<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1997
REGISTRATION NO. 333-18475
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
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. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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
- ---------------------------------------------------------------------------------
<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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 APRIL 9, 1997
LOGO 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") 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 COMPANY HAS NO CURRENTLY OUTSTANDING INDEBTEDNESS TO WHICH THE ORIGINAL
NOTES ARE SENIOR IN RIGHT OF PAYMENT.
AS MORE FULLY DESCRIBED UNDER "RISK FACTORS," THE ORIGINAL NOTES ARE, AND THE
EXCHANGE NOTES WILL BE, STRUCTURALLY SUBORDINATED TO THE CONSOLIDATED
INDEBTEDNESS OF THE COMPANY'S SUBSIDIARIES WHICH AT NOVEMBER 30, 1996 WAS
APPROXIMATELY $454.5 MILLION. THE TOTAL CONSOLIDATED INDEBTEDNESS OF THE
COMPANY AT NOVEMBER 30, 1996 WAS $537.3 MILLION WHICH WAS 1.38 TIMES THE TOTAL
CAPITALIZATION OF THE COMPANY.
THE EXCHANGE NOTES WILL BE SECURED BY ALL OF THE ISSUED AND OUTSTANDING
CAPITAL STOCK OF IHF HOLDINGS, INC. AND INTERCOMPANY NOTES, IF ANY, ISSUED BY
IHF HOLDINGS, INC. TO THE COMPANY. IN THE EVENT OF A DEFAULT ON THE EXCHANGE
NOTES, LIQUIDATION, INSOLVENCY OR SIMILAR EVENT, THE PROCEEDS FROM THE SALE OF
THE SECURITY OF THE EXCHANGE NOTES MAY NOT BE SUFFICIENT TO SATISFY IN FULL THE
COMPANY'S OBLIGATIONS UNDER THE EXCHANGE NOTES.
The Original Notes were issued at a discount of 49.069% from their principal
amount at maturity. The offering price of the Original Notes was $82,508,220
and their principal amount upon maturity is $162,000,000. 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. SEE "CERTAIN FEDERAL TAX
CONSIDERATIONS" FOR A FURTHER DISCUSSION OF ORIGINAL ISSUE DISCOUNT.
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" BEGINNING ON PAGE 15 HEREIN 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 ,1997.
<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 $16.0
million in 1995, 1996 and the first six months of 1997, respectively. The
Company had a ratio of earnings to fixed charges of 1.2x for the year ended May
31, 1996 and a deficiency of earnings to fixed charges of $21.6 million for the
first six months of 1997. The percentage of revenue of the Company represented
by interest expense (including amortization of deferred financing and dividends
on the
3
<PAGE>
cumulative redeemable preferred stock of a subsidiary held for a minority
interest) was 6.0% in 1996 and 6.6% in the first six months of 1997. The
Company's interest coverage ratio under the Credit Agreement (as defined) was
2.24 and 1.66 for the twelve month periods ended May 31, 1996 and November 30,
1996, 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.
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
4
<PAGE>
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 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
two quarters of 1997 were $6.0 million, $9.3 million, $7.8 million, $10.2
million, $7.1 million and $13.8 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"). The Company's ability to incur
indebtedness to finance future growth opportunities may be limited by the level
of indebtedness of the Company and by the various financial and operating
covenants of the Credit Agreement (as defined) and the other debt instruments.
At November 30, 1996 there was an additional $29.3 million of borrowings
available to the Company (of a total commitment of $310 million) under the
Credit Agreement with General Electric Capital Corporation ("GE Capital"),
various other lenders and GE Capital, as Agent, as amended (the "Credit
Agreement") which, if borrowed, would be senior in right of payment to the
Exchange Notes. See "Certain Relationships and Related Transactions"
"Business--Legal Proceedings--Settlement of WHF Litigation" and "Risk Factors--
Expansion Strategy,--Leverage, and --Liquidity," and "Description of Certain
Indebtedness."
5
<PAGE>
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 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 $10.8 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
6
<PAGE>
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. See "Description of Certain Indebtedness."
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. On November 20, 1996, the Company repurchased shares of
IHF Capital and Preferred Stock of IHF Holdings held by certain stockholders
for an aggregate amount of $78.1 million. As a result of the Recapitalization
and the repurchase of common stock of IHF Capital and redemption of the
Preferred Stock of IHF Holdings in November 1996, the Company had a deficiency
in stockholder's equity of $149.3 million as of November 30, 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 OFFER
REGISTRATION RIGHTS To fund the repurchase of the common stock of
AGREEMENT..................... 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 aggregate principal amount
of the Original Notes are outstanding.
7
<PAGE>
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 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
8
<PAGE>
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.
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 The Exchange Offer is subject to certain
OFFER......................... customary conditions, which may be waived by
the Company. See "The Exchange Offer--
Conditions of the Exchange Offer."
PROCEDURES FOR TENDERING Each holder of Original Notes wishing to accept
NOTES......................... 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 Holders of Original Notes who wish to tender
PROCEDURES.................... their Original Notes and whose Original Notes
are not immediately
9
<PAGE>
available or who cannot deliver their Original
Notes, the Letter of Transmittal, as the case
may be, or any other 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.
There can be no assurance that adequate cash
will be available to pay accrued interest when
cash interest payments become payable. If
interest were payable on the Senior Discount
Notes semi-annually in cash from the date the
Original Notes were issued, the Company would
not, on a pro forma basis, generate sufficient
cash flow from operations to service the
interest payments on the Senior Discount Notes
and satisfy the Company's other cash
obligations. For the first six months of 1997,
the Company had a deficiency of earnings to
fixed charges on both a historical and pro
forma basis of $21.6 and $17.5 million,
respectively.
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. ICON does
not currently have any outstanding indebtedness
other than the Original Notes. However, the
operations of ICON are conducted through its
Subsidiaries, including IHF Holdings and Health
& Fitness and, as a result, the
11
<PAGE>
Exchange Notes will be effectively subordinated
to all indebtedness and other liabilities of
such Subsidiaries. As of November 30, 1996, the
aggregate amount of indebtedness and other
obligations of the Company's Subsidiaries to
which the Holders of the Senior Discount Notes
were structurally subordinated was
approximately $454.5 million. As of November
30, 1996 there was an additional $29.3 million
of borrowings available to the Company under
the Credit Agreement which, if borrowed, would
be senior in right of payment to the Exchange
Notes.
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." IHF Holdings and its Subsidiary,
Health & Fitness, are highly leveraged,
however, and the indebtedness of these
Subsidiaries is effectively senior in right of
payment to this security interest. In the event
of a default on the Exchange Notes,
liquidation, insolvency or similar event, the
proceeds from the sale of the security on the
Exchange Notes may not be sufficient to satisfy
the Company's obligations under the Exchange
Notes in full.
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)
12
<PAGE>
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".
The high level of indebtedness of the Company
may impair the ability of ICON to pay the
purchase price of the Exchange Notes upon a
Change of Control. In addition to the
repurchase obligation under the Senior Discount
Note Indenture, the IHF Holdings Indenture (as
defined) and the Health & Fitness Indenture (as
defined) require that the Company offer to
repurchase the notes issued thereunder upon a
change of control and the Credit Agreement
provides that a "Changed Control" under either
the IHF Holdings Indenture or the Health &
Fitness Indenture shall constitute an event of
default under the Credit Agreement.
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, SIX MONTHS ENDED
----------------------------------------- ------------------------
DECEMBER 2, NOVEMBER 30,
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 $353.4 $375.3
------ ------ ------ ------ ------ ------ ------
Gross profit........... 59.2 86.3 114.8 152.4 206.1 93.7 106.5
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and
administrative and
other operating
expenses............. 46.9 64.6 83.5 105.0 148.7 67.3 103.3
Compensation expense
attributable to
options.............. -- -- -- 39.0 (2) 2.8 -- --
------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 46.9 64.6 83.5 144.0 151.5 67.3 103.3
------ ------ ------ ------ ------ ------ ------
Income from operations. 12.3 21.7 31.3 8.4 54.6 26.4 3.2
Interest expense....... 4.9 5.5 6.2 21.5 36.5 18.0 20.6
Amortization of
deferred financing
fees.................. -- -- -- 1.7 3.5 1.7 2.1
Dividends on preferred
stock of subsidiary... -- -- -- 2.8 5.1 2.6 2.1
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 7.4 16.2 25.1 (17.6) 9.5 4.1 (21.6)
Provision for (benefit
from) income taxes.... 2.8 6.2 9.8 (4.7) 7.9 3.3 (5.6)
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 4.6 $ 10.0 $ 15.3 $(12.9) $ 1.6 $ .8 $(16.0)
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
Depreciation and
amortization.......... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7 $ 9.7 $ 12.2
Capital expenditures .. 4.0 4.0 6.9 8.0 15.4 7.9 13.6
Ratio of earnings to
fixed charges(3)...... 2.2x 3.2x 4.3x -- (4) 1.2x 1.2x -- (4)
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
---------------- NOVEMBER 30,
1995 1996 1996
------- ------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................... $ 4.1 $ 19.3 $ 11.6
Working capital................................ 137.7 159.0 256.4
Total assets................................... 290.2 316.7 551.6
Total indebtedness............................. 268.1 282.8 537.3
Preferred stock of subsidiary (including
accrued dividends)............................ 42.8 47.9 --
Stockholders' deficit.......................... (109.6) (104.8) (149.3)
</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 and
$21.6 million for the year ended May 31, 1995 and the six months ended
November 30, 1996, respectively.
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 November 30, 1996, the Company had total
consolidated indebtedness of approximately $537.3 million and consolidated
stockholders' deficit of approximately $149.3 million. The total consolidated
indebtedness of the Company at November 30, 1996 was 1.38 times the total
capitalization of the Company. The Company's strategy to pursue growth
opportunities through acquisitions may involve additional borrowings. See "--
Expansion Strategy; Acquisitions."
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. ICON's ability to make cash payments with respect to the Exchange
Notes 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 payment of principal
and cash interest on the Exchange Notes, when due, is not guaranteed by any
Person.
