Treasurers. Unless the board of directors
----------------------------------
otherwise specifies, the treasurer shall be the chief financial officer of the
corporation and shall be in charge of its funds and valuable papers, and shall
have such other duties and powers as may be designated from time to time by the
board of directors or by the president. If no controller is elected, the
treasurer shall, unless the board of directors otherwise specifies, also have
the duties and powers of the controller.
Any assistant treasurers shall have such duties and powers as shall be
designated from time to time by the board of directors, the president or the
treasurer.
4.7. Controller and Assistant Controllers. If a controller is elected, he
------------------------------------
shall, unless the board of directors otherwise specifies, be the chief
accounting officer of the corporation
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<PAGE>
and be in charge of its books of account and accounting records, and of its
accounting procedures. He shall have such other duties and powers as may be
designated from time to time by the board of directors, the president or the
treasurer.
Any assistant controller shall have such duties and powers as shall be
designated from time to time by the board of directors, the president, the
treasurer or the controller.
4.8. Secretary and Assistant Secretaries. The secretary shall record all
-----------------------------------
proceedings of the stockholders, of the board of directors and of committees of
the board of directors in a book or series of books to be kept therefor and
shall file therein all actions by written consent of stockholders or directors.
In the absence of the secretary from any meeting, an assistant secretary, or if
there be none or he is absent, a temporary secretary chosen at the meeting,
shall record the proceedings thereof. Unless a transfer agent has been
appointed the secretary shall keep or cause to be kept the stock and transfer
records of the corporation, which shall contain the names and record addresses
of all stockholders and the number of shares registered in the name of each
stockholder. He shall have such other duties and powers as may from time to
time be designated by the board of directors or the president.
Any assistant secretaries shall have such duties and powers as shall be
designated from time to time by the board of directors, the president or the
secretary.
Section 5. RESIGNATIONS AND REMOVALS
5.1. Any director or officer may resign at any time by delivering his
resignation in writing to the chairman of the board, if any, the president, or
the secretary or to a meeting of the board of directors. Such resignation shall
be effective upon receipt unless specified to be effective at some other time,
and without in either case the necessity of its being accepted unless the
resignation shall so state. A director (including persons elected by
stockholders or directors to fill vacancies in the board) may be removed from
office with or without cause by the vote of the holders of a majority of the
issued and outstanding shares of the particular class or series entitled to vote
in the election of such director. The board of directors may at any time remove
any officer either with or without cause. The board of directors may at any
time terminate or modify the authority of any agent.
Section 6. VACANCIES
6.1. If the office of the president or the treasurer or the secretary
becomes vacant, the directors may elect a successor by vote of a majority of
the directors then in office. If the office of any other officer becomes
vacant, any person or body empowered to elect or appoint that officer may choose
a successor. Each such successor shall hold office for the unexpired term, and
in the case of the president, the treasurer and the secretary until his
successor is chosen and qualified or in each case until he sooner dies, resigns,
is removed or becomes
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<PAGE>
disqualified. Any vacancy of a directorship shall be filled as specified in
Section 3.4 of these by-laws.
Section 7. CAPITAL STOCK
7.1. Stock Certificates. Each stockholder shall be entitled to a
------------------
certificate stating the number and the class and the designation of the series,
if any, of the shares held by him, in such form as shall, in conformity to law,
the certificate of incorporation and the by-laws, be prescribed from time to
time by the board of directors. Such certificate shall be signed by the
chairman or vice chairman of the board, if any, or the president or a vice
president and by the treasurer or an assistant treasurer or by the secretary or
an assistant secretary. Any of or all the signatures on the certificate may be
a facsimile. In case an officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed on such certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the time of its issue.
7.2. Loss of Certificates. In the case of the alleged theft, loss,
--------------------
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms, including receipt of a bond
sufficient to indemnify the corporation against any claim on account thereof, as
the board of directors may prescribe.
Section 8. TRANSFER OF SHARES OF STOCK
8.1. Transfer on Books. Subject to the restrictions, if any, stated or
-----------------
noted on the stock certificate, shares of stock may be transferred on the books
of the corporation by the surrender to the corporation or its transfer agent of
the certificate therefor properly endorsed or accompanied by a written
assignment and power of attorney properly executed, with necessary transfer
stamps affixed, and with such proof of the authenticity of signature as the
board of directors or the transfer agent of the corporation may reasonably
require. Except as may be otherwise required by law, by the certificate of
incorporation or by these by-laws, the corporation shall be entitled to treat
the record holder of stock as shown on its books as the owner of such stock for
all purposes, including the payment of dividends and the right to receive notice
and to vote or to give any consent with respect thereto and to be held liable
for such calls and assessments, if any, as may lawfully be made thereon,
regardless of any transfer, pledge or other disposition of such stock until the
shares have been properly transferred on the books of the corporation.
It shall be the duty of each stockholder to notify the corporation of his
post office address.
8.2. Record Date. In order that the corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the
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<PAGE>
board of directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
board of directors, and which record date shall not be more than sixty nor less
than ten days before the date of such meeting. If no such record date is fixed
by the board of directors, the record date for determining the stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of directors may
fix a new record date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
such record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
the General Corporation Law of the State of Delaware, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
Delaware by hand or certified or registered mail, return receipt requested, to
its principal place of business or to an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. If no record date has been fixed by the board of directors and prior
action by the board of directors is required by the General Corporation Law of
the State of Delaware, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the board of directors adopts the resolution
taking such prior action.
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the board of directors may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be not
more than sixty days prior to such payment, exercise or other action. If no
such record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
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<PAGE>
Section 9. CORPORATE SEAL
9.1. Subject to alteration by the directors, the seal of the
corporation shall consist of a flat-faced circular die with the word "Delaware"
and the name of the corporation cut or engraved thereon, together with such
other words, dates or images as may be approved from time to time by the
directors.
Section 10. EXECUTION OF PAPERS
10.1. Except as the board of directors may generally or in particular
cases authorize the execution thereof in some other manner, all deeds, leases,
transfers, contracts, bonds, notes, checks, drafts or other obligations made,
accepted or endorsed by the corporation shall be signed by the chairman of the
board, if any, the president, a vice president or the treasurer.
Section 11. FISCAL YEAR
11.1. The fiscal year of the corporation shall end on the 31st day of
May.
Section 12. AMENDMENTS
12.1. These by-laws may be adopted, amended or repealed by vote of a
majority of the directors then in office or by vote of a majority of the voting
power of the stock outstanding and entitled to vote. Any by-law, whether
adopted, amended or repealed by the stockholders or directors, may be amended or
reinstated by the stockholders or the directors.
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<PAGE>
EXHIBIT 4.2
================================================================================
ICON FITNESS CORPORATION
__________________
$162,000,000
SERIES A AND SERIES B
14% SENIOR DISCOUNT NOTES DUE 2006
__________________
INDENTURE
Dated as of November 20, 1996
__________________
FLEET NATIONAL BANK
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
- ------------------- -------------------
<S> <C>
310(a)(1)......................................... 7.10
(a)(2)......................................... 7.10
(a)(3)......................................... N.A.
(a)(4)......................................... N.A.
(a)(5)......................................... 7.10
(b)............................................ 7.8; 7.10
(c)............................................ N.A.
311(a)............................................ 7.11
(b)............................................ 7.11
(c)............................................ N.A.
312(a)............................................ 2.5
(b)............................................ 11.3
(c)............................................ 11.3
313(a)............................................ 7.6
(b)(1)......................................... N.A.
(b)(2)......................................... 7.6
(c)............................................ 7.6
(d)............................................ 7.6
314(a)............................................ 4.3; 4.4
(b)............................................ N.A.
(c)(1)......................................... 11.4
(c)(2)......................................... 11.4
(c)(3)......................................... N.A.
(d)............................................ N.A.
(e)............................................ 11.5
(f)............................................ N.A.
315(a)............................................ 7.1(b)
(b)............................................ 7.5
(c)............................................ 7.1(a)
(d)............................................ 7.1(c)
(e)............................................ 6.11
316(a)(last sentence)............................. 2.9
(a)(1)(A)...................................... 6.5
(a)(1)(B)...................................... 6.4
(a)(2)......................................... N.A.
(b)............................................ 6.7
(c)............................................ 9.4
317(a)(1)......................................... 6.8
(a)(2)......................................... 6.9
(b)............................................ 2.4
318(a)............................................ 11.1
(b)............................................ N.A.
(c)............................................ 11.1
</TABLE>
- -------------------------
N.A. means not applicable
*This Cross-Reference Table is not part of this Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
<S> <C>
Section 1.1 Definitions............................................................ 1
Section 1.2 Other Definitions...................................................... 18
Section 1.3 Incorporation by Reference of Trust Indenture Act...................... 18
Section 1.4 Rules of Construction.................................................. 19
ARTICLE 2
THE NOTES
Section 2.1 Form and Dating........................................................ 19
Section 2.2 Execution and Authentication........................................... 20
Section 2.3 Registrar and Paying Agent............................................. 20
Section 2.4 Paying Agent to Hold Money in Trust.................................... 21
Section 2.5 Holder Lists........................................................... 21
Section 2.6 Transfer and Exchange.................................................. 21
Section 2.7 Replacement Notes...................................................... 28
Section 2.8 Outstanding Notes...................................................... 28
Section 2.9 Treasury Notes......................................................... 29
Section 2.10 Temporary Notes........................................................ 29
Section 2.11 Cancellation........................................................... 29
Section 2.12 Defaulted Interest..................................................... 30
ARTICLE 3
REDEMPTION AND OFFERS TO PURCHASE
Section 3.1 Notice to Trustee...................................................... 30
Section 3.2 Selection of Notes to Be Redeemed...................................... 30
Section 3.3 Notice of Redemption................................................... 31
Section 3.4 Effect of Notice of Redemption......................................... 32
Section 3.5 Deposit of Redemption Price............................................ 32
Section 3.6 Notes Redeemed in Part................................................. 33
Section 3.7 Optional Redemption.................................................... 33
Section 3.8 Mandatory Redemption................................................... 34
Section 3.9 Offer to Purchase by Application of Excess Proceeds.................... 34
ARTICLE 4
COVENANTS
Section 4.1 Payment of Notes....................................................... 36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 4.2 Maintenance of Office or Agency........................................ 36
Section 4.3 Reports................................................................ 37
Section 4.4 Compliance Certificate................................................. 37
Section 4.5 Taxes.................................................................. 38
Section 4.6 Stay, Extension and Usury Laws......................................... 38
Section 4.7 Company and Corporate Existence........................................ 38
Section 4.8 Limitation on Incurrence of Indebtedness and Issuance
of Preferred Stock..................................................... 38
Section 4.9 Limitation on Restricted Payments...................................... 41
Section 4.10 Limitation on Liens.................................................... 43
Section 4.11 Limitation on Transactions with Affiliates............................. 43
Section 4.12 Limitation on Sale/Leaseback Transactions.............................. 44
Section 4.13 Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries................................................. 44
Section 4.14 Line of Business....................................................... 45
Section 4.15 Asset Sales............................................................ 45
Section 4.16 Change of Control...................................................... 46
ARTICLE 5
SUCCESSORS
Section 5.1 Merger, Consolidation or Sale of Assets................................ 48
Section 5.2 Successor Person Substituted........................................... 48
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1 Events of Default...................................................... 49
Section 6.2 Acceleration........................................................... 51
Section 6.3 Other Remedies......................................................... 51
Section 6.4 Waiver of Past Defaults................................................ 51
Section 6.5 Control by Majority.................................................... 51
Section 6.6 Limitation on Suits.................................................... 52
Section 6.7 Rights of Holders to Receive Payment................................... 52
Section 6.8 Collection Suit by Trustee............................................. 52
Section 6.9 Trustee May File Proofs of Claim....................................... 53
Section 6.10 Priorities............................................................. 53
Section 6.11 Undertaking for Costs.................................................. 54
ARTICLE 7
TRUSTEE
Section 7.1 Duties of Trustee...................................................... 54
Section 7.2 Rights of Trustee...................................................... 55
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 7.3 Definitive Rights of Trustee........................................... 56
Section 7.4 Trustee's Disclaimer................................................... 56
Section 7.5 Notice of Defaults..................................................... 56
Section 7.6 Reports by Trustee to Holders.......................................... 56
Section 7.7 Compensation and Indemnity............................................. 57
Section 7.8 Replacement of Trustee................................................. 57
Section 7.9 Successor Trustee by Merger, etc....................................... 59
Section 7.10 Eligibility; Disqualification.......................................... 59
Section 7.11 Preferential Collection of Claims Against Company...................... 59
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.1 Option to Effect Legal Defeasance or Covenant Defeasance............... 59
Section 8.2 Legal Defeasance and Discharge......................................... 59
Section 8.3 Covenant Defeasance.................................................... 60
Section 8.4 Conditions to Legal Defeasance or Covenant Defeasance.................. 60
Section 8.5 Deposited Money and Government Securities to be Held in
Trust; Other Miscellaneous Provisions.................................. 62
Section 8.6 Repayment to Company................................................... 62
Section 8.7 Reinstatement.......................................................... 62
Section 8.8 Discharge of Liability on Securities; Defeasance....................... 63
ARTICLE 9
AMENDMENTS
Section 9.1 Without Consent of Holders............................................. 63
Section 9.2 With Consent of Holders................................................ 64
Section 9.3 Compliance with Trust Indenture Act.................................... 65
Section 9.4 Revocation and Effect of Consents...................................... 65
Section 9.5 Notation on or Exchange of Notes....................................... 66
Section 9.6 Trustee to Sign Amendments, etc........................................ 66
ARTICLE 10
PLEDGE OF COLLATERAL AND SECURITY
Section 10.1 Grant of Security Interest............................................. 66
Section 10.2 Delivery and Substitution of Collateral................................ 67
Section 10.3 Representations and Warranties......................................... 67
Section 10.4 Further Assurances..................................................... 67
Section 10.5 Dividends; Investments of Collateral; Voting
Rights; Release upon Discharge or Defeasance........................... 68
Section 10.6 Trustee Appointed Attorney-in-Fact..................................... 69
Section 10.7 Trustee May Perform.................................................... 69
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 10.8 Trustee's Duties....................................................... 69
Section 10.9 Remedies upon Event of Default......................................... 69
Section 10.10 Application of Proceeds................................................ 70
Section 10.11 Continuing Lien........................................................ 70
Section 10.12 Certificates and Opinions.............................................. 71
Section 10.13 Margin Regulations..................................................... 71
ARTICLE 11
MISCELLANEOUS
Section 11.1 Trust Indenture Act Controls........................................... 71
Section 11.2 Notices................................................................ 71
Section 11.3 Communication by Holders with Other Holders............................ 72
Section 11.4 Certificate and Opinion as to Conditions Precedent..................... 72
Section 11.5 Statements Required in Certificate or Opinion.......................... 73
Section 11.6 Rules by Trustee and Agents............................................ 74
Section 11.7 Legal Holidays......................................................... 74
Section 11.8 No Recourse Against Others............................................. 74
Section 11.9 Governing Law.......................................................... 74
Section 11.10 No Adverse Interpretation of Other Agreements.......................... 74
Section 11.11 Successors............................................................. 75
Section 11.12 Severability........................................................... 75
Section 11.13 Counterpart Originals.................................................. 75
Section 11.14 Table of Contents, Headings, etc....................................... 75
</TABLE>
iv
<PAGE>
SIGNATURES
EXHIBITS
Exhibit A FORM OF NOTE................................................... A-1
Exhibit B CERTIFICATE OF TRANSFEROR...................................... B-1
Exhibit C CERTIFICATE OF ACCREDITED INSTITUTION.......................... C-1
Exhibit D CERTIFICATE OF REGULATION S TRANSFEROR......................... D-1
v
<PAGE>
INDENTURE, dated as of November 20, 1996, between ICON Fitness Corporation,
a Delaware corporation (the "Company"), and Fleet National Bank, a national
banking association, as trustee ("Trustee").
The Company and the Trustee agree as follows for the benefit of each other
and for the equal and ratable benefit of the Holders of the 14% Series A Senior
Discount Notes due 2006 (the "Series A Notes") of the Company, and the 14%
Series B Senior Discount Notes due 2006 of the Company (the "Series B Notes"
and, together with the Series A Notes, the "Notes").
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1 Definitions.
"Accreted Value" means, as of any date of determination prior to November
15, 2001, the sum of (a) the initial offering price of each Note and (b) that
portion of the excess of the principal amount of each Note over such initial
offering price as shall have been accreted thereon through such date, such
amount to be so accreted on a daily basis at the rate of 14% per annum of the
initial offering price of the Notes, compounded semi-annually on each May 15 and
November 15 from the Issue Date through the date of determination.
"Acquired Debt" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contempla tion of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (ii) Indebtedness encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
(collectively, "dispositions") of any assets (including by way of a
Sale/Leaseback Transaction) other than dispositions of inventory in the ordinary
course of business, (ii) the issuance by any Restricted Subsidiary of Equity
Interests of such Restricted Subsidiary and (iii) the disposition by the Company
or any of its Restricted Subsidiaries of Equity Interests of any Restricted
Subsidiary of
<PAGE>
the Company, in the case of either clause (i), (ii) or (iii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $2.0 million or (b) for net proceeds in excess of $2.0
million. Notwithstanding the foregoing, the following will not be deemed to be
Asset Sales: (i) a disposition of assets by the Company to a Wholly Owned
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary,
(iii) a disposition consisting of a Restricted Payment permitted by Section 4.9
hereof, (iv) the disposition of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole permitted by Article 5 hereof, (v)
sales of accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" to a Receivables Subsidiary
for the fair market value thereof, including cash in an amount at least equal to
75% of the book value thereof as determined in accordance with GAAP, (vi)
transfers of accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" (or a fractional undivided
interest therein) by a Receivables Subsidiary in a Qualified Receivables
Transaction or (vii) the sale by ICON of the building at which HealthRider's
headquarters was located and the related mortgage, including a sale, if any, of
all of ICON's interest in Boyer Old Mill LLC and any related options to purchase
interests therein. For the purposes of clauses (v) and (vi), notes received in
exchange for the transfer of accounts receivable and related assets shall be
deemed cash if the Receivables Subsidiary or other payor is required to repay
said notes as soon as practicable from available cash collections less amounts
required to be established as reserves pursuant to contractual agreements with
entities that are not Affiliates of the Company entered into as part of a
Qualified Receivables Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP or, in the
event that such rate of interest is not reasonably determinable, discounted at
the rate of interest borne by the Notes) of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).
"Bain" means Bain Capital, Inc.
"Banks" means General Electric Capital Corporation, as agent for the
lenders, and the banks and other financial institutions from time to time that
are lenders under the Credit Agreement.
"Board of Directors" means, as applicable, the Board of Directors of the
Company or any authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Borrowing Base" of any Person means, as of any date, an amount equal to
the sum of (a) 85.0% of the book value of all accounts receivable owned by such
Person and its Subsidiaries
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(excluding any accounts receivable from an Affiliate of such Person or that are
more than 90 days past due, less (without duplication) the allowance for
doubtful accounts attributable to current trade accounts receivable) and (b)
60.0% of the book value of all inventory owned by such Person and its
Subsidiaries as of such date (with a seasonal increase to 70.0% of inventory in
effect from July 1 through November 30 of each year), all calculated on a
consolidated basis and in accordance with GAAP. To the extent that information
is not available as to the amount of accounts receivable as of a specific date,
such Person may utilize the most recent available information for purposes of
calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including, without
limitation, with respect to partnerships, partnership interests (whether general
or limited) and any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, such partnership.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, demand deposits, certificates of deposit,
Eurodollar time deposits or Eurodollar certificates of deposit of any domestic
commercial bank of recognized standing (i) having capital and surplus in excess
of $100.0 million and (ii) whose short-term commercial paper rating from S&P is
at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the
equivalent thereof (any such bank being an "Approved Lender"), in each case with
maturities of not more than twelve months from the date of acquisition, (c)
commercial paper and variable or fixed rate notes issued by any Approved Lender
(or by the parent company thereof) or any variable rate notes issued by, or
guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or
better by S&P or P-1 (or the equivalent thereof) or better by Moody's and
maturing within twelve months of the date of acquisition, (d) repurchase
agreements with a bank or trust company or recognized securities dealer having
capital and surplus in excess of $100.0 million for direct obligations issued by
or fully guaranteed by the United States of America in which the Company shall
have a perfected first priority security interest (subject to no other Liens)
and having, on the date of purchase thereof, a fair market value of at least
100% of the amount of repurchase obligations, and (e) interests in money market
mutual funds which invest solely in assets or securities of the type described
in subparagraphs (a), (b), (c) or (d) hereof.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Bain or its Affiliates, is or becomes the
"beneficial owner" (as defined in Rules 13d-3
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and 13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total outstanding Voting
Stock of the Company or IHF Capital, as the case may be; (ii) during any period
of two consecutive years, individuals who constituted Continuing Directors of
the Company or IHF Capital, as the case may be, cease for any reason to
constitute a majority of the Board of Directors of the Company or IHF Capital,
as the case may be, then in office; (iii) the Company or IHF Capital, as the
case may be, consolidates or merges with or into another Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates or
merges into or with the Company or IHF Capital, as the case may be, in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company or IHF Capital, as the case may be, is changed into or exchanged for
cash, securities or other property, other than any such transaction where the
outstanding Voting Stock of the Company or IHF Capital, as the case may be, is
not changed or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company or IHF Capital, as
the case may be,) or where (A) the outstanding Voting Stock of the Company or
IHF Capital, as the case may be, is changed into or exchanged for (x) Voting
Stock of the surviving corporation which is not Disqualified Stock or (y) cash,
securities and other property (other than Capital Stock of the surviving
corporation) in an amount which could be paid by the Company or IHF Capital, as
the case may be, as a Restricted Payment under Section 4.9 hereof (and such
amount shall be treated as a Restricted Payment subject to the provisions of
such section) and (B) no "person" or "group" other than Bain or its Affiliates
owns immediately after such transaction, directly or indirectly, more than 50%
of the total outstanding Voting Stock of the surviving corporation; (iv) the
Company or IHF Capital, as the case may be, is liquidated or dissolved or adopts
a plan of liquidation or dissolution (other than as permitted under Section 5.1
hereof); or (v) the Company or IHF Capital, as the case may be, shall directly
or indirectly hold less than 100% of the outstanding Capital Stock of ICON.
"Collateral" means all of the issued and outstanding Capital Stock and
inter-company notes (if any) of IHF Holdings held by the Company.
"Commodity Agreement" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
any Subsidiary designed to protect the Company or any of its Subsidiaries
against fluctuations in the price of commodities actually used in the ordinary
course of business of the Company and its Subsidiaries.
"Company" means the party named as such in this Indenture until a successor
replaces it pursuant to this Indenture and thereafter means the successor.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period, plus (a) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
asset sale, to the extent such losses were deducted in computing Consolidated
Net Income, plus (b) provision for taxes based on income or profits of such
Person for such period, to the extent such provision for taxes was
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deducted in computing Consolidated Net Income, plus (c) the Fixed Charges for
such period, to the extent such amount was deducted in computing Consolidated
Net Income, plus (d) deprecia tion and amortization (including amortization of
goodwill and other intangibles and amortization of deferred compensation in
respect of non-cash compensation but excluding amortization of prepaid cash
expenses that were paid in a prior period) of such Person for such period, to
the extent such depreciation and amortization were deducted in computing
Consolidated Net Income, in each case, for such period without duplication on a
consolidated basis and determined in accordance with GAAP, plus (e) non-cash
cost of goods sold as a result of any purchase accounting adjustments.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of cash dividends or cash
distributions paid to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Person that is a Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, (iv) all extraordinary gains and
extraordinary losses and any unusual or non-recurring charges recorded or
accrued in connection with the Refinancing shall be excluded and (v) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of this Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company or IHF Capital who (i) was a member of
the Board of Directors of
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the Company or IHF Capital, as the case may be, at the beginning of the two-year
period referenced in clause (ii) of the definition of "Change of Control", (ii)
was nominated for election or elected to the Board of Directors of the Company
or IHF Capital, as the case may be, with the affirmative vote of 66-2/3% of the
Continuing Directors who were members of the applicable Board at the time of
such nomination or election or (iii) was nominated for election or elected to
the Board of Directors of the Company or IHF Capital, as the case may be, by the
directors of the Company or IHF Capital, as the case may be, nominated by Bain
or its Affiliates.
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 11.2 hereof or such other address as to which the
Trustee may give notice to the Company.
