<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3949 87-0531208
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
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)
----------------
SCOTT R. WATTERSON
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)
----------------
WITH COPIES TO:
ALFRED O. ROSE ROPES & GRAY ONE ROHAN S. WEERASINGHE SHEARMAN &
INTERNATIONAL PLACE BOSTON, STERLING 599 LEXINGTON AVENUE NEW
MASSACHUSETTS 02110 (617) 951-7000 YORK, NEW YORK 10022 (212) 848-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities are being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
fo the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
NUMBER OF PROPOSED MAXIMUM
TITLE OF SHARES MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.01 par
value)................ $160,000,000.00 $55,172.41
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments. The shares of Common Stock are not being registered
for the purpose of sales outside the United States.
(2) Estimated pursuant to Rule 457(a), solely for the purpose of computing the
registration fee.
----------------
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>
EXPLANATORY NOTE
Please note that the name of the registrant will be changed to ICON Fitness
Corporation in connection with the consummation of the Offering.
<PAGE>
CROSS REFERENCE SHEET
LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY
PART I OF FORM S-1
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION LOCATION IN PROSPECTUS
-------------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front Facing Page of Registration Statement;
Cover Page of Prospectus....... Cross-Reference Sheet; Outside Front Cover
Page of Prospectus.
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover Page and Back Cover Page
of Prospectus.
3. Summary Information, Risk
Factors and Ratio of Earnings Prospectus Summary; Risk Factors; The
to Fixed Charges............... Company; Unaudited Pro Forma Financial
Data; Selected Financial Data.
4. Use of Proceeds................ Prospectus Summary; Sources and Uses of
Funds.
5. Determination of Offering Facing Page of Registration Statement;
Price.......................... Outside Front Cover Page of Prospectus;
Prospectus Summary; Underwriting.
6. Dilution....................... Dilution.
7. Selling Security Holders....... *
8. Plan of Distribution........... Outside Front and Inside Cover Pages of
Prospectus; Prospectus Summary;
Underwriting.
9. Description of Securities to be Outside Front and Inside Cover Pages of
Registered..................... Prospectus; Prospectus Summary; Risk
Factors; Description of Capital Stock;
Stockholders Agreement.
10. Interests of Named Experts and
Counsel........................ Legal Matters; Experts.
11. Information With Respect to Outside and Inside Front Cover Pages of
Registrant..................... Prospectus; Prospectus Summary; Risk
Factors; Capitalization; Background;
Unaudited Pro Forma Financial Data;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain Relationships
and Related Transactions; Principal
Shareholders; Description of Capital Stock;
Shareholders Agreement; Description of
Certain Indebtedness.
12. Disclosure of Commissions
Position on Indemnification for
Securities Act Liabilities..... *
</TABLE>
- --------
* Not Applicable.
<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 MAY 22, 1996
SHARES
[LOGO] ICON FITNESS CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
Of the shares of Common Stock of the Company offered, shares are
being offered hereby in the United States and shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share are identical
for both the U.S. Offering and the International Offering. See "Underwriting."
All of the shares of Common Stock are being sold by the Company. Prior to
this offering, there has been no public market for the Common Stock. It
currently is estimated that the initial public offering price will be between
$ and $ per share. For factors considered in determining the initial
public offering price, See "Underwriting."
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Company has applied for the Common Stock to be approved for listing on
the New York Stock Exchange.
-----------
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.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters options, for 30 days to purchase
up to an additional shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such options are exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Company
will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
delivery of the certificates representing such shares will be made in New York,
New York on or about , 1996.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
-----------
The date of this Prospectus is , 1996
<PAGE>
----------------
Reference in this Prospectus is made to the following trademarks and brand
names: Accusmart(TM), Concor(TM), CRANK-IT-UP(TM), Cross Trainer(TM),
CrossWalk(R), Image(TM), INSYNC(TM), INTELEX(TM), JumpKing(R), Legend(TM),
ProForm(R), Pro-Tech(TM), Smart Card(TM), Space Saver(TM), Speed Link(TM),
Stowaway(TM), Triple Play(TM), WeiderCare(TM), 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
In this Prospectus, all references to "IHF Capital," "IHF Holdings" and
"Health & Fitness" refer to IHF Capital, Inc., IHF Holdings, Inc. and ICON
Health & Fitness, Inc., respectively. The issuer of Common Stock is IHF
Capital. IHF Capital 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. Concurrently with the
Offering, IHF Holdings will be merged with and into IHF Capital (the "Merger"),
with IHF Capital as the surviving corporation, which will change its name to
ICON Fitness Corporation ("ICON"). Health & Fitness and IHF Holdings have been
reporting companies under the Securities Exchange Act of 1934 (the "1934 Act").