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. At May 31, 1996, the Company was in compliance with
all of its financial covenants in the Credit Agreement except for the capital
expenditure limitation for the year ended May 31, 1996 with respect to which
compliance was waived. At August 31, 1996, the Company was in compliance with
all of its financial covenants in the Credit Agreement. At November 30, 1996,
the Company was in compliance with all of its financial covenants in the
Credit Agreement except for the maximum funded debt to adjusted net worth
ratio with respect to which compliance was waived. At February 28, 1997, the
Company was in compliance with all of its financial covenants in the Credit
Agreement except for minimum interest coverage ratio, the minimum debt service
coverage ratio and maximum funded debt to adjusted net worth ratio, with
respect to which the compliance was waived. The Credit Agreement was amended
as of March 17, 1997 (i) to increase the maximum funded debt to adjusted net
worth ratio from 4.0 to 1.0 to 4.25 to 1.0 for any time prior to November 30,
1997; (ii) to change the minimum interest coverage ratio from 1.50 to 1.20 for
each of the twelve month periods ending May 31, 1997 and August 31, 1997;
(iii) to reduce the minimum debt service ratio from 1.30 to 1.15 for each of
the twelve month periods ended May 31, 1997 and August 31, 1997. Although
there can be no assurance, management believes that the Company will be in
compliance with its financial covenants through the balance of 1997. 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.
15
<PAGE>
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. An event of default under the Credit Agreement, the Health &
Fitness Indenture or the IHF Holdings Indenture which results in the
acceleration of the maturity of the indebtedness to which the Credit Agreement
or such indenture relates is an Event of Default under the Senior Discount
Note Indenture which would entitle the holders of the Senior Discount Notes to
various remedies. A foreclosure of assets pledged under the Credit Agreement
or the IHF Holdings Indenture would not constitute a "change of control" under
the Senior Discount Note Indenture. See "Description of Senior Discount
Notes--Events of Default and Remedies."
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, 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 November 30, 1996, the aggregate
amount of indebtedness and other obligations of ICON's Subsidiaries to which
holders of the Exchange Notes were structurally subordinated was approximately
$454.5 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 contain covenants which, among other things, restrict the
ability of IHF Holdings, Health & Fitness and its Subsidiaries to pay
dividends or make other distributions or loans to the Company unless certain
specified requirements with respect to, among other things, minimum interest
coverage ratios and maximum allowable restricted payments under such
agreements, are satisfied. The Credit Agreement requires the Company to have a
minimum interest coverage ratio for the twelve month periods which end at the
conclusion of each fiscal quarter of between 1.20 and 1.70, depending on the
fiscal quarter. The Company was in compliance with the minimum interest
coverage ratio at the conclusion of each fiscal quarter from February 28, 1995
to and including November 30, 1996. Compliance with respect to the interest
coverage ratio at February 28, 1997 was waived. The Credit Agreement also
provides that, subject to certain exceptions, Health & Fitness may not declare
or make any dividends or other distributions of cash or property in respect
of, in exchange for or to any holder of the capital stock of Health & Fitness.
The IHF Indenture and the Health & Fitness Indenture provide that, subject
to certain exceptions, IHF Holdings and Health & Fitness, respectively, may
not make certain restricted payments unless, among other things, IHF Holdings
or Health & Fitness, as the case may be, is permitted to incur $1.00 of
additional indebtedness under its respective indenture and the aggregate
amount of such restricted payments does not exceed the sum of (A) 50% of its
aggregate cumulative consolidated adjusted net
16
<PAGE>
income (as defined in the respective indenture) accrued on a cumulative basis
during the period beginning on the first day of the month commencing
immediately after November 14, 1994 and ending on the last day of the
Company's last fiscal quarter ending prior to the date of such proposed
restricted payment (or, if such aggregate cumulative consolidated adjusted net
income shall be a loss, minus 100% of such loss); (B) the aggregate net cash
proceeds received after November 14, 1994 by either IHF Holdings or Health &
Fitness, as the case may be, from the issuance or sale (other than to any of
its subsidiaries) of shares of its capital stock (other than redeemable
capital stock) or any options, warrants or rights to purchase shares of such
capital stock; (C) the aggregate net cash proceeds received after November 14,
1994 by either IHF Holdings or Health & Fitness, as the case may be, from the
issuance or sale of debt securities (other than to any subsidiary) that have
been converted into or exchanged for its capital stock (other than redeemable
capital stock) to the extent such debt securities were originally sold for
cash, together with the aggregate net cash proceeds received at the time of
such conversion or exchange; (D) the aggregate net cash proceeds received
after November 14, 1994 by either IHF Holdings or Health & Fitness, as the
case may be, as capital contributions (other than from any of its
subsidiaries); and (E) $2 million. As of January 31, 1997, neither IHF
Holdings nor Health & Fitness was permitted to make restricted payments
because it was unable to incur $1.00 of additional indebtedness under the IHF
Indenture and the Health & Fitness Indenture, respectively.
In the event that ICON does not have available liquidity to make interest
payments on the Senior Discount Notes after such interest first becomes
payable on May 15, 2002, these and other restrictions contained in the debt
agreements could limit the ability of IHF Holdings, Health & Fitness and its
Subsidiaries to pay dividends or make other distributions or loans to ICON in
order to service the Senior Discount Notes.
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".
ICON believes that it is not insolvent, and while ICON can make no
assurances, it has no reason to believe that a bankruptcy case will be
commenced against ICON in the foreseeable future.
Cash interest on the Exchange Notes will not accrue prior to November 15,
2001 and, therefore, the Exchange Notes are not a suitable investment for a
person seeking current income.
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
17
<PAGE>
defrauding its current or future creditors or (b) that, after giving effect to
the Offering, ICON 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.
Although, as of November 30, 1996, the Company had a stockholder deficit of
approximately $149.3 million, the Company believes that, based in part on a
solvency opinion of American Appraisal Associates rendered on November 20,
1996, it was not insolvent on November 20, 1996 and was not rendered insolvent
as a result of the Offering.
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.
SUBORDINATION TO CERTAIN CREDITORS
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
18
<PAGE>
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
The Company's two largest customers together accounted for approximately
47%, 43%, 42% and 33% of the Company's revenues in 1994, 1995, 1996 and the
first six months of 1997, respectively. The Company's largest customer, Sears
Roebuck ("Sears"), accounted for approximately 34%, 31%, 34% and 23% of the
Company's revenues in 1994, 1995, 1996 and the first six months of 1997,
respectively. The Company's second largest customer, Sam's Warehouse Stores
("Sam's"), accounted for approximately 13%, 12%, 8% and 10% of the Company's
revenues in 1994, 1995, 1996 and the first six months of 1997, respectively.
Accounts receivable for the Company's two largest customers accounted for
approximately 27%, 37% and 30% of total gross accounts receivable at May 31,
1995, May 31, 1996 and November 30, 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.
EXPOSURE TO THE RETAIL INDUSTRY
In 1995, 1996 and the first six months 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
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 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.
19
<PAGE>
DEPENDENCE ON PRODUCT INNOVATION
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.
DEPENDENCE ON PARTICULAR PRODUCTS
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 six months of 1997 of $252.6 million, $235.4
million, $289.9 million and $156.8 million, respectively, representing
approximately 63%, 44%, 39% and 42%, 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 six months of 1997 of $138.1 million, $259.1 million and $47.3 million,
respectively, representing 26%, 35% and 13% 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 $47.3 million during the first six months of
1997, compared to $125.9 million during the first six months 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.
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
20
<PAGE>
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.
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
21
<PAGE>
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. The Company's largest suppliers
of components and finished products for fiscal 1996 were: All Fitness, Goodway
Holdings, Chang Chen, Al Multitech, GS Electric, Weslo International, United
Technologies and MOL Belting. However, the loss of a smaller supplier could
also significantly adversely affect the Company's business. 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
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 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
22
<PAGE>
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 who collectively beneficially own 94.17% of the
outstanding Class A Common Stock of IHF Capital and 92.97% of the outstanding
Class L Common Stock of IHF Capital. 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. None of the
officers, directors or shareholders of the Company owe any fiduciary duty to
the Holders of the Exchange Notes.
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 November 30, 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 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") conducted 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 responded to these requests.
The FTC and the Company resolved this matter through a consent decree on
January 30, 1997. The consent decree provides among other things that (i) the
Company shall not make any
23
<PAGE>
representation in connection with the manufacturing, labeling, advertising,
promotion and distribution of an exercise equimpment product (a) regarding the
benefits, performance or efficiency of such product with respect to calorie
burning, fat burning or weight loss unless the Company possesses competent and
reliable evidence that substantiates the representation or (b) expressing or
implying that the experience represented by the testimonial or endorsement of
any user of such product represents the typical experience of members of the
public unless the Company relies on scientific evidence or the Company
provides proper disclosure regarding the results consumers should expect; and
(ii) the Company maintain and make available to the FTC materials relied on in
dessiminating such representations as well as materials which call into
question such representations. The Company does not believe that the consent
decree will have a material adverse affect on its ability to advertise its
products. The consent decree is for settlement purposes only and does not
constitute an admission by the Company that it has violated any laws. There,
however, can be no assurance that the FTC will not withdraw the consent decree
and 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.
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.
Because management believes that the FTC is no longer pursuing its
investigation of 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 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
24
<PAGE>
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.
CAPITALIZATION
The following table sets forth as of November 30, 1996 the consolidated
capitalization of the Company:
<TABLE>
<CAPTION>
NOVEMBER 30,
1996
-------------
(IN MILLIONS)
<S> <C>
Short-term debt, consisting of current portions of long-term debt
and capital lease obligations................................... $ 4.9
-------
Long-term liabilities (excluding current portion):
Capital lease obligations...................................... 17.7
Revolving credit borrowings.................................... 228.3
Term loans..................................................... 29.2
Senior Subordinated Notes...................................... 99.4
Discount Notes................................................. 74.4
Senior Discount Notes.......................................... 82.8
Other long-term debt........................................... .6
-------
Total long-term liabilities.................................... 532.4
-------
Stockholders' equity:
Common stock and additional paid-in-capital.................... 49.7
Receivable from officers for purchase of equity................ (.7)
Cumulative translation adjustment.............................. (.1)
Accumulated deficit............................................ (198.2)
-------
Total stockholders' equity (deficit)........................... (149.3)
-------
Total Capitalization......................................... $ 388.0
=======
</TABLE>
25
<PAGE>
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 provided 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. On
November 20, 1996, in connection with the WHF Settlement, as defined, 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 and purchased the IHF Holdings Preferred Stock (as defined) held by
WHF for $32.1 million and the options to purchase shares of IHF Holdings
Preferred Stock held by Messrs. Watterson and Stevenson for $3.7 million. See
"Business--Legal Proceedings--Settlement of WHF Litigation."