"Credit Agreement" means the Amended and Restated Credit Agreement among
ICON and the Banks, as in effect as at the date of this Indenture, providing for
a revolving credit facility and term loans to ICON, as such agreement may be
amended, renewed, extended, substituted, refinanced, restructured, replaced,
supplemented or otherwise modified from time to time, including, without
limitation, amendments and modifications that provide for loans for Foreign
Subsidiaries and for sub-facilities (including, without limitation, any
successive renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplementations or other modifications of any of the foregoing),
together with the security agreements and other agreements in favor of the Banks
entered into from time to time in connection with such Credit Agreement as such
security agreements and other agreements may be amended, supplemented or
otherwise modified from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries in the ordinary course of business against
fluctuation in the values of the currencies of the countries (other than the
United States) in which the Company or its Restricted Subsidiaries conduct
business.
"Default" means any event that is, or after notice or passage of time, or
both, would be, an Event of Default.
"Definitive Notes" means Notes that are in the form of Exhibit A attached
hereto (but without including the text referred to in the footnote thereto).
"Depository" means, with respect to the Notes issuable or issued in whole
or in part in global form, the Person specified in Section 2.3 hereof as the
Depository with respect to the Notes, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depository" shall mean or include such successor.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or
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otherwise, or redeemable at the option of the Holder thereof, in whole or in
part, on or prior to November 15, 2006.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Default" has the meaning set forth in Section 6.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the offer by the Company to the Holders of all
outstanding Transfer Restricted Securities to exchange all such outstanding
Transfer Restricted Securities held by such Holders for Series B Notes, in an
aggregate principal amount equal to the aggregate principal amount of the
Transfer Restricted Securities tendered in such exchange offer by such Holders.
"Exchange Offer Registration Statement" means the registration statement
under the Securities Act relating to the Exchange Offer, including the related
prospectus.
"Existing Indebtedness" means Indebtedness of IHF Holdings and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of this Indenture, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems any preferred stock, in each case subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date of the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Transaction Date"), then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect to such incurrence, assumption,
Guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the applicable
four-quarter period. For purposes of making the computation referred to above,
acquisitions (including all mergers and consolidations), dispositions and
discontinuance of operations that have been made by the Company or any of its
Subsidiaries during the four-quarter reference period or subsequent to such
reference period and on or prior to the Transaction Date shall be calculated on
a pro forma basis assuming that all such acquisitions, dispositions and
discontinuance of operations had occurred on the first day of the four-quarter
reference period; provided, however, that Fixed Charges shall be reduced by
amounts attributable to operations that are so disposed of or discontinued only
to the extent that the obligations giving rise to such Fixed Charges would no
longer be obligations contributing to the Company's Fixed Charges subsequent to
the Transaction Date.
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"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations but excluding amortization of deferred financing fees)
and (ii) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv)
the product of (a) all cash dividend payments (and non-cash dividend payments in
the case of a Person that is a Restricted Subsidiary) on any series of preferred
stock of such Person payable to a party other than the Company or a Wholly Owned
Restricted Subsidiary, times (b) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, on a
consolidated basis and in accordance with GAAP.
"Foreign Subsidiary" means any Subsidiary that is organized in a
jurisdiction outside of the U.S. and its territories.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect in the United States on the date of this
Indenture.
"Global Note" means a Note that contains the paragraph referred to in
footnote 1 and the additional schedule referred to in the form of Note attached
hereto as Exhibit A.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HealthRider" means HealthRider Inc., a Delaware corporation.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holder" means a Person in whose name a Note is registered.
"ICON" means ICON Health & Fitness, Inc., a Delaware corporation.
"ICON Indenture" means the Indenture dated as of November 14, 1994, as
amended by a First Supplemental Indenture dated as of March 20, 1995, between
ICON and Fleet National Bank (formerly known as Fleet Bank of Massachusetts,
N.A.), as Trustee, relating to ICON's 13% Senior Subordinated Notes due 2002.
"IHF Capital" means IHF Capital, Inc., a Delaware corporation.
"IHF Holdings" means IHF Holdings, Inc., a Delaware corporation.
"IHF Holdings Indenture" means the Indenture dated as of November 14, 1994,
as amended by a First Supplemental Indenture dated as of March 20, 1995, between
IHF Holdings and Fleet National Bank (formerly known as Fleet Bank of
Massachusetts, N.A.), as Trustee, relating to IHF Holdings' 15% Senior Secured
Discount Notes due 2004.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is assumed by such
Person) and, to the extent not otherwise included, the Guarantee of items that
would be included within this definition.
"Indenture" means this Indenture, as amended or supplemented from time to
time.
"Initial Purchaser" means Donaldson, Lufkin & Jenrette Securities
Corporation, as initial purchaser in the Offering.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel,
salary and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for
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consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets, Equity
Interests or other securities by the Company for consideration consisting of
common equity securities of the Company shall not be deemed to be an Investment.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquidated Damages" means all liquidated damages then owing pursuant to
the Registration Rights Agreement.
"Maturity Date" means, with respect to any Note, the date on which any
principal of such Note becomes due and payable as therein or herein provided,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (i) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), or (ii)
the disposition of any securities or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries, and (b) any extraordinary
gain (but not loss), together with any related provision for taxes on such
extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets the
subject of such Asset Sale, any reserve for adjustment in respect of the sale
price of such asset or assets and any reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any of its Restricted Subsidiaries, as the case may be, after such Asset Sale,
including, without limitation,
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pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officer's Certificate.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated to payable prior to its Stated Maturity;
and (ii) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Note Custodian" means the Trustee, as custodian with respect to the Notes
in global form, or any successor entity thereto.
"Notes" means the Company's Series A Notes and Series B Notes.
"Obligations" means any principal, premium, interest (including post-
petition interest), penalties, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documentation governing any
Indebtedness.
"Offering" means the offering of the Series A Notes pursuant to the
Offering Memorandum.
"Offering Memorandum" means the Offering Memorandum of the Company, dated
November 15, 1996, relating to the Offering.
"Officer" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice-President of such Person.
"Officer's Certificate" means a certificate signed by (i) the Chairman, the
Chief Executive Officer, the President or a Vice President and (ii) the
Treasurer, the Chief Financial Officer, the Director of Finance, an Assistant
Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered
to the Trustee.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee, that meets the requirements of Section 11.5 hereof.
The counsel may be an employee of or counsel to the Company, any of its
Subsidiaries or the Trustee.
"Parent" means IHF Capital, and also means any other Person which holds
directly, or indirectly, more than 50% of the total outstanding Voting Stock of
the Company, other than Bain
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and other than any Bain Affiliate whose assets do not principally consist
(directly or indirectly) of Equity Interests in the Company.
"Permitted Business" means a business in which the Company and its
Subsidiaries was engaged on the date of this Indenture or a business that is
reasonably related thereto.
"Permitted Investments" means (a) any Investments in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (b) any Investment by the
Company or a Wholly Owned Restricted Subsidiary in a Receivables Subsidiary or
an Investment by a Receivables Subsidiary in any other Person in connection with
a Qualified Receivables Transaction; provided that the foregoing Investment is
in the form of a note that the Receivables Subsidiary or other Person is
required to pay as soon as practicable from available cash collections less
amounts required to be established as reserves pursuant to contractual
arrangements with entities that are not Affiliates of the Company entered into
as part of a Qualified Receivables Transaction; (c) any Investments in Cash
Equivalents; (d) Investments by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment (i) such Person becomes
a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Subsidiary of the Company; and (e) Investments in any Person
engaged in a Permitted Business in an aggregate amount not to exceed $5 million
at any time outstanding.
"Permitted Liens" means (a) Liens in favor of the Company; (b) Liens
securing Indebtedness that was permitted to be incurred pursuant to clauses (i),
(iii) and (viii) of Section 4.8 hereof; (c) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (d) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company; provided that such Liens were in existence prior to the
contemplation of such acquisition; (e) Liens to secure surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business; (f) Liens existing on the date of this Indenture; (g) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (h) Liens imposed by law, such as mechanics', carriers',
warehousemen's, materialmen's, and vendors' Liens, incurred in good faith in the
ordinary course of business with respect to amounts not yet delinquent or being
contested in good faith by appropriate proceedings if a reserve or other
appropriate provisions, if any, as shall be required by GAAP shall have been
made therefor; (i) zoning restrictions, easements, licenses, covenants,
reservations, restrictions on the use of real property or minor irregularities
of title incident thereto that do not, in the aggregate, materially detract from
the value of the property or the assets of the
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Company or impair the use of such property in the operation of the Company's
business; (j) judgment Liens to the extent that such judgments do not cause or
constitute a Default or an Event of Default; and (k) Liens to secure the payment
of all or a part of the purchase price of property or assets acquired or
constructed in the ordinary course of business on or after the date of this
Indenture, provided that (i) such property or assets are used in a Permitted
Business, (ii) at the time of incurrence of any such Lien, the aggregate
principal amount of the obligations secured by such Lien shall not exceed the
lesser of the cost or fair market value of the assets or property (or portions
thereof) so acquired or constructed, (iii) each such Lien shall encumber only
the assets or property (or portions thereof) so acquired or constructed and
shall attach to such property within 120 days of the purchase or construction
thereof and (iv) any Indebtedness secured by such Lien shall have been permitted
to be incurred under Section 4.8 hereof, (l) Liens of landlords or of mortgagees
of landlords arising by operation of law, provided that the rentals payments
secured thereby are not yet due and payable; (m) Liens incurred in the ordinary
course of business of the Company or any Restricted Subsidiary of the Company
with respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary; (n) Liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security; (o) Liens securing reimbursement obligations with respect to letters
of credit which encumber only documents and other property relating to such
letters of credit and the products and proceeds thereof; (p) Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual or warranty requirements; (q) Liens arising out of consignment or
similar arrangements for the sale of goods in the ordinary course of business;
(r) any interest or title of a lessor in property subject to any capital lease
obligation or operating lease; and (s) Liens on the assets of a Receivables
Subsidiary incurred in connection with a Qualified Receivables Transaction.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization, or government or any agency or
political subdivision thereof.
"Principals" means Scott Watterson and Gary Stevenson.
"Principals Repurchase" means the repurchase of all of the outstanding
options to purchase preferred stock of IHF Holdings held by the Principals
pursuant to that certain Key Executive Preferred Stock Option Agreement dated as
of September 6, 1996 between IHF Capital and the Principals.
"Public Equity Offering" with respect to any Person means a bona fide
underwritten sale to the public of common stock of such Person pursuant to a
registration statement (other than on Form S-8 or any other form relating to
securities issuable under any benefit plan of the Company) that is declared
effective by the Securities and Exchange Commission.
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"Purchase Money Obligations" of any Person means any obligations of such
Person or any of its subsidiaries to any seller or any other Person incurred or
assumed in connection with the purchase of real or personal property to be used
in the business of such Person or any of its subsidiaries within 180 days of
such incurrence or assumption.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any of its Subsidiaries may sell, convey or
otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer by
the Company or any of its Subsidiaries) and (ii) any other Person (in the case
of a transfer by a Receivables Subsidiary), or may grant a security interest in,
any accounts receivable (whether now existing or arising in the future) of the
Company or any of its Subsidiaries, and any assets related thereto including,
without limitation, all collateral securing such accounts receivable, all
contracts and all guarantees or other obligations in respect of such accounts
receivable, proceeds of such accounts receivable and other assets which are
customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of the Company
which engages in no activities other than in connection with the financing of
accounts receivable and which is designated by the Board of Directors of the
Company (as provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise), of which (i) is
guaranteed by the Company or any Restricted Subsidiary of the Company (excluding
guarantees of Obligations (other than the principal of, and interest on,
Indebtedness) pursuant to representations, warranties, covenants and indemnities
entered into in the ordinary course of business in connection with a Qualified
Receivables Transaction), (ii) is recourse to or obligates the Company or any
Restricted Subsidiary of the Company in any way other than pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction or (iii) sub jects any property or asset of the Company or any
Restricted Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to representations,
warranties, covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction, (b) with which
neither the Company nor any Restricted Subsidiary of the Company has any
material contract, agreement, arrangement or understanding other than on terms
no less favorable to the Company or such Subsidiary than those that might be
obtained at the time from persons who are not Affiliates of the Company, other
than fees payable in the ordinary course of business in connection with
servicing accounts receivable and (c) with which neither the Company nor any
Restricted Subsidiary of the Company has any obligation to maintain or preserve
such Subsidiary's financial condition or cause such Subsidiary to achieve
certain levels of operating results. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of the Board of Directors of the
Company giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
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"Registration Rights Agreement" means that certain Registration Rights
Agreement, dated as of the date of this Indenture, between the Company and the
Initial Purchaser.
"Responsible Officer" when used with respect to the Trustee, means any
officer within the corporate trust department of the Trustee (or any successor
group of the Trustee) or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of such Person
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned on the Issue Date or thereafter acquired whereby the Company or a
Restricted Subsidiary transfers such property to a Person and leases it back
from such Person, other than (i) any such arrangement (a) the term of which is
not more than one year and (b) the Attributable Debt associated with which is
less than $1.0 million (aggregating any series of related transactions), (ii)
any such arrangement between the Company and a Wholly Owned Restricted
Subsidiary or between Wholly Owned Restricted Subsidiaries and (iii) a lease by
the Company or a Restricted Subsidiary of the Company of a portion of the
building at which HealthRider's headquarters was located.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Notes" means the Company's 14% Series A Senior Discount Notes due
2006 to be issued pursuant to this Indenture.
"Series B Notes" means the Company's 14% Series B Senior Discount Notes due
2006 to be issued pursuant to this Indenture in the Exchange Offer.
"Significant Subsidiary" means any Subsidiary of the Company that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"S&P" means Standard & Poor's Rating Group, and its successors.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and when used with respect to any other
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Indebtedness, means the date specified in the instrument governing such
Indebtedness as the fixed date on which the principal of such Indebtedness, or
any installment of interest thereon, is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a combination
thereof.
"TIA" means the Trust Indenture Act of 1939, as in effect on the date this
Indenture is qualified under the TIA.
"Transfer Restricted Securities" has the meaning ascribed to such term in
the Registration Rights Agreement.
"Trustee" means the party named as such above until a successor replaces it
in accordance with applicable provisions of this Indenture, and thereafter means
the successor serving hereunder.
"UCC" means the Uniform Commercial Code as it may be from time to time in
effect in the State of New York.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary: (i) has no Indebtedness other than
Non-Recourse Debt; (ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of such agreement, contract, arrangement or understanding are
no less favorable to the Company or such Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of the
Company, (iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (iv) has not guaranteed or otherwise, directly
or indirectly, provided credit support for any Indebtedness of the Company or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and
certifying that such designation complied with the foregoing conditions and was
permitted by Section 4.9 hereof. If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of this
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under Section 4.8
hereof the Company shall be in default of such section). The Board of Directors
of the Company may at
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any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary of
the Company; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under Section 4.8 hereof and
(ii) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers,
general partners or trustees of any Person (irrespective of whether or not, at
the time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency) or, with respect to
a partnership (whether general or limited), any general partner interest in such
partnership.
"Weider Repurchase" means the repurchase, pursuant to that certain Stock
and Warrants Purchase Agreement dated as of September 6, 1996 among IHF Capital,
IHF Holdings, Weider Health and Fitness, a Nevada corporation, and the other
parties thereto, of (i) all of the shares of common stock of the IHF Capital and
certain warrants to purchase such stock held by the Weider Investors (as defined
in such purchase agreement) and (ii) all of the shares of preferred stock of IHF
Holdings held by Weider Health and Fitness.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (b) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Subsidiaries of
such Person and one or more Wholly Owned Restricted Subsidiaries of such Person.
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Section 1.2 Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
- ---- ----------
<S> <C>
"Asset Sale"................................................... 4.15
"Asset Sale Offer"............................................. 4.15
"Bankruptcy Law"............................................... 6.1
"Change of Control Offer"...................................... 4.16
"Change of Control Payment".................................... 4.16
"Change of Control Payment Date"............................... 4.16
"Covenant Defeasance".......................................... 8.3
"Custodian".................................................... 6.1
"Excess Proceeds".............................................. 4.15
"incur"........................................................ 4.8
"Legal Defeasance"............................................. 8.2
"Legal Holiday"................................................ 11.8
"Offer Amount"................................................. 3.9
"Offer Period"................................................. 3.9
"Paying Agent"................................................. 2.3
"Permitted Refinancing"........................................ 4.8
"Purchase Date"................................................ 3.9
"Registrar".................................................... 2.3
"Refinancing Indebtedness"..................................... 4.8
"Restricted Payments".......................................... 4.9
</TABLE>
Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes;
"indenture security holder" means a Holder of Notes;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
"obligor" on the Notes means the Company, as obligor, or any successor
obligor upon the Notes.
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All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule under the TIA have
the meanings so assigned to them.
Section 1.4 Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in the
United States;
(3) references to "generally accepted accounting principles" shall
mean generally accepted accounting principles in effect in the United
States as of the date hereof;
(4) words in the singular include the plural, and in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act or the
Exchange Act shall be deemed to include substitute, replacement or
successor sections or rules adopted by the SEC from time to time.
ARTICLE 2
THE NOTES
Section 2.1 Form and Dating.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A, the terms of which are incorporated in
and made a part of this Indenture. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or usage. Each Note shall be
dated the date of its authentication. The Notes shall be in face denominations
of $1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall constitute, and are
hereby expressly made, a part of this Indenture, and the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
The Notes will initially be issued in global form, substantially in the
form of Exhibit A attached hereto (including footnote 1 thereto) and in
definitive form, substantially in the form of
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Exhibit A hereto (not including footnote 1 thereto). The Global Notes shall
represent such of the outstanding Notes as shall be specified therein and shall
provide that it shall represent the aggregate amount of outstanding Notes from
time to time endorsed thereon and that the aggregate amount of outstanding Notes
represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges and redemptions. Any endorsement of a Global
Note to reflect the amount of any increase or decrease in the amount of
outstanding Notes represented thereby shall be made by the Trustee in accordance
with instructions given by the Holder thereof as required by Section 2.6 hereof.
Section 2.2 Execution and Authentication.
Two Officers of the Company shall sign the Notes for the Company by manual
or facsimile signature. The seal of the Company shall be reproduced on the Notes
and may be in facsimile form.
If an Officer of the Company whose signature is on a Note no longer holds
that office at the time the Note is authenticated, the Note shall nevertheless
be valid.
A Note shall not be valid until authenticated by the manual signature of
the Trustee. The signature of the Trustee shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed by an Officer
of the Company, authenticate Notes for original issue up to the aggregate
principal amount stated in paragraph 4 of the Notes. The aggregate principal
amount of Notes outstanding at any time may not exceed such amount, except as
provided in Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Notes. Unless limited by the terms of such appointment, an
authenticating agent may authenticate Notes whenever the Trustee may do so. Each
reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same right as an
Agent to deal with the Company or an Affiliate of the Company.
Section 2.3 Registrar and Paying Agent.
The Company shall maintain an office or agency where Notes may be presented
for registration of transfer or for exchange ("Registrar") and an office or
agency where Notes may be presented for payment ("Paying Agent"). The Registrar
shall keep a register of the Notes and of their transfer and exchange. The
Company may appoint one or more co-registrars and one or more additional paying
agents. The term "Registrar" includes any co-registrar and the term "Paying
Agent" includes any additional paying agents. The Company may change any Paying
Agent or Registrar without notice to any Holder. The Company shall notify the
Trustee in writing of the name and address of any Agent not a party to this
Indenture. If the Company fails
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to appoint or maintain another entity as Registrar or Paying Agent, the Trustee
shall act as such and shall be entitled to appropriate compensation in
accordance with Section 7.7 hereof.
The Company shall enter into an appropriate agency agreement with any Agent
not a party to this Indenture, which shall incorporate the provisions of the
TIA. The agreement shall implement the provisions of this Indenture that relate
to such Agent. The Company initially appoints The Depository Trust Company
("DTC") to act as Depository with respect to the Global Note.
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and agent for service of notices and demands in connection with the
Notes.
Section 2.4 Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent will hold in trust for the benefit of Holders
or the Trustee all money held by the Paying Agent for the payment of principal
of, premium, if any, or interest on, or Liquidated Damages with respect to, the
Notes, and will notify the Trustee promptly in writing of any default by the
Company in making any such payment. While any such default continues, the
Trustee may require a Paying Agent to pay all money held by it to the Trustee.
The Company at any time may require a Paying Agent to pay all money held by it
to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other
than the Company or any of its Subsidiaries) shall have no other liability for
the money.
Section 2.5 Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not
the Registrar, the Company shall furnish to the Trustee at least seven Business
Days before each interest payment date and at such other times as the Trustee
may request in writing a list in such form and as of such date as the Trustee
may reasonably require of the names and addresses of Holders, including the
aggregate principal amount of Notes held by each Holder, and the Company shall
otherwise comply with TIA (S) 312(a).
Section 2.6 Transfer and Exchange.
(a) Transfer and Exchange of Definitive Notes. When Definitive Notes
are presented to the Registrar with the request:
(x) to register the transfer of the Definitive Notes, or
(y) to exchange such Definitive Notes for an equal principal
amount of Definitive Notes of other authorized
denominations,
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the Registrar shall register the transfer or make the exchange as requested if
its requirement for such transactions are met; provided, however, that the
Definitive Notes presented or surrendered for registration of transfer or
exchange:
(i) shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Registrar duly executed
by the Holder thereof or by his attorney, duly authorized in writing; and
(ii) in the case of Transfer Restricted Securities that are
Definitive Notes, shall be accompanied by the following additional
information and documents, as applicable:
(A) if such Transfer Restricted Securities are being
delivered to the Registrar by a Holder for registration in the
name of such Holder, without transfer, a certification from such
Holder to that effect (in substantially the form of Exhibit B
hereto); or
(B) if such Transfer Restricted Securities are being
transferred (1) to a "qualified institutional buyer" (as defined
in Rule 144A under the Securities Act) in accordance with Rule
144A under the Securities Act or (2) pursuant to an exemption
from registration in accordance with Rule 144 (and based upon an
opinion of counsel if the Company or Trustee so requests) or (3)
pursuant to an effective registration statement under the
Securities Act, a certification to that effect from such Holder
(in substantially the form of Exhibit B hereto); or
(C) if such Transfer Restricted Securities are being
transferred to an institutional "accredited investor," within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities
Act pursuant to a private placement exemption from the
registration requirements of the Securities Act (and based upon
an opinion of counsel if the Company or Trustee so requests), a
certification to that effect from such Holder (in substantially
the form of Exhibit B hereto) and a certification from the
applicable transferee (in substantially the form of Exhibit C
hereto);
(D) if such Transfer Restricted Securities are being
transferred pursuant to an exemption from registration in
accordance with Rule 904 under the Securities Act (and based on
an opinion of counsel if the Company or Registrar so requests),
certification to that effect from such Holder (in substantially
the form of Exhibits B and D hereto); or
(E) if such Transfer Restricted Securities are being
transferred in reliance on another exemption from the
registration requirement of the Securities Act (and based upon an
opinion of counsel if the Company or
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Trustee so requests), a certification to that effect from such
Holder (in substantially the form of Exhibit B hereto).
(b) Restriction on Transfer of a Definitive Note for a Beneficial
Interest in a Global Note. A Definitive Note may not be exchanged for a
beneficial interest in a Global Note except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive Note,
duly endorsed or accompanied by appropriate instruments of transfer, in form
satisfactory to the Trustee, together with:
(i) if such Definitive Note is a Transfer Restricted Security,
certification, substantially in the form of Exhibit B hereto, that such
Definitive Note is being transferred to a "qualified institutional buyer"
(as defined in Rule 144A under the Securities Act) in accordance with Rule
144A under the Securities Act; and
(ii) whether or not such Definitive Note is a Transfer
Restricted Security, written instructions directing the Trustee to make, or
directing the Note Custodian to make, an endorsement on the Global Note to
reflect an increase in the aggregate principal amount of the Notes
represented by the Global Note;
then the Trustee shall cancel such Definitive Note in accordance with Section
2.11 hereof and cause, or direct the Note Custodian to cause, in accordance with
the standing instructions and procedures existing between the Depository and the
Note Custodian, the aggregate principal amount of Notes represented by the
Global Note to be increased accordingly. If no Global Notes are then
outstanding, the Company shall issue and, upon receipt of an authentication
order in accordance with Section 2.2 hereof, the Trustee shall authenticate a
new Global Note in the appropriate principal amount.
(c) Transfer and Exchange of Global Notes. The transfer and exchange
of Global Notes or beneficial interests therein shall be effected through the
Depository, in accordance with this Indenture (including the restrictions on
transfer set forth herein) and the procedures of the Depository therefor, which
shall include restrictions on transfer comparable to those set forth herein to
the extent required by the Securities Act.
(d) Transfer of a Beneficial Interest in a Global Note for a
Definitive Note.
(i) Any Person having a beneficial interest in a Global Note
may upon request exchange such beneficial interest for a Definitive Note.