Financial information provided herein is of IHF Capital 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" and with respect to periods
after November 14, 1994 refer to the consolidated operations of IHF Capital,
IHF Holdings and Health & Fitness. 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, "1995" refers to the fiscal year ended May 31,
1995. Industry data is based on the calendar year, however.
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 points specifically targeted to meet
different consumers' health and fitness needs. The Company's line of home
fitness aerobic products includes upright rowers, treadmills, exercise bikes,
stair steppers and cross country skiers, and its line of anaerobic fitness
products includes home gyms and weight benches. 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 represented
approximately 28% of total wholesale domestic home fitness equipment sales in
calendar 1994. In the first quarter of fiscal 1996, the Company began to
directly market its products in Europe. In fiscal 1995, the Company had net
sales of $530.8 million versus $202.4 million in fiscal 1991, reflecting
compound annual growth in net sales of 27.3%. For the first nine months of
fiscal 1996, the Company had net sales of $594.2 million, compared to $416.4
million in the comparable prior year period, representing an increase of 42.7%.
The Company believes that from 1991 to 1995 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.
Based on industry trade association data, the Company believes that retail
sales of fitness equipment in the U.S. grew from approximately $0.4 billion in
calendar 1980 to approximately $2.6 billion and $2.7 billion in calendar 1993
and 1994, 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 incorporation of 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
3
<PAGE>
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 at a different price point). 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 fiscal 1994 and
1995 and the first nine months of fiscal 1996, approximately 45%, 46% and 45%,
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, and the development of the Cardio family of upright rowers,
which significantly improved on upright rower designs first marketed by others.
The Company believes that its ability to identify industry trends and to take a
product from concept to delivery quickly 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; and (iii) feedback
on market trends and changing consumer tastes.
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 points 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
points 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
4
<PAGE>
sophisticated programmable electronic products, at a variety of price points.
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 and
geographic 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 believes there may be acquisition opportunities which would
complement its existing business and provide an opportunity for growth, and at
any time the Company may be in discussions concerning one or more possible
acquisitions. In addition, 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, in the first quarter of fiscal 1996,
the Company began 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 countries. Prior to
fiscal 1996, the Company had minimal foreign sales. Net sales from
international markets in the first three quarters of fiscal 1996 were $6.0
million, $9.3 million and $7.8 million, respectively. The Company has granted,
subject to certain conditions, certain exclusive and non-exclusive rights to
distribute its products in certain other international markets to Weider Sports
Equipment Co., Ltd. ("Weider Sports"). In addition, the Company is considering
offering services that complement its product offerings, such as on-line
personal training services.
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, IHF Capital's
subsidiaries issued $60.0 million in proceeds of 15% Senior Secured Discount
Notes due 2004 (the "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 a credit agreement (the "Credit Agreement") with General Electric Capital
Corporation ("GE Capital"), various other lenders and GE Capital, as agent. As
a result of the Recapitalization, the Company had a deficiency in stockholder's
equity of $101.8 million as of March 2, 1996.
The above summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, all financial
information and share and per share data contained in this Prospectus (i) give
effect to the conversion ("Conversion") that will occur concurrently with the
closing of the sale of the common stock, $0.01 par value (the "Common Stock"),
offered hereby, whereby all shares of the
5
<PAGE>
existing Class A Common Stock, par value $.001, and Class L Common Stock, par
value $.001, of IHF Capital will be exchanged on the basis of a formula derived
from the initial public offering price for a single class of Common Stock at a
ratio of Class A shares and Class L shares per share of Common Stock,
(ii) assume no exercise of the Underwriters' over-allotment option, and (iii)
solely for purposes of presenting information with respect to dilution, assume
the exercise of warrants issued to purchasers of the Senior Subordinated Notes
and the Discount Notes into shares of Common Stock on a post-Conversion
basis. See "Background," "Description of Capital Stock," "Underwriting" and the
Notes to Consolidated Financial Statements.
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."
6
<PAGE>
THE OFFERING
The offering of shares of Common Stock in the United States (the "U.S.
Offering") and the offering of shares of Common Stock outside the United
States (the "International Offering") are collectively referred to herein as
the "Offering."
<TABLE>
<S> <C>
Common Stock offered by the Company....... shares
Common Stock to be outstanding after this
Offering (a)............................. shares
Sources and uses of funds................. The net proceeds to the Company from
this Offering together with
borrowings under the Credit
Agreement will be used for the
redemption of certain indebtedness
of the Company, to retire preferred
stock of IHF Holdings ("IHF Holdings
Preferred Stock") and options to
purchase IHF Holdings Preferred
Stock and to purchase certain Common
Stock and warrants to purchase
Common Stock held by the former
principal owners of the Company and
certain other stockholders. See
"Sources and Use of Funds."
New York Stock Exchange, Inc. ("NYSE")
symbol...................................
</TABLE>
- --------
(a) Excludes shares that may be issued upon exercise of options granted
pursuant to the Company's 1994 Stock Option Plan at an average exercise
price of $ per share, shares that may be issued upon exercise of
options granted pursuant to the Company's 1996 Stock Option Plan at an
average exercise price of $ per share and shares that may be issued
upon exercise of warrants at an average exercise price of $ per share.