26
<PAGE>
The following is an organizational chart of the Company prior to the
Recapitalization:
=====================
WEIDER HEALTH
AND FITNESS
=====================
===================== =====================
WESLO, INC. PROFORM FITNESS
PRODUCTS, INC.
===================== =====================
===================== ===================== =====================
JUMPKING, INC. SILICONE PRODUCTS, IMAGE, INC.
INC.
===================== ===================== =====================
=====================
UTS
=====================
The following is an organizational chart of the Company immediately following
the Recapitalization:
=====================
IHF CAPITAL, INC.
=====================
=====================
IHF HOLDINGS, INC.
=====================
===================== ===================== =====================
IHF (HOLDINGS) LTD. ICON HEALTH ICON CS, INC.
===================== & FITNESS, INC. =====================
=====================
===================== ===================== =====================
JUMPKING, INC. SILICONE PRODUCTS, UTS
===================== INC. =====================
=====================
ICON, which was incorporated on November 12, 1996, is now a subsidiary of IHF
Capital, Inc. and the parent corporation of IHF Holdings, Inc.
27
<PAGE>
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
and the six months ended November 30, 1996. The historical results of
operations for the periods presented carry over the 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. 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 $10.1 million of accrued dividends thereon) at November 30, 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 $42.3 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
Company's historical consolidated balance sheet at November 30, 1996 includes
the impact of all of the events described above, and therefore, no unaudited
pro forma balance sheet data have been presented. The statement of operations
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 of CanCo have been reflected in the unaudited pro forma financial data,
although 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 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.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHRIDER
STATEMENT OF CANCO
OPERATIONS STATEMENT OF ADJUSTMENTS
HISTORICAL TWELVE MONTHS OPERATIONS ----------------------- PRO FORMA
YEAR ENDED ENDED YEAR ENDED WELDER YEAR ENDED
MAY 31, JUNE 30, MAY 31, 1996 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
expense............. 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 $10.8 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 (including
amortization of financing costs and 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
STATEMENT OF CANCO
OPERATIONS STATEMENT OF
HISTORICAL PERIOD FROM OPERATIONS PRO FORMA
SIX MONTHS JUNE 1, THREE MONTHS ADJUSTMENTS SIX MONTHS
ENDED 1996 TO ENDED -------------------------- ENDED
NOVEMBER 30, AUGUST 15, AUGUST 31, WEIDER SETTLEMENT NOVEMBER 30,
1996 1996 (1) 1996 (2) COMBINED & ACQUISITIONS OFFERING 1996
------------ ------------ ------------ -------- ----------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $375,305 $ 16,154 $8,999 $400,458 (8,999)(a) $ -- $391,459
Cost of sales........... 268,775 7,005(3) 7,415 283,195 (8,399)(a) -- 274,796
-------- -------- ------ -------- ------- ------- --------
Gross profit........... 106,530 9,149 1,584 117,263 (600) -- 116,663
Operating expenses
Selling................ 56,370 14,763 -- 71,133 (870)(b) -- 70,263
Research and
development........... 3,474 -- -- 3,474 -- -- 3,474
General and
administrative........ 27,002 4,389 667 32,058 (570)(c) -- 31,235
(253)(d)
Acquisition expenses... -- 6,173 -- 6,173 (6,173)(k) -- --
Weider settlement...... 16,465 -- -- 16,465 (16,465)(f) -- --
-------- -------- ------ -------- ------- ------- --------
Total operating
expense............. 103,311 25,325 667 129,303 (24,331) -- 104,972
-------- -------- ------ -------- ------- ------- --------
Income from operations.. 3,219 (16,176) 917 (12,040) 23,731 -- 11,691
Interest expense........ 20,629 714 7 21,350 1,126 (f) 5,513 (g) 27,581
(408)(d)
Other income............ -- (554) (51) (605) -- -- (605)
Amortization of deferred
financing fees......... 2,059 -- -- 2,059 -- 198 (h) 2,257
Dividends on cumulative
redeemable preferred
stock of a subsidiary
held by a minority
interest............... 2,125 -- -- 2,125 -- (2,125)(i) --
-------- -------- ------ -------- ------- ------- --------
Income (loss) before
taxes.................. (21,594) (16,336) 961 (36,969) 23,013 (3,586) (17,542)
Provision for income
taxes.................. (5,606) (5,554) 299 (10,861) 8,745 (j) (2,170)(j) (4,286)
-------- -------- ------ -------- ------- ------- --------
Net income (loss)....... $(15,988) $(10,782) $ 662 $(26,108) $14,268 $(1,416) $(13,256)
======== ======== ====== ======== ======= ======= ========
Other Data:
Cash interest expense.. $ 16,979
Depreciation and
amortization (4)...... 18,885
Capital expenditures... 14,257
Ratio of earnings to
fixed charges (5)..... -- (6)
</TABLE>
- -------
(1) HealthRider was acquired by the Company on August 16, 1996. For purposes
of the pro forma presentation, the results of operations of HealthRider
for the period from June 1, 1996 to August 15, 1996 have been included.
Subsequent to August 15, 1996, the results of operations of the Company
include those of HealthRider.
(2) CanCo's fiscal year ends on May 31. CanCo was acquired by the Company on
September 6, 1996 in connection with the Settlement of the WHF Litigation.
The results of operations of CanCo from September 1, 1996 to September 5,
1996 have been excluded from the pro forma period presented and are not
considered significant.
(3) In conjunction with the HealthRider acquisition, the Company and its
subsidiaries recognized a significant, non-recurring non-cash increase in
cost of goods sold in the first and second quarters of 1997 of
approximately $8.2 million and will recognize an additional increase in
costs of goods sold of approximately $2.6 million in the third quarter of
1997 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.
(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 (including
amortization of financing costs and 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 $17.5 million.
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
30
<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 $.3 million
for the twelve months ended June 30, 1996 and the period from June 1, 1996
to August 15, 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 $.6 million for the twelve months ended June
30, 1996 and the period from June 1, 1996 to August 15, 1996,
respectively).
(c) Represents adjustments to general and administrative expenses as
summarized below:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
MAY 31, NOVEMBER 30,
1996 1996
----------- ------------
<S> <C> <C>
Elimination of HealthRider executive and related
severance costs for terminated executives performing
duplicate functions which are performed by ICON
executives.......................................... $(1,725) $(862)
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) 20
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) --
Amortization of goodwill attributable to the excess
purchase price of Weider Sports Equipment and CanCo
over the net assets acquired, straight-line over a
period of 10 years.................................. 544 272
------- -----
$(4,208) $(570)
======= =====
</TABLE>
- --------
(1) This adjustment represents the elimination of a one-time charge which
was recorded in the historical accounts of CanCo which results directly
from the acquisition of CanCo. The historical statement of operations
of CanCo for the year ended May 31, 1996 was adjusted to reflect the
negotiated discount for the fixed assets and inventory of CanCo being
purchased by the Company's subsidiaries and the elimination of the
historical amount of goodwill recorded in the balance sheet of CanCo at
May 31, 1996. Had the CanCo acquisition not been consummated, these
adjustments would not have been recorded in the statement of operations
of CanCo.
(d) Represents elimination of the depreciation ($.5 million and $.3 million
for the twelve months ended June 30, 1996 and the period from June 1, 1996
to August 15, 1996, respectively) on the building acquired by a subsidiary
of the Company in connection with the HealthRider Acquisition and the
related interest ($.7 million and $.4 million for the twelve months ended
June 30, 1996 and the period from June 1, 1996 to August 15, 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.
31
<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). In addition, the pro forma statement of operations for
the six months ended November 30, 1996 reflects the elimination of the
$16.5 million settlement expenses incurred in connection with the WHF
Settlement, as these expenses were incurred pursuant to agreements that
were contingent on and executed in connection with the acquisition of WSE
and CanCo by the Company.
(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.
(k) Represents elimination of the costs to terminate HealthRider employees,
including key executives, and the costs to terminate or amend royalty
agreements and other related costs which were incurred by HealthRider in
connection with its acquisition by the Company.
32
<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 December 2, 1995 and the period beginning
June 1, 1996 and ending November 30, 1996 and as of November 30, 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 November 30, 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) SIX MONTHS ENDED
---------------------------------------- ------------------------
DECEMBER 2, NOVEMBER 30,
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ----------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $254.1 $314.9 $403.0 $530.8 $747.6 $353.4 $375.3
Cost of sales.......... 194.9 228.6 288.2 378.4 541.5 259.7 268.8
------ ------ ------ ------ ------ ------ ------
Gross profit........... 59.2 86.3 114.8 152.4 206.1 93.7 106.5
Operating Expenses:
Selling................ 25.1 38.5 52.1 68.7 93.9 40.4 56.4
Research and
development........... 1.2 1.6 2.8 5.2 6.8 3.0 3.4
General and
administrative........ 20.6 24.5 28.6 31.1 48.0 23.9 27.0
Weider settlement...... -- -- -- -- -- -- 16.5
Compensation expense
attributable to
options............... -- -- -- 39.0(2) 2.8 (3) -- --
------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 46.9 64.6 83.5 144.0 151.5 67.3 103.3
------ ------ ------ ------ ------ ------ ------
Income from operations. 12.3 21.7 31.3 8.4 54.6 26.4 3.2
Interest expense....... 4.9 5.5 6.2 21.5 36.5 18.0 20.6
Amortization of
deferred financing
fees.................. -- -- -- 1.7 3.5 1.7 2.1
Dividends on subsidiary
preferred stock....... -- -- -- 2.8 5.1 2.6 2.1
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 7.4 16.2 25.1 (17.6) 9.5 4.1 (21.6)
Provision for (benefit
from) income taxes.... 2.8 6.2 9.8 (4.7) 7.9 3.3 (5.6)
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 4.6 $ 10.0 $ 15.3 $(12.9) $ 1.6 $ .8 $(16.0)
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
Depreciation and
amortization.......... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7 $ 9.7 $ 12.2
Capital expenditures... 4.0 4.0 6.9 8.0 15.4 7.9 13.6
Ratio of earnings to
fixed charges (4)..... 2.2x 3.2x 4.3x -(5) 1.2x 1.2x -- (5)
</TABLE>
<TABLE>
<CAPTION>
MAY 31, (1)
-------------------------------------- NOVEMBER 30,
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 $ 11.6
Working capital.......... 64.2 24.8 97.8 137.7 159.0 256.4
Total assets............. 110.3 151.7 184.7 290.2 316.7 551.6
Total indebtedness....... 52.0 72.4 65.4 268.1 282.8 537.3
Preferred stock of
subsidiary (including
accrued dividends)...... -- -- -- 42.8 47.9 --
Stockholders' equity
(deficit)............... 30.2 39.8 54.5 (109.6) (104.8) (149.3)
</TABLE>
33
<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 and
$21.6 million for the year ended May 31, 1995, the six months ended
November 30, 1996, respectively.