Upon receipt by the Trustee of written instructions or such other form of
instructions as is customary for the Depository from the Depository or its
nominee on behalf of any Person having a beneficial interest in a Global
Note, and, in the case of a Transfer Restricted Security, the following
additional information and documents (all of which may be submitted by
facsimile):
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(A) if such beneficial interest is being transferred to
the Person designated by the Depository as being the beneficial owner,
a certification from such Person to that effect (in substantially the
form of Exhibit B hereto); or
(B) if such beneficial interest is being transferred (1)
to a "qualified institutional buyer" (as defined in Rule 144A under
the Securities Act) in accordance with Rule 144A under the Securities
Act or (2) pursuant to an exemption from registration in accordance
with Rule 144 under the Securities Act (and based upon an opinion of
counsel if the Company or Trustee so requests) or (3) pursuant to an
effective registration statement under the Securities Act, a
certification to that effect from the transferor (in substantially the
form of Exhibit B hereto); or
(C) if such beneficial interest is being transferred to an
institutional "accredited investor," within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act pursuant to a
private placement exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company or
Trustee so requests), a certification to that effect from such
transferor (in substantially the form of Exhibit B hereto) and a
certification from the applicable transferee (in substantially the
form of Exhibit C hereto); or
(D) if such beneficial interest is being transferred
pursuant to an exemption from registration in accordance with rule 904
under the Securities Act (and based upon an opinion of counsel if the
Company or Trustee so requests), certifications to that effect from
such transferor (in substantially the form of Exhibits B and D
hereto); or
(E) if such beneficial interest is being transferred in
reliance on another exemption from the registration requirements of
the Securities Act (and based upon an opinion of counsel if the
Company or Trustee so requests), a certification to that effect from
such Holder (in substantially the form of Exhibit B hereto);
the Trustee, or the Note Custodian at the direction of the Trustee, shall,
in accordance with the standing instructions and procedures existing
between the Depository and the Note Custodian, cause the aggregate
principal amount of Global Notes to be reduced accordingly and, following
such reduction, the Company shall execute and, upon receipt of an
authentication order in accordance with Section 2.2 hereof, the Trustee
shall authenticate and deliver to the transferee a Definitive Note in the
appropriate principal amount.
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(ii) Definitive Notes issued in exchange for a beneficial
interest in a Global Note pursuant to this Section 2.6(d) shall be
registered in such names and in such authorized denominations as the
Depository, pursuant to instructions in writing from its direct or indirect
participants or otherwise, shall instruct the Trustee in writing. The
Trustee shall deliver such Definitive Notes to the Persons in whose names
such Notes are so registered.
(c) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provisions of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.6), a Global Note may
not be transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(d) Authentication of Definitive Notes in Absence of Depository. If
at any time:
(i) the Depository for the Notes notifies the Company and
Trustee in writing that the Depository is unwilling or unable to continue
as Depository for the Global Notes and a successor Depository for the
Global Notes is not appointed by the Company within 90 days after delivery
of such notice; or
(ii) the Company, at its sole discretion, notifies the Trustee
in writing that it elects to cause the issuance of Definitive Notes under
this Indenture,
then the Company will execute, and the Trustee, upon receipt of an Officers'
Certificate requesting the authentication and delivery of Definitive Notes, will
authenticate and deliver Definitive Notes, in an aggregate principal amount
equal to the principal amount of the Global Notes, in exchange for such Global
Notes and registered in such names as the Depository shall instruct the Trustee
or the Company in writing.
(e) Legends.
(i) Except as permitted by the following paragraph (ii), each
Note certificate evidencing the Global Notes and the Definitive Notes (and
all Notes issued in exchange therefor or substitution thereof) shall bear a
legend in substantially the following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
25
<PAGE>
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER OF THE
SECURITY EVIDENCED HEREBY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED, ONLY (l)(a) TO A PERSON WHO THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A
UNDER THE SECURITIES ACT, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A
FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S
UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED, IN THE CASE
OF CLAUSES (b), (c) AND (d) ABOVE, UPON AN OPINION OF COUNSEL IF THE
COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY
OR ANY SECURITY ISSUED IN EXCHANGE FOR OR IN SUBSTITUTION HEREOF OF THE
RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global Note)
pursuant to Rule 144 under the Securities Act or an effective registration
statement under the Securities Act:
(A) in the case of any Transfer Restricted Security that is
a Definitive Note, the Registrar shall permit the Holder thereof
to exchange such Transfer Restricted Security for a Definitive
Note that does not bear the legend set forth in (i) above and
rescind any restriction on the transfer of such Transfer
Restricted Security; and
(B) in the case of any Transfer Restricted Security
represented by a Global Note, such Transfer Restricted Security
shall not be required to bear the legend set forth in (i) above
if all other interests in such Global Note have been or are
concurrently being sold or transferred pursuant to Rule 144 under
the Securities Act or pursuant to an effective registration
statement under the Securities Act, but such Transfer Restricted
Security shall continue to be subject to the provisions of
Section 2.6(c) hereof;
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<PAGE>
provided, however, that with respect to any request for an
exchange of a Transfer Restricted Security that is represented by
a Global Note for a Definitive Note that does not bear a legend
set forth in (i) above, which request is made in reliance upon
Rule 144, the Holder thereof shall certify in writing to the
Registrar that such request is being made pursuant to Rule 144
(such certification to be substantially in the form of Exhibit B
hereto).
(iii) Notwithstanding the foregoing, upon consummation of the
Exchange Offer, the Company shall issue and, upon receipt of an
authentication order in accordance with Section 2.2 hereof, the Trustee
shall authenticate Series B Notes in exchange for Series A Notes accepted
for exchange in the Exchange Offer, which Series B Notes shall not bear the
legend set forth in (i) above, and the Registrar shall rescind any
restriction on the transfer of such Notes, in each case unless the Holder
of such Series A Notes is either (A) a broker-dealer, (B) a Person
participating in the distribution of the Series A Notes or (C) a Person who
is an affiliate (as defined in Rule 144A) of the Company. The Company shall
identify to the Trustee such Holders of the Notes in a written
certification signed by an Officer of the Company and, absent certification
from the Company to such effect, the Trustee shall assume without further
inquiry that there are no such Holders.
(f) Cancellation and/or Adjustment of Global Note. At such time as all
beneficial interests in a Global Note have either been exchanged for Definitive
Notes, redeemed, repurchased or canceled, such Global Note shall be returned to
or retained and canceled by the Trustee. At any time prior to such
cancellation, if any beneficial interest in a Global Note is exchanged for
Definitive Notes, redeemed, repurchased or canceled, the principal amount of
Notes represented by such Global Note shall be reduced and an endorsement shall
be made on such Global Note, by the Trustee, or the Note Custodian at the
direction of the Trustee, to reflect such reduction.
(g) General Provisions with respect to Transfer and Exchanges.
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Definitive Notes
and Global Notes at the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company or Registrar may
require payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection therewith (other than any such
transfer taxes or similar governmental charges payable upon exchange or
transfer pursuant to Sections 3.7, 3.9, 4.15, 4.16 and 9.5 hereof).
(iii) The Registrar shall not be required to register the
transfer or exchange of any Note selected for redemption in whole or in
part, except the unredeemed portion of any Note being redeemed in part.
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<PAGE>
(iv) All Definitive Notes and Global Notes issued upon any
registration of transfer or exchange of Definitive Notes or Global Notes
shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefit under this Indenture as the Definitive
Notes or Global Notes surrendered upon such registration of transfer or
exchange.
(v) The Company shall not be required to issue, register the
transfer of or exchange Notes during a period beginning at the opening of
business 15 days before the day of any selection of Notes for redemption
under Section 3.2 and ending at the close of business on the day of
selection.
(vi) Prior to due presentment for registration of transfer of any
Note, the Trustee, any Agent and the Company may deem and treat the Person
in whose name any Note is registered as the absolute owner of such Note for
the purpose of receiving payment of principal of, and premium, interest and
Liquidated Damages, if any, on such Note, and neither the Trustee, any
Agent nor the Company shall be affected by notice to the contrary.
(vii) The Trustee shall authenticate Definitive Notes and Global
Notes in accordance with the provisions of Section 2.2 hereof.
Section 2.7 Replacement Notes.
If any mutilated Note is surrendered to the Trustee, or the Company and the
Trustee receive evidence to their satisfaction of the destruction, loss or theft
of any Note, the Company shall issue and the Trustee, upon the written order of
the Company signed by an Officer of the Company shall authenticate a replacement
Note if the Trustee's requirements are met. If required by the Trustee or the
Company, an indemnity bond must be supplied by the Holder that is sufficient in
the judgment of the Trustee and the Company to protect the Company, the Trustee,
any Agent or any authenticating agent from any loss which any of them may suffer
if a Note is replaced. The Company and the Trustee may charge for their expenses
in replacing a Note.
Every replacement Note is an additional obligation of the Company.
Section 2.8 Outstanding Notes.
The Notes outstanding at any time are all the Notes authenticated by the
Trustee except for those canceled by it, those delivered to it for cancellation,
those reductions in the interest in a Global Note effected by the Trustee
hereunder, and those described in this Section as not outstanding. Except as set
forth in Section 2.9 hereof, a Note does not cease to be outstanding because
either of the Company or an Affiliate of the Company holds a Note.
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<PAGE>
If a Note is replaced pursuant to Section 2.7 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under Section 4.1
hereof, it ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a redemption date or maturity date, money sufficient to pay all
principal, interest, premium and Liquidated Damages, if any, payable on that
date with respect to the Notes (or the portion thereof to be redeemed or
maturing, as the case may be), then on and after that date such Notes (or
portions thereof) shall be deemed to be no longer outstanding and shall cease to
accrue interest.
Section 2.9 Treasury Notes.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company or any Affiliate of the Company shall be considered as though not
outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes which a Responsible Officer of the Trustee knows are so owned shall be so
disregarded.
Section 2.10 Temporary Notes.
Until definitive Notes are ready for delivery, the Company may prepare and
the Trustee shall authenticate temporary Notes. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that the
Company and the Trustee consider appropriate for temporary Notes. Without
unreasonable delay, the Company shall prepare and the Trustee, upon receipt of
the written order of the Company signed by an Officer of the Company shall
authenticate, definitive Notes in exchange for temporary Notes.
Until such exchange, Holders of temporary Notes shall be entitled to all of
the right, benefit and privileges of this Indenture.
Section 2.11 Cancellation.
The Company at any time may deliver Notes to the Trustee for cancellation.
The Registrar and Paying Agent shall forward to the Trustee any Notes
surrendered to them for registration of transfer, exchange or payment. The
Trustee shall cancel all Notes surrendered for registration of transfer or
exchange, payment, replacement or cancellation. The Company may not issue new
Notes to replace Notes that have been redeemed or paid or that have been
delivered to the Trustee for cancellation. All canceled Notes held by the
Trustee shall be destroyed and certification of their destruction delivered to
the Company.
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<PAGE>
Section 2.12 Defaulted Interest.
(a) If the Company defaults in a payment of interest on the Notes, it shall
pay the defaulted interest plus, to the extent lawful, interest payable on the
defaulted interest, to the Persons who are Holders on a subsequent special
record date, which date shall be at the earliest practicable date but in all
events at least five Business Days prior to the payment date, in each case at
the rate provided in the Notes and in Section 4.1 hereof. The Company shall,
with the consent of the Trustee, fix or cause to be fixed each such special
record date and payment date. At least 15 days before the special record date,
the Company (or the Trustee, in the name of and at the expense of the Company)
shall mail to Holders a notice that states the special record date, the related
payment date and the amount of such interest to be paid.
(b) The Company may make payment of defaulted interest in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, if, after notice given by the Company to the Trustee of the proposed
payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.
ARTICLE 3
REDEMPTION AND OFFERS TO PURCHASE
Section 3.1 Notice to Trustee.
If the Company elects to redeem Notes pursuant to the optional redemption
provisions of Section 3.7 hereof, it shall furnish to the Trustee, at least 45
days before a redemption date (unless a shorter notice period shall be
satisfactory to the Trustee), an Officers' Certificate setting forth (i) the
Section of this Indenture pursuant to which the redemption shall occur, (ii) the
redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the
redemption price.
If the Company is required to make an offer to purchase Notes pursuant to
the provisions of Sections 4.15 or 4.16 hereof, it shall furnish to the Trustee,
at least 30 days before the scheduled purchase date, an Officers' Certificate
setting forth (i) the Section of this Indenture pursuant to which the offer to
purchase shall occur, (ii) the terms of the offer, (iii) the purchase price,
(iv) the principal amount of the Notes to be purchased, and (v) further setting
forth a statement to the effect that (a) the Company or one of its Restricted
Subsidiaries has made an Asset Sale and there are Excess Proceeds aggregating
more than $10 million and the amount of such Excess Proceeds or (b) a Change of
Control has occurred, as applicable.
Section 3.2 Selection of Notes to Be Redeemed.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes to be redeemed among the Holders of the Notes pro rata, by lot or in
accordance with a method which
30
<PAGE>
the Trustee considers to be fair and appropriate (and in such manner as complies
with applicable legal and stock exchange requirements, if any). In the event of
partial redemption by lot, the particular Notes to be redeemed shall be
selected, unless otherwise provided herein, not less than 30 nor more than 60
days prior to the redemption date by the Trustee from the outstanding Notes not
previously called for redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
them selected shall be in face amounts of $1,000 or whole multiples of $1,000;
except that if all of the Notes of a Holder are to be redeemed, the entire
outstanding amount of Notes held by such Holder, even if not a multiple of
$1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
In the event the Company is required to make an Asset Sale Offer pursuant
to Section 3.9 and Section 4.15, and the amount of the Net Proceeds from the
Asset Sale is not evenly divisible by $1,000, the Trustee shall promptly refund
to the Company the portion of such Excess Proceeds that is not necessary to
purchase the immediately lesser principal amount of Notes that is so divisible.
Section 3.3 Notice of Redemption.
Subject to the provisions of Section 3.9 hereof, at least 30 days but not
more than 60 days before a redemption date, the Company shall mail a notice of
redemption to each Holder whose Notes are to be redeemed at its registered
address and to the Trustee.
The notice shall identify the Notes to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price, separately stating the amount of any
Liquidated Damages to be paid in connection with the redemption;
(3) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption
date, upon surrender of such Note, a new Note or Notes in principal amount
equal to the unredeemed portion will be issued;
(4) the name and address of the Paying Agent;
(5) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
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<PAGE>
(6) that, unless the Company defaults in making such redemption
payment, interest on Notes or portions of Notes called for redemption
ceases to accrue on and after the redemption date;
(7) the paragraph of the Notes or Section of this Indenture pursuant
to which the Notes called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or of the
CUSIP number, if any, listed in such notice or printed on the Notes.
At the Company's written request, the Trustee shall give the notice of
redemption in the name of the Company and at its expense; provided, however,
that the Company shall deliver to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as provided
in the preceding paragraph.
Section 3.4 Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.3 herein,
Notes called for redemption become due and payable on the redemption date at the
redemption price stated in such notice.
Section 3.5 Deposit of Redemption Price.
At least one Business Day prior to the redemption date, the Company shall
deposit with the Trustee (to the extent not already held by the Trustee) or with
the Paying Agent money in immediately available funds sufficient to pay the
redemption price of and accrued interest and Liquidated Damages, if any, on all
Notes to be redeemed on that date. The Trustee or the Paying Agent shall return
to the Company upon its written request any money deposited with the Trustee or
the Paying Agent by the Company and certified by the Company to be in excess of
the amount necessary to pay the redemption price of, and accrued interest and
Liquidated Damages on all Notes to be redeemed.
If the Company complies with the provisions of the preceding paragraph, on
and after the redemption date, interest shall cease to accrue on the Notes or
the portions of Notes called for redemption. If a Note is redeemed on or after
an interest record date but on or prior to the related interest payment date,
then any accrued and unpaid interest and Liquidated Damages, if any, shall be
paid to the Person in whose name such Note was registered at the close of
business on such record date. If any Note called for redemption shall not be so
paid upon surrender for redemption because of the failure of the Company to
comply with the preceding paragraph, interest shall be paid on the unpaid
principal, from the redemption date until such principal or Liquidated Damages,
if any, is paid, and to the extent lawful on any interest not paid on such
unpaid principal or Liquidated Damages, if any, in each case at the rate
provided in the Notes and
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<PAGE>
in Section 4.1 hereof.
Section 3.6 Notes Redeemed in Part.
Upon surrender of a Note that is redeemed in part, the Company shall issue
and the Trustee shall authenticate for the Holder at the written direction and
expense of the Company a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.
Section 3.7 Optional Redemption.
At any time following the Issue Date, the Notes may be redeemed (subject to
contractual and other restrictions and legal availability of funds therefor) at
the option of the Company upon not less than 30 nor more than 60 days' written
notice as follows:
(a) in whole but not in part, at the redemption prices (expressed as
percentages of the Accreted Value thereof on the applicable redemption
date) set forth below, plus Liquidated Damages, if any, to the redemption
date, if redeemed during the twelve-month period beginning on November 15
of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR THE ACCRETED VALUE
---- ------------------
<S> <C>
1996..................................... 104.000%
1997..................................... 106.500%
1998..................................... 109.000%
1999..................................... 110.000%
2000..................................... 110.000%
</TABLE>
(b) in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon (plus Liquidated Damages, if any) to the applicable
redemption date, if redeemed during the twelve-month period beginning on
November 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2001..................................... 110.000%
2002..................................... 106.666%
2003..................................... 103.333%
2004..................................... 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem the Notes in part as
described in clause (b) above only if at least $100 million aggregate principal
amount of the Notes
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<PAGE>
originally issued remains outstanding immediately after the occurrence of each
such partial redemption.
Section 3.8 Mandatory Redemption.
The Company will be required to redeem the Notes with the net proceeds of
any Public Equity Offering by the Company, any Parent of the Company or any of
the Company's Subsidiaries as follows:
(a) at the redemption prices (expressed as percentages of the
Accreted Value thereof on the applicable redemption date) set forth below,
plus Liquidated Damages, if any, to the redemption date, if redeemed during
the twelve-month period beginning on November 15 of the years indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR THE ACCRETED VALUE
---- ------------------
<S> <C>
1996..................................... 104.000%
1997..................................... 106.500%
1998..................................... 109.000%
1999..................................... 110.000%
2000..................................... 110.000%
</TABLE>
(b) at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (plus
Liquidated Damages, if any) to the applicable redemption date, if redeemed
during the twelve-month period beginning on November 15 of the years
indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2001..................................... 110.000%
2002..................................... 106.666%
2003..................................... 103.333%
2004..................................... 100.000%
</TABLE>
Any such redemption shall occur within 60 days of the date of the closing of
any such Public Equity Offering.
Section 3.9 Offer to Purchase by Application of Excess Proceeds.
Any Asset Sale Offer pursuant to Section 4.15 shall remain open for a
period of 20 Business Days following its commencement and no longer, except to
the extent that a longer period is required by applicable law (the "Offer
Period"). On a date within five Business Days
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<PAGE>
after the termination of the Offer Period (the "Purchase Date"), the Company
shall purchase the principal amount of Notes required to be purchased pursuant
to Section 4.15 hereof (the "Offer Amount") or, if less than the Offer Amount
has been tendered, all Notes tendered in response to the Asset Sale Offer.
Payment for any Notes so purchased shall be made in the same manner as interest
payments are made.
The Company shall comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, and any other applicable
securities laws or regulations, in connection with any offer required to be made
by the Company to repurchase the Notes as a result of an Asset Sale Offer. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this Section 3.9, the Company shall comply with the
applicable securities laws or regulations and shall not be deemed to have
breached its obligations hereunder by virtue thereof.
If the Purchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued and unpaid interest shall
be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
On or before the Purchase Date, the Company shall, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Offer
Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer,
or if less than the Offer Amount has been tendered, all Notes tendered, and
shall deliver to the Trustee an Officers' Certificate stating that such Notes or
portions thereof were accepted for payment by the Company in accordance with the
terms of this Section 3.9. The Company, the Depository or the Paying Agent, as
the case may be, shall promptly (but in any case not later than five Business
Days after the Purchase Date) mail or deliver to each tendering Holder an amount
equal to the purchase price of the Notes tendered by such Holder and accepted by
the Company for purchase, and the Company shall promptly issue a new Note, and
the Trustee, upon written request from the Company shall authenticate and mail
or deliver such new Note to such Holder, in a principal amount equal to any
unpurchased portion of the Note surrendered. Any Note not so accepted shall be
promptly mailed or delivered by the Company to the Holder thereof. The Company
shall publicly announce the results of the Asset Sale Offer on the Purchase
Date.
Other than as specifically provided in this Section 3.9, any purchase
pursuant to this Section 3.9 shall be made pursuant to the provisions of
Sections 3.1 through 3.6 hereof.
No repurchase of Notes under this Section 3.9 shall be deemed to be a
redemption of Notes.
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<PAGE>
ARTICLE 4
COVENANTS
Section 4.1 Payment of Notes.
The Company shall pay the principal of and interest on the Notes on the
dates and in the manner provided in the Notes. Principal and interest shall be
considered paid on the date due if the Paying Agent holds one Business Day
before that date money deposited by the Company in immediately available funds
and designated for and sufficient to pay all principal, premium, if any, and
interest then due. The Company shall pay all Liquidated Damages, if any, in the
same manner on the dates and in the amounts set forth in the Registration Rights
Agreement. If any Liquidated Damages become payable, the Company shall not later
than the date that any payment of Liquidated Damages is due (i) deliver an
Officers' Certificate to the Trustee setting forth the amount of Liquidated
Damages payable to Holders and (ii) instruct the Paying Agent to pay such amount
of Liquidated Damages to Holders entitled to receive such Liquidated Damages.
The Company shall pay interest (including post-petition interest under any
Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess
of the then applicable interest rate on the Notes to the extent lawful; it shall
pay interest (including post-petition interest under any Bankruptcy Law) on
overdue installments of interest and Liquidated Damages (without regard to any
applicable grace period) at the same rate to the extent lawful.
Section 4.2 Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan, The City of New
York, an office or agency (which may be an office of the Trustee, Registrar or
co-registrar) where Notes may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Company in respect of the
Notes and this Indenture may be served. The Company shall give prompt written
notice to the Trustee of the location, and any change in the location, of such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligations to maintain an office or agency in the Borough of Manhattan,
The City of New York for such purposes. The Company will give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
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<PAGE>
The Company hereby designates the office of Chase Banking Corp., 4 New York
Plaza, Ground Floor Receive Window, New York, New York 10004, Account Name:
Fleet National Bank, Account Number: BS72152-07 as one such office or agency of
the Company in accordance with Section 2.3.
Section 4.3 Reports.
(a) Whether or not required by the rules and regulations of the SEC, so
long as any Notes are outstanding, the Company shall furnish to the Trustee and
the SEC, and transmit to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the SEC on Forms 10-Q and 10-K if the Company were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
reports that would be required to be filed with the SEC on Form 8-K if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the SEC, the Company shall file a copy of all
such information with the SEC for public availability.
(b) For so long as any Transfer Restricted Securities remain outstanding,
the Company shall furnish to all Holders and prospective purchasers of the Notes
designated by the Holders of Transfer Restricted Securities, promptly upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Section 4.4 Compliance Certificate.
(a) The Company shall deliver to the Trustee, within 90 days after the end
of each fiscal year, an Officers' Certificate stating that a review of the
activities of the Company and its Subsidiaries during the preceding fiscal year
has been made under the supervision of the signing Officers with a view to
determining whether each has kept, observed, performed and fulfilled its
obligations under this Indenture, and further stating, as to each such Officer
signing such certificate, that to the best of his knowledge each has kept,
observed, performed and fulfilled each and every covenant contained in this
Indenture, and is not in default in the performance or observance of any of the
terms, provisions and conditions hereof or thereof (or, if a Default or Event of
Default shall have occurred, describing all such Default or Events of Default of
which he may have knowledge and what action each is making or proposes to take
with respect thereto).
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.3(a) above shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation reasonably satisfactory to the
Trustee) that in making the examination necessary for certification of such
financial statements nothing has come to their attention which would lead them
to believe that either the Company or any of its Subsidiaries has violated any
provisions of Article 4 or Article 5
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of this Indenture or, if any such violation has occurred, specifying the nature
and period of existence thereof, it being understood that such accountants shall
not be liable directly or indirectly to any Person for any failure to obtain
knowledge of any such violation.
(c) The Company will, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware
of (i) any Default or Event of Default or (ii) any event of default under any
other mortgage, indenture or instrument referred to in Section 6.1(5), an
Officers' Certificate specifying such Default, Event of Default or other event
of default and what action the Company are taking or propose to take with
respect thereto.
Section 4.5 Taxes.