7
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, NINE MONTHS ENDED
----------------------------------- -------------------
MARCH 4, MARCH 2,
1991(2) 1992 1993 1994 1995 1995 1996
------- ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $202.4 $254.1 $314.9 $403.0 $530.8 $416.4 $594.2
------ ------ ------ ------ ------ ------ ------
Gross profit........... 49.0 59.2 86.3 114.8 152.4 114.2 161.5
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and
administrative and
other operating
expenses.............. 36.3 46.9 64.6 83.5 105.0 72.5 109.7
Compensation expense
attributable to
options............... -- -- -- -- 39.0(3) 39.0(3) --
------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 36.3 46.9 64.6 83.5 144.0 111.5 109.7
------ ------ ------ ------ ------ ------ ------
Income from operations. 12.7 12.3 21.7 31.3 8.4 2.7 51.8
Interest expense....... 4.7 4.9 5.5 6.2 21.5 15.5 27.5
Amortization of
deferred financing
fees.................. -- -- -- -- 1.7 1.0 2.6
Dividends on preferred
stock of subsidiary... -- -- -- -- 2.8 1.5 3.8
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 8.0 7.4 16.2 25.1 (17.6) (15.3) 17.9
Provision for (benefit
from) income taxes.... 3.1 2.8 6.2 9.8 (4.7) (5.2) 10.0
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 4.9 $ 4.6 $ 10.0 $ 15.3 $(12.9) $(10.1) $ 7.9
====== ====== ====== ====== ====== ====== ======
Supplemental pro forma net income (loss) per common
share(4)........................................... $ $
====== ======
Supplemental pro forma weighted average common
shares outstanding(4)..............................
OTHER DATA: ====== ======
Depreciation and
amortization.......... $ 1.7 $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 8.1 $ 14.7
Capital expenditures .. 3.3 4.0 4.0 6.9 8.0 7.1 11.6
</TABLE>
<TABLE>
<CAPTION>
MAY 31, MARCH 2, 1996
-------------- ------------------------
1994 1995 ACTUAL AS ADJUSTED (4)
------ ------- ------- ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................. $ 0.1 $ 4.1 $ 3.2 $ 3.2
Working capital...................... 97.8 138.1 204.5 215.6
Total assets......................... 184.7 290.2 390.9 391.0
Total indebtedness................... 65.4 268.1 325.5 264.9
Preferred stock of subsidiary
(including accrued dividends)....... -- 42.8 46.6 --
Stockholders' equity (deficit)....... 54.5 (109.2) (101.8) 6.2
</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 IHF Capital and its
subsidiaries.
(2) The results of operations of WeiderCare are not included in operating and
other data for fiscal year ended May 31, 1991. Such results of operations
and other data are immaterial to the combined operating and other data for
that period.
(3) 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 IHF Capital and $4.0 million
of replacement options to purchase IHF Holdings Preferred Stock and related
warrants to purchase Class A 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").
(4) Reflects (i) the sale by IHF Capital of shares of Common Stock offered
hereby, an increase of $40.5 million in revolving credit borrowings and the
application of the estimated net proceeds therefrom to redeem $35.0 million
principal amount of Senior Subordinated Notes, all of the Discount Notes,
all of the IHF Holdings Preferred Stock, all of the options to purchase IHF
Holdings Preferred Stock and certain Common Stock and warrants to purchase
Common Stock held by the former principal owners of the Company and certain
other stockholders and (ii) the effect of the Conversion as if such
transactions occurred on March 2, 1996, and, for purposes of the per share
information (which includes all common stock equivalents), as if such
transactions had occurred on June 1, 1994. See "Selected Consolidated
Financial Data" and "Sources and Uses of Funds."
8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors,
together with the other information contained in this Prospectus, in
evaluating an investment in the Common Stock.
RELIANCE ON MAJOR CUSTOMERS; EXPOSURE TO THE RETAIL INDUSTRY
The Company's two largest customers together accounted for approximately
47%, 43% and 42% of the Company's revenues in fiscal 1994, 1995 and the first
nine months of fiscal 1996, respectively. The Company's largest customer,
Sears Roebuck ("Sears"), accounted for approximately 34%, 31% and 34% of the
Company's revenues in fiscal 1994 and 1995 and the first nine months of fiscal
1996, respectively. Accounts receivable for the Company's two largest
customers accounted for approximately 41%, 27% and 40% of total accounts
receivable at May 31, 1994 and 1995 and March 2, 1996, respectively. The level
of the Company's sales to these customers depends in large part 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 purchase 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. 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.
In fiscal 1995 and the first nine months of fiscal 1996 approximately 90%
and 98%, 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. See "Business--Customers."
PRODUCT LIFE CYCLES; DEPENDENCE ON PARTICULAR PRODUCTS AND CONSUMER INTEREST
IN FITNESS
Product life cycles can be short in the fitness industry and innovation is
an important component of competition. 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. See "Business--Product Innovation and Development."
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 fiscal years 1994 and 1995 and the first nine months of fiscal 1996 of
$252.6 million, $235.4 million and $221.6 million, respectively, representing
approximately 63%, 44% and 37%, respectively, of the Company's net sales in
such periods. The Cardio family of upright rowers was introduced in the second
quarter of fiscal 1994 and produced net sales in fiscal 1995 and the first
nine months of fiscal 1996 of $138.1 million and $228.8 million, respectively,
representing 26% and 39% of
9
<PAGE>
the Company's net sales in such periods. 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 its Cardio family of
upright rowers and one or more similarly popular products were not developed
and introduced by the Company in a timely manner. See "Business--Products."