34
<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 .8 31.1
Stockholders' Equity..................................... 8.7 22.7 19.2
</TABLE>
35
<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 $125.9 million during
the first six months of 1996 to $47.3 million during the first six months of
1997, 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.
36
<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 $10.8 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 $16.5 million in
settlement expenses related to the WHF Settlement; and (iv) the related tax
benefit of $12.3 million.
37
<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 six
months ended December 2, 1995 and November 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, SIX MONTHS ENDED,
----------------------- ------------------------
DECEMBER 2, NOVEMBER 30,
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 73.5 71.6
------ ------ ------ ----- -----
Gross profit................. 28.5 28.7 27.6 26.5 28.4
------ ------ ------ ----- -----
Operating expenses:
Selling...................... 12.9 12.9 12.6 11.4 15.0
Research and development..... .7 1.0 .9 .8 .9
General and administrative... 7.2 5.9 6.4 6.8 7.2
Weider settlement............ -- -- -- -- 4.4
Stock option compensation
expense..................... -- 7.3 .4 -- --
------ ------ ------ ----- -----
Total operating expenses..... 20.8 27.1 20.3 19.0 27.5
------ ------ ------ ----- -----
Income from operations....... 7.7 1.6 7.3 7.5 .9
Interest expense and
amortization of debt
financing fees.............. 1.5 4.4 5.3 5.6 6.1
Dividends on subsidiary
preferred stock............. -- .5 .7 .7 .6
------ ------ ------ ----- -----
Income before income taxes... 6.2 (3.3) 1.3 1.2 (5.8)
Provision (benefit) for
income taxes................ 2.4 (.9) 1.1 1.0 (1.5)
------ ------ ------ ----- -----
Net income (loss)............ 3.8% (2.4%) .2% .2% (4.3%)
====== ====== ====== ===== =====
</TABLE>
The following table sets forth the historical sales data of the Company by
product category for each quarter of fiscal 1995 and 1996 and the first two
quarters of fiscal 1997:
<TABLE>
<CAPTION>
TOTAL UPRIGHT
SALES TREADMILLS TRAMPOLINES ROWERS ABDOMINAL HEALTHRIDER OTHER
------ ---------- ----------- ------- --------- ----------- -----
(IN MILLIONS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL 1995
Q1...................... $ 70.6 $ 39.3 $ 14.4 $-- $-- $-- $16.9
Percent of Q1 Total
Sales.................. 100% 56% 20% -- % -- % -- % 24%
Q2...................... $163.0 100.4 16.6 19.8 -- -- 26.2
Percent of Q2 Total
Sales.................. 100% 62 10 12 -- -- 16
Q3...................... $182.8 83.7 10.0 49.3 -- -- 39.8
Percent of Q3 Total
Sales.................. 100% 46 5 27 -- -- 22
Q4...................... $114.4 17.0 17.8 69.0 -- -- 10.6
Percent of Q4 Total
Sales.................. 100% 15 16 60 -- -- 9
FISCAL 1996
Q1...................... $124.8 40.6 15.2 47.8 -- -- 21.2
Percent of Q1 Total
Sales ................. 100% 33 12 38 -- -- 17
Q2...................... $228.5 100.3 14.6 78.1 -- -- 35.5
Percent of Q2 Total
Sales.................. 100% 44 6 34 -- -- 16
Q3...................... $240.9 101.4 7.8 90.6 -- -- 41.1
Percent of Q3 Total
Sales.................. 100% 42 3 38 -- -- 17
Q4...................... $153.4 70.1 17.5 42.6 1.1 -- 22.1
Percent of Q4 Total
Sales.................. 100% 46 11 28 1 -- 14
FISCAL 1997
Q1...................... $125.8 43.5 17.4 18.2 14.4 2.8 29.5
Percent of Q1 Total
Sales.................. 100% 35 14 14 11 2 24
Q2...................... $249.5 113.3 16.7 29.1 22.5 19.2 48.7
Percent of Q2 Total
Sales.................. 100% 45 7 12 9 8 19
</TABLE>
38
<PAGE>
SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO THE SIX MONTHS ENDED DECEMBER
2, 1995
Net sales were $375.3 million in the first half of 1997, compared to $353.4
million in the first half of 1996. Sales of the Company's line of abdominal
machines, first introduced in April of 1996, totaled $36.9 million and net
sales of HealthRider branded products totaled $22.0 million with no comparable
sales of either of these products during the first half of 1996. Sales of the
company's home weight systems increased $10.2 million, while treadmill sales
increased $16.0 million in the first half of 1997 compared to first half of
1996. Treadmill sales accounted for approximately 42% and 40% of total net
sales during the first half of 1997 and 1996, respectively. Sales of
trampolines increased $4.3 million in the first half of 1997 to $34.1 million
from $29.8 million in the first half of 1996. Sales of the Company's line of
upright rowers decreased $78.6 million to $47.3 million for the first half of
1996 from $125.9 million in the first half of 1996 due to decreased market
demand. Sales in Europe increased $5.6 million to $17.1 million over the same
period for fiscal 1996.
Gross profit for the first half of 1997 was $106.5 million, or 28.4% of net
sales, compared to $93.7 million, or 26.5% of net sales, for the first half of
1996. Purchase accounting for the HealthRider Acquisition and the WSE
Acquisition included the write-up of the book value of the acquired inventory
to fair market value less estimated sales costs. This inventory write-up
increased cost of sales by $8.2 million for the first half of 1997. Without
this charge, the gross profit would have increased to 30.6% due to gross
margin improvements in the Company's line of treadmill products and higher
gross margin on HealthRider branded products.
Selling expenses were $56.4 million, or 15.0% of net sales, in the first
half of 1997 compared to $40.5 million, or 11.4% of net sales for the first
half of 1996. This increase is primarily attributed to $14.0 million in
expenditures at HealthRider during the second quarter of 1997, including one
time selling expenses totaling $3.2 million during the first half of 1997.
These one time selling expenses will continue until discontinued products
purchased in the HealthRider acquisition are liquidated. The company had no
comparable expenses during the comparable period of fiscal 1996.
Research and development expenses were $3.5 million or .9% of net sales, for
the first half of 1997 compared to $3.0 million, or .8% of net sales, for the
first half of 1996.
General and administrative expenses totaled $27.0 million, or 7.2% of net
sales, for the first half of 1997 compared to $23.9 million, or 6.8% of net
sales, for the first half of 1996. HealthRider general and administrative
expenses totaled $2.3 million with no comparable expenses in the prior year.
Weider settlement expenses totaled $16.5 million. See Note 14 of the Notes
to Consolidated Financial Statements and "Business--Legal Proceedings--WHF
Litigation".
As a result of the foregoing factors, operating income was $3.2 million, or
.9% of net sales in the first half of 1997, compared to a $26.4 million, or
7.5% of net sales, in the first half of 1996. Operating income before one time
HealthRider selling expenses and the expense of the Weider settlement would
have been $22.9 million or 6.1% of net sales for the first half of 1997.
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 $24.8 million for the first six months of
1997 from $22.3 million for the first six months of 1996. Interest expense
increased due to the costs associated with the 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 $5.6 million for the first six months of 1997
compared with a tax provision of $3.3 million for the first six months of
1996. This is a result of the Company incurring a
39
<PAGE>
loss before income tax during the first six months of 1997 compared to the
income before income tax for the same period in the preceding year.
As a result of the foregoing factors, the net loss was $16.0 million for the
first six months of 1997 compared to net income of $.8 million for the same
period of 1996.
Advertising allowances with retail customers have increased by $6.9 million
from May 31, 1996, to $11.1 million at November 30, 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 $2.0 million at November 30, 1996 compared to $1.4
at May 31, 1996. Terms with retail customers remained unchanged from previous
periods.
Prepaid income taxes were $12.2 million at November 30, 1996. $5.2 million
of this balance is attributable to the HealthRider Acquisition, with the
remaining $7.0 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 $42.6 million, compared to $69.0 million during
the fourth quarter of 1995. The decline in the sales of upright rowers by the
Company may indicate a weakening of market demand for upright rowers. 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 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
40
<PAGE>
"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,
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 the IHF Holdings Preferred Stock and options thereon issued in
connection with the Recapitalization were outstanding for all of 1996, but
were outstanding for only 197 days in 1995.
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.
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 which 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.
41
<PAGE>
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 interest
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.
As a result of the foregoing factors, the Company incurred 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 $249.5 $ -- $ --
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 $ 1.2(2) $ -- $ --
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) $ (8.9)(2) $ -- $ --
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>
- --------
42
<PAGE>
(1) Includes $39.0 million in one-time compensation expense attributable to
the exchange and partial redemption of management options.
(2) Includes $16.5 million in one-time expense attributable to the settlement
of the WHF litigation.
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 six months of 1997, the Company used $92.6 million of cash in
operating activities primarily as a result of increased accounts receivable
and inventory. During the first six months of 1997, the Company had a net
decrease in cash of $7.7 million. The Company also used $13.6 million of cash
in the first six months of 1997 for capital expenditures primarily related to
tooling, manufacturing equipment and building expansion, $28.2 million to fund
the HealthRider Acquisition, $10.8 million to fund the Weider Sports and CanCo
Acquisitions and $16.5 million to pay settlement expenses in connection with
the settlement of the WHF litigation.