The Company shall, and shall cause its Subsidiaries to, pay prior to
delinquency all material taxes, assessment, and governmental levies except as
contested in good faith and by appropriate proceedings.
Section 4.6 Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law has
been enacted.
Section 4.7 Company and Corporate Existence.
Subject to Section 4.15 and Article 5 hereof, the Company shall do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence, and the corporate, partnership or other existence of
each of its Subsidiaries, in accordance with their respective organizational
documents (as the same may be amended from time to time) and (b) its (and its
Subsidiaries') rights (charter and statutory), licenses and franchises;
provided, however, that the Company shall not be required to preserve any such
right, license or franchise, or the corporate, partnership or other existence of
any Subsidiary, if the Board of Directors of the Company shall determine that
the preservation thereof is no longer desirable in the conduct of the business
of the Company and its Subsidiaries taken as a whole and that the loss thereof
is not adverse in any material respect to the Holders.
Section 4.8 Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly
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liable with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company shall not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that IHF Holdings may incur Indebtedness or
issue shares of preferred stock if the Fixed Charge Coverage Ratio for IHF
Holdings' most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such preferred stock is issued,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period would have been greater than 1.5 to 1; provided, further,
however, that ICON or any of its Restricted Subsidiaries may incur Indebtedness
or issue shares of preferred stock if the Fixed Charge Coverage Ratio for ICON's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such preferred stock is issued, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Indebtedness had been incurred, or the preferred stock had
been issued, as the case may be, at the beginning of such four-quarter period
would have been greater than 1.75 to 1.
The foregoing limitations will not apply to:
(i) Indebtedness incurred by any of the Company's Restricted
Subsidiaries under the Credit Agreement (including Guarantees by Subsidiaries);
provided (a) that the aggregate principal amount of such Indebtedness at any one
time outstanding shall not exceed the greater of (1) the Borrowing Base of ICON
and its Subsidiaries plus $60 million and (2) $345 million; and (b) that each of
such $60 million and such $345 million shall be reduced (without duplication) by
any amount which the commitment of the lenders thereunder to lend under the
Credit Agreement is permanently reduced; and provided, further, that any
borrowings by any Foreign Subsidiaries of the Company permitted under this
clause (i) shall be reduced by the amount of Indebtedness then outstanding under
clause (x) below;
(ii) Indebtedness incurred by any of the Company's Restricted
Subsidiaries in respect of Capital Lease Obligations or Purchase Money
Obligations in an aggregate principal amount not to exceed $10 million at any
time outstanding;
(iii) Existing Indebtedness outstanding on the date of this
Indenture, including Indebtedness under the IHF Indenture and the ICON Indenture
and Indebtedness associated with the building at which HealthRider's
headquarters was located;
(iv) Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any Indebtedness that is to
be outstanding without violation of this Indenture;
(v) intercompany Indebtedness between or among the Company and
any of its Wholly Owned Restricted Subsidiaries; provided, however, that (a) any
subsequent issuance or
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transfer of Equity Interests that results in any such Indebtedness being held by
a Person other than a Wholly Owned Restricted Subsidiary and (b) any sale or
other transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be;
(vi) Indebtedness of the Company's Restricted Subsidiaries
attributable to any Currency Agreement or Commodity Agreement;
(vii) Other Indebtedness of the Company's Restricted
Subsidiaries in an aggregate principal amount not to exceed $20 million at any
time outstanding;
(viii) the incurrence by any of the Company's Restricted
Subsidiaries of Indebtedness issued in exchange for, or the proceeds of which
are used to extend, refinance, renew, replace, defease or refund Indebtedness
permitted to be incurred or outstanding under this Indenture in whole or in part
(the "Refinancing Indebtedness"); provided, however, that (1) the principal
amount of such Refinancing Indebtedness shall not exceed the principal amount of
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded,
other than by an amount equal to the lesser of (A) the stated amount of any
premium or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being refinanced or (B)
the amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses incurred in
connection with such refinancing; (2) the Refinancing Indebtedness shall have a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (3) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is pari passu with or
subordinated in right of payment to the Notes, the Refinancing Indebtedness
shall be pari passu with or subordinated, as the case may be, in right of
payment to the Notes on terms at least as favorable to the Holders of Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded (any such extension,
refinancing, renewal, replacement, defeasance or refunding being referred to as
a "Permitted Refinancing");
(ix) the incurrence by a Receivables Subsidiary of Indebtedness
in a Qualified Receivables Transaction that is without recourse to the Company
or to any Restricted Subsidiary of the Company or its assets (other than such
Receivables Subsidiary and its assets), and is not guaranteed by any such
person;
(x) Indebtedness of Foreign Subsidiaries of the Company in an
aggregate principal amount not to exceed the lesser of $15 million or the
Borrowing Base of such Foreign Subsidiaries (after subtracting that portion of
the Borrowing Base of such Foreign Subsidiaries counted towards the Borrowing
Base of ICON and its Subsidiaries for purposes of clause (i) above) at any one
time outstanding; provided that such $15 million shall be reduced by the
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amount by which the Indebtedness of Foreign Subsidiaries of the Company then
outstanding under clause (i) above exceeds $10 million; and
(xi) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
guarantees, letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Subsidiaries pursuant to such
agreements, in any case incurred in connection with the disposition of any
business, assets or Subsidiary of the Company, in a principal amount not to
exceed the proceeds received by the Company or any Subsidiary of the Company in
connection with such disposition.
Section 4.9 Limitation on Restricted Payments.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any distribution on account of the Company's or any Restricted Subsidiary's
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or a Wholly Owned Restricted Subsidiary of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Restricted Subsidiary or other Affiliate
of the Company (other than any such Equity Interests owned by the Company or a
Wholly Owned Restricted Subsidiary of the Company); (iii) purchase, redeem or
otherwise acquire or retire for value any Indebtedness (other than the Notes)
that is subordinated to the Notes, except at final maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) (i) in the case of a Restricted Payment by the Company, the
Company would, at the time of such Restricted Payment, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test (applicable to IHF Holdings but substituting the
Company for each reference to IHF Holdings) set forth in the first
paragraph of Section 4.8 hereof and (ii) in the case of a Restricted
Payment by IHF Holdings, IHF Holdings would, and in the case of a
Restricted Payment by ICON or any of its Restricted Subsidiaries, ICON
would, at the time of such Restricted Payment, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test (applied with respect to IHF Holdings and ICON,
respectively) set forth in Section 4.8 hereof; and
(c) such Restricted Payment (the amount of any such payment, if
other than cash, to be determined by the Board of Directors, whose
determination shall be conclusive and evidenced by a resolution in an
Officers' Certificate delivered to the Trustee), together with the
aggregate of all other Restricted Payments made by the
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Company and its Restricted Subsidiaries after the date of this Indenture
(including Restricted Payments permitted by the paragraph following the
next succeeding paragraph other than pursuant to clauses (ii) or (iii)
thereof), shall not exceed the sum of (1) 50% of the Consolidated Net
Income of the Company (if the Restricted Payment is made by the Company),
IHF Holdings (if the Restricted Payment is made by IHF Holdings) or ICON
(if the Restricted Payment is made by ICON or any of its Restricted
Subsidiaries) for the period (taken as one accounting period) commencing
with the first full fiscal quarter after the date of initial issuance of
the Notes and ending on the last day of the Company's, IHF Holdings' or
ICON's, as the case may be, most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
100% of such deficit as a negative number), plus (2) 100% of the aggregate
net cash proceeds received by the Company from the issue or sale since the
date of this Indenture of Equity Interests of the Company or of debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or convertible debt securities)
sold to a Subsidiary of the Company and other than Disqualified Stock or
debt securities that have been converted into Disqualified Stock), plus
(3) the aggregate cash received by the Company as capital contributions to
the Company after the Issue Date, plus (4) the amount of the net
reduction in Investments in Unrestricted Subsidiaries resulting from (x)
the payment of cash dividends or the repayment in cash of the principal of
loans or the cash return on any Investment, in each case to the extent
received by the Company or any Wholly Owned Restricted Subsidiary of the
Company from any Unrestricted Subsidiary, (y) to the extent that any
Restricted Investment that was made after the date of this Indenture is
sold for cash or otherwise liquidated or repaid for cash, the after-tax
cash return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (z) the redesignation of any Unrestricted
Subsidiaries as Restricted Subsidiaries (valued as provided in the
definition of "Investment"), in an amount not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Restricted Investments previously
made by the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount of
Restricted Payments.
Not later than the date of making any Restricted Payment (other than a
Restricted Payment permitted by the immediately following paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this Section were computed, which calculations may be
based upon the Company's latest available financial statements.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of this
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company, or the defeasance, redemption or repurchase
of subordinated Indebtedness in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than any Disqualified Stock) or out of
the proceeds of a substantially
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concurrent cash capital contribution received by the Company; (iii) the
defeasance, redemption or repurchase of subordinated Indebtedness with the net
proceeds from an incurrence of Refinancing Indebtedness; (iv) the redemption,
repurchase or retiring for value of any Equity Interests of the Company or IHF
Capital held by one or more employees of the Company, IHF Capital or any of the
Company's Subsidiaries in connection with the termination of such employee's
employment with such employer; (v) the acquisition by a Receivables Subsidiary
in connection with a Qualified Receivables Transaction of Equity Interests of a
trust or other person established by such Receivables Subsidiary to effect such
Qualified Receivables Transaction; (vi) the making of other Restricted Payments
of up to $5 million in the aggregate; (vii) the making of loans to members of
management of any Subsidiary of the Company in the ordinary course of business
not to exceed $1.2 million at any one time outstanding; (viii) the Weider
Repurchase; and (ix) the Principals Repurchase.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such designation, all outstanding Investments by the Company
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated shall be deemed to be Restricted Payments at the time
of such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this Section. All such outstanding Investments
will be deemed to constitute Restricted Investments in an amount equal to the
greatest of (i) the net book value of such Investments at the time of such
designation, (ii) the fair market value of such Investments at the time of such
designation and (iii) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Investment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
Section 4.10 Limitation on Liens.
The Company shall not, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens, unless the Notes are equally and ratably
secured thereby.
Section 4.11 Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, sell, lease, license, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into any contract, agreement, understanding, loan, advance or guarantee with, or
for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (b) the Company delivers to
the Trustee (i) with respect to any Affiliate Transaction involving aggregate
payments in excess of $2 million, a resolution of the Board of Directors set
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forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (a) above and such Affiliate Transaction is approved by a
majority of the disinterested members of the Board of Directors and (ii) with
respect to any Affiliate Transaction involving aggregate payments in excess of
$25 million, an opinion as to the fairness to the Company or such Restricted
Subsidiary from a financial point of view issued by an investment banking firm
of national standing with expertise in underwriting non-investment grade debt
securities; provided, however, that (i) any employment agreement or stock option
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business, (ii) transactions between or among the Company
and its Restricted Subsidiaries, (iii) transactions permitted by Section 4.9
hereof, (iv) the payment of reasonable fees to directors of the Company or its
Restricted Subsidiaries, (v) any issuance of securities or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, stock options and stock ownership plans of the
Company entered into in the ordinary course of business and approved by the
Board of Directors, (vi) transactions between the Company and/or its Wholly
Owned Restricted Subsidiaries or transactions between a Receivables Subsidiary
and any Person in which the Receivables Subsidiary has an investment, (vii) the
Weider Repurchase, (viii) the Principals Repurchase and (ix) Affiliate
Transactions pursuant to agreements existing on the date of this Indenture or
any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) in any replacement agreement thereto, so long
as any such amendment or replacement is not more disadvantageous in the
aggregate to the Holders than the original agreement as in effect on the date of
this Indenture, in each case, shall not be deemed Affiliate Transactions.
Section 4.12 Limitation on Sale/Leaseback Transactions.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any Sale/Leaseback Transaction; provided that a
Restricted Subsidiary of the Company may enter into a Sale/Leaseback Transaction
if: (i) such Restricted Subsidiary could have (a) incurred Indebtedness in an
amount equal to the Attributable Debt relating to such Sale/Leaseback
Transaction pursuant to Section 4.8 hereof and (b) incurred a Lien to secure
such Indebtedness pursuant to Section 4.10 hereof, (ii) the gross cash proceeds
of such Sale/Leaseback Transaction are at least equal to the fair market value
(as determined in good faith by the Board of Directors) of the property that is
the subject of such Sale/Leaseback Transaction and (iii) the transfer of assets
in such Sale/Leaseback Transaction is permitted by, and the Company or such
Restricted Subsidiary of the Company, as the case may be, applies the proceeds
of such transaction in compliance with, Section 4.15 hereof.
Section 4.13 Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, it
profits, (b) pay any
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indebtedness owed to the Company or any of its Restricted Subsidiaries, (c) make
loans or advances to the Company or any of its Restricted Subsidiaries or (d)
transfer any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (i) Existing Indebtedness as in effect on the date of this Indenture,
including Indebtedness under the IHF Indenture and the ICON Indenture, (ii) the
Credit Agreement, (iii) this Indenture and the Notes, (iv) applicable law, (v)
any instrument governing Indebtedness or Capital Stock of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that the Consolidated Cash Flow of such Person is not taken
into account in determining whether such acquisition was permitted by the terms
of this Indenture, (vi) customary nonassignment provisions in leases entered
into in the ordinary course of business and consistent with past practices,
(vii) Purchase Money Obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (d) above on
the property so acquired, (viii) Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Refinancing Indebtedness
are not materially more restrictive with respect to the provisions set forth in
clauses (a), (b), (c) and (d) above than those contained in the agreements
governing the Indebtedness being refinanced, or (ix) Indebtedness or other
contractual requirements of a Receivables Subsidiary in connection with a
Qualified Receivables Transaction, provided that such restrictions apply only to
such Receivables Subsidiary.
Section 4.14 Line of Business.
So long as any Notes are outstanding, the Company and its Restricted
Subsidiaries shall engage primarily in a Permitted Business.
Section 4.15 Asset Sales.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, engage in any Asset Sale, unless (x) the Company (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets sold or otherwise disposed of and (y) at
least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash; provided, however, that the amount
of (A) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of the Company
or any Restricted Subsidiary (other than liabilities that are by their terms
subordinated in right of payment to the Notes) that are assumed by the
transferee of any such assets and (B) any notes or other obligations received by
the Company or such Restricted Subsidiary from such transferee that are
immediately converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received), shall be deemed to be cash for purposes of
this provision. A transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary or by a Restricted
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Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary will
not be deemed to be an Asset Sale.
Within 360 days after any Asset Sale, the Company or any Restricted
Subsidiary may apply the Net Proceeds from such Asset Sale to (i) an investment
(or the entering into of a legally binding agreement for an investment within
360 days after such Asset Sale and segregate such Net Proceeds from the general
funds of the Company or such Restricted Subsidiary, as the case may be, for that
purpose) in another business, capital expenditures or other long-term tangible
assets, in each case, in or used in a Permitted Business or (ii) permanently
reduce Indebtedness of any Restricted Subsidiary of the Company. Pending the
making of any investment contemplated by clause (i) of the immediately preceding
sentence, such Net Proceeds may be used to temporarily reduce the amount of
outstanding Indebtedness under the Credit Agreement and such reduction shall
constitute such a segregation referred to in such clause (i). In addition, if
any such legally binding agreement to invest such Net Proceeds is terminated,
then the Company or such Restricted Subsidiary, as the case may be, shall, prior
to the later of (A) 360 days after such Asset Sale and (B) 90 days after the
date of such termination, invest such Net Proceeds as provided in clause (i) or
(ii) (without regard to the parenthetical contained in such clause (i) above).
Pending the final application of any Net Proceeds from the Asset Sale, the
Company may invest such Net Proceeds in any manner that is not prohibited by
this Indenture. Any Net Proceeds from the Asset Sale that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company shall (subject to IHF Holdings' obligation to
make an "Excess Proceeds Offer" under the IHF Holdings Indenture and ICON's
obligation to make an "Excess Proceeds Offer" under the ICON Indenture) make an
offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes that may be purchased out of the Excess Proceeds, at
an offer price in cash in an amount equal to 101% of the Accreted Value thereof
on the date of purchase plus Liquidated Damages, if any, to the date of purchase
(if prior to November 15, 2001) or 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase (if on or after November 15, 2001), in accordance with the procedures
set forth in this Indenture. To the extent that the aggregate amount of Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company may use such deficiency for general corporate purposes. If the aggregate
principal amount of Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero. The Company shall comply with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of Notes pursuant to an Asset Sale Offer.
Section 4.16 Change of Control.
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control
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Offer") at an offer price in cash equal to 101% of the Accreted Value thereof on
the date of purchase plus Liquidated Damages, if any, thereon to the date of
purchase (if prior to November 15, 2001) or 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase (if on or after November 15, 2001) (in either
case, the "Change of Control Payment"). Within 30 days following any Change of
Control, the Company shall mail a notice to each Holder, with a copy to the
Trustee, stating: (1) that the Change of Control Offer is being made pursuant to
this Section 4.16 and that all Notes tendered will be accepted for payment; (2)
the purchase price and the purchase date, which will be no earlier than 30 days
nor later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"); (3) that any Note not tendered will continue to accrue
interest; (4) that, unless the Company defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change of
Control Offer will cease to accrue interest after the Change of Control Payment
Date; (5) that Holders electing to have any Notes purchased pursuant to a Change
of Control Offer will be required to surrender the Notes, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Notes completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the fifth Business Day preceding the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holders, the principal
amount of Notes delivered for purchase, and a statement that such Holder is
withdrawing his election to have such Notes purchased; (7) that Holders whose
Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof; and (8) the circumstances and material facts regarding the
Change of Control (including but not limited to information with respect to the
historical consolidated financial information of the Company and pro forma
consolidated financial information of the Company after giving effect to the
Change of Control, information regarding the Person or Persons acquiring
control, to the extent reasonably available, and the business plans of such
Person or Persons with respect to the Company, to the extent reasonably
available). The Company shall comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control.
One Business Day prior to the Change of Control Payment Date, the Company
will, to the extent lawful, deposit with the Paying Agent an amount equal to the
Change of Control Payment in immediately available funds in respect of all Notes
or portions thereof so tendered. On the Change of Control Payment Date, the
Company shall, to the extent lawful, (1) accept for payment Notes or portions
thereof tendered pursuant to the Change of Control Offer and (2) deliver or
cause to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each Holder of Notes so
accepted the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate at the written direction of the Company and mail to each
Holder a new Note equal in principal amount to any unpurchased portion of the
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Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company shall
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
ARTICLE 5
SUCCESSORS
Section 5.1 Merger, Consolidation or Sale of Assets.
(a) The Company shall not consolidate or merge with or into (whether or not
the Company is the surviving Person), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions to, another Person unless (i) the Company is
the surviving Person or the Person formed by or surviving any such consolidation
or merger (if other than the Company) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of the Company pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) the
Company or such other Person formed by or surviving any such consolidation or
merger, or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (A) will have Consolidated Net Worth
(immediately after the transaction) equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction and (B) will, at
the time of such transaction and after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in Section 4.8 hereof.
(b) The Company shall deliver to the Trustee prior to the consummation of
any proposed transaction subject to the foregoing paragraph an Officers'
Certificate to the foregoing effect and an Opinion of Counsel stating that the
proposed transaction and such supplemental indenture comply with this Indenture.
The Trustee shall be entitled to conclusively rely upon such Officers'
Certificate and Opinion of Counsel.
Section 5.2 Successor Person Substituted.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company in accordance with Section 5.1 hereof, the successor Person formed by
such consolidation or into or with which the Company is merged or to which such
sale, assignment, transfer, lease, conveyance or other disposition is made shall
succeed to, and be substituted for (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of this
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Indenture referring to the "Company" shall refer to or include instead the
successor Person and not the Company), and may exercise every right and power of
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein.
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1 Events of Default.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of the principal of or
premium, if any, on any Note when the same becomes due and payable (upon
Stated Maturity, acceleration, optional or mandatory redemption, required
purchase (whether pursuant to Sections 4.15 or 4.16) or otherwise; or
(2) the Company defaults in the payment of an installment of interest
on, or Liquidated Damages, if any, with respect to, any of the Notes, when
the same becomes due and payable, which default continues for a period of
30 days; or
(3) the Company fails to comply with Sections 3.8, 4.8, 4.9, 4.15 or
4.16 (other than with respect to the purchase of Notes) or Article 5 hereof
and such default continues for a period of 45 days after written notice of
such default requiring the Company to remedy the same shall have been given
(x) to the Company by the Trustee or (y) to the Company and the Trustee by
Holders of 25% in aggregate principal amount of the Notes then outstanding;
or
(4) the Company fails to perform or observe any other term, covenant
or agreement contained in the Notes or this Indenture (other than a default
specified in clause (1), (2) or (3) above) and such default continues for a
period of 60 days after written notice of such default requiring the
Company to remedy the same shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by Holders of 25% in
aggregate principal amount of the Notes then outstanding; or
(5) a default or defaults occur under any other Indebtedness of the
Company or any Restricted Subsidiary of the Company aggregating $10 million
or more and either (a) such Indebtedness is already due and payable in full
or (b) such default or defaults have resulted in the acceleration of the
Maturity of such Indebtedness;
(6) the entry by a court of one or more judgments or orders against
the Company or any Significant Subsidiary in an aggregate amount in excess
of $10.0 million (net of applicable insurance coverage by a third party
insurer which is acknowledged in writing by such insurer) that has not been
vacated, discharged, satisfied
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or stayed pending appeal within 60 days from the entry thereof;
(7) the Trustee shall not have or shall cease to have a valid,
perfected and subsisting first priority lien on the Collateral for its
benefit and the benefit of the Holders;
(8) the Company or any of its Significant Subsidiaries pursuant to or
within the meaning of any Bankruptcy Law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against it in an
involuntary case,
(c) consents to the appointment of a Custodian of it or for all
or substantially all of its property,
(d) makes a general assignment for the benefit of its creditors,
or
(e) admits in writing its inability to pay debts as the same
become due; or
(9) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(a) is for relief against the Company, or any of its Restricted
Subsidiaries in an involuntary case;
(b) appoints a Custodian of the Company or any of its Restricted
Subsidiaries or for all or substantially all of its property; or
(c) orders the liquidation of the Company, or any of its
Restricted Subsidiaries, and the order or decree remains unstayed and
in effect for 60 days.
The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal
or state law for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
In the case of any Event of Default pursuant to the provisions of this
Section 6.1 occurring by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding payment
of the premium that the Company would have had to pay if the Company then had
elected to redeem the Notes pursuant to Section 3.7 hereof, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law, anything in this Indenture or in the Notes to the contrary
notwithstanding.
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Section 6.2 Acceleration.
If an Event of Default (other than an Event of Default specified in clauses
(8) and (9) of Section 6.1) occurs and is continuing, the Trustee by notice to
the Company, or the Holders of at least 25% in principal amount of the then
outstanding Notes by written notice to the Company and the Trustee may declare
all the Notes to be due and payable. Upon such declaration the Accreted Value of
(if prior to November 15, 2001) or principal of, premium, if any, and interest
on (if on or after November 15, 2001) the Notes shall be due and payable
immediately. Notwithstanding the foregoing, if an Event of Default specified in
clause (8) or (9) of Section 6.1 occurs, such amounts shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder. The Holders of a majority of the then
outstanding Notes by written notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default (except nonpayment of principal or
interest that has become due solely because of the acceleration) have been cured
or waived.
Section 6.3 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy (under this Indenture or otherwise) to collect the payment of
principal or interest on the Notes, to enforce the performance of any provision
of the Notes or this Indenture or to collect the payment of Liquidated Damages
under the Registration Rights Agreement.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or omission
by the Trustee or any Holder of Notes in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.
Section 6.4 Waiver of Past Defaults.
Holders of a majority in principal amount of the then outstanding Notes by
written notice to the Trustee may on behalf of the Holders of all of the Notes
waive any existing Default or Event of Default and annul its consequences under
this Indenture, except a continuing Default or Event of Default in the payment
of the principal of, premium, if any or interest on, or Liquidated Damages with
respect to any Note held by a non-consenting Holder. Upon any such waiver, such
Default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
Section 6.5 Control by Majority.
The Holders of a majority in principal amount of the then outstanding Notes
may direct in writing the time, method and place of conducting any proceeding
for any remedy available to the
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Trustee or exercising any trust or power conferred on it. However, the Trustee
may refuse to follow any direction (i) that conflicts with law or this Indenture
that the Trustee determines may be unduly prejudicial to the rights of other
Holders of Notes, or (ii) that may involve the Trustee in personal liability.
Section 6.6 Limitation on Suits.
A Holder of Notes may pursue a remedy with respect to this Indenture or the
Notes only if:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer and, if requested, provide to
the Trustee indemnity satisfactory to the Trustee against any claim, loss,
liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and, if requested, the provision
of indemnity; and
(5) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of Notes may not use this Indenture to prejudice the rights of
another Holder of Notes or to obtain a preference or priority over another
Holder of Notes.