LEVERAGE
The Company incurred substantial indebtedness in connection with the
Recapitalization and may incur additional indebtedness in the future. Part of
the net proceeds to be received by the Company from this Offering will be used
to pay down a portion of the Company's debt. As of March 2, 1996, on a pro
forma basis after giving effect to the Offering and the application of the net
proceeds therefrom, the Company would have had outstanding total indebtedness
of approximately $264.9 million and stockholders' equity of approximately $6.2
million. Such indebtedness contains financial and restrictive covenants, and
the Company would be in default thereunder if it failed to comply with such
covenants. If not cured or waived, such a default could have a material
adverse effect on the Company. The degree to which the Company is leveraged
could have important consequences, including the following: (i) the Company's
ability to obtain additional financing for working capital or other purposes
in the future may be limited; (ii) a substantial portion of the Company's cash
flow from operations will be dedicated to the payment of the principal of and
interest on its indebtedness, thereby reducing funds available for operations;
and (iii) the Company may be more vulnerable to economic downturns and be
limited in its ability to withstand competitive pressures. In addition,
because certain of the Company's borrowings are and will continue to be at
variable rates of interest, the Company will be vulnerable to increases in
interest rates. The Company's ability to make scheduled payments of the
principal of or interest on, or to refinance, its indebtedness will depend on
its future operating performance and cash flow, which are subject to
prevailing economic conditions, prevailing interest rate levels and financial,
competitive, business and other factors, many of which are beyond its control.
The Credit Agreement with GE Capital as agent and various lenders, and other
debt instruments, including the Indenture (the "Senior Subordinated Notes
Indenture") with respect to the Senior Subordinated Notes, which will continue
in effect after the Offering, contain significant financial and operating
covenants, including, among other things, restrictions on the ability of
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, prohibits it from amending certain
provisions of the Senior Subordinated Notes Indenture and provides that the
occurrence of a Change of Control (as defined in the Senior Subordinated Notes
Indenture), among other things, constitutes an event of default under the
Credit Agreement requiring immediate payment of all indebtedness outstanding
under the Credit Agreement and the discontinuance of the extension of credit
thereunder. See "Description of Certain Indebtedness." Although Health &
Fitness is currently in compliance with the terms of these debt instruments
and does not believe that its current operating plans will be restricted by
them, changes in economic or business conditions, results of operations or
other factors may in the future result in circumstances in which such
covenants restrict its plans or business operation.
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
10
<PAGE>
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., HealthRider, Inc. and Diversified Products Corporation
("DP") and Roadmaster Industries Inc. ("Roadmaster"), which are commonly
owned. 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. See "Business--Competition."
EXPANSION STRATEGY
An important part of the Company's strategy is to increase its sales by,
among other things, (i) developing innovative, high-quality products, (ii)
utilizing multiple distribution channels, (iii) positioning its brands to
address specific distribution channels, (iv) providing broad product
offerings, (v) maintaining low-cost flexible manufacturing, and (vi) pursuing
growth opportunities in domestic and international markets, including through
acquisitions. Each of these efforts requires significant investment and
entails a risk of poor consumer response. Product innovation, though necessary
because of product life cycles, requires a significant dedication of
resources. There can be no assurance that new products will be positively
received by consumers.
In the past, affiliates of Weider Health & Fitness ("WHF") and Weider
Europe, B.V. ("Weider Europe"), who are affiliates of the Company, have
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 fiscal 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. Affiliates of WHF currently distribute the Company's
products in certain other countries. See "Certain Relationships and Related
Transactions" and "Business--Legal Proceedings." 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.
In August 1995, the Company gave notice of its intention to exercise its
option (the "CanCo Option") to purchase the assets of three Canadian
manufacturing businesses affiliated with WHF (collectively "CanCo") for an
estimated $5 million under the terms of the CanCo Option. The Company can
terminate its obligation to purchase the CanCo assets at any time prior to
executing a final purchase and sale agreement. The purchase of the CanCo
assets has not yet been completed due to complications related to the Weider
litigation.
The Company believes there may be other acquisition opportunities which
could complement its existing business, and at any time the Company may be in
discussions concerning one or more possible acquisitions. Any such
acquisitions, some of which could be material to the Company, will require
integration of such businesses with the Company's current operations and may
involve additional borrowings. There can be no assurance that any business
that the Company may acquire
11
<PAGE>
in the future will be effectively and profitably integrated with the Company.
Expansion or acquisition costs could adversely affect the Company's liquidity
and financial stability. See "Business--Business Strategy" and "--Legal
Proceedings" and "Certain Relationships and Related Transactions."
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, the Company is subject to the general risks of doing
business abroad, 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 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. The
occurrence of any of the risks relating to its foreign suppliers or the loss
of certain of these suppliers could adversely affect the Company's business
until alternative supply arrangements could be secured, particularly if such
loss occurred during the Company's key production periods. There can be no
assurance that the Company would be able to obtain products and supplies on
satisfactory terms should any of these risks materialize. See "Business--
Manufacturing and Purchasing."
SEASONALITY; FLUCTUATION IN QUARTERLY RESULTS
Historically, the Company has sold the majority of its products to its
customers in its second and third fiscal quarters (i.e., from September
through February). Increased sales 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 period do not meet or exceed
projected sales for that period, expenditures and inventory levels could be
disproportionately high for such period and the Company's cash flow and
earnings for that period and future periods 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends to a considerable extent on the performance of
its senior management team. The loss of services of either Scott Watterson,
the Company's Chief Executive Officer, or Gary Stevenson, the Company's Chief
Operating Officer, as well as the loss of other members of the Company's
management team, could have a material adverse effect on the Company.