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 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's revolving credit facility 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.
43
<PAGE>
At November 30, 1996, Health & Fitness had $228.3 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
November 30, 1996, Health & Fitness had $29.3 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, including the requirement that the Company maintain an Adjusted Net
Worth (as defined therein) of at least $75,000,000. The Credit Agreement also
requires the Company to have a minimum interest coverage ratio of EBITDA (as
defined in the Credit Agreement) to interest charges (as defined in the Credit
Agreement) for the twelve month periods which end at the conclusion of each
fiscal quarter of between 1.20 and 1.70, depending on the fiscal quarter. The
Company has been in compliance with the minimum interest coverage ratio at the
conclusion of each fiscal quarter from February 28, 1995 to and including
November 30, 1996. At May 31, 1996, the Company was in compliance with all of
its financial covenants in the Credit Agreement except for the capital
expenditure limitation for the year ended May 31, 1996 with respect to which
compliance was waived. At August 31, 1996, the Company was in compliance with
all of its financial covenants in the Credit Agreement. At November 30, 1996,
the Company was in compliance with all of its financial covenants in the
Credit Agreement except for the maximum funded debt to adjusted net worth
ratio with respect to which compliance was waived. At February 28, 1997, the
Company was in compliance with all of its financial covenants in the Credit
Agreement except for minimum interest coverage ratio, the minimum debt service
coverage ratio and maximum funded debt to adjusted net worth ratio, with
respect to which the compliance was waived. The Credit Agreement was amended
as of March 17, 1997 (i) to increase the maximum permitted funded debt to
adjusted net worth ratio from 4.0 to 1.0 to 4.25 to 1.0 for any time prior to
November 30, 1997; (ii) to change the minimum interest coverage ratio from
1.50 to 1.20 for each of the twelve month periods ending May 31, 1997 and
August 31, 1997; (iii) to reduce the minimum debt service ratio from 1.30 to
1.15 for each of the twelve month periods ended May 31, 1997 and August 31,
1997. Management believes that the Company will be in compliance with its
financial covenants through the balance of 1997. 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
Consolidated Financial Statements.
On November 20, 1996, ICON Fitness issued 14% Series A Senior Discount Notes
with a face value of $162,000,000. These Senior Discount Notes generated gross
proceeds of $82.5 million. The Company used the net proceeds from the Senior
Discount Notes to finance the purchase of some of the outstanding shares of
common stock of IHF Capital, Inc. and warrants to purchase shares of such
44
<PAGE>
stock held by certain stockholders and the purchase of all of the outstanding
shares of preferred stock of IHF Holdings and options to purchase shares of
such stock. Interest on the Notes will begin accruing on November 15, 2001 and
will be payable semi-annually on each May 15 and November 15, commencing May
15, 2002. The principal and accrued interest on the Senior Discount Notes will
be due on November 15, 2007.
The Company made capital expenditures of approximately $15.4 million during
fiscal 1996 and expects to make capital expenditures of approximately $17.0
million 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 also 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 became due and
payable within 60 to 90 days after the closing of the HealthRider Acquisition.
The Company funded 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 June 1995, 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
45
<PAGE>
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.
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
46
<PAGE>
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, because of the accelerating deterioration of HealthRider's
business prior to the HealthRider Acquisition by substantially less than 100%
of HealthRider's net sales. The Company also expects that its overall 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,
47
<PAGE>
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.
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.
48
<PAGE>
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.
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.
49
<PAGE>
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
$16.0 million in 1995 and 1996 and the first six months 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
50
<PAGE>
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 two quarters of 1997 were $6.0 million, $9.3 million, $7.8
million, $10.2 million, $7.1 million and $13.8 million, respectively. In
connection with the Recapitalization, the Company granted certain exclusive
and non-exclusive rights
51
<PAGE>
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. 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
52
<PAGE>
quarter of 1994 were approximately 1.0 million units in 1995 and approximately
2.2 million units in 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>
Consumers by 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
</TABLE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Consumers by Income Bracket
---------------------------
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.
53
<PAGE>
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
- ----
<S> <C>
DEPARTMENT STORES 45%
WAREHOUSE CLUBS 17%
SPORTING GOODS STORES 11%
CATALOGUE SHOWROOMS 10%
DIRECT RESPONSE 9%
DISCOUNT RETAILERS 4%
MAIL ORDER 3%
OTHER 1%
</TABLE>
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
1996
- ----
<S> <C>
DEPARTMENT STORES 47%
WAREHOUSE CLUBS 11%
SPORTING GOODS STORES 10%
CATALOGUE SHOWROOMS 12%
DISCOUNT RETAILERS 12%
DIRECT RESPONSE 3%
MAIL ORDER 3%
OTHER 2%
</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.
54
<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
two quarters of 1997 were $6.0 million, $9.3 million, $7.8 million, $10.2
million, $7.1 million and $13.8 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 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 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,
55
<PAGE>
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.
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
56
<PAGE>
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 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
57
<PAGE>
has 50 patent applications pending. The Company had research and development
expenses of $2.9 million, $5.2 million, $6.8 million and $3.5 million in 1994,
1995, 1996 and the first six months 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 Consolidated Financial
Statements.
As of November 30, 1996 the Company had open orders of approximately $158.3
million compared to approximately $164.8 million as of December 2, 1995. The
Company expects to ship substantially all of such 1997 orders during the third
quarter of 1997.
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
58
<PAGE>
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 (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
59
<PAGE>
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 recognized a significant, non-recurring, non-cash increase in cost
of goods sold in the first and second quarters of 1997 of $8.2 million and
will recognize an additional increase in cost of goods sold in the third
quarter of 1997 of approximately $2.6 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 total
expenses of approximately $5.0 million in 1997 related to the integration of
HealthRider into the Company's business. See "Risk Factors--Expansion
Strategy; Acquisitions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--HealthRider."
60
<PAGE>
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
61
<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
$42.3 million.
62
<PAGE>
Repurchase of Preferred Stock. On November 20, 1996, the Company purchased
the IHF Holdings Preferred Stock held by WHF at a price of $32.1 million. 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 for $3.7 million.
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 $1.7 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 November 30, 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
63
<PAGE>
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. See "Risk Factors--Product
Liability."
FTC INVESTIGATIONS
The FTC conducted 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 asked the Company to
voluntarily provide information and documents on several occasions, and the
Company responded to these requests.
The FTC and the Company resolved this matter through a consent decree on
January 30, 1996. The consent decree is for settlement purposes only and does
not constitute an admission by the Company that it has violated any laws.
There, however, can be no assurance that the FTC will not withdraw the consent
decree and 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.
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.
64
<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
Offices, Manufacturing,
Garland, TX............. 95,405 Leased (Expires 9/97) 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
Warehouse, Offices,
Anzin, France........... 8,097 Leased (Expires 12/96) 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.
65
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages as of
April 9, 1997, 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................ 36 Director
Geoffrey S. Rehnert........... 39 Director
S. Fred Beck.................. 39 Chief Financial and Accounting Officer,
Vice President and Treasurer
Lynn C. Brenchley............. 50 Vice President, Business Development
David J. Watterson............ 38 Vice President, Marketing and Research and
Development
Jon M. White.................. 49 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 Managing Director of Bain
Capital since the Fall of 1996. Mr. Mika was a Principal of Bain Capital from
December 1992 through the Fall of 1996 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.
66
<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.
67
<PAGE>
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 $8.92.
68
<PAGE>
The following table sets forth information concerning options granted to
each of the named executive officers in the last fiscal year.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
MARKET
PRICE OF POTENTIAL REALIZABLE VALUE AT
CLASS A ASSUMED ANNUAL RATES
% OF TOTAL COMMON OF STOCK PRICE APPRECIATION
OPTIONS GRANTED STOCK ON FOR OPTION TERM($)(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 7,549(1) .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 7,549(1) .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 5,033(1) .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 these options vest each year on November 14 and all such
options will vest upon a change of control, in connection with certain
public offerings of the Company's common stock registered under the
Securities Act of 1933 or upon the death or permanent disability of the
Optionee. As of the end of fiscal 1996, one third of these options had
vested. As of March 21, 1997 two-thirds of these options had vested.
Vested portions of these options become exercisable upon the earlier of
(i) November 14, 2003, (ii) the sale of any of the Company's Common Stock
in a public offering registered under the Securities Act of 1933 or upon
the occurrence of other specified events.
(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. The assumed value of the Class
A Common Stock at May 31, 1996 was $8.92 per share.
69
<PAGE>
The following table sets forth information as of May 31, 1996, concerning
options of the Company exercised by each of the named executive officers in
fiscal 1996 and year end option values.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS AT
OPTIONS AT FY-END (#) FY-END ($)(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 -- 54,736/37,745 -- 460,658 --
David J. Watterson...... -- -- -- 54,736/52,843 -- 593,822 --
Jon M. White............ 10,065 57,371 -- 32,837/25,163 -- 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 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 WHF Settlement.
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). The 1996 Stock
Option Plan will be administered by the Board of Directors or a committee
70
<PAGE>
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 of moral terpitude, willful insubordination and failure
to comply with certain covenants under the
71
<PAGE>
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 (these options were redeemed in
connection with the WHF Settlement); 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 $0.10 per share. The per share price of Class A Common Stock paid in
the Recapitalization was $0.10, and the per share price
72
<PAGE>
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 of such indemnities to certain
limitations as to time and amount. The Master Transaction Agreement
73
<PAGE>
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
$0.5 million in the second quarter of 1997 in connection with the WHF
Settlement. No management fees were received from CanCo in
74
<PAGE>
1995 or in 1996. Scott Watterson 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.
75
<PAGE>
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 also received a fee equal to 1% of the gross purchase price of the
HealthRider Acquisition (including all assumed liabilities) of approximately
$.75 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
76
<PAGE>
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."