Section 6.7 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, premium and interest on, or
Liquidated Damages, if any, with respect to the Notes, on or after the
respective due dates expressed in the Note, or to bring suit for the enforcement
of any such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.
Section 6.8 Collection Suit by Trustee.
If an Event of Default specified in Section 6.1(1) or (2) occurs and is
continuing, the Trustee is authorized to recover judgment in its own name and as
trustee of an express trust against the Company for the whole amount of
principal and interest remaining unpaid on the Notes and interest on overdue
principal and, to the extent lawful, interest and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
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reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.9 Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of Notes allowed in any judicial proceedings relative to the Company (or
any other obligor upon the Notes), its creditors or its property and shall be
entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder of Notes to make such
payments to the Trustee, and in the event that the Trustee shall consent to the
making of such payments directly to the Holders of Notes, to pay to the Trustee
any amount due to it for the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 7.7 hereof. To the extent that the payment of any
such compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel, and any other amounts due the Trustee under Section 7.7
hereof out of the estate in any such proceeding, shall be denied for any reason,
payment of the same shall be secured by a Lien on, and shall be paid out of, any
and all distributions, dividends, money, securities and other properties which
the Holders of the Notes may be entitled to receive in such proceeding whether
in liquidation or under any plan of reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder of Notes any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder of Notes in any such proceeding.
Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article, it shall pay
out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.7, including payment of all compensation, expense and liabilities
incurred, and all advances made, by the Trustee and the costs and expenses of
collection;
Second: to Holders of Notes for amounts due and unpaid on the Notes for
principal, premium, Liquidated Damages and interest, ratably, without preference
or priority of any kind, according to the amounts due and payable on the Notes
for principal and interest, respectively; and
Third: to the Company or to such party as a court of competent jurisdiction
shall direct.
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The Trustee may fix a record date and payment date for any payment to
Holders of Notes.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7,
or a suit by Holders of more than 10% in principal amount of the then
outstanding Notes.
ARTICLE 7
TRUSTEE
Section 7.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) The duties of the Trustee shall be determined solely
by the express provisions of this Indenture and the Trustee need
perform only those duties that are specifically set forth in this
Indenture and no others, and no implied covenants or obligations
shall be read into this Indenture against the Trustee.
(ii) In the absence of negligence or willful misconduct on
its part, the Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligence or its own willful misconduct, except that:
(i) This paragraph does not limit the effect of paragraph
(b) of this Section.
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(ii) The Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it
is proved that the Trustee was negligent in ascertaining the
pertinent facts.
(iii) The Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with
a direction received by it pursuant to Section 6.5.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), (c), (e) and (f) of this Section.
(e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or incur any liability. The Trustee may refuse to
perform any duty or exercise any right or power unless it receives indemnity
satisfactory to it against any claim, loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
Section 7.2 Rights of Trustee.
(a) The Trustee may conclusively rely upon any document believed
by it to be genuine and to have been signed or presented by the proper Person.
The Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel and the written advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability,
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its agent and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers conferred upon it by this Indenture.
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(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient if
in writing and signed by an Officer of the Company.
Section 7.3 Definitive Rights of Trustee.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Notes and may otherwise deal with the Company or an Affiliate of the
Company with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. However, the Trustee is subject to Sections
7.10 and 7.11.
Section 7.4 Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture, the Notes or the Collateral or the
compliance thereof or of any disclosure or other document related thereto with
any applicable securities laws or regulations, it shall not be accountable for
the Company's use of the proceeds from the Notes or any money paid to the
Company or upon the Company's direction under any provision hereof, it shall not
be responsible for monitoring or inquiring as to the performance of the
Company's covenants in Article 4 hereof, it shall not be responsible for the use
or application of any money received by any Paying Agent other than the Trustee
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
Section 7.5 Notice of Defaults.
If a Default or Event of Default occurs and is continuing and if it is
actually known to a Responsible Officer of the Trustee, the Trustee shall mail
to Holders of Notes a notice of the Default or Event of Default within 90 days
after it occurs. Except in the case of a Default or Event of Default in payment
on any Note pursuant to Section 6.1(1) or (2), the Trustee may withhold the
notice if it determines that withholding the notice is in the interests of
Holders of Notes.
Section 7.6 Reports by Trustee to Holders.
Within 60 days after each May 15 beginning with the May 15 following the
date of this Indenture, the Trustee shall mail to Holders of Notes a brief
report dated as of such reporting date that complies with TIA (S) 313(a) (but if
no event described in TIA (S) 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA (S) 313(b). The Trustee shall also transmit by mail all
reports as required by TIA (S) 313(c).
Commencing at the time this Indenture is qualified under the TIA, a copy of
each report at the time of its mailing to Holders of Notes shall be filed with
the SEC and each stock
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exchange on which the Notes are listed. The Company shall promptly notify the
Trustee in writing when the Notes are listed on any stock exchange.
Section 7.7 Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable
compensation for its acceptance of this Indenture and services hereunder, as
agreed to between the Company and the Trustee. The Trustee's compensation shall
not be limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel,
except such disbursements, advances and expenses as may be attributable to its
negligence or bad faith.
The Company shall indemnify the Trustee against any and all claims, losses,
liabilities or expenses incurred by it without negligence or willful misconduct
on its part arising out of or in connection with the acceptance or
administration of its duties under this Indenture, except as set forth below.
The Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve the
Company of its obligations hereunder. The Company shall defend the claim and the
Trustee shall cooperate in the defense. The Trustee may have separate counsel
and the Company shall pay the reasonable fees and expenses of such counsel. The
Company need not pay for any settlement made without its consent, which consent
shall not be unreasonably withheld.
The obligations of the Company under this Section 7.7 shall survive the
satisfaction and discharge of this Indenture and the resignation or removal of
the Trustee.
The Company need not reimburse any expense or indemnify against any loss or
liability incurred by the Trustee through its own negligence or willful
misconduct.
To secure the Company's payment obligations in this Section, the Trustee
shall have a Lien prior to the Notes on all money or property held or collected
by the Trustee, except that held in trust to pay principal and interest on
particular Notes. Such Lien shall survive the satisfaction and discharge of this
Indenture and the resignation or removal of the Trustee.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(8) or (9) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 7.8 Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
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The Trustee may resign at any time and be discharged from the trust hereby
created by so notifying the Company. The Holders of a majority in principal
amount of the then outstanding Notes may remove the Trustee by so notifying the
Trustee and the Company. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian or public officer takes charge of the Trustee or
its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the then outstanding Notes may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee after written request by any Holder of Notes who has been a
Holder of Notes for at least six months fails to comply with Section 7.10, such
Holder of Notes may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon, the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Holders of Notes. The retiring Trustee shall promptly transfer all property held
by it as Trustee to the successor Trustee, provided all sums owing to the
Trustee hereunder have been paid and subject to the Lien provided for in Section
7.7. Notwithstanding replacement of the Trustee pursuant to this Section 7.8,
the Company' obligations under Section 7.7 hereof shall continue for the benefit
of the retiring Trustee.
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Section 7.9 Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation, the
successor corporation without any further act shall be the successor Trustee.
Section 7.10 Eligibility; Disqualification.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America or of any state thereof authorized under such laws to exercise corporate
trustee power, shall be subject to supervision or examination by Federal or
state authority and shall have a combined capital and surplus of at least
$100,000,000 as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA (S)(S) 310(a)(1) and 310(a)(5). The Trustee is subject to TIA (S) 310(b).
Section 7.11 Preferential Collection of Claims Against Company.
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.1 Option to Effect Legal Defeasance or Covenant Defeasance.
The Company may, at the option of the Board of Directors of the Company,
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
Section 8.2 Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.1 hereof of the option
applicable to this Section 8.2, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.4 hereof, be deemed to have been
discharged from its obligations with respect to all outstanding Notes on the
date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes, which shall thereafter be deemed to be "outstanding" only for
the purposes of Section 8.5 hereof and the other Sections of this Indenture
referred to in (a) and (b) below, and to have satisfied all its other
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obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following provisions which shall survive
until otherwise terminated or discharged hereunder: (a) the rights of Holders of
outstanding Notes to receive solely from the trust fund described in Section 8.4
hereof, and as more fully set forth in such Section, payments in respect of the
principal of, premium, if any, interest and Liquidated Damages, if any, on such
Notes when such payments are due, (b) the Company's obligations with respect to
outstanding Notes under Article 2 and Section 4.2 hereof, (c) the rights,
powers, trusts, duties and immunities of the Trustee hereunder and the Company's
obligations in connection therewith and (d) this Article 8. Subject to
compliance with this Article 8, the Company may exercise its option under this
Section 8.2 notwithstanding the prior exercise of its option under Section 8.3
hereof.
Section 8.3 Covenant Defeasance.
Upon the Company's exercise under Section 8.1 hereof of the option
applicable to this Section 8.3, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.4 hereof, be released from its
obligations under the covenants contained in Section 4.3(a), 4.4, 4.5, 4.7, 4.8,
4.9, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15 and 4.16 and Article 5 hereof with
respect to the outstanding Notes on and after the date the conditions set forth
below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall
thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder (it being understood that such
Notes shall not be deemed outstanding for accounting purposes). For this
purpose, Covenant Defeasance means that, with respect to the outstanding Notes,
the Company may omit to comply with and shall have no liability in respect of
any term, condition or limitation set forth in any such covenant, whether
directly or indirectly, by reason of any reference elsewhere herein or in any
other document, and such omission to comply shall not constitute a Default under
Section 6.1 hereof, but, except as specified above, the remainder of this
Indenture and such Notes shall be unaffected thereby. In addition, upon the
Company's exercise under Section 8.1 hereof of the option applicable to this
Section 8.3 hereof, subject to the satisfaction of the conditions set forth in
Section 8.4 hereof, Sections 6.1(3), 6.1(4), 6.1(5) 6.1(6) and 6.1(7) hereof,
and Sections 6.1(8) and 6.1(9) hereof with respect to any Restricted Subsidiary
that is a Significant Subsidiary, shall not constitute Events of Default.
Section 8.4 Conditions to Legal Defeasance or Covenant Defeasance.
The following shall be the conditions to the application of either Section
8.2 or 8.3 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance, as
applicable:
(a) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, cash in United States dollars, non-
callable Government Securities,
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or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium and Liquidated Damages, if any, and
interest on the outstanding Notes on the stated date for payment thereof or
on the applicable redemption date, as the case may be;
(b) in the case of an election under Section 8.2 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the
United States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of this Indenture, there has
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such Opinion of Counsel shall confirm
that, the Holders of the outstanding Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the
United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(d) no Default shall have occurred and be continuing on the date
of such deposit or insofar as Section 6.1(8) or 6.1(9) hereof are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violations of, or constitute a default under, any
material agreement or instrument (other than this Indenture) to which
either of the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(f) on or prior to the 91st day following the deposit, the
Company shall have delivered to the Trustee an Opinion of Counsel to the
effect that on the 91st day following the deposit, the trust funds are not
subject to any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company; and
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(h) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
Section 8.5 Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions.
Subject to Section 8.6 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.5, the
"Trustee") pursuant to Section 8.4 hereof in respect of the outstanding Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent as the Trustee may determine, to the Holders of such
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 8.4. hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
Section 8.6 Repayment to Company.
(a) Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
written request of the Company any money or non-callable Government Securities
held by it as provided in Section 8.4 hereof which, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(a) hereof), are in excess of the amount thereof that
would then be required to be deposited to effect an equivalent Legal Defeasance
or Covenant Defeasance.
(b) Subject to any applicable abandoned property law, the
Trustee and the Paying Agent shall pay to the Company upon request any money
held by them for the payment of principal, interest, premium or Liquidated
Damages, if any, that remains unclaimed for two years after such principal,
interest, premium or Liquidated Damages, if any, became due and payable, and,
thereafter, Holders entitled to the money must look to the Company for payment
of such money as secured creditors and all liability of the Trustee and the
Paying Agent with respect to such money shall cease.
Section 8.7 Reinstatement.
If the Trustee or Paying Agent is unable to apply any United States dollars
or non-callable Government Securities in accordance with Section 8.2 or 8.3
hereof, as the case may be,
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by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, then the
Company's obligations under this Indenture and the Notes shall be revived and
reinstated as though no deposit had occurred pursuant to Section 8.2 or 8.3
hereof until such time as the Trustee or Paying Agent is permitted to apply all
such money in accordance with Section 8.2 or 8.3 hereof, as the case may;
provided that, if the Company makes any payment of principal of, premium, if
any, or interest on any Note following the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
Section 8.8 Discharge of Liability on Securities; Defeasance.
When (a)(i) the Company delivers to the Trustee all outstanding Notes for
cancellation or (ii) all outstanding Notes have become due and payable, whether
at maturity or on a specified redemption date as a result of the mailing of a
notice of redemption pursuant to Article 3 hereof, (b) the Company irrevocably
deposits with the Trustee money sufficient to pay at maturity or upon redemption
all outstanding Notes, including interest, premium and Liquidated Damages
thereon to maturity or such redemption date, and if in either case the Company
pay all other sums payable hereunder by the Company, and (c) if the Notes have
been called for redemption and the redemption date has not occurred, the Company
delivers to the Trustee an Opinion of Counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such actions and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such actions had not occurred, then this Indenture shall cease to be of further
effect except for (i) the provisions set forth in Article 2, Sections 4.2, 7.7
and 8.6 hereof and (ii) if the Notes have been called for redemption and the
redemption date has not occurred, the Company's obligation to pay the redemption
price on such redemption date. The Trustee shall acknowledge satisfaction and
discharge of this Indenture on demand of the Company accompanied by an Officers'
Certificate and an Opinion of Counsel and at the cost and expense of the
Company.
ARTICLE 9
AMENDMENTS
Section 9.1 Without Consent of Holders.
The Company and the Trustee may amend this Indenture or the Notes without
the consent of any Holder of Notes:
(a) to cure any ambiguity, defect or inconsistency;
(b) to comply with Article 5;
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(c) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(d) to make any change that would provide additional rights or
benefits to the Holders of the Notes or that does not adversely affect the
legal rights hereunder and under the Registration Rights Agreement of any
Holder of the Notes; or
(e) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA.
Upon the written request of the Company, accompanied by a resolution of the
Board of Directors of the Company, authorizing the execution of any such
supplemental indenture or amendment, and upon receipt by the Trustee of the
documents described in Section 9.6 hereof required or requested by the Trustee,
the Trustee shall join with the Company in the execution of any supplemental
indenture or amendment authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations which may be
therein contained, but the Trustee shall not be obligated to enter into such
supplemental indenture or amendment which affects its own rights, duties or
immunities under this Indenture or otherwise.
Section 9.2 With Consent of Holders.
Except as otherwise provided herein, the Company and the Trustee may amend
this Indenture or the Notes with the written consent of the Holders of at least
a majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer for the Notes).
Upon the request of the Company, accompanied by a resolution of the Board
of Directors of the Company authorizing the execution of any such supplemental
indenture or amendment, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid,
and upon receipt by the Trustee of the documents described in Section 9.6
hereof, the Trustee shall join with the Company in the execution of such
supplemental indenture or amendment unless such supplemental indenture or
amendment affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise, in which case the Trustee may in its discretion, but
shall not be obligated to, enter into such supplemental indenture.
It shall not be necessary for the consent of the Holders under this Section
to approve the particular form of any proposed supplemental indenture or
amendment, but it shall be sufficient if such consent approves the substance
thereof.
After a supplemental indenture or amendment under this Section becomes
effective, the Company shall mail to the Holders of each Note affected thereby,
with a copy to the Trustee, a notice briefly describing the amendment or waiver.
Any failure of the Company to mail such notice, or any defect therein, shall
not, however, in any way impair or affect the validity of any
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such supplemental indenture, amendment or waiver. Subject to Sections 6.4 and
6.7 hereof, the Holders of a majority in principal amount of the Notes then
outstanding may waive compliance in a particular instance by the Company with
any provision of this Indenture or the Notes. However, without the consent of
each Holder of Notes affected, an amendment or waiver under this Section may not
(with respect to any Notes held by a non-consenting Holder of Notes):
(a) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any
Note or alter the optional or mandatory redemption provisions (other than
provisions relating to the covenants described in Section 4.15 and Section
4.16);
(c) reduce the rate of or change the time for payment of
interest or Liquidated Damages, if any, including default interest, on any
Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest or Liquidated Damages, if any,
on any Note (other than a Default in the payment of an amount due as a
result of an acceleration if the Holders of Notes rescind such acceleration
pursuant to Section 6.2);
(e) make any Note payable in money other than that stated in the
Note;
(f) make any change in Section 6.4 or 6.7 hereof or in this
sentence of this Section 9.2; or
(g) make any change in the foregoing amendment and waiver
provisions.
Section 9.3 Compliance with Trust Indenture Act.
If at the time of an amendment to this Indenture or the Notes, this
Indenture shall be qualified under the TIA, every amendment to this Indenture or
the Notes shall be set forth in a supplemental indenture that complies with the
TIA as then in effect.
Section 9.4 Revocation and Effect of Consents.
Until a supplemental indenture, an amendment or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. A supplemental indenture, amendment or waiver becomes
effective in accordance with its terms and thereafter binds every Holder of
Notes.
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The Company may fix a record date for determining which Holders must
consent to such supplemental indenture, amendment or waiver. If the Company
fixes a record date, the record date shall be fixed at (i) the later of 30 days
prior to the first solicitation of such consent or the date of the most recent
list of Holders furnished to the Trustee prior to such solicitation pursuant to
Section 2.5, or (ii) such other date as the Company shall designate.
Section 9.5 Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about a supplemental
indenture, amendment or waiver on any Note thereafter authenticated. The Company
in exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment or waiver.
Section 9.6 Trustee to Sign Amendments, etc.
The Trustee shall sign any amendment or supplemental indenture authorized
pursuant to this Article 9 if the amendment does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but need not, sign it. In signing or refusing to sign such
amendment or supplemental indenture, the Trustee shall be entitled to receive,
if requested, an indemnity reasonably satisfactory to it and to receive and,
subject to Section 7.1, shall be fully protected in relying upon, an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that such amendment
or supplemental indenture is authorized or permitted by this Indenture, that it
is not inconsistent herewith or therewith, and that it will be valid and binding
upon the Company in accordance with its terms. The Company may not sign an
amendment or supplemental indenture until the Board of Directors of the Company
approves it.
ARTICLE 10
PLEDGE OF COLLATERAL AND SECURITY
Section 10.1 Grant of Security Interest.
To secure the full and punctual payment when due and the full and punctual
performance of the Company's obligations hereunder, the Company hereby grants to
the Trustee, for the benefit of the Trustee and the Holders, a security interest
in all its right, title and interest in and to the Collateral.
The Company covenants that it will cause IHF Holdings not to issue any
uncertificated shares of stock.
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Section 10.2 Delivery and Substitution of Collateral.
(a) Any and all Collateral shall be delivered to and held by or
on behalf of the Trustee pursuant hereto on the Closing Date and shall be in
suitable form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to the Trustee.
(b) The Trustee shall have the right, at any time after the
occurrence and during the countenance of an Event of Default, in its discretion
and without notice to the Company, to transfer to or to register in the name of
the Trustee or any of its nominees any or all of the Collateral. In addition,
the Trustee shall have the right at any time to exchange certificates or
instruments representing or evidencing Collateral for certificates or
instruments of different denominations.
Section 10.3 Representations and Warranties.
The Company hereby represents and warrants on the Closing Date as follows:
(a) It is the record and beneficial owner of the Collateral
pledged on such date, free and clear of any Lien, except for the Lien
created by this Indenture.
(b) It has full corporate power, authority and legal right to
pledge all the Collateral pledged on the Closing Date.
(c) The shares of capital stock of IHF Holdings constituting
Collateral pledged on such date have been duly authorized and are validly
issued, fully paid and on-assessable.
(d) the pledge in accordance with the terms of this Indenture of
the Collateral crates a valid and perfected first priority Lien on the
Collateral, securing payment of the Company's obligations hereunder.
Section 10.4 Further Assurances.
(a) The Company agrees that at any time and from time to time, at
its expense, it will promptly execute and deliver all further instruments and
documents and take all further action that may be necessary or that the Trustee
may reasonably request in order to perfect and protect any Lien granted or
purported to be granted hereby or to enable the Trustee to exercise and enforce
its rights and remedies hereunder with respect to any Collateral.
(b) The Company shall have the right from time to time to execute
and deliver in favor of the Trustee for the benefit of the Holders one or more
instruments or other documents evidencing or providing for additional security
for the Notes, which may be in the form of a pledge of collateral, a negative
pledge or otherwise. Any such instrument or document shall be
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effective without requiring execution or delivery by the Trustee and may be
terminated pursuant to the terms thereof by written notice to the Trustee.
Section 10.5 Dividends; Investments of Collateral; Voting Rights; Release upon
Discharge or Defeasance.
(a) As long as no Default shall have occurred and be continuing,
the Company shall be entitled to receive and retain for its own account any and
all dividends (other than stock or liquidating dividends) and other
distributions at any time and from time to time declared or paid upon any of the
Collateral. During any period in which an Event of Default shall have occurred
and be continuing, the Company shall promptly deliver to the Trustee all
dividends and other distributions paid in respect of the Collateral owned by the
Company as additional collateral hereunder. During any period in which an Event
of Default shall have occurred and be continuing, all such dividends and other
distributions shall be held by the Trustee as Collateral and shall, if received
by the Company, be received in trust for the benefit of the Trustee, be
segregated from the other property or funds of the Company and be forthwith
delivered to the Trustee as Collateral in the same form as so received (with any
necessary endorsement). Any cash dividends or distributions delivered to or
otherwise held by the Trustee pursuant to this Section 10.5 during any period in
which an Event of Default shall have occurred and be continuing, and any other
cash constituting Collateral delivered to the Trustee, shall be invested by the
Trustee in Cash Equivalents.
(b) As long as no Default shall have occurred and be continuing
and until delivery of the notice from the Trustee to the Company referred to in
Section 10.5(c), the Company shall be entitled to exercise any and all voting
and other consensual rights relating to Collateral or any part thereof for any
purpose; provided, however, that no vote shall be cast, and no consent, waiver
-------- -------
or ratification given or action taken, which would be inconsistent with or
violate any provision of this Indenture or the Notes.
(c) Upon the occurrence and during the continuance of a Default,
all rights of the Company to exercise the voting and other consensual rights
that it would otherwise be entitled to exercise pursuant to Section 10.5(b)
shall cease upon notice from the Trustee to the Company and upon the giving of
such notice of all such rights shall thereupon be vested in the Trustee who
shall thereupon have the sole right to exercise such voting and other consensual
rights.
(d) In order to permit the Trustee to exercise the voting and
other consensual rights which it may be entitled to exercise pursuant to Section
10.5(c), and to receive all dividends and distributions which it may be entitled
to receive under Section 10.5(a), the Company shall, upon written notice of the
Trustee, from time to time execute and deliver to the Trustee such instruments
as the Trustee may reasonably request.
(e) Upon satisfaction by the Company of the conditions set forth
in Article 8 to its legal defeasance options or its covenant defeasance option
or to the discharge of this
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Indenture, the Lien of this Indenture on all the Collateral shall terminate and
all the Collateral shall be released without any further action on the part of
the Trustee or any other Person. Upon the release of any Collateral, the
Trustee shall execute and deliver to the Company an instrument or instruments
acknowledging the release of such Collateral from this Indenture and the
discharge of the Lien on such Collateral created by this Article 10, and will
duly assign, transfer and deliver to the Company (without recourse and without
any representation or warranty) such Collateral.
Section 10.6 Trustee Appointed Attorney-in-Fact.
The Company hereby appoints the Trustee as the Company's attorney-in-fact,
with full authority in the place and stead of the Company and in the name of the
Company or otherwise, from time to time in the Trustee's discretion but only
after the occurrence and during the continuance of an Event of Default, to take
any action and to execute any instrument which the Trustee may deem necessary or
advisable in order to accomplish the purposes of this Article 10, including to
receive, endorse and collect all instruments made payable to the Company
representing any dividend, interest payment or other distribution in respect of
the Collateral or any part thereof and to give full discharge for the same.
This power, being coupled with an interest, is irrevocable.
Section 10.7 Trustee May Perform.
If the Company fails to perform any agreement contained in this Article 10,
the Trustee may, but shall not be obligated to, itself perform, or cause
performance of, such agreement, and the expenses of the Trustee incurred in
connection therewith shall be payable by the Company under Section 7.7.
Section 10.8 Trustee's Duties.