12
<PAGE>
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. See "Management-Employment Agreements" and "Certain Relationships and
Related Transactions."
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of the Offering, the Company's officers and
directors (including affiliates of Bain Capital), and entities with which they
are affiliated, together will beneficially own approximately % of the
outstanding shares of Common Stock (with affiliates of Bain Capital owning
approximately % of the outstanding shares of Common Stock). All current
stockholders and warrantholders have entered into a ten-year stockholders
agreement dated as of November 14, 1994 (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 Capital
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 even though they will hold less than a majority
of the Company's Common Stock. This concentration of ownership and voting
power may have the effect of delaying or preventing a change in control of the
Company. See "Stockholders Agreement--Voting Rights" and "Principal
Stockholders."
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. The Company currently carries an occurrence-based product
liability insurance policy. The current policy provides coverage for the
period from September 1, 1995 to September 30, 1996 of up to $25 million per
occurrence, and $25 million in the aggregate. The 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 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. See "Business--Legal
Proceedings."
ENVIRONMENTAL CONSIDERATIONS
The Company's operations are subject to federal, state and local
environmental and health and safety laws and regulations that impose workplace
standards and limitations on the discharge of pollutants into the environment
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances
and wastes. The nature of the Company's operations exposes it to the risk of
claims with respect to environmental matters, and there can be no assurance
that material costs or liabilities will not be incurred in connection with
such claims. Future events, such as changes in existing laws and regulations
or enforcement policies or the discovery of contamination on sites 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 "Business--Environmental Matters."
13
<PAGE>
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied to list the Common Stock on the NYSE, there
can be no assurance that an active public market will develop upon completion
of the Offering or, if developed, that such a market will be sustained after
the Offering. Factors such as fluctuations in the Company's operating results
and general changes in the market conditions in the health and fitness product
industry could have a significant impact on the market price of the Common
Stock. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Underwriters and
may not be indicative of the market price for the Common Stock after
completion of the Offering. See "Underwriting."
ANTI-TAKEOVER EFFECTS
IHF Capital's Amended and Restated Certificate of Incorporation and Bylaws
will, after the completion of the Offering, contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions establish staggered
terms for members of IHF Capital's Board of Directors and include advance
notice procedures for stockholders to nominate candidates for election as
directors of the Company and for stockholders to submit proposals for
consideration at stockholders' meetings. In addition IHF Capital will be
subject to Section 203 of the Delaware General Corporation Law ("DGCL") which
limits transactions between a publicly held company and "interested
stockholders" (generally, those stockholders who, together with their
affiliates and associates, own 15% or more of a company's outstanding capital
stock). The restrictions of Section 203 would not apply to those who were
"interested stockholders" prior to the consummation of the Offering. This
provision of the DGCL may have the effect of deterring certain potential
acquisitions of the Company. IHF Capital's Amended and Restated Certificate of
Incorporation will provide for authorized but unissued shares of Preferred
Stock, the rights, preferences, qualifications, limitations and restrictions
of which may be fixed by the Board of Directors without any further action by
stockholders, and, as the sole stockholder of Health & Fitness, IHF Capital
will be entitled to authorize preferred stock of Health & Fitness. The Company
is also subject to the Senior Subordinated Notes Indenture, which provides
that, upon the occurrence of a Change of Control (as defined therein), the
Company will be obligated to make an offer to purchase each holder's Senior
Subordinated Notes at a purchase price in cash equal to 101% of the principal
amount thereof, together with any accrued and unpaid interest thereon. An
occurence of a Change of Control would also constitute an event of default
under the Credit Agreement requiring immediate payment of all indebtedness
outstanding under the Credit Agreement and discontinuance of the extension of
credit thereunder. See "Description of Capital Stock" and "Description of
Certain Indebtedness."
NO DIVIDENDS ON COMMON STOCK
Other than in connection with the Recapitalization, the Company has not
paid a dividend on its Common Stock and does not anticipate paying any
dividends on its Common Stock in the foreseeable future. Debt instruments of
IHF Capital's operating subsidiary, Health & Fitness, severely restrict its
ability to pay dividends to IHF Capital. See "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Certain Indebtedness."
DILUTION
Based on an initial public offering price of $ per share (the midpoint of
the range set forth on the cover of this Prospectus), purchasers of the Common
Stock offered hereby will experience immediate and substantial dilution of
$ in the net tangible book value per share of Common Stock. See "Dilution."