77
<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
April 9, 1997 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)(4)........... 237,816 36.30 3,050,618 37.49
S. Fred Beck(6)(4)................. 202,915 32.87 2,098,984 26.85
David S. Watterson(7)(4)........... 203,000 32.88 2,084,736 26.67
Jon M. White(8)(4)................. 202,625 32.82 2,069,152 26.55
Robert C. Gay+(9)(4)............... 559,305 90.60 5,593,050 72.06
Ronald P. Mika+(9)(4).............. 559,305 90.60 5,593,050 72.06
Geoffrey S. Rehnert+(9)(4)......... 559,305 90.60 5,593,050 72.06
The Bain Funds (9)(4).............. 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)(4)................... 654,280 92.97 8,234,896 94.12
</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 April 9, 1997 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 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
78
<PAGE>
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 April 9, 1997.
(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 April 9, 1997.
(6) Includes 54,736 shares of Class A Common Stock subject to purchase upon
exercise of options that are exercisable within 60 days after April 9,
1997. Excludes 37,745 shares of Class A Common Stock subject to purchase
upon exercise of options that are not exercisable within 60 days after
April 9, 1997.
(7) Includes 54,736 shares of Class A Common Stock subject to purchase upon
exercise of options that are exercisable within 60 days after April 9,
1997. Excludes 52,843 shares of Class A Common Stock subject to purchase
upon exercise of options that are not exercisable within 60 days after
April 9, 1997.
(8) Includes 32,837 shares of Class A Common Stock subject to purchase upon
exercise of options that are exercisable within 60 days after April 9,
1997. Excludes 25,163 shares of Class A Common Stock subject to purchase
upon exercise of options that are not exercisable within 60 days after
April 9, 1997.
(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.
79
<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 the
material 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 and have been filed as
Exhibits to the Registration Statement of which this prospectus is a part. 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 November 30, 1996 of the aggregate amount of indebtedness
and other obligations of ICON's Subsidiaries to which the holders of the
Senior Discount Notes were structurally subordinated was approximately $454.5
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
80
<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.
81
<PAGE>
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:
(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
82
<PAGE>
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 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
83
<PAGE>
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 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
84
<PAGE>
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
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
85
<PAGE>
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 Health & Fitness', 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 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
86
<PAGE>
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 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;
87
<PAGE>
(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 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.
88
<PAGE>
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.
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 provides 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.
89
<PAGE>
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, 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
90
<PAGE>
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.
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
91
<PAGE>
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 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
92
<PAGE>
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.
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
93
<PAGE>
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 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
94
<PAGE>
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 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
95
<PAGE>
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.
"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
96
<PAGE>
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 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
97
<PAGE>
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 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. The definition of Change of Control
includes a phrase relating to the sale, assignment, conveyance, transfer,
lease or other disposition of "all or substantially all" of Icon's or IHF
Capital's assets. Although there is a developing body of case law interpreting
the phrase "substantially all," there is no precise definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
ICON to repurchase such Notes as a result of a sale, assignment, conveyance,
transfer, lease or other disposition of less than all of the assets of the
Company to another person may be uncertain.
"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
98
<PAGE>
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 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.
99
<PAGE>
"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.
"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
100
<PAGE>
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 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
101
<PAGE>
(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.
"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).
102
<PAGE>
"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) 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,
103
<PAGE>
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 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.
104
<PAGE>
"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 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.
105
<PAGE>
"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
$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
106
<PAGE>
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 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.
107
<PAGE>
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 issued as described below under
"Certificated Securities," will be issued in registered form (the
"Certificated 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
108
<PAGE>
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.
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.
109
<PAGE>
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, upon the written request of any such broker-dealer to
maintain the effectiveness of the Registration Statement for such purposes for
180 days from the date on which the Exchange Offer is committed.
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
110
<PAGE>
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 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.
111
<PAGE>
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."
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, the form of which is included as Exhibit 99.1 to
the Registration Statement of which this prospectus is a part, 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
112
<PAGE>
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.
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 the condition set
forth below under "--Conditions of the Exchange" 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 ten 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 ten business day period.
113
<PAGE>
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 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").
114
<PAGE>
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 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
115
<PAGE>
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.
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
116
<PAGE>
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.
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 OFFER
The Exchange Offer is subject to the condition that the Exchange Offer, or
the making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the Commission. If there has been a
change in commission policy such that in the reasonable opinion of Counsel to
the Company there is a substantial question whether the Exchange Offer is
permitted by applicable federal law, the Company has agreed to seek a no-
action letter or other favorable decision from the Commission allowing the
Company to consummate the Exchange Offer.
If the Company determines, in its reasonable discretion, that the Exchange
Offer is not permitted by applicable Federal law, it may terminate the
Exchange Offer. In connection therewith the Company may (i) refuse to accept
any Original Notes and return any Original Notes that have been tendered by
the holders thereof, (ii) extend the Exchange Offer and retain all Original
Notes tendered prior to the Expiration of the Exchange Offer, subject to the
rights of such holders of tendered Original Notes to withdraw their tendered
Original Notes, or (iii) waive such termination event with respect to the
Exchange Offer and accept all properly tendered Original Notes that have not
been withdrawn. If such waiver constitutes a material change in the Exchange
Offer, the Company will disclose such change by means of a supplement to this
Prospectus that will be distributed to each registered holder of Original
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the
manner of disclosure to the registered holders of the Original Notes, if the
Exchange Offer would otherwise expire during such period.
117
<PAGE>
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 EXPRESS: BY MAIL: BY HAND:
(insured or registered recommended)
Fleet National Bank Fleet National Bank Fleet National Bank
150 Windsor Street P.O. Box 1440 One Talcott Plaza, 5th
Hartford, CT 06120 Hartford, CT 06143 Floor
Attn: Claire Young Attn: Claire Young Hartford, CT 06120
Mail Stop CT/OP/T06D Mail Stop CT/OP/T06D Attn: Claire Young
Mail Stop CT/OP/T06D
or or
or
Chase Banking Corp Chase Banking Corp
11th Floor 11th Floor Chase Banking Corp
4 New York Plaza 4 New York Plaza 4 New York Plaza
NY, NY 10004 NY, NY 10004 Ground Floor Receive
Attn: Lawrence Zimmer Attn: Lawrence Zimmer Window
NY, NY 10004
FACSIMILE: A/C #B5 72152-07
(860) 986-7908
FOR INFORMATION:
(800) 666-6431
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.
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.
118
<PAGE>
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 from the date of consummation of the
Exchange Offer, 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.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary, although subject to, and qualified in its entirety by
reference to, the agreements summarized herein, including the definitions
therein of certain terms, is complete in all material respects.
At November 30, 1996, Health & Fitness had $228.3 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 twelve 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
119
<PAGE>
revolving credit borrowings under the Credit Agreement expires on November 14,
1999. At November 30, 1996, Health & Fitness had $29.3 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 of its
financial covenants in the Credit Agreement except for the capital expenditure
limitation for the year ended May 31, 1996 with respect to which compliance
was waived. At August 31, 1996, the Company was in compliance with all of its
financial covenants in the Credit Agreement. At November 30, 1996, the Company
was in compliance with all of its financial covenants in the Credit Agreement
except for the maximum funded debt to adjusted net worth ratio with respect to
which compliance was waived. At February 28, 1997, the Company was in
compliance with all of its financial covenants in the Credit Agreement except
for minimum interest coverage ratio, the minimum debt service coverage ratio
and maximum funded debt to adjusted net worth ratio, with respect to which the
compliance was waived. The Credit Agreement was amended as of March 17, 1997
(i) to increase the maximum permitted funded debt to adjusted net worth ratio
from 4.0 to 1.0 to 4.25 to 1.0 for any time prior to November 30, 1997; (ii)
to change the minimum interest coverage ratio from 1.50 to 1.20 for each of
the twelve month periods ending May 31, 1997 and August 31, 1997; (iii) to
reduce the minimum debt service ratio from 1.30 to 1.15 for each of the twelve
month periods ended May 31, 1997 and August 31, 1997. Management believes that
the Company will be in compliance with its financial covenants through the
balance of 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.
CERTAIN FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the material United States federal
income tax consequences of the purchase, ownership and disposition of the
Senior Discount Notes to the purchasers thereof who purchase directly from the
Initial Purchaser and who are United States Holders
120
<PAGE>
(as defined below) and the principal United States federal income and estate
tax consequences of the ownership of the Senior Discount Notes to purchasers
who purchase directly from the Initial Purchaser and who are Non-United States
Holders (as defined below).
Ropes & Gray, counsel to the Company, has opined that the material United
States federal income tax consequences of the purchase, ownership and
disposition of the Senior Discount Notes to the purchasers thereof who
purchase directly from the Intital Purchaser are as follows. 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 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.
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
121
<PAGE>
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.
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.
122
<PAGE>
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 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.
123
<PAGE>
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)
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
124
<PAGE>
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.
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.
125
<PAGE>
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 180 days from the date of the consummation of the
Exchange Offer, 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 90 days after the Expiration Date, 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 from the date of the consummation of the Exchange
Offer, 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 report appearing herein
and elsewhere in the Registration Statement, and are included in reliance upon
the report 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
126
<PAGE>
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.