The powers conferred on the Trustee under this Article 10 are solely to
protect its interest in the Collateral and other Collateral and shall not impose
any duty upon it to exercise any such powers. Except for the safe custody of
any Collateral in its possession and the accounting for moneys actually received
by its hereunder, the Trustee shall have no duty as to any Collateral or as to
the taking of any necessary steps to preserve rights against prior parties or
any other rights pertaining to any Collateral.
Section 10.9 Remedies upon Event of Default
If any Event of Default shall have occurred and be continuing, the Trustee
may exercise in respect of the Collateral, in addition to other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies provided a secured party upon the default of a debtor under the UCC at
that time, and the Trustee may also, without notice except as specified below,
sell the Collateral or any part thereof in one or more parcels at public or
private sale, at any exchange, broker's board or at any of the Trustee's offices
or elsewhere, for cash, on credit
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or for future delivery, upon such terms as the Trustee may determine to be
commercially reasonable, and the Trustee or any Holder may be the purchaser of
any or all of the Collateral so sold and thereafter hold the same, absolutely,
free from any right or claim of whatsoever kind. The Company agrees that, to the
extent notice of sale shall be required by law, at least 10 days' notice to the
Company of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. The
Trustee shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Trustee may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned. The Trustee shall incur no liability as a result of the sale
of the Collateral, or any part thereof, at any private sale conducted in a
commercially reasonable manner. The Company hereby waives any claims against
the Trustee arising by reason of the fact that the price at which any Collateral
may have been sold at such a private sale was less than the price which might
have been obtained at a public sale, even if the Trustee accepts the first offer
received and does not offer such Collateral to more than one offeree.
The Company recognizes that, by reason of certain prohibitions contained in
the Securities Act and applicable state securities laws, the Trustee may be
compelled, with respect to any sale of all or any part of the Collateral, to
limit purchasers to those who will agree, among other things, to acquire such
securities for their own account, for investment, and not with a view to the
distribution or resale thereof. The Company acknowledges and agrees that any
such sale may result in prices and other terms less favorable to the seller than
if such sale were a public sale without such restrictions and, notwithstanding
such circumstances, agrees that any such sale shall be deemed to have been made
in a commercially reasonable manner. The Trustee shall be under no obligation
to delay the sale of any of the Collateral for the period of time necessary to
permit the Company to register such securities for public sale under the
Securities Act, or under applicable state laws, even if the Company would agree
to do so.
Section 10.10 Application of Proceeds.
Upon the occurrence and during the continuance of an Event of Default and
after the acceleration of the Notes pursuant to Section 6.2 (so long as such
acceleration has not been rescinded), any cash held by the Trustee as collateral
and all cash proceeds received by the Trustee in respect of any sale of,
collection from, or other realization upon, all or any part the Collateral,
shall be applied by the Trustee in the manner specified in Section 6.10.
Section 10.11 Continuing Lien.
Except as provided in Sections 10.2 and 10.5, this Indenture shall create a
continuing Lien on the Collateral that shall (i) remain in full force and effect
until payment in full of the Notes, (ii) be binding upon the Company and its
successors and assigns and (iii) inure to the benefit of the Trustee and its
successors and the Holders.
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Section 10.12 Certificates and Opinions.
The Company shall comply with (a)TIA (S) 314(b), relating to Opinions of
Counsel regarding the Lien of this Indenture, and (b) TIA (S) 314(d), relating
to, among other matters, the release of Collateral from the Lien of this
Indenture and Officers' Certificates or other documents regarding fair value of
the Collateral, to the extent such provisions are applicable. Any certificate
or opinion required by TIA (S) 314(d) may be executed and delivered by an
Officer of the Company to the extent permitted by TIA (S) 314(d).
Section 10.13 Margin Regulations.
The Company shall take such steps as may be necessary so that it shall
comply with Regulations G, U and X (insofar as Regulation X applies to
Regulations G and U) promulgated by the Board of Governors of the Federal
Reserve System, in each case as in effect from time to time and to the extent
such Regulations are at the time applicable to the Notes issued by the Company.
ARTICLE 11
MISCELLANEOUS
Section 11.1 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by TIA (S) 318(c), the imposed duties shall control.
Section 11.2 Notices.
Any notice or communication by the Company or the Trustee to the others is
duly given if in writing and delivered in person or mailed by first-class mail
(registered or certified, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, to the others' addresses:
If to the Company:
ICON Fitness Corporation
1500 South 1000 West
Logan, Utah 84321-8206
Attention: S. Fred Beck, Chief Financial Officer
Telecopier No.: (801) 750-5238
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If to the Trustee:
Fleet National Bank
One Federal Street
Boston, Massachusetts 02110
Attention: Corporate Trust Department
Telecopier No.: (617) 346-5501
The Company or the Trustee by notice to the others may designate additional
or different addresses of subsequent notices or communications.
All notices and communications (other than those sent to Holders of Notes)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder of Notes shall be mailed by first-
class mail to his address shown on the register kept by the Registrar. Failure
to mail a notice or communication to a Holder of Notes or any defect in it shall
not affect its sufficiency with respect to other Holders of Notes.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company mails a notice or communication to Holders of Notes, it
shall mail a copy to the Trustee and each Agent at the same time.
Section 11.3 Communication by Holders with Other Holders.
Holders of Notes may communicate pursuant to TIA (S) 312(b) with other
Holders of Notes with respect to their rights under this Indenture or the Notes.
The Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA (S) 312(c).
Section 11.4 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any
action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 11.5 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
72
<PAGE>
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 11.5 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been complied with.
Section 11.5 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA (S) 314(a)(4)) shall include:
(a) statement that the Person making such certificate or opinion
has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been complied with.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons may certify or give an opinion as to such matters in
one or several documents.
Any certificate or opinion of an Officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of
counsel, unless such officer knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representation with respect to the
matters upon which his certificate or opinion is based are erroneous. Any such
certificate or opinion of counsel may be based, insofar as it relates to factual
matters, upon a certificate or opinion of, or representations by, an Officer or
Officers of the Company stating that the information with respect to such
factual matters is in the possession of the Company, unless such counsel knows,
or in the exercise of reasonable care should know, that the certificate or
opinion or representations with respect to such matters are erroneous.
73
<PAGE>
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 11.6 Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of
Holders of Notes. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
Section 11.7 Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in The City of New York, in the city in which the Corporate Trust
Office of the Trustee is located or at a place of payment are authorized or
obligated by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
Section 11.8 No Recourse Against Others.
(a) No director, officer, employee, agent, stockholder or
controlling person of the Company shall have any liability for any
obligations of the Company under the Notes or this Indenture or for any
claim based on, in respect of or by reason of such obligations. Each Holder
of Notes, by accepting a Note, waives and releases all such liability. The
waiver and release shall be part of the consideration for the issuance of
the Notes.
(b) Notwithstanding the foregoing, nothing in this provision
shall be construed as a waiver or release of any claims under the federal
securities laws.
Section 11.9 Governing Law.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
Section 11.10 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or its Subsidiaries. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
74
<PAGE>
Section 11.11 Successors.
All agreements of the Company in this Indenture and the Notes shall bind
its successor. All agreements of the Trustee in this Indenture shall bind its
successor.
Section 11.12 Severability.
In case any provision in this Indenture or in the Notes shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
Section 11.13 Counterpart Originals.
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
Section 11.14 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
[signatures on following page]
75
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the undersigned have caused this Indenture to be
executed as of the date first above written.
ICON FITNESS CORPORATION
By: /s/ Gary Stevenson
------------------------------
Name: Gary Stevenson
Title: President
By: /s/ S. Fred Beck
------------------------------
Name: S. Fred Beck
Title: Treasurer
FLEET NATIONAL BANK, as Trustee
By: /s/ Shawn P. George
------------------------------
Name: Shawn P. George
Title: Corporate Trust Officer
76
<PAGE>
EXHIBIT A
[Face of Note]
ICON FITNESS CORPORATION
14% SERIES [A/B] SENIOR DISCOUNT NOTE DUE 2006
No. $_________
CUSIP NO. 451039AA9
ICON Fitness Corporation, a Delaware corporation, promises to pay to
______________________ or registered assigns the principal sum of_______________
Dollars on November 15, 2006.
Interest Payment Dates: May 15 and November 15, commencing May 15, 2002
Record Dates: May 1 and November 1
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
In Witness Whereof, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers and a facsimile of its corporate
seal to be affixed hereto or imprinted hereon.
Dated:
[Seal] ICON FITNESS CORPORATION
By: _____________________________________
By: _____________________________________
Certificate of Authentication:
Fleet National Bank, as Trustee, certifies that
this is one of the Notes referred to in the
within-mentioned Indenture.
By __________________________
Authorized Signature
Additional provisions of this Note are set forth on the other side of this Note.
A-1
<PAGE>
(Back of Note)
14% Series [A/B] Senior Discount Notes due 2006
[Unless and until it is exchanged in whole or in part for Notes in
definitive form, this Note may not be transferred except as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository or any
such nominee to a successor Depository or a nominee of such successor
Depository. The Depository Trust Company shall act as the Depository until a
successor shall be appointed by the Company and the Registrar. Unless this
certificate is presented by an authorized representative of The Depository Trust
Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its
agent for registration of transfer, exchange or payment, and any certificate
issued is registered in the name of Cede & Co. or such other name as may be
requested by an authorized representative of DTC (and any payment is made to
Cede & Co. or such other entity as may be requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.]/1/
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY MAY
BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(A) TO A PERSON WHO THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (B) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, (C) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (D)
IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND, IN THE CASE OF CLAUSE (B), (C), OR (D), BASED UPON AN
OPINION OF COUNSEL IF THE ISSUER SO REQUESTS), (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
______________________
/1/ This paragraph should be included only if the Note is issued in global
form.
A-2
<PAGE>
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OR ANY SECURITY ISSUED IN EXCHANGE FOR OR IN
SUBSTITUTION HEREOF OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. Interest. ICON Fitness Corporation, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note
at 14% per annum from November 15, 2001 until maturity and to pay
Liquidated Damages payable pursuant to Section 5 of the Registration Rights
Agreement referred to below. The Company will pay interest and Liquidated
Damages, if any, semiannually on May 15 and November 15 of each year (each
an "Interest Payment Date"), or if any such day is not a Business Day, on
the next succeeding Business Day. Interest on the Notes will accrue from
the most recent Interest Payment Date on which interest has been paid or,
if no interest has been paid, from November 15, 2001; provided, that if
there is no existing Default in the payment of interest, and if this Note
is authenticated between a record date referred to on the face hereof and
the next succeeding Interest Payment Date, interest shall accrue from such
next succeeding Interest Payment Date; provided, further, that the first
Interest Payment Date shall be May 15, 2002. The Company shall pay
interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue principal and premium, if any, from time to time
on demand at a rate that is 1% per annum in excess of the interest rate
then in effect; it shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue installments of
interest and Liquidated Damages (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. Method of Payment. The Company will pay interest on the Notes and
Liquidated Damages to the Persons who are registered Holders of Notes at
the close of business on the record date immediately preceding the Interest
Payment Date, except that the Company will pay defaulted interest as
provided in Section 2.12 of the Indenture. The Notes will be payable as to
principal, premium, interest and Liquidated Damages, if any, at the office
or agency of the Company maintained for such purpose within or without the
City and State of New York, or, at the option of the Company, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
Holders at their respective addresses set forth in the register of Holders;
provided that payment by wire transfer of immediately available/same day
funds will be required with respect to principal of an interest, premium
and Liquidated Damages, if any, on, all Global Notes. Such payment shall be
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
A-3
<PAGE>
3. Paying Agent and Registrar. Initially, the Trustee will act as Paying
Agent and Registrar. The Company may change any Paying Agent, Registrar or
co-registrar without notice.
4. Indenture. The Company issued the Notes under an Indenture, dated as of
November 20, 1996 (the "Indenture"), between the Company and the Trustee.
Capitalized terms herein are used as defined in the Indenture unless
otherwise defined herein. The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbb).
Notwithstanding anything to the contrary herein, the Notes are subject to
all such terms, and Holders are referred to the Indenture and such Act for
a statement of such terms. The Notes are secured obligations of the
Company limited to $162,000,000 in aggregate principal amount, plus
amounts, if any, sufficient to pay interest, premium and Liquidated
Damages, if any, on outstanding Notes as set forth in paragraph 2 hereof.
5. Optional Redemption. At any time following the Issue Date, the Notes may
be redeemed (subject to contractual and other restrictions and legal
availability of funds therefor) at the option of the Company upon not less
than 30 nor more than 60 days' notice as follows:
(a) in whole but not in part, at the redemption prices (expressed as
percentages of the Accreted Value thereof on the applicable redemption
date) set forth below, plus Liquidated Damages, if any, to the redemption
date, if redeemed during the twelve-month period beginning on November 15
of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR THE ACCRETED VALUE
---- ------------------
<S> <C>
1996..................................... 104.000%
1997..................................... 106.500%
1998..................................... 109.000%
1999..................................... 110.000%
2000..................................... 110.000%
</TABLE>
(b) in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon (plus Liquidated Damages, if any) to the applicable
redemption date, if redeemed during the twelve-month period beginning on
November 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2001..................................... 110.000%
2002..................................... 106.666%
2003..................................... 103.333%
2004..................................... 100.000%
</TABLE>
A-4
<PAGE>
Notwithstanding the foregoing, the Company may redeem the Notes in part as
described in clause (b) above only if at least $100 million aggregate principal
amount of the Notes originally issued remains outstanding immediately after the
occurrence of each such partial redemption.
6. Mandatory Redemption. The Company will be required to redeem the Senior
Discount Notes with the net proceeds of any Public Equity Offering by the
Company or any of its Subsidiaries as follows:
(a) at the redemption prices (expressed as percentages of the Accreted
Value thereof on the applicable redemption date) set forth below, plus
Liquidated Damages, if any, to the redemption date, if redeemed during the
twelve-month period beginning on November 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR THE ACCRETED VALUE
---- ------------------
<S> <C>
1996..................................... 104.000%
1997..................................... 106.500%
1998..................................... 109.000%
1999..................................... 110.000%
2000..................................... 110.000%
</TABLE>
(b) at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (plus
Liquidated Damages, if any) to the applicable redemption date, if redeemed
during the twelve-month period beginning on November 15 of the years
indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2001..................................... 110.000%
2002..................................... 106.666%
2003..................................... 103.333%
2004 and thereafter...................... 100.000%
</TABLE>
Any such redemption shall occur within 60 days of the date of the closing
of any such Public Equity Offering.
7. Notice of Redemption. Notice of redemption will be mailed to the Holder's
registered address at least 30 days but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed. If less than all
Notes are to be redeemed, the Trustee shall select pro rata the Notes to be
redeemed in multiples of $1,000. Notes in denominations larger than $1,000
may be redeemed in part. On and after the redemption
A-5
<PAGE>
date interest ceases to accrue on Notes or portions of them called for
redemption (unless the Company shall default in the payment of the
redemption price or accrued interest).
8. Change of Control. In the event of a Change of Control of the Company, the
Company shall be required to make an offer to purchase all or any portion
of each Holder's Notes, at 101% of the Accreted Value thereof, plus
Liquidated Damages, if any, thereon to the date of purchase (if prior to
November 15, 2001) or 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase (if on or after November 15, 2001).
9. Asset Sale Offer. In the event of certain Asset Sales, the Company may be
required to make an Asset Sale Offer to purchase all or any portion of each
Holder's Notes, at 101% of the Accreted Value of the Notes (if prior to
November 15, 2001) or 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase (if on or after November 15, 2001).
10. Restrictive Covenants. The Indenture imposes certain limitations on, among
other things, the ability of the Company to merge or consolidate with any
other Person or sell, lease or otherwise transfer all or substantially all
of its properties or assets, the ability of the Company or its Restricted
Subsidiaries to dispose of certain assets, to pay dividends and make
certain other distributions and payments, to make certain investments or
redeem, retire, repurchase or acquire for value shares of Capital Stock, to
incur additional Indebtedness or incur encumbrances against certain
property and to enter into certain transactions with Affiliates, all
subject to certain limitations described in the Indenture.
11. Denominations, Transfer, Exchange. The Notes are in registered form
without coupons in denominations of $1,000 and whole multiples of $1,000.
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
transfer or exchange any Notes selected for redemption. Also, it need not
transfer or exchange any Notes for a period of 30 days before a selection
of Notes to be redeemed.
12. Persons Deemed Owners. The registered Holder of a Note may be treated as
the owner of it for all purposes and neither the Company, the Trustee nor
any Agent shall be affected by notice to the contrary.
13. Unclaimed Money. If money for the payment of principal or interest remains
unclaimed for one year, the Trustee or Paying Agent will pay the money back
to the Company at its request. After that, all liability of the Trustee
and such Paying Agent with respect to such money shall cease.
14. Amendment, Supplement, Waiver. Subject to certain exceptions, the
Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a
A-6
<PAGE>
majority in principal amount of the Notes, and any past default or
noncompliance with any provision may be waived with the consent of the
Holders of a majority in principal amount of the Notes. Without the
consent of any Holder, the Company may amend or supplement the Indenture or
the Notes to, among other things, cure any ambiguity, defect or
inconsistency or to provide for uncertificated Notes in addition to
certificated Notes or to make any change that does not adversely affect the
rights of any Holder.
15. Defaults and Remedies. An event of default generally is: (i) default in
payment when due of the principal of or premium, if any, on any of the
Notes; (ii) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, any of the Notes; (iii) failure by the
Company for 45 days after notice to comply with certain of its agreements
in the Indenture and the Notes; (iv) failure by the Company for 60 days
after notice to comply with any of its other agreements in the Indenture or
the Notes; (v) default which is caused by a failure to pay principal of or
premium, if any, or interest on certain or other Indebtedness aggregating
$10 million or more prior to the expiration of the grace period provided in
such Indebtedness (a "Payment Default") or results in the acceleration of
such Indebtedness prior to its express maturity; (vi) failure by the
Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $10 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its
Restricted Subsidiaries and (viii) the Trustee not having or ceasing to
have a valid, perfected and subsisting first priority lien on the
Collateral for its benefit and the benefit of the Holders. Subject to
certain limitations in the Indenture, if an Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount
of the then outstanding Notes may declare the Accreted Value, if such Event
of Default shall occur prior to November 15, 2001, or the principal amount
of all such Notes, together with any premium and interest thereon, if any,
if such Event of Default shall occur on or after November 15, 2001, to be
due and payable immediately, except that in the case of an Event of Default
arising from certain events of bankruptcy, insolvency or reorganization
relating to either of the Company, such amounts shall become due and
payable immediately without further action or notice. Holders may not
enforce the Indenture or the Notes except as provided in the Indenture.
The Trustee may require indemnity satisfactory to it before it enforces the
Indenture or the Notes. Subject to certain limitations, Holders of a
majority in principal amount of the Notes may direct the Trustee in its
exercise of any trust or power. The Company must furnish an annual
compliance certificate to the Trustee.
16. Trustee Dealings with Company. Fleet National Bank, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with the Company or its respective
Subsidiaries or Affiliates with the same rights it would have if it were
not Trustee.
17. No Recourse Against Others. A director, officer, employee, agent,
stockholder or controlling person of the Company shall not have any
liability for any obligations of the
A-7
<PAGE>
Company under the Notes or the Indenture or for any claim based on, in
respect of or by reason of, such obligations or their creation. Each
Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the
Notes.
18. Authentication. This Note shall not be valid until the Trustee or an
authenticating agent signs the certificate of authentication on the other
side of this Note.
19. Abbreviations. Customary abbreviations may be used in the name of a Holder
or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by
the entireties), JT TEN (=joint tenants with right of survivorship and not
as tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to
Minors Act).
20. Additional Rights of Holders of Transfer Restricted Notes. In addition to
the rights provided by Holders of Notes under the Indenture, Holders of
Transfer Restricted Notes shall have all the rights set forth in the
Registration Rights Agreement, dated as of the date of the Indenture (the
"Registration Rights Agreement"), between the Company and the Initial
Purchaser.
21. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee
on Uniform Note Identification Procedures, the Company will cause CUSIP
numbers to be printed on the Notes as a convenience to Holder of the Notes.
No representation is made as to the accuracy of such numbers as printed on
the Notes and reliance may be placed only on the other identification
numbers printed hereon.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture or Registration Rights Agreement. Requests may
be made to: ICON Fitness Corporation, 1500 South 1000 West, Logan, Utah 84321-
8206, Attention: Secretary.
A-8
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to:
________________________________________________________________________________
(Insert assignee's social security or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint ______________________ as agent to transfer this Note on
the books of the Company. The agent may substitute another to act for him.
________________________________________________________________________________
Your Signature: ____________________________________________________________
(Sign exactly as your name appears on the other side of
_______________________
this Note)
Date: ______________
Signature Guarantee: _____________________
A-9
<PAGE>
FORM OF OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.15 or Section 4.16 of the Indenture, check the appropriate box:
Section 4.15 [ ] Section 4.16 [ ]
If you want to have only part of this Note purchased by the Company
pursuant to Section 4.15 or Section 4.16 of the Indenture, state the amount (in
integral multiples of $1,000):
$ _____________
Date: _____________ Signature: ____________________________
(Sign exactly as your name
appears on the other side
of this Note)
________________________________________________________________________________
Signature Guarantee:
A-10
<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE NOTE
The following exchanges of a part of this Global Note for Definitive Notes have
been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of Amount of of this Global Note Signature of
decrease in increase in following such authorized officer of
Principal Amount of Principal Amount decrease Trustee or
Date of Exchange this Global Note of this Global Note (or increase) Note Custodian
- ------------------ ------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
_____________________________
/*/ This should be included only if the Note is issued in global form.
A-11
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF NOTES
Re: 14% Series [A/B] Senior Discount Notes due 2006 of ICON Fitness Corporation
This Certificate relates to $_____ principal amount of Notes held in /*/
_______ book-entry or /*/ ______ definitive form by _________________ (the
"Transferor").
The Transferor/*/:
[_] has requested the Trustee by written order to deliver in exchange for
its beneficial interest in the Global Note held by the Depository a Note or
Notes in definitive, registered form equal to its beneficial interest in such
Global Note (or the portion thereof indicated above); or
[_] has requested the Trustee by written order to exchange or register the
transfer of a Note or Notes.
In connection with such request and in respect of each such Note, the
Transferor does hereby certify that the Transferor is familiar with the
Indenture relative to the above captioned Notes and that the transfer of this
Note does not require registration under the Securities Act (as defined below)
because:/*/
[_] Such Note is being acquired for the Transferor's own account without
transfer (in satisfaction of Section 2.6(a)(ii)(A) or Section 2.6(d)(i)(A) of
the Indenture).
[_] Such Note is being transferred (i) to a "qualified institutional buyer"
(as defined in Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act")), in reliance on Rule 144A or (ii) pursuant to an exemption
from registration in accordance with Rule 904 under the Securities Act (and in
the case of clause (ii), based on an opinion of counsel if the Company so
request and together with a certification in substantially the form of Exhibit D
to the Indenture).
[_] Such Note is being transferred (i) in accordance with Rule 144 under
the Securities Act (and based on an opinion of counsel if the Company so
request) or (ii) pursuant to an effective registration statement under the
Securities Act.
[_] Such Note is being transferred to an institutional accredited investor
within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act
pursuant to a private placement exemption from the registration requirements of
the Securities Act (and based on an opinion of counsel if the Company so
requests) together with a certification in substantially the form of Exhibit C
to the Indenture.
________________________
/*/ Check applicable box.
B-1
<PAGE>
[_] Such Note is being transferred in reliance on and in compliance with
another exemption from the registration requirements of the Securities Act (and
based on an opinion of counsel if the Company so requests).
_____________________________
[INSERT NAME OF TRANSFEROR]
By: _________________________
Name:
Title:
Address:
Date: _______________ ___, ______
B-2
<PAGE>
EXHIBIT C
FORM OF LETTER TO BE DELIVERED BY ACCREDITED INSTITUTIONS
____________ ___, ____
Fleet National Bank, as Registrar
Attention: Corporate Trust Department
Ladies and Gentlemen:
We are delivering this letter in connection with an offering of 14% Series
[A/B] Senior Discount Notes due 2006 (the "Notes") of ICON Fitness Corporation,
a Delaware corporation (the "Company"), as described in the Offering Memorandum
(the "Offering Memorandum") relating to the Offering.
We hereby confirm that:
(i) we are an "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act, or an entity in
which all of the equity owners are accredited investors within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act
(an "Institutional Accredited Investor");
(ii) any purchase of Notes will be used by us for our own account or for
the account of one or more other Institutional Accredited Investors;
(iii) in the event that we purchase Notes, we will acquire Notes having a
minimum purchase price of at least $100,000 for our own account and
for each separate account for which we are acting;
(iv) we have such knowledge and experience in financial and business
matters that we are capable of evaluating the merits and risks of
purchasing Notes;
(v) we are not acquiring Notes with a view to any distribution thereof
in a transaction that would violate the Securities Act or the
securities laws of any State of the United States or any other
applicable jurisdiction; provided that the disposition of our
property and the property of any accounts for which we are acting as
fiduciary shall remain at all times within our control; and
(vi) we have received a copy of the Offering Memorandum and acknowledge
that we have had access to such financial and other information, and
have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we
deem necessary in connection with our decision to purchase Notes.