14
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the sale of the Common Stock offered hereby, Bain Capital and its
affiliates, management and Weider Health and Fitness and its affiliates owned
substantially all of the Company's outstanding Common Stock. All of the shares
of Common Stock outstanding prior to the Offering are "restricted securities"
as that term is defined in Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), and, under certain circumstances, may be sold
without registration pursuant to Rule 144 at varying times. The Securities and
Exchange Commission (the "Commission") has proposed changes to Rule 144 that
would shorten the holding periods thereunder. In addition, existing
stockholders and warrant and option holders have registration rights with
respect to substantially all of the Common Stock held by them or issuable upon
exercise of their warrants and options. In connection with the Offering, all
existing stockholders have agreed not to dispose of any shares for a period of
180 days from the date of this Prospectus, or to make any demand for or
exercise any right with respect to the registration of their shares, and the
Company has agreed not to dispose of any shares (other than shares sold in the
Offering or issuances by the Company of certain employee stock options and
shares covered thereby) for a period of 180 days from the date of this
Prospectus, without the prior written consent of Goldman, Sachs & Co.
("Goldman Sachs") on behalf of the Underwriters. After 180 days after this
Offering, the Company intends to file a registration statement on Form S-8
under the Act to register shares of Common Stock reserved for issuance under
its 1994 Stock Option Plan and 1996 Stock Option Plan, thus permitting the
resale of shares issued under the plans by non-affiliates in the public market
without restriction under the Act. Such registration statement will become
effective immediately upon filing. As of the closing of the Offering, options
to purchase shares of Common Stock will be outstanding under the Company's
stock option plans and shares of Common Stock will be available for future
grants. Warrants to purchase shares of the Company's Common Stock will also
be outstanding. See "Management--Executive Compensation," "Shares Eligible for
Future Sale" and "Stockholders Agreement--Registration Rights."
No prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price of the Common Stock from time to time. The sale
of a substantial number of shares held by the existing stockholders, whether
pursuant to a subsequent public offering or otherwise, or the perception that
such sales could occur, could adversely affect the market price of the Common
Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities.
15
<PAGE>
SOURCES AND USES OF FUNDS
Based on assumed gross proceeds of $160,000,000, the net proceeds from the
Offering to the Company are estimated to be approximately $150,400,000 after
deducting the underwriting discount.
The net proceeds to the Company from the Offering together with borrowings
under the Credit Agreement will be used to retire $35.0 million principal
amount of the 13% Senior Subordinated Notes due 2002 and all of the 15% Senior
Secured Discount Notes due 2004 (of which, Discount Notes with an accreted
value of $ as of May 31, 1996 are held by affiliates of WHF, an affiliate
of the Company) and to redeem all of the outstanding IHF Holdings Preferred
Stock and options to purchase IHF Holdings Preferred Stock (all of which is
held by affiliates of the Company) and to repurchase certain shares of Common
Stock and warrants held by the former principal owners of the Company and
certain other stockholders. The Credit Agreement currently requires
application of a portion of the proceeds of the Offering to repay debt
thereunder, and would not permit the application of proceeds as described
herein. The Company is negotiating an amendment of these provisions of the
Credit Agreement. See "Background," "Certain Relationships and Related
Transactions," and "Description of Certain Indebtedness." The estimated
applications of funds by the Company from the Offering are as follows:
<TABLE>
<CAPTION>
SOURCES OF FUNDS
----------------
<S> <C>
Net Proceeds of the Offering................................ $150,400,000
Borrowings under the Credit Agreement....................... 45,326,000
------------
Total....................................................... $195,726,000
============
<CAPTION>
USES OF FUNDS
-------------
<S> <C>
Redemption of Senior Subordinated Notes(1).................. $ 40,996,000(2)
Redemption of Discount Notes(3)............................. 85,530,000(2)
Redemption of the IHF Holdings Preferred Stock(4)........... 40,000,000
Repurchase of Certain Securities from WHF(5)................ 28,200,000
Offering Expenses........................................... 1,000,000
------------
Total..................................................... $195,726,000
============
</TABLE>
- --------
(1) Includes a redemption premium of 12.25% over face value and $1.7 million
of accrued interest at May 31, 1996.
(2) As of May 31, 1996.
(3) Includes a redemption premium of 14.00% over accreted value at May 31,
1996.
(4) For purposes of this and other tables herein, it has been assumed that the
IHF Holdings Preferred Stock will be redeemed at face value and the
options to purchase IHF Holdings Preferred Stock will be redeemed at face
value less the exercise price. The actual redemption price is being
negotiated. See "Business--Legal Proceedings--Proposed Settlement of WHF
Litigation."
(5) Simultaneously with the completion of the Offering, the Company expects to
be required to repurchase half of the Common Stock held by the former
principal owners of the Company and certain other stockholders and expects
to have the right to purchase all of the Common Stock and warrants to
purchase Common Stock held by the former principal owners of the Company
and certain other stockholders. See "Business--Legal Proceedings--Proposed
Settlement of WHF Litigation."