127
<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-27
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................. F-28
Consolidated Statements of Income........................................ F-29
Consolidated Statements of Stockholders' Equity.......................... F-30
Consolidated Statements of Cash Flows.................................... F-31
Notes to Consolidated Financial Statements............................... F-32
</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, NOVEMBER 30,
1995 1996 1996
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................... $ 4,099 $ 19,313 $ 11,565
Accounts receivable, net................... 114,325 126,869 226,614
Inventories................................ 95,635 95,922 161,151
Deferred income taxes...................... 7,588 5,240 5,240
Other assets............................... 5,600 4,770 8,137
Prepaid income taxes....................... -- 882 12,202
--------- --------- ---------
Total current assets..................... 227,247 252,996 424,909
Property and equipment, net................. 23,144 32,312 78,586
Deferred income taxes....................... 3,121 5,489 7,085
Other assets................................ 36,673 25,930 40,981
--------- --------- ---------
$ 290,185 $316,727 $ 551,561
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFI-
CIT)
Current liabilities:
Current portion of long-term debt.......... $ 688 $ 3,065 $ 4,885
Accounts payable........................... 73,968 73,652 122,689
Interest payable........................... 5,035 5,815 6,176
Accrued expenses........................... 9,739 11,424 34,733
Income taxes payable....................... 130 -- --
--------- --------- ---------
Total current liabilities................ 89,560 93,956 168,483
--------- --------- ---------
Long-term debt.............................. 267,427 279,693 532,423
Minority interest in cumulative redeemable
preferred stock of subsidiary.............. 42,804 47,904 --
Stockholders' equity (deficit):
Common stock and additional paid-in
capital................................... 74,957 77,730 49,691
Receivable from officers for purchase of
equity.................................... (758) (758) (758)
Cumulative translation adjustment.......... -- 386 (106)
Accumulated deficit........................ (183,805) (182,184) (198,172)
--------- --------- ---------
Total stockholders' equity (deficit)..... (109,606) (104,826) (149,345)
--------- --------- ---------
Commitments and contingencies (Notes 12, 13
and 14).................................... -- -- --
--------- --------- ---------
$ 290,185 $ 316,727 $ 551,561
========= ========= =========
</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 SIX MONTHS ENDED
MAY 31, YEAR ENDED MAY 31, DECEMBER 2, NOVEMBER 30,
------------- ------------------- ----------- ------------
1994 1995 1996 1995 1996
------------- --------- -------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $403,016 $ 530,774 $747,577 $353,363 $375,305
-------- --------- -------- -------- --------
Cost of sales........... 288,208 378,322 541,443 259,650 260,610
Revaluation of
HealthRider inventory.. -- -- -- -- 8,165
-------- --------- -------- -------- --------
Total cost of sales..... 288,208 378,322 541,443 259,650 268,775
-------- --------- -------- -------- --------
Gross profit............ 114,808 152,452 206,134 93,713 106,530
-------- --------- -------- -------- --------
Operating expenses:
Selling................ 52,116 68,706 93,924 40,479 56,370
Research and
development........... 2,863 5,163 6,759 2,980 3,474
General and
administrative........ 28,578 31,097 48,055 23,859 27,002
Weider settlement (Note
14)................... -- -- -- -- 16,465
Compensation expense
attributable to
options............... -- 39,046 2,769 -- --
-------- --------- -------- -------- --------
Total operating
expenses........... 83,557 144,012 151,507 67,318 103,311
-------- --------- -------- -------- --------
Income from operations.. 31,251 8,440 54,627 26,395 3,219
Interest expense........ 6,224 21,495 36,527 18,001 20,629
Dividends on cumulative
redeemable preferred
stock of a subsidiary
held by minority
interest............... -- 2,804 5,100 2,550 2,125
Amortization of deferred
financing fees......... -- 1,741 3,483 1,749 2,059
-------- --------- -------- -------- --------
Income (loss) before
income taxes........... 25,027 (17,600) 9,517 4,095 (21,594)
Provision for (benefit
from) income taxes..... 9,766 (4,719) 7,896 3,303 (5,606)
-------- --------- -------- -------- --------
Net income (loss)....... $ 15,261 $ (12,881) $ 1,621 $ 792 $(15,988)
======== ========= ======== ======== ========
</TABLE>
The accompanying 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
contribution of capi-
tal 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)
Discount on redemp-
tion of and forgive-
ness of dividends on
minority interest in
cumulative redeemable
preferred stock of
subsidiary (unau-
dited)............... -- -- -- -- 14,280 -- -- -- 14,280
Return of capital on
the repurchase of eq-
uity of
IHF Capital, Inc.
(unaudited).......... -- -- -- -- (42,319) -- -- -- (42,319)
Foreign currency
translation (unau-
dited)............... -- -- -- -- -- -- (492) -- (492)
Net loss (unaudited). -- -- -- -- -- -- -- (15,988) (15,988)
------- ------- -------- --- -------- ----- ----- --------- ---------
Balance, November 30,
1996 (unaudited)..... -- $ -- 1,000 -- $ 49,691 $(758) $(106) $(198,172) $(149,345)
======= ======= ======== === ======== ===== ===== ========= =========
</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
------------- --------------------------------------------
SIX MONTHS ENDED
YEAR ENDED YEAR ENDED
MAY 31, MAY 31, DECEMBER 2, NOVEMBER 30,
------------- ------------------ ----------- ------------
1994 1995 1996 1995 1996
------------- -------- -------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....... $15,261 $(12,881) $ 1,621 $ 792 $(15,988)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activi-
ties:
Provision (benefit)
from deferred taxes... (1,153) (9,493) (20) 3,149 (1,596)
Depreciation and
amortization.......... 4,010 5,561 7,205 3,604 4,517
Amortization of
deferred financing
fees and debt
discount.............. -- 6,018 12,458 6,047 7,636
Compensation expense
attributable to
options............... -- 12,303 2,769 -- --
Interest expense
attributable to
dividends on preferred
stock held by minority
interest.............. -- 2,804 5,100 2,550 2,125
Changes in operating
assets and liabilities:
Accounts receivable.... (32,559) (14,106) (12,544) (108,898) (80,853)
Inventories............ 726 (41,429) (287) (13,840) (28,756)
Other assets........... 1,217 (5,837) 7,073 2,661 (10,756)
Accounts payable and
accrued expenses...... 25,844 30,350 2,149 35,197 31,098
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 (68,738) (92,573)
------- -------- -------- -------- --------
INVESTING ACTIVITIES:
HealthRider Acquisition. -- -- -- -- (28,203)
CanCo and WSE
Acquisitions........... -- -- -- -- (10,759)
Purchases of property
and equipment.......... (6,924) (7,977) (15,356) (7,913) (13,622)
Payment for non-compete
agreements............. -- (4,070) -- -- --
------- -------- -------- -------- --------
Net cash used in
investing activities.. (6,924) (12,047) (15,356) (7,913) (52,584)
------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings (payments) on
revolving loans and
lines of credit, net... (68,925) 66,400 6,355 76,709 138,359
Proceeds from long-term
debt................... 105,197 194,999 -- -- 82,508
Payments on long-term
debt................... (43,222) (58,197) (687) -- (1,375)
Payments on capital
lease obligations...... -- -- -- -- (462)
Proceeds from issuance
of common stock........ -- 40,422 4 -- --
Repurchase of common
stock.................. -- (1,808) -- -- --
Return of capital to
parent................. -- -- -- -- (42,319)
Retirement of preferred
stock.................. -- -- -- -- (35,748)
Payments of dividends... (531) (243) -- -- --
Distributions to
stockholders........... -- (166,737) -- -- --
Payment of debt
financing fees......... -- (27,508) -- -- (3,062)
------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ (7,481) 47,328 5,672 76,709 137,901
------- -------- -------- -------- --------
Effect of exchange rate
changes on cash........ -- -- 386 13 (492)
------- -------- -------- -------- --------
Net (decrease) increase
in cash................ (140) 4,004 15,214 71 (7,748)
Cash, beginning of
period................. 235 95 4,099 4,099 19,313
------- -------- -------- -------- --------
Cash, end of period..... $ 95 $ 4,099 $ 19,313 $ 4,170 $ 11,565
======= ======== ======== ======== ========
</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 six months ended December 2, 1995
and November 30, 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>
Accounts receivable...................................... $119,633 $134,464
Less allowances.......................................... (5,308) (7,595)
-------- --------
$114,325 $126,869
======== ========
</TABLE>
4. INVENTORIES
Inventories consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
--------------- ------------
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials, princi-
pally parts and sup-
plies.................. $36,472 $26,264 $ 50,978
Finished goods.......... 59,163 69,658 $110,173
------- ------- --------
$95,635 $95,922 $161,151
======= ======= ========
</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.
F-12
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
----------------- ------------
1995 1996 1996
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving Credit Facility.................... $ 73,645 $ 80,000 $228,338
Term Loan A Facility......................... 17,500 16,875 15,625
Term Loan B Facility......................... 17,500 17,438 17,313
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 $1,849 at November 30, 1996
(unaudited)................................. 99,123 99,298 99,401
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 $49,341 at November 30, 1996
(unaudited) ................................ 60,347 69,147 74,359
14% Series B Senior Discount Notes, face
amount $162,000 net of unamortized discount
of $79,230 at November 30, 1996 (Note
14)(unaudited).............................. -- -- 82,770
Capital lease obligations.................... -- -- 18,869
Other........................................ -- -- 633
-------- -------- --------
268,115 282,758 537,308
Less current portion......................... 688 3,065 4,885
-------- -------- --------
Total long-term debt..................... $267,427 $279,693 $532,423
======== ======== ========
</TABLE>
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
As of May 31, 1996, the agreement provided for borrowings of up to $160.0
million based upon a percentage of eligible accounts receivable and
inventories and expires on November 14, 1999. As of August 23, 1996 the Credit
Agreement was amended to permit total borrowings of up to $310 million in
order to fund the HealthRider Acquisition (Note 14), the settlement of the WHF
Litigation (Note 14), the Weider Sports and CanCo Acquisitions (Note 14) and
other long term working capital needs. Advances under the Revolving Credit
Facility bear interest, at Health & Fitness's option, at either
F-13
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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.
F-14
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 in the
indentures, 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>
F-15
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-16
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management anticipated that the option to redeem the Series A Preferred
would be exercised and for the years ended May 31, 1995 and 1996 had 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 were charged to the Company's current
operations. 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.
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 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
F-17
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1,145,052 have vested
and are exercisable at May 31, 1996. All unvested options under the 1994 Plan
vest upon a change of control of the Company, as determined by the Board of
Directors. In addition, certain outstanding option have vested and will become
exercisable upon an initial public offering or other specified events, as
defined in the option grants. 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-18
<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-19
<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-20
<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-21
<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 November 30, 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-22
<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-23
<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 six months ended
November 30, 1996 have been combined with the HealthRider results for the
period from June 1, 1966 through August 15, 1996 (with HealthRider results
included in those of the Company for the period after August 15, 1996), and
the historical results for the Company for the six months ending December 2,
1995 have been combined with the HealthRider results for the six months ending
December 31, 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
F-24
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
from the fact 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>
SIX MONTHS ENDED NOVEMBER
30, 1996
----------------------------
(UNAUDITED)
COMPANY HEALTHRIDER TOTAL
------- ----------- -------
<S> <C> <C> <C>
Revenues...................................... $375.3 $16.2 $391.5
Net loss...................................... $ (9.6) $(6.7) $ (16.3)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 2, 1995
-------------------------------------
(UNAUDITED)
COMPANY HEALTHRIDER TOTAL
------------------------- -----------
<S> <C> <C> <C>
Revenues............................. $ 353.3 $ 113.5 $ 466.8
Net Income (Loss).................... $ .8 $ 8.5 $ 9.3
</TABLE>
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 reflected 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 million in full payment and settlement of CanCo's Management
fee obligations to the Company under the CanCo Management and Advisory
Agreement.