We understand that the Notes are being offered in a transaction not
involving any public offering within the meaning of the Securities Act and that
the Notes have not been registered under the Securities Act, and we agree, on
our own behalf and on behalf of each account for which we acquire any Notes,
that (a) such Notes may be offered, resold, pledged or otherwise transferred
only (i) to a person whom we reasonably believe to be a qualified institutional
buyer (as defined in Rule 144A under the Securities Act) in a transaction
meeting the requirements of Rule 144A, in a transaction meeting the requirements
C-1
<PAGE>
of Rule 144 under the Securities Act, outside the United States in a transaction
meeting the requirements of Rule 904 under the Securities Act, or in accordance
with another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel if the Company so requests), (ii) to the
Company or (iii) pursuant to an effective registration statement, and, in each
case, in accordance with any applicable securities laws of any State of the
United States or any other applicable jurisdiction and (b) we will notify any
subsequent purchaser from us, or from any account for which we acquire Notes, of
the resale restrictions set forth in (a) above. We understand that the
Registrar will not be required to accept for registration of transfer any Notes,
except upon presentation of evidence satisfactory to the Company that the
foregoing restrictions on transfer have been complied with. We further
understand that the Notes purchased by us will be in the form of definitive
physical certificates and that such certificates will bear a legend reflecting
the substance of this paragraph.
We acknowledge that you, the Company and others will rely upon our
confirmations, acknowledgments and agreements set forth herein, and we agree to
notify you promptly in writing if any of our representations or warranties
herein ceases to be accurate and complete.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK.
Very truly yours,
____________________________________
[Name of Transferor]
By: _______________________________
Name:
Title:
Address:
C-2
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION
WITH TRANSFERS PURSUANT TO REGULATION S
__________, _____
Fleet National Bank, as Registrar
Attention: Corporate Trust Department
Ladies and Gentlemen:
In connection with our proposed sale of certain 14% Series [A/B] Senior
Discount Notes due 2006 (the "Notes") of ICON Fitness Corporation, a Delaware
corporation (the "Company") we represent that:
(i) the offer of the Notes was not made to a person in the United
States;
(ii) at the time the buy order was originated, the transferee was outside
the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United
States;
(iii) no directed selling efforts have been made by us in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable; and
(iv) the transaction is not part of a plan or scheme to evade the
registration requirements of the U.S. Securities Act of 1933.
You and the Company are entitled to rely upon this letter and you are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
_____________________________________
[Name of Transferor]
By: ________________________________
Name:
Title:
Address:
D-1
<PAGE>
Exhibit 4.3
===============================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of November 20, 1996
by and between
ICON Fitness Corporation
and
Donaldson, Lufkin & Jenrette Securities Corporation
===============================================================================
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and entered
---------
into as of November 20, 1996 by and between ICON Fitness Corporation, a Delaware
corporation (the "Company"), and Donaldson, Lufkin & Jenrette Securities
-------
Corporation (the "Initial Purchaser"), who has agreed to purchase the Company's
-----------------
14% Series A Senior Discount Notes due 2006 (the "Series A Notes") pursuant to
--------------
the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated November
15, 1996 (the "Purchase Agreement"), by and between the Company and the Initial
------------------
Purchaser. In order to induce the Initial Purchaser to purchase the Series A
Notes, the Company has agreed to provide the registration rights set forth in
this Agreement. The execution and delivery of this Agreement is a condition to
the obligations of the Initial Purchaser set forth in Section 3 of the Purchase
Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Act: The Securities Act of 1933, as amended.
---
Business Day: Any day except a Saturday, Sunday or other day in the City
------------
of New York, or in the city of the corporate trust office of the Trustee, on
which banks are authorized to close.
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
-------------
Broker-Dealer Transfer Restricted Securities: Series B Notes that are
--------------------------------------------
acquired by a Broker-Dealer in the Exchange Offer in exchange for Series A Notes
that such Broker-Dealer acquired for its own account as a result of market
making activities or other trading activities (other than Series A Notes
acquired directly from the Company or any of its affiliates).
Closing Date: The date hereof.
------------
Commission: The Securities and Exchange Commission.
----------
Consummate: An Exchange Offer shall be deemed "Consummated" for purposes
----------
of this Agreement upon the occurrence of (a) the filing and effectiveness under
the Act of the Exchange Offer Registration Statement relating to the Series B
Notes to be issued in the Exchange Offer, (b) the maintenance of such
Registration Statement continuously effective and the keeping of the Exchange
Offer open for a period not less than the minimum period required pursuant to
Section 3(b) hereof and (c) the delivery by the Company to the Registrar under
the Indenture of Series B Notes in the same aggregate principal amount as the
aggregate principal amount of Series A Notes tendered by Holders thereof
pursuant to the Exchange Offer.
<PAGE>
Damages Payment Date: With respect to the Series A Notes, each Interest
--------------------
Payment Date.
Definitive Notes: As defined in the Indenture.
----------------
Effectiveness Target Date: As defined in Section 5.
-------------------------
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Exchange Offer: The registration by the Company under the Act of the
--------------
Series B Notes pursuant to the Exchange Offer Registration Statement pursuant to
which the Company shall offer the Holders of all outstanding Transfer Restricted
Securities the opportunity to exchange all such outstanding Transfer Restricted
Securities for Series B Notes in an aggregate principal amount equal to the
aggregate principal amount of the Transfer Restricted Securities tendered in
such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement relating
-------------------------------------
to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchaser proposes
--------------
to sell the Series A Notes to certain "qualified institutional buyers," as such
term is defined in Rule 144A under the Act, and to certain "accredited
investors," as such term is defined in Rule 501(a)(1), (2), (3), (5) and (7) of
Regulation D under the Act.
Global Noteholder: The Holders of the Global Note (as such terms are
-----------------
defined in the Indenture).
Holders: As defined in Section 2 hereof.
-------
Indemnified Holder: As defined in Section 8(a) hereof.
------------------
Indenture: The Indenture, dated the Closing Date, between the Company and
---------
Fleet National Bank, as trustee (the "Trustee"), pursuant to which the Notes are
-------
to be issued, as such Indenture is amended or supplemented from time to time in
accordance with the terms thereof.
Interest Payment Date: As defined in the Notes.
---------------------
NASD: National Association of Securities Dealers, Inc.
----
Notes: The Series A Notes and the Series B Notes.
-----
Person: An individual, partnership, corporation, trust, unincorporated
------
organization, limited liability company, or a government or agency or political
subdivision thereof.
2
<PAGE>
Prospectus: The prospectus included in a Registration Statement at the
----------
time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
Record Holder: With respect to any Damages Payment Date, each Person who
-------------
is a Holder of Notes on the record date with respect to the Interest Payment
Date on which such Damages Payment Date shall occur.
Registration Default: As defined in Section 5 hereof.
--------------------
Registration Statement: Any registration statement of the Company relating
----------------------
to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the
registration for resale of Transfer Restricted Securities pursuant to the Shelf
Registration Statement, in each case, (i) which is filed pursuant to the
provisions of this Agreement and (ii) including the Prospectus included therein,
all amendments and supplements thereto (including post-effective amendments) and
all exhibits and material incorporated by reference therein.
Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer
------------------------
Transfer Restricted Securities.
Series B Notes: The Company's 14% Series B Senior Discount Notes due 2006
--------------
to be issued pursuant to the Indenture (i) in the Exchange Offer or (ii) upon
the request of any Holder of Series A Notes covered by a Shelf Registration
Statement, in exchange for such Series A Notes.
Shelf Registration Statement: As defined in Section 4 hereof.
----------------------------
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as
---
in effect on the date of the Indenture.
Transfer Restricted Securities: Each Note, until the earliest to occur of
------------------------------
(a) the date on which such Note is exchanged in the Exchange Offer and entitled
to be resold to the public by the Holder thereof without complying with the
prospectus delivery requirements of the Act, (b) the date on which such Note has
been disposed of in accordance with a Shelf Registration Statement, (c) the date
on which such Note is disposed of by a Broker-Dealer pursuant to the "Plan of
Distribution" contemplated by the Exchange Offer Registration Statement
(including delivery of the Prospectus contained therein) or (d) the date on
which such Note is distributed to the public pursuant to Rule 144 under the Act.
Underwritten Registration or Underwritten Offering: A registration in
------------------------- ---------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.
3
<PAGE>
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities (each,
a "Holder") whenever such Person owns Transfer Restricted Securities.
------
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by applicable federal
law (after the procedures set forth in Section 6(a)(i) below have been complied
with), the Company shall (i) cause to be filed with the Commission as soon as
practicable after the Closing Date, but in no event later than 30 days after the
Closing Date, the Exchange Offer Registration Statement, (ii) use its best
efforts to cause such Exchange Offer Registration Statement to become effective
at the earliest possible time, but in no event later than 150 days after the
Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective
amendments to such Exchange Offer Registration Statement as may be necessary in
order to cause such Exchange Offer Registration Statement to become effective,
(B) file, if applicable, a post-effective amendment to such Exchange Offer
Registration Statement pursuant to Rule 430A under the Act and (C) cause all
necessary filings, if any, in connection with the registration and qualification
of the Series B Notes to be made under the Blue Sky laws of such jurisdictions
as are necessary to permit Consummation of the Exchange Offer, and (iv) promptly
following the effectiveness of such Exchange Offer Registration Statement,
commence and Consummate the Exchange Offer. The Exchange Offer shall be on the
appropriate form permitting registration of the Series B Notes to be offered in
exchange for the Series A Notes that are Transfer Restricted Securities and to
permit sales of Broker-Dealer Transfer Restricted Securities by Restricted
Broker-Dealers as contemplated by Section 3(c) below.
(b) The Company shall use its best efforts to cause the Exchange Offer
Registration Statement to be effective continuously, and shall keep the Exchange
Offer open for a period of not less than the minimum period required under
applicable federal and state securities laws to Consummate the Exchange Offer;
provided, however, that in no event shall such period be less than 20 Business
Days. The Company shall cause the Exchange Offer to comply with all applicable
federal and state securities laws. No securities other than the Notes shall be
included in the Exchange Offer Registration Statement. The Company shall use its
best efforts to cause the Exchange Offer to be Consummated on the earliest
practicable date after the Exchange Offer Registration Statement has become
effective, but in no event later than 90 Business Days thereafter.
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Restricted Broker-Dealer who holds Series A Notes that are
Transfer Restricted Securities and that were acquired for the account of such
Broker-Dealer as a result of market-making activities or other trading
activities, may exchange such Series A Notes (other than Transfer Restricted
Securities acquired directly from the Company or any Affiliate of the Company)
pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be
an "underwriter" within the meaning
4
<PAGE>
of the Act and must, therefore, deliver a prospectus meeting the requirements of
the Act in connection with its initial sale of each Series B Note received by
such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement
may be satisfied by the delivery by such Broker-Dealer of the Prospectus
contained in the Exchange Offer Registration Statement. Such "Plan of
Distribution" section shall also contain all other information with respect to
such sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-
Dealers that the Commission may require in order to permit such sales pursuant
thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer
or disclose the amount of Notes held by any such Broker-Dealer, except to the
extent required by the Commission as a result of a change in policy after the
date of this Agreement.
The Company shall use its best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for sales of Broker-Dealer Transfer Restricted
Securities by Restricted Broker-Dealers, and to ensure that such Registration
Statement conforms with the requirements of this Agreement, the Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period, upon the written request of any Restricted Broker-Dealer, of
180 days from the date on which the Exchange Offer is Consummated.
The Company shall promptly provide sufficient copies of the latest version
of such Prospectus to such Restricted Broker-Dealers promptly upon request, and
in no event later than one day after such request, at any time during such 180-
day period in order to facilitate such sales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Company is not required to file an
------------------
Exchange Offer Registration Statement with respect to the Series B Notes because
the Exchange Offer is not permitted by applicable law (after the procedures set
forth in Section 6(a)(i) below have been complied with) or (ii) if any Holder of
Transfer Restricted Securities shall notify the Company within 20 Business Days
following the Consummation of the Exchange Offer that (A) such Holder was
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) such Holder may not resell the Series B Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the Prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales by such Holder or (C) such Holder is a Broker-Dealer
and holds Series A Notes acquired directly from the Company or one of its
affiliates, then the Company shall (x) cause to be filed on or prior to 30 days
after the date on which the Company determines that it is not required to file
the Exchange Offer Registration Statement pursuant to clause (i) above or 30
days after the date on which the Company receives the notice specified in clause
(ii) above a shelf registration statement pursuant to Rule 415 under the Act
(which may be an amendment to the Exchange Offer Registration Statement (in
either event, the "Shelf Registration Statement")), relating to all Transfer
----------------------------
Restricted Securities the Holders of which shall have provided the information
required pursuant to Section 4(b) hereof,
5
<PAGE>
and shall (y) use its best efforts to cause such Shelf Registration Statement to
become effective on or prior to 150 days after the date on which the Company
becomes obligated to file such Shelf Registration Statement; provided that if
the Company has not Consummated the Exchange Offer within 180 days after the
Closing Date, then the Company shall file the Shelf Registration Statement with
the Commission on or prior to the 181st day after the Closing Date. If, after
the Company has filed an Exchange Offer Registration Statement which satisfies
the requirements of Section 3(a) above, the Company is required to file and make
effective a Shelf Registration Statement solely because the Exchange Offer shall
not be permitted under applicable federal law, then the filing of the Exchange
Offer Registration Statement shall be deemed to satisfy the requirements of
clause (x) above. Such an event shall have no effect on the requirements of
clause (y) above. The Company shall use its best efforts to keep the Shelf
Registration Statement discussed in this Section 4(a) continuously effective,
supplemented and amended as required by and subject to the provisions of
Sections 6(b) and (c) hereof to the extent necessary to ensure that it is
available for sales of Transfer Restricted Securities by the Holders thereof
entitled to the benefit of this Section 4(a), and to ensure that it conforms
with the requirements of this Agreement, the Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period of at
least three years (as extended pursuant to Section 6(c)(i)) following the date
on which such Shelf Registration Statement first becomes effective under the
Act.
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
- ----------------------------
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 20 days after receipt of a request therefor, such
information specified in item 507 of Regulation S-K under the Act for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. No Holder of Transfer Restricted Securities shall
be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until
such Holder shall have used its best efforts to provide all such information.
Each Holder as to which any Shelf Registration Statement is being effected
agrees to furnish promptly to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Holder not materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any Registration Statement required by this Agreement is not filed
with the Commission on or prior to the date specified for such filing in this
Agreement, (ii) any such Registration Statement has not been declared effective
by the Commission on or prior to the date specified for such effectiveness in
this Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer has
-------------------------
not been Consummated within 30 Business Days after the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement (unless the Exchange
Offer is contrary to established Commission policy and the Company is complying
with the procedures set forth in Section 6(a)(i) hereof)or (iv) any Registration
Statement required by this Agreement is filed and declared effective but shall
thereafter cease to be effective or fail to be
6
<PAGE>
usable for its intended purpose without being succeeded immediately by a post-
effective amendment to such Registration Statement that cures such failure and
that is itself declared effective immediately (each such event referred to in
clauses (i) through (iv), a "Registration Default"), then the Company agrees to
--------------------
pay liquidated damages to each Holder of Transfer Restricted Securities with
respect to the first 90-day period immediately following the occurrence of such
Registration Default, in an amount equal to $.05 per week per $1,000 principal
amount of Transfer Restricted Securities held by such Holder for each week or
portion thereof that the Registration Default continues. The amount of the
liquidated damages shall increase by an additional $.05 per week per $1,000 in
principal amount of Transfer Restricted Securities with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of liquidated damages of $.30 per week per $1,000 principal
amount of Transfer Restricted Securities. Notwithstanding anything to the
contrary set forth herein, (1) upon filing of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the case
of (i) above, (2) upon the effectiveness of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the case
of (ii) above, (3) upon Consummation of the Exchange Offer, in the case of (iii)
above, or (4) upon the filing of a post-effective amendment to the Registration
Statement or an additional Registration Statement that causes the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration Statement)
to again be declared effective or made usable in the case of (iv) above, the
liquidated damages payable with respect to the Transfer Restricted Securities as
a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease.
All accrued liquidated damages shall be paid to the Global Note Holder by
wire transfer of immediately available funds or by federal funds check and to
Holders of Definitive Notes by mailing checks to their registered addresses on
each Damages Payment Date. All obligations of the Company set forth in the
preceding paragraph that are outstanding with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer Restricted Security
shall survive until such time as all such obligations with respect to such
security shall have been satisfied in full. Registration Defaults relating to
any particular Transfer Restricted Securities may be waived by the Holder
thereof.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the
-------------------------------------
Exchange Offer, the Company shall comply with all applicable provisions of
Section 6(c) below, shall use its best efforts to effect such exchange and to
permit the sale of Broker-Dealer Transfer Restricted Securities being sold in
accordance with the intended method or methods of distribution thereof, and
shall comply with all of the following provisions:
(i) If, following the date hereof there has been published a
change in Commission policy with respect to exchange offers such as the
Exchange Offer, such that in the reasonable opinion of counsel to the
Company there is a substantial question as to whether the Exchange Offer is
permitted by applicable federal law, the Company hereby agrees to seek a
no-action letter or other favorable decision from the Commission
7
<PAGE>
allowing the Company to Consummate an Exchange Offer for such Series A
Notes. The Company hereby agrees to pursue the issuance of such a decision
to the Commission staff level. In connection with the foregoing, the
Company hereby agrees to take all such other actions as are requested by
the Commission or otherwise required in connection with the issuance of
such decision, including without limitation (A) participating in telephonic
conferences with the Commission, (B) delivering to the Commission staff an
analysis prepared by counsel to the Company setting forth the legal bases,
if any, upon which such counsel has concluded that such an Exchange Offer
should be permitted and (C) diligently pursuing a resolution (which need
not be favorable) by the Commission staff of such submission.
(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Company, prior to the
Consummation of the Exchange Offer, a written representation to the Company
(which may be contained in the letter of transmittal contemplated by the
Exchange Offer Registration Statement) to the effect that (A) it is not an
affiliate of the Company, (B) it is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the Series B Notes to be issued in the
Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary
course of business. Each Holder hereby acknowledges and agrees that any
Broker-Dealer and any such Holder using the Exchange Offer to participate
in a distribution of the securities to be acquired in the Exchange Offer
(1) could not under Commission policy as in effect on the date of this
Agreement rely on the position of the Commission enunciated in Morgan
------
Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings
-------------------- ----------------------
Corporation (available May 13, 1988), as interpreted in the Commission's
-----------
letter to Shearman & Sterling, dated July 2, 1993, and similar no-action
letters (including, if applicable, any no-action letter obtained pursuant
to clause (i) above), and (2) must comply with the registration and
prospectus delivery requirements of the Act in connection with a secondary
resale transaction and that such a secondary resale transaction must be
covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable, of
Regulation S-K if the resales are of Series B Notes obtained by such Holder
in exchange for Series A Notes acquired by such Holder directly from the
Company or an affiliate thereof.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company shall provide a supplemental letter to the
Commission (A) stating that the Company is registering the Exchange Offer
in reliance on the position of the Commission enunciated in Exxon Capital
-------------
Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc.
-------------------- ---------------------------
(available June 5, 1991) and, if applicable, any no-action letter obtained
pursuant to clause (i) above, (B) including a representation that the
Company has not entered into any arrangement or understanding with any
Person to distribute the Series B Notes to be received in the Exchange
Offer and that, to the best of the Company's information and belief, each
Holder participating in the Exchange Offer is
8
<PAGE>
acquiring the Series B Notes in its ordinary course of business and has no
arrangement or understanding with any Person to participate in the
distribution of the Series B Notes received in the Exchange Offer and (C)
any other undertaking or representation required by the Commission as set
forth in any no-action letter obtained pursuant to clause (i) above.
(b) Shelf Registration Statement. In connection with the Shelf
----------------------------
Registration Statement, the Company shall comply with all the provisions of
Section 6(c) below and shall use its best efforts to effect such registration to
permit the sale of the Transfer Restricted Securities being sold in accordance
with the intended method or methods of distribution thereof (as indicated in the
information furnished to the Company pursuant to Section 4(b) hereof), and
pursuant thereto the Company will prepare and file with the Commission a
Registration Statement relating to the registration on any appropriate form
under the Act, which form shall be available for the sale of the Transfer
Restricted Securities in accordance with the intended method or methods of
distribution thereof within the time periods and otherwise in accordance with
the provisions hereof.
(c) General Provisions. In connection with any Registration Statement and
------------------
any related Prospectus required by this Agreement to permit the sale or resale
of Transfer Restricted Securities (including, without limitation, any Exchange
Offer Registration Statement and the related Prospectus, to the extent that the
same are required to be available to permit sales of Broker-Dealer Transfer
Restricted Securities by Restricted Broker-Dealers), the Company shall:
(i) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for
the period specified in Section 3 or 4 of this Agreement, as applicable.
Upon the occurrence of any event that would cause any such Registration
Statement or the Prospectus contained therein (A) to contain a material
misstatement or omission or (B) not to be effective and usable for resale
of Transfer Restricted Securities during the period required by this
Agreement, the Company shall file promptly an appropriate amendment to such
Registration Statement, (1) in the case of clause (A), correcting any such
misstatement or omission, and (2) in the case of clauses (A) and (B), use
their respective best efforts to cause such amendment to be declared
effective and such Registration Statement and the related Prospectus to
become usable for their intended purpose(s) as soon as practicable
thereafter.