DIVIDEND POLICY
Other than in connection with the Recapitalization, IHF Capital has not
paid a dividend on its Common Stock and does not anticipate paying any
dividends on its Common Stock in the foreseeable future. Debt instruments of
IHF Capital's subsidiary, Health & Fitness, severely restrict its ability to
pay dividends.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of March 2, 1996 (i) the actual
consolidated capitalization of the Company and (ii) the consolidated
capitalization as adjusted to reflect (a) the sale by IHF Capital of
shares of Common Stock offered hereby, (b) the application of the estimated
net proceeds to the Company (after deducting the underwriting discount and
estimated offering expenses) to redeem $35.0 million principal amount of
Senior Subordinated Notes, all of the Discount Notes, all of the IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock, and
certain Common Stock and warrants to purchase Common Stock held by the former
principal owners of the Company and certain other stockholders and (c) the
effects of the Conversion, as if such transactions had occurred on March 2,
1996. This table should be read in conjunction with the consolidated financial
statements and related notes thereto and the unaudited pro forma financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 2, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Short-term debt, consisting of current maturities
of long-term debt................................ $ 2.8 $ 2.8
Long-term debt (excluding current portion):
Revolving credit borrowings..................... 124.6 165.1 (1)
Term loans...................................... 32.2 32.2
Senior Subordinated Notes....................... 99.3 64.8 (2)
Discount Notes.................................. 66.7 -- (3)
---------- ----------
Total long-term debt............................ 322.8 262.1
---------- ----------
Minority interest in preferred stock of
Subsidiary....................................... 46.6 -- (4)
Stockholders' equity:
Common Stock and additional paid-in-capital..... 75.0 197.1
Receivable from officers for exercised stock
options........................................ (0.8) (0.8)
Retained earnings (deficit)..................... (176.0) (190.1)(5)
---------- ----------
Total stockholders' equity (deficit)............ (101.8) 6.2
---------- ----------
Total Capitalization.......................... $ 270.4 $ 271.1
========== ==========
</TABLE>
- --------
(1) Revolving credit borrowings will increase as of March 2, 1996, on an as-
adjusted basis, by $40.5 million to reflect the increase in borrowings
that would have been required had the Offering and the redemption of the
$35 million principal amount of Senior Subordinated Notes, all of the
Discount Notes, the Common Stock and warrants to purchase Common Stock
held by the former principal owners of the Company and certain other
stockholders, all of the IHF Holdings Preferred Stock and all of the
options to purchase IHF Holdings Preferred Stock taken place on March 2,
1996. See "Sources and Uses of Funds."
(2) $35.0 million principal amount of Senior Subordinated Notes will be
redeemed at a premium of 12.25% over face value plus accrued interest of
$.6 million at March 2, 1996.
(3) The Discount Notes will be redeemed at a premium of 14.00% over accreted
value at March 2, 1996.
(4) For purposes of this and other tables herein, it has been assumed that the
IHF Holdings Preferred Stock will be redeemed at face value and the
options to purchase IHF Holdings Preferred Stock will be redeemed at face
value less the exercise price. The actual redemption price is being
negotiated. See "Business--Legal Proceedings--Proposed Settlement of WHF
Litigation."
(5) Represents the extraordinary loss, net of related tax benefits, on the
securities redemptions as further described in "Unaudited Pro Forma
Financial Data."
17
<PAGE>
DILUTION
As of March 2, 1996 the Company had a pro forma net tangible book deficiency
of $104.6 million or $ per share of Common Stock, after giving effect to the
Conversion. Pro forma net tangible book deficiency per share represents the
amount of total tangible assets less total liabilities divided by the total
number of shares of Common Stock outstanding after giving effect to the
Conversion. Without taking into account any other changes in the net tangible
book deficiency after March 2, 1996, other than to give effect to the receipt
and application by the Company of the net proceeds from the sale of the
shares of Common Stock offered hereby at an offering price of $ per share as
described in "Sources and Uses" and the issuance of shares of Common Stock
upon exercise of warrants issued in connection with the Senior Subordinated
Notes and the Discount Notes (solely to show the dilutive effect thereof) the
pro forma net tangible book value of the Company would have been $ or $
per share. This represents an immediate increase in the pro forma net tangible
book value of $ per share to existing shareholders and an immediate dilution
of $ per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $
----
Pro forma net tangible book deficiency per share as of March 2,
1996 before the Offering....................................... $ (1)
Increase per share attributable to the exercise of warrants.....
Increase per share attributable to new investors................
----
Pro forma net tangible book value per share as of March 2, 1996
after the Offering............................................... $
----
Dilution per share purchased in the Offering...................... $
====
</TABLE>
The following table summarizes, on a pro forma basis as of March 2, 1996,
the differences between existing stockholders and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration and the average price per share, before deductions of the
underwriting discount and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
Shareholders(2)........ $ 60,633,000 27%
New Investors........... 160,000,000 73%
--------- ------ ------------ --- ------
Total................. 100% $220,633,000 100% $
========= ====== ============ === ======
</TABLE>
Other than as noted above, the foregoing computations assume the exercise of
no stock options or warrants after March 2, 1996. As of that date, there were
outstanding options and warrants to purchase shares of Common Stock on a
pro forma basis, at a weighted average exercise price of $ per share, of
which are vested. To the extent these options or warrants are exercised,
there will be further dilution to new stockholders. See Note 10 of the Notes
to the Consolidated Financial Statements.
- --------
(1) Reflects the conversion of all issued and outstanding shares of Class A
and Class L Common Stock into shares and shares, respectively, of
Common Stock upon the closing of the Offering.
(2) Includes shares issuable pursuant to the exercise of warrants issued in
connection with the Senior Subordinated Notes and Discount Notes, as if
they were exercised concurrently with the Offering.