F-25
<PAGE>
ICON FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 were used to fund the purchase
of IHF Capital common stock and IHF Holdings preferred stock in connection
with the WHF Settlement.
F-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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........................................ 28
Selected Consolidated Financial Data...................................... 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 36
Business.................................................................. 50
Management................................................................ 66
Certain Relationships and Related Transactions............................ 73
Security Ownership of Certain Beneficial Owners and Management............ 78
Description of Senior Discount Notes...................................... 80
The Exchange Offer........................................................ 110
Description of Certain Indebtedness....................................... 119
Certain Federal Tax Considerations........................................ 120
Plan of Distribution...................................................... 126
Legal Matters............................................................. 126
Experts................................................................... 126
Additional Information.................................................... 127
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 20. 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.
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.
II-1
<PAGE>
<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.
5(1) Opinion of Ropes & Gray re legality.
8(1) Opinion of Ropes & Gray re tax matters.
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.
10.9(3) Canada Exclusive License Agreement dated as of November 14, 1994
between Weider Sports Equipment Co., Ltd. and Health & Fitness.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
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>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<C> <S>
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(2) Asset Purchase Agreement dated as of July 3, 1996 by and among
IHF Capital, Inc. HealthRider Acquisition Corp. and HealthRider,
Inc.
10.38(2) Asset Purchase Agreement for the purchase of certain assets of
Parkway Manufacturing, Inc. dated July 3, 1996.
10.39(2) Buy-Out Agreement between HealthRider Acquisition Corp. and
Parkway Manufacturing, Inc. dated August 26, 1996.
10.40(2) IHF Capital's 1996 Stock Option Plan.
10.41(2) WSE Asset Purchase Agreement, dated September 6, 1996 between
Weider Sports Equipment Co. Ltd. and ICON Health & Fitness Inc.
10.42(2) 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>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
10.43(2) 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(2) 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(2) 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(2) Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and
Scott Watterson.
10.47(2) 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(2) 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(2) 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(2) 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(2) 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(2) Escrow Agreement, dated September 6, 1996 among ICON Health &
Fitness, ICON of Canada, Inc., CANCO, Lapointe Rosenstein and
Goodman Phillips of Vineberg.
10.53(2) Representation Agreement, dated September 6, 1996 between ICON
Health & Fitness, Inc. and Ben Weider.
10.54(2) Letter Agreement regarding advertising space, dated September 6,
1996 between Weider Publications, Inc. and ICON Health & Fitness,
Inc.
10.55(2) Letters of Credit issued by Royal Bank of Canada to ICON Health &
Fitness, Inc. dated September 5, 1996.
10.56(2) 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(2) 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.58(2) Letter Agreement dated September 6, 1996 among ICON Health & Fitness, Inc.,
Ben Weider and Eric Weider regarding charitable contributions.
10.59(2) Deed of Sale.
12 Statement regarding computation of ratio of earnings to fixed charges.
16(2) Letter of Deloitte & Touche LLP regarding change in certifying accountant.
21(1) Subsidiaries of the Company.
23.1 Consent and report on schedule of Deloitte & Touche LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Ropes & Gray (included in Exhibit 5).
23.5 Consent of American Appraisal Associates.
24(1) Powers of Attorney (included on signature page).
25(1) Statement of Eligibility of Fleet National Bank, Trustee.
99.1(1) Form of Letter of Transmittal used in connection with the Exchange Offer.
99.2(1) Form of Notice of Guaranteed Delivery used in connection with The Exchange Offer.
</TABLE>
- --------
(1) Previously filed as part of this Registration Statement.
(2) 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.
(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.
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 II 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:
(1) 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.
(2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(3) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, IHF Capital, Inc. has
duly caused this Amendment No. 3 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Logan, State of Utah, on the 9th day
of April, 1997.
ICON FITNESS CORPORATION
*
By: __________________________________
Name: Scott R. Watterson
Title: Chairman of the Board and
ChiefExecutive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 has been signed below by the following persons in the capacities
indicated on the 9th day of April, 1997.
SIGNATURE TITLE
* 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)
* Director, President and Chief Operating
- ------------------------------------ Officer
GARY E. STEVENSON
* Vice Chairman of the Board of Directors
- ------------------------------------
ROBERT C. GAY
* Director
- ------------------------------------
RONALD P. MIKA
* Director
- ------------------------------------
GEOFFREY S. REHNERT
/s/ S. Fred Beck
- ------------------------------------
S. FRED BECK
ATTORNEY-IN-FACT
II-8
<PAGE>
ICON FITNESS CORPORATION
CONSOLIDATED SUPPLEMENTAL SCHEDULE II
<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.
5(1) Opinion of Ropes & Gray re legality.
8(1) Opinion of Ropes & Gray re tax matters.
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.
10.9(3) Canada Exclusive License Agreement dated as of November 14,
1994 between Weider Sports Equipment Co., Ltd. and Health &
Fitness.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
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(2) Asset Purchase Agreement dated as of July 3, 1996 by and
among IHF Capital, Inc. HealthRider Acquisition Corp. and
HealthRider, Inc.
10.38(2) Asset Purchase Agreement for the purchase of certain assets
of Parkway Manufacturing, Inc. dated July 3, 1996.
10.39(2) Buy-Out Agreement between HealthRider Acquisition Corp. and
Parkway Manufacturing, Inc. dated August 26, 1996.
10.40(2) IHF Capital's 1996 Stock Option Plan.
10.41(2) WSE Asset Purchase Agreement, dated September 6, 1996
between Weider Sports Equipment Co. Ltd. and ICON Health &
Fitness Inc.
10.42(2) 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(2) 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(2) 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(2) 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(2) Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and
Scott Watterson.
10.47(2) 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(2) 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(2) 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(2) 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(2) 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(2) Escrow Agreement, dated September 6, 1996 among ICON Health &
Fitness, ICON of Canada, Inc., CANCO, Lapointe Rosenstein and
Goodman Phillips of Vineberg.
10.53(2) Representation Agreement, dated September 6, 1996 between ICON
Health & Fitness, Inc. and Ben Weider.
10.54(2) Letter Agreement regarding advertising space, dated September
6, 1996 between Weider Publications, Inc. and ICON Health &
Fitness, Inc.
10.55(2) Letters of Credit issued by Royal Bank of Canada to ICON
Health & Fitness, Inc. dated September 5, 1996.
10.56(2) 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(2) 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<S> <C> <C>
10.58(2) Letter Agreement dated September 6, 1996 among ICON Health & Fitness, Inc.,
Ben Weider and Eric Weider regarding charitable contributions.
10.59(2) Deed of Sale.
12 Statement regarding computation of ratio of earnings to fixed charges.
16(2) Letter of Deloitte & Touche LLP regarding change in certifying accountant.
21(1) Subsidiaries of the Company.
23.1 Consent and report on schedule of Deloitte & Touche LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Ropes & Gray (included in Exhibit 5).
23.5 Consent of American Appraisal Associates.
24(1) Powers of Attorney (included on signature page).
25(1) Statement of Eligibility of Fleet National Bank, Trustee.
99.1(1) Form of Letter of Transmittal used in connection with the Exchange Offer.
99.2(1) Form of Notice of Guaranteed Delivery used in connection with The Exchange Offer.
</TABLE>
- --------
(1) Previously filed as part of this Registration Statement.
(2) 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.
(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.
<PAGE>
EXHIBIT 12
ICON FITNESS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, SIX MONTHS ENDED PRO FORMA
---------------------------------------- ------------------------- -----------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 2, NOVEMBER 30, MAY 31, NOVEMBER 30,
1992 1993 1994 1995 1996 1995 1996 1996 1996
----- ------ ------ ------- ----- ----------- ------------ ---------- ------------
<S> <C> <C> <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 $4.10 $(21.59) $18.02 $(17.54)
Fixed charges:
Interest expense....... 4.89 5.47 6.22 21.50 36.53 18.00 20.63 53.42 27.58
Amortization of de-
ferred financing fees
(1).................... .56 .86 .46 1.74 3.48 1.75 2.06 3.90 2.26
Rental expense (25%)... 0.44 0.50 0.49 0.72 0.63 .36 .32 3.52 1.76
Preferred stock divi-
dends.................. 0.53 0.53 0.53 0.24 -- -- -- -- --
Dividends on preferred
stock of subsidiary
held by a minority in-
terest................. -- -- -- 2.80 5.10 2.55 2.13 -- --
----- ------ ------ ------- ----- ----- ------- ------ -------
Total fixed charges.... 6.42 7.36 7.70 27.00 45.74 22.66 25.14 60.84 31.60
Earnings before income
taxes and fixed charges. 13.84 23.61 32.73 9.40 55.26 26.76 3.55 78.86 14.06
===== ====== ====== ======= ===== ===== ======= ====== =======
Ratio of earnings to
fixed charges........... 2.2x 3.2x 4.3x 0.3x(2) 1.2x 1.2x(2) 0.1x(2) 1.3x 0.4x(2)
===== ====== ====== ======= ===== ===== ======= ====== =======
</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, $21.6
million and $17.5 million for the year ended May 31, 1995, the six months
ended November 30, 1996, and the pro forma six months ended November 30,
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 this Amendment No. 3 to the 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 II 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
April 8, 1997
<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 (No. 333-18475) 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 two 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
April 8, 1997
<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
April 8, 1997
<PAGE>
[LETTERHEAD]
EXHIBIT 23.5
CONSENT OF APPRAISER
We hereby consent to the references made to us and/or our opinion by ICON
Fitness Corporation under the caption(s) "Risk Factors: Fraudulent Conveyance
and Other Risks" in the Prospectus constituting a part of Amendment 3 to
Registration Statement No. 333-18475 on Form S-4. In giving such consent, we
do not thereby admit that we come within the category of persons whose consent
is required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
American Appraisal Associates, Inc.
/s/ Ronald M. Goergen
By: ____________________________
Ronald M. Goergen
President
Milwaukee, Wisconsin
April 9, 1997