(ii) prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary
to keep the Registration Statement effective for the applicable period set
forth in Section 3 or 4 hereof, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration
Statement have been sold; cause the Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant
to Rule 424 under the Act, and to comply fully with Rules 424, 430A and
462, as applicable, under the Act in a timely manner; and comply with the
provisions of the Act with respect to the disposition of all securities
covered by such Registration
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Statement during the applicable period in accordance with the intended
method or methods of distribution by the sellers thereof set forth in such
Registration Statement or supplement to the Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders
promptly and, if requested by such Persons, confirm such advice in writing,
(A) when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to any Registration Statement
or any post-effective amendment thereto, when the same has become
effective, (B) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or
for additional information relating thereto, (C) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement under the Act or of the suspension by any state
securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of
any proceeding for any of the preceding purposes, (D) of the existence of
any fact or the happening of any event that makes any statement of a
material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes
in the Registration Statement in order to make the statements therein not
misleading, or that requires the making of any additions to or changes in
the Prospectus in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If at any time
the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption from qualification of the Transfer Restricted Securities under
state securities or Blue Sky laws, the Company shall use its best efforts
to obtain the withdrawal or lifting of such order at the earliest possible
time;
(iv) furnish to the Initial Purchaser(s), each selling Holder
named in any Registration Statement or Prospectus and each of the
underwriter(s) in connection with such sale, if any, before filing with the
Commission, copies of any Registration Statement or any Prospectus included
therein or any amendments or supplements to any such Registration Statement
or Prospectus (including all documents incorporated by reference after the
initial filing of such Registration Statement), which documents will be
subject to the review and comment of such Holders and underwriter(s) in
connection with such sale, if any, for a period of at least five Business
Days, and the Company will not file any such Registration Statement or
Prospectus or any amendment or supplement to any such Registration
Statement or Prospectus (including all such documents incorporated by
reference) to which the selling Holders of the Transfer Restricted
Securities covered by such Registration Statement or the underwriter(s) in
connection with such sale, if any, shall reasonably object within five
Business Days after the receipt thereof. A selling Holder or underwriter,
if any, shall be deemed to have reasonably objected to such filing if such
Registration Statement, amendment, Prospectus or supplement, as applicable,
as proposed to be filed, contains a material misstatement or omission or
fails to comply with
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the applicable requirements of the Act; provided that such misstatement or
omission was not made in reliance upon and in conformity with written
information furnished by such Holder or underwriter;
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to the selling Holders and to the
underwriter(s) in connection with such sale, if any, make the Company's
representatives available for discussion of such document and other
customary due diligence matters, and include such information in such
document prior to the filing thereof as such selling Holders or
underwriter(s), if any, reasonably may request;
(vi) make available at reasonable times for inspection by the
selling Holders, any managing underwriter participating in any disposition
pursuant to such Registration Statement and any attorney or accountant
retained by such selling Holders or any of such underwriter(s), all
financial and other records, pertinent corporate documents and properties
of the Company and cause the Company's officers, directors and employees to
supply all information reasonably requested by any such Holder,
underwriter, attorney or accountant in connection with such Registration
Statement or any post-effective amendment thereto subsequent to the filing
thereof and prior to its effectiveness;
(vii) if requested by any selling Holders or the underwriter(s) in
connection with such sale, if any, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective
amendment if necessary, such information as such selling Holders and
underwriter(s), if any, may reasonably request to have included therein,
including, without limitation, information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, information with
respect to the principal amount of Transfer Restricted Securities being
sold to such underwriter(s), the purchase price being paid therefor and any
other terms of the offering of the Transfer Restricted Securities to be
sold in such offering; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of the matters to be included in such Prospectus
supplement or post-effective amendment;
(viii) furnish to each selling Holder and each of the
underwriter(s) in connection with such sale, if any, without charge, at
least one copy of the Registration Statement, as first filed with the
Commission, and of each amendment thereto, including all documents
incorporated by reference therein and all exhibits (including exhibits
incorporated therein by reference);
(ix) deliver to each selling Holder and each of the
underwriter(s), if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement
thereto as such Persons reasonably may request; the Company hereby consents
to the use (in accordance with law) of the Prospectus and any
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amendment or supplement thereto by each of the selling Holders and each of
the underwriter(s), if any, in connection with the offering and the sale of
the Transfer Restricted Securities covered by the Prospectus or any
amendment or supplement thereto;
(x) enter into such agreements (including an underwriting
agreement) and make such representations and warranties and take all such
other actions in connection therewith in order to expedite or facilitate
the disposition of the Transfer Restricted Securities pursuant to any
Registration Statement contemplated by this Agreement as may be reasonably
requested by any Holder of Transfer Restricted Securities or underwriter in
connection with any sale or resale pursuant to any Registration Statement
contemplated by this Agreement, and in such connection, whether or not an
underwriting agreement is entered into and whether or not the registration
is an Underwritten Registration, the Company shall:
(A) furnish (or in the case of paragraphs (2) and (3), use its
best efforts to furnish) to each selling Holder and each underwriter,
if any, upon the effectiveness of the Shelf Registration Statement and
to each Restricted Broker-Dealer upon Consummation of the Exchange
Offer:
(1) a certificate, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, signed on behalf of
the Company by (x) the President or any Vice President and (y) a
principal financial or accounting officer of the Company,
confirming, as of the date thereof, the matters set forth in
paragraphs (a) through (d) of Section 7 of the Purchase Agreement
and such other similar matters as the Holders, underwriter(s)
and/or Restricted Broker Dealers may reasonably request;
(2) an opinion, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, of counsel for the
Company covering matters similar to those set forth in paragraph
(f) of Section 7 of the Purchase Agreement and such other matters
as are mutually agreed to by the Company, the Holders,
underwriters and/or Restricted Broker Dealers and in any event
including a statement to the effect that such counsel has
participated in conferences with officers and other
representatives of the Company, representatives of the
independent public accountants for the Company and have
considered the matters required to be stated therein and the
statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of
such statements; and that such counsel advises that, on the basis
of the foregoing (relying as to materiality to a large extent
upon facts provided to such counsel by officers and other
representatives of the Company and without independent check or
verification), no facts came to such counsel's
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<PAGE>
attention that caused such counsel to believe that the applicable
Registration Statement, at the time such Registration Statement
or any post-effective amendment thereto became effective and, in
the case of the Exchange Offer Registration Statement, as of the
date of Consummation of the Exchange Offer, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus contained in such
Registration Statement as of its date and, in the case of the
opinion dated the date of Consummation of the Exchange Offer, as
of the date of Consummation, contained an untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Without limiting the foregoing, such counsel may state further
that such counsel assumes no responsibility for, and has not
independently verified, the accuracy, completeness or fairness of
the financial statements, notes and schedules and other financial
data included in any Registration Statement contemplated by this
Agreement or the related Prospectus; and
(3) a customary comfort letter, dated as of the date of
effectiveness of the Shelf Registration Statement or the date of
Consummation of the Exchange Offer, as the case may be, from the
Company's independent accountants, in the customary form and
covering matters of the type customarily covered in comfort
letters to underwriters in connection with primary underwritten
offerings, and affirming the matters set forth in the comfort
letters delivered pursuant to Section 7(i) of the Purchase
Agreement, without exception;
(B) set forth in full or incorporate by reference in the
underwriting agreement, if any, in connection with any sale or resale
pursuant to any Shelf Registration Statement the indemnification
provisions and procedures of Section 8 hereof with respect to all
parties to be indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by the selling Holders, the underwriter(s), if
any, and Restricted Broker Dealers, if any, to evidence compliance
with clause (A) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the
Company pursuant to this clause (x).
The above shall be done at each closing under such underwriting or
similar agreement, as and to the extent required thereunder, and if at any
time the representations and warranties of the Company contemplated in
(A)(1) above cease to be true and correct, the Company shall so advise the
underwriter(s), if any, the selling Holders and each
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<PAGE>
Restricted Broker-Dealer promptly and if requested by such Persons, shall
confirm such advice in writing;
(xi) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the underwriter(s), if any,
and their respective counsel in connection with the registration and
qualification of the Transfer Restricted Securities under the securities or
Blue Sky laws of such jurisdictions as the selling Holders or
underwriter(s), if any, may request and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of
the Transfer Restricted Securities covered by the applicable Registration
Statement; provided, however, that the Company shall not be required to
register or qualify as a foreign corporation where it is not now so
qualified or to take any action that would subject it to the service of
process in suits or to taxation, other than as to matters and transactions
relating to the Registration Statement, in any jurisdiction where it is not
now so subject;
(xii) issue, upon the request of any Holder of Series A Notes
covered by any Shelf Registration Statement contemplated by this Agreement,
Series B Notes having an aggregate principal amount equal to the aggregate
principal amount of Series A Notes surrendered to the Company by such
Holder in exchange therefor or being sold by such Holder; such Series B
Notes to be registered in the name of such Holder or in the name of the
purchaser(s) of such Notes, as the case may be; in return, the Series A
Notes held by such Holder shall be surrendered to the Company for
cancellation;
(xiii) in connection with any sale of Transfer Restricted
Securities that will result in such securities no longer being Transfer
Restricted Securities, cooperate with the selling Holders and the
underwriter(s), if any, to facilitate the timely preparation and delivery
of certificates representing Transfer Restricted Securities to be sold and
not bearing any restrictive legends; and to register such Transfer
Restricted Securities in such denominations and such names as the Holders
or the underwriter(s), if any, may request at least two Business Days prior
to such sale of Transfer Restricted Securities;
(xiv) use its best efforts to cause the disposition of the
Transfer Restricted Securities covered by the Registration Statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers thereof or
the underwriter(s), if any, to consummate the disposition of such Transfer
Restricted Securities, subject to the proviso contained in clause (xi)
above;
(xv) subject to Section 6(c)(i), if any fact or event
contemplated by Section 6(c)(iii)(D) above shall exist or have occurred,
prepare a supplement or post-effective amendment to the Registration
Statement or related Prospectus or any document incorporated therein by
reference or file any other required document so that, as thereafter
delivered to the purchasers of Transfer Restricted Securities, the
Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary
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<PAGE>
to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(xvi) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of a Registration Statement
covering such Transfer Restricted Securities and provide the Trustee under
the Indenture with printed certificates for the Transfer Restricted
Securities which are in a form eligible for deposit with the Depository
Trust Company;
(xvii) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use its best efforts to cause such Registration Statement to
become effective and approved by such governmental agencies or authorities
as may be necessary to enable the Holders selling Transfer Restricted
Securities to consummate the disposition of such Transfer Restricted
Securities;
(xviii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to
its security holders with regard to any applicable Registration Statement,
as soon as practicable, a consolidated earnings statement meeting the
requirements of Rule 158 (which need not be audited) covering a twelve-
month period beginning after the effective date of the Registration
Statement (as such term is defined in paragraph (c) of Rule 158 under the
Act);
(xix) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by
this Agreement and, in connection therewith, cooperate with the Trustee and
the Holders of Notes to effect such changes to the Indenture as may be
required for such Indenture to be so qualified in accordance with the terms
of the TIA; and execute and use its best efforts to cause the Trustee to
execute, all documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to
enable such Indenture to be so qualified in a timely manner; and
(xx) provide promptly to each Holder upon request each document
filed with the Commission pursuant to the requirements of Section 13 or
Section 15(d) of the Exchange Act.
(d) Restrictions on Holders. Each Holder agrees by acquisition of a
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Transfer Restricted Security that, upon receipt of the notice referred to in
Section 6(c)(i) or any notice from the Company of the existence of any fact of
the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith
discontinue disposition of Transfer Restricted Securities pursuant to the
applicable Registration Statement until such Holder's receipt of the copies of
the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof,
or until it is advised in writing by the Company that the use of the Prospectus
may be resumed, and has
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received copies of any additional or supplemental filings that are incorporated
by reference in the Prospectus (the "Advice"). If so directed by the Company,
each Holder will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in such Holder's possession, of the
Prospectus covering such Transfer Restricted Securities that was current at the
time of receipt of either such notice. In the event the Company shall give any
such notice, the time period regarding the effectiveness of such Registration
Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended
by the number of days during the period from and including the date of the
giving of such notice pursuant to Section 6(c)(i) or Section 6(c)(iii)(D) hereof
to and including the date when each selling Holder covered by such Registration
Statement shall have received the copies of the supplemented or amended
Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the
Advice.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or compliance
with this Agreement will be borne by the Company, regardless of whether a
Registration Statement becomes effective, including without limitation: (i) all
registration and filing fees and expenses (including filings made by any
purchaser or Holder with the NASD (and, if applicable, the fees and expenses of
any "qualified independent underwriter") and its counsel that may be required by
the rules and regulations of the NASD); (ii) all fees and expenses of compliance
with federal securities and state Blue Sky or securities laws; (iii) all
expenses of printing (including printing certificates for the Series B Notes to
be issued in the Exchange Offer and printing of Prospectuses), messenger and
delivery services and telephone; (iv) all fees and disbursements of counsel for
the Company, and counsel for the Holders of Transfer Restricted Securities
(subject to Section 7(b) hereof); (v) all application and filing fees in
connection with listing the Notes on a national securities exchange or automated
quotation system pursuant to the requirements hereof; and (vi) all fees and
disbursements of independent certified public accountants of the Company
(including the expenses of any special audit and comfort letters required by or
incident to such performance).
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Company.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
purchaser and the Holders of Transfer Restricted Securities being tendered in
the Exchange Offer and/or resold pursuant to the "Plan of Distribution"
contained in the Exchange Offer Registration Statement or registered pursuant to
the Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements of not more than one counsel, who shall be chosen by the Holders
of a majority in principal amount of the Transfer Restricted Securities for
whose benefit such Registration Statement is being prepared.
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SECTION 8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless (i) each Holder and
(ii) each person, if any, who controls (within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act) any Holder (any of the persons referred
to in this clause (ii) being hereinafter referred to as a "controlling person")
and (iii) the respective officers, directors, partners, employees,
representatives and agents of any Holder or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an
"Indemnified Holder"), to the fullest extent lawful, from and against any and
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all losses, claims, damages, liabilities, judgments, actions and expenses
(including without limitation and as incurred, reimbursement of all reasonable
costs of investigating, preparing, pursuing or defending any claim or action, or
any investigation or proceeding by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel to any
Indemnified Holder) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement,
preliminary prospectus or Prospectus (or any amendment or supplement thereto),
or any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses are
caused by an untrue statement or omission or alleged untrue statement or
omission that is made in reliance upon and in conformity with information
relating to any of the Holders furnished in writing to the Company by any of the
Holders expressly for use therein.
(b) Promptly after receipt by an Indemnified Holder under the immediately
preceding paragraph of notice of the commencement of any action or proceeding
(including any governmental investigation or inquiry), such Indemnified Holder
shall, if a claim in respect thereof is to be made against the Company under
such paragraph, promptly notify the Company in writing of the commencement
thereof; but the omission so to notify the Company shall not relieve it from any
liability that it may have to such Indemnified Holder except to the extent that
the omission to give such notice actually and materially prejudice the rights of
the Company. In case any such action shall be brought against any Indemnified
Holder, and it shall notify the Company of the commencement thereof, the Company
shall be entitled to participate in, and, to the extent that it shall wish, to
assume the defense thereof, with counsel satisfactory to the Indemnified Holder,
and after notice from the Company to such Indemnified Holder of its election, so
to assume the defense thereof, the Company shall not be liable to such
Indemnified Holder under such paragraph for any legal or other expenses
subsequently incurred by such Indemnified Holder in connection with the defense
thereof (other than reasonable costs of investigation) unless (a) the Company
has agreed to pay such fees and expenses or (b) the named parties to any such
action or proceeding (including any impleaded parties) include both the
Indemnified Holder and the Company, and the Indemnified Holder shall have been
advised in writing by counsel that there may be one or more legal defenses
available to such Indemnified Holder which are different from or additional to
those available to the Company (in which case, if such Indemnified Holder
notifies the Company in writing that it elects to employ separate counsel at the
expense of the Company, the Company shall not have the right to assume the
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defense of such action or proceeding on behalf of such Indemnified Holder, it
being understood, however, that the Company shall not, in connection with any
one such action or proceeding or separate but substantially similar or related
actions or proceeding in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) at
any time for such Indemnified Holder and any other Indemnified Holder, which
firm (and local counsel if any) shall be designated in writing by such
Indemnified Holder). The Company shall not be liable for any settlement of any
such action or proceeding effected without its prior written consent, which
consent will not be unreasonably withheld, but if settled with its written
consent, or if there be a final judgment for the plaintiff in any such action or
proceeding, the Company agrees to indemnify and hold harmless such Indemnified
Holder from and against any loss or liability by reason of such settlement or
judgment. The Company shall not, without the prior written consent of each
Indemnified Holder, settle or compromise or consent to the entry of judgment in
or otherwise seek to terminate any pending or threatened action, claim,
litigation or proceeding in respect of which indemnification or contribution may
be sought hereunder (whether or not any Indemnified Holder is a party thereto),
unless such settlement, compromise, consent or termination includes an
unconditional release of each Indemnified Holder from all liability arising out
of such action, claim, litigation or proceeding.
(c) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Company and its directors,
officers, and any person controlling (within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act) the Company, and the respective officers,
directors, partners, employees, representatives and agents of each such person,
to the same extent as the foregoing indemnity from the Company to each of the
Indemnified Holders, but only with respect to claims and actions based on
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement. In case any action or
proceeding shall be brought against the Company or its directors or officers or
any such controlling person in respect of which indemnity may be sought against
a Holder of Transfer Restricted Securities, such Holder shall have the rights
and duties given the Company, and the Company, such directors or officers or
such controlling person shall have the rights and duties given to each Holder by
the preceding paragraph. In no event shall any Holder be liable or responsible
for any amount in excess of the amount by which the total received by such
Holder with respect to its sale of Transfer Restricted Securities pursuant to a
Registration Statement exceeds (i) the amount paid by such Holder for such
Transfer Restricted Securities plus (ii) the amount of any damages which such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.
(d) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by
reason of exceptions provided in those Sections) in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Holders, on the
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other hand, from their sale of Transfer Restricted Securities or if such
allocation is not permitted by applicable law, the relative fault of the
Company, on the one hand, and of the Indemnified Holder, on the other hand, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Company, on the one hand,
and of the Indemnified Holder, on the other hand, shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Indemnified Holder and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in the second paragraph of Section 8(a), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim.
The Company and each Holder of Transfer Restricted Securities agree that it
would not be just and equitable if contribution pursuant to this Section 8(c)
were determined by pro rata allocation (even if the Holders were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, no Holder or
its related Indemnified Holders shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the total received by
such Holder with respect to the sale of its Transfer Restricted Securities
pursuant to a Registration Statement exceeds the sum of (A) the amount paid by
such Holder for such Transfer Restricted Securities plus (B) the amount of any
damages which such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Holders' obligations to contribute
pursuant to this Section 8(c) are several in proportion to the respective
principal amount of Series A Notes held by each of the Holders hereunder and not
joint.
SECTION 9. RULE 144A
The Company hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding and during any period in which the
Company is not subject to Section 13 or 15(d) of the Securities Exchange Act, to
make available, upon request of any Holder of Transfer Restricted Securities, to
any Holder or beneficial owner of Transfer Restricted Securities in connection
with any sale thereof and any prospective purchaser of such Transfer Restricted
Securities designated by such Holder or beneficial owner, the information
required by
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Rule 144A(d)(4) under the Act in order to permit resales of such Transfer
Restricted Securities pursuant to Rule 144A.
SECTION 10. UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder unless
such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on
the basis provided in customary underwriting arrangements entered into in
connection therewith and (b) completes and executes all reasonable
questionnaires, powers of attorney, and other documents required under the terms
of such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
For any Underwritten Offering, the investment banker or investment bankers
and manager or managers for any Underwritten Offering that will administer such
offering will be selected by the Holders of a majority in aggregate principal
amount of the Transfer Restricted Securities included in such offering with the
consent of the Company (which consent will not be unreasonably withheld). Such
investment bankers and managers are referred to herein as the "underwriters."
SECTION 12. MISCELLANEOUS
(a) Remedies. Each Holder, in addition to being entitled to exercise all
--------
rights provided herein, in the Indenture, the Purchase Agreement or granted by
law, including recovery of liquidated or other damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by them of the provisions of this Agreement and hereby
agree to waive the defense in any action for specific performance that a remedy
at law would be adequate.
(b) No Inconsistent Agreements. The Company will not, on or after the date
--------------------------
of this Agreement, enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. The Company has not previously
entered into any agreement granting any registration rights with respect to its
securities to any Person. The rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's securities under any agreement in effect on the date
hereof.
(c) Adjustments Affecting the Notes. The Company will not take any action,
-------------------------------
or voluntarily permit any change to occur, with respect to the Notes that would
materially and adversely affect the ability of the Holders to Consummate any
Exchange Offer.
(d) Amendments and Waivers. The provisions of this Agreement may not be
----------------------
amended, modified or supplemented, and waivers or consents to or departures from
the
20
<PAGE>
provisions hereof may not be given unless (i) in the case of Section 5 hereof
and this Section 12(d)(i), the Company has obtained the written consent of
Holders of all outstanding Transfer Restricted Securities and (ii) in the case
of all other provisions hereof, the Company has obtained the written consent of
Holders of a majority of the outstanding principal amount of Transfer Restricted
Securities. Notwithstanding the foregoing, a waiver or consent to departure
from the provisions hereof that relates exclusively to the rights of Holders
whose securities are being tendered pursuant to the Exchange Offer and that does
not affect directly or indirectly the rights of other Holders whose securities
are not being tendered pursuant to such Exchange Offer may be given by the
Holders of a majority of the outstanding principal amount of Transfer Restricted
Securities subject to such Exchange Offer.
(e) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company:
ICON Fitness Corporation
1500 South 1000 West
Logan, Utah 84321-8206
Telecopier No.: (801) 750-5238
Attention: Brad H. Bearnson
General Counsel
With a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Telecopier No.: (617) 951-7050
Attention: Winthrop Minot, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and on the next business day, if timely delivered
to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
21
<PAGE>
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities directly from such Holder.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Entire Agreement. This Agreement is intended by the parties as a final
----------------
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted with respect to the Transfer
Restricted Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
22
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
ICON FITNESS CORPORATION
By: /s/ S. Fred Beck
-------------------------
Name: S. Fred Beck
Title: Treasurer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Kirk B. Wortman
---------------------------
Name: Kirk B. Wortman
Title: Vice President
23
<PAGE>
EXHIBIT 12
ICON FITNESS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, THREE MONTHS ENDED
---------------------------------------- ------------------------
SEPTEMBER 2, AUGUST 31,
1992 1993 1994 1995 1996 1995 1996
----- ------ ------ ------- ----- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income (loss)
from continuing opera-
tions................. $7.42 $16.25 $25.03 $(17.60) $9.52 $(4.08) $(8.97)
Fixed charges:
Interest expense..... 4.89 5.47 6.22 21.50 36.53 8.38 8.77
Amortization of de-
ferred financing fees
(1).................. .56 .86 .46 1.74 3.48 0.86 0.95
Rental expense (25%). 0.44 0.50 0.49 0.72 0.63 .18 .16
Preferred stock divi-
dends................ 0.53 0.53 0.53 0.24 -- -- --
Dividends on pre-
ferred stock of sub-
sidiary held by a mi-
nority interest...... -- -- -- 2.80 5.10 1.28 1.28
----- ------ ------ ------- ----- ------ ------
Total fixed charges.. 6.42 7.36 7.70 27.00 45.74 10.70 11.16
Earnings before income
taxes and fixed
charges............... 13.84 23.61 32.73 9.40 55.26 6.62 2.19
===== ====== ====== ======= ===== ====== ======
Ratio of earnings to
fixed charges......... 2.2x 3.2x 4.3x 0.3x(2) 1.2x 0.6x(2) 0.2x(2)
===== ====== ====== ======= ===== ====== ======
<CAPTION>
PRO FORMA
---------------------------------------
THREE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
MAY 31, AUGUST 31, AUGUST 31,
1996 1996 1996
---------- -------------- -------------
<S> <C> <C> <C>
Pre-tax income (loss)
from continuing opera-
tions................. $18.02 $(11.86) $15.82
Fixed charges:
Interest expense..... 53.42 13.14 53.69
Amortization of de-
ferred financing fees
(1).................. 3.90 1.05 3.99
Rental expense (25%). 3.52 .88 3.52
Preferred stock divi-
dends................ -- -- --
Dividends on pre-
ferred stock of sub-
sidiary held by a mi-
nority interest...... -- -- --
---------- -------------- -------------
Total fixed charges.. 60.84 15.07 61.20
Earnings before income
taxes and fixed
charges............... 78.86 3.21 77.02
========== ============== =============
Ratio of earnings to
fixed charges......... 1.3x 0.2x(2) 1.3x
========== ============== =============
</TABLE>
- ----
(1) For the years ended May 31, 1992, 1993 and 1994, deferred financing fee
amortization was included in management fees and corporate allocations
charged by Weider.
(2) Earnings were insufficient to cover fixed charges by $17.6 million, $4.1
million, $9.0 million and $11.9 million for the year ended May 31, 1995,
the three months ended September 2, 1995, the three months ended August
31, 1996 and the pro forma three months ended August 31, 1996,
respectively.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors of
IHF Capital, Inc.:
Logan, Utah
We consent to the use in Registration Statement of ICON Fitness Corporation on
Form S-4 of our report dated July 15, 1994 (December 23, 1994 as to Note 1)
relating to the consolidated financial statements of ICON Fitness Corporation
and its subsidiaries (the Company) appearing in the Prospectus, which is a
part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
Our audit of the consolidated financial statements of the Company referred to
in our aforementioned report also included the consolidated supplemental
schedule VIII of the Company for the year ended May 31, 1994. This
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Salt Lake City, Utah
December 18, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of ICON Fitness Corporation of our report
dated December 18, 1996, which appears in such Prospectus. We also consent to
the application of such report to the Financial Statement Schedule for the
three years ended May 31, 1996 listed under item 21(b) of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audits referred to in such report
also included this schedule. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Price Waterhouse LLP
Boston, Massachusetts
December 18, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 22, 1996 (except with respect to the consummation of the
asset purchase agreement discussed in Notes 1, 7 and 13, as to which the date
is August 16, 1996), relating to the consolidated financial statements of
HealthRider, Inc. and subsidiaries as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995 (and to all
references to our Firm), included in or made a part of this registration
statement on Form S-4 of ICON Fitness Corporation.
Arthur Andersen LLP
Salt Lake City, Utah
December 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated financial statements of ICON Fitness Corporation for the year ended
May 31, 1996 and is qualified in its entirety by reference to such financial
information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> MAY-31-1996
<CASH> 19,313,000
<SECURITIES> 0
<RECEIVABLES> 134,464,000
<ALLOWANCES> 7,595,000
<INVENTORY> 95,922,000
<CURRENT-ASSETS> 252,996,000
<PP&E> 52,053,000
<DEPRECIATION> 19,741,000
<TOTAL-ASSETS> 316,727,000
<CURRENT-LIABILITIES> 93,956,000
<BONDS> 282,758,000
0
0
<COMMON> 0
<OTHER-SE> (104,826,000)
<TOTAL-LIABILITY-AND-EQUITY> 316,727,000
<SALES> 747,577,000
<TOTAL-REVENUES> 747,577,000
<CGS> 541,443,000
<TOTAL-COSTS> 541,443,000
<OTHER-EXPENSES> 151,507,000
<LOSS-PROVISION> 3,662,000
<INTEREST-EXPENSE> 45,110,000
<INCOME-PRETAX> 9,517,000
<INCOME-TAX> 7,896,000
<INCOME-CONTINUING> 1,621,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