18
<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 Class A Common Stock and
Class L Common Stock of the Company, $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 Class A and
Class L Common Stock of IHF Capital, of which $26.4 million were redeemable at
the option of the Company (the "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 Class A Common Stock and Class L 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 Discount Notes, one
warrant to purchase shares of Common Stock of IHF Capital at an exercise
price of $ per share and one warrant to purchase shares of Common Stock of
IHF Capital at an exercise price of $ 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 shares
of Common Stock and of IHF Capital at an exercise price of $ per share and
one warrant to purchase shares of Common Stock of IHF Capital at an exercise
price of $ per share, were issued, (v) term borrowings of $35.0 million and
revolving borrowings of $111.5 million under the Credit Agreement were made
and (vi) the Shareholder Notes and certain indebtedness of the Recapitalized
Companies were repaid.
Concurrent with the Recapitalization Closing, the Company obtained exclusive
licenses to market fitness equipment and certain non-ingestive sports medicine
products under the "Weider" and related brand names. Under one such license,
the Company made a $5.0 million payment at the Recapitalization Closing; the
other license provides for royalty payments to be paid over time. See
"Business--Legal Proceedings--WHF Litigation" and "--Proposed Settlement of
WFH 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.
The name of the issuer of the Common Stock is currently IHF Capital, Inc.
Health & Fitness is a wholly-owned subsidiary of IHF Holdings which in turn is
a wholly-owned subsidiary of IHF Capital. Concurrent with the Offering, the
Merger and the Conversion will occur, and IHF Capital, Inc. (the issuer of the
Common Stock) will change its name to ICON Fitness Corporation.
19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following pages present the unaudited pro forma consolidated results of
operations of the Company for the nine months ended March 2, 1996, the year
ended May 31, 1995 and the twelve month period beginning March 4, 1995 and
ending March 2, 1996, as well as the balance sheet as of March 2, 1996,
adjusted to reflect the following events:
(i) the sale of shares of Common Stock offered hereby, resulting in
net proceeds of approximately $150.4 million after deducting the
underwriting discount;
(ii) the conversion of the Class A Common and Class L Common into Common
Stock at a conversion ratio of -to-1 and -to-1, respectively, and the
conversion of options to purchase Class A and Class L Common into options
to purchase Common Stock at the same conversion ratios;
(iii) the redemption of $35.0 million principal amount of the Senior
Subordinated Notes with a total redemption price of $39.9 million at March
2, 1996, which reflects $.6 million of accrued interest thereon and a
12.25% premium over the principal amount being redeemed (total redemption
price of $41.0 million at May 31, 1996);
(iv) the redemption of all of the Discount Notes with a total redemption
price of $82.9 million at March 2, 1996, which reflects a redemption
premium of $12.8 million equivalent to 114.0% of the accreted value of the
Discount Notes at March 2, 1996 (total redemption price of $85.5 million at
May 31, 1996);
(v) the redemption of all of the IHF Holdings Preferred Stock and options
to purchase IHF Holdings Preferred Stock at an assumed price of $40.0
million which is currently being negotiated and the forgiveness of $6.6
million of accrued dividends thereon at March 2, 1996 (accrued dividends of
$7.9 million at May 31, 1996);
(vi) the additional borrowings under the Credit Agreement of $40.5
million (and a corresponding increase in interest expense), together with
the net proceeds of the Offering required to effect the redemption of the
Senior Subordinated Notes, the Discount Notes, the IHF Holdings Preferred
Stock and the options to purchase IHF Holdings Preferred Stock (additional
borrowings $44.3 million at May 31, 1996);
(vii) the purchase of Common Stock and warrants to purchase Common Stock
owned by the former principal owners of the Company and certain other
stockholders at an assumed price of $28.2 million which is currently being
negotiated; and
(viii) the Recapitalization. See "Background."
The Unaudited Pro Forma Consolidated Statement of Operations gives effect to
the events described above as if they had occurred on June 1, 1994. The
Unaudited Pro Forma Consolidated Balance Sheet data give effect to the events
described above as if they had occurred on March 2, 1996. No adjustments have
been made for the proposed, non-binding WHF Litigation Settlement except for
the redemption of the IHF Holdings Preferred Stock and the purchase of Common
Stock and warrants to purchase Common Stock held by the former principal
owners of the Company and certain other stockholders from the proceeds of this
offering at assumed prices which are being negotiated.
The pro forma financial data are provided for informational purposes only
and are not necessarily indicative of the results of operations or financial
position of the Company 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.
In connection with the events described above (and assuming they occur on
March 2, 1996), the Company will incur extraordinary debt extinguishment costs
consisting of (i) $10.4 million relating to the write-off of the unamortized
balance of deferred financing costs on the redeemed Discount Notes and Senior
Subordinated Notes; (ii) $3.5 million relating to the write-off of the
unamortized discount attributable to the warrants issued in connection with
the redeemed Discount Notes and Senior Subordinated Notes; and (iii) $17.5
million representing the premium for early redemption of the Discount Notes
and the $35.0 million principal amount of Senior Subordinated Notes; offset by
$6.6 million of dividends on the IHF Holdings Preferred Stock which will not
be paid upon redemption. Such charges, which will be incurred upon the closing
of the Offering and which aggregate $14.2 million (net of related tax benefit
of $10.6 million), are reflected in the Unaudited Pro Forma Consolidated
Balance Sheet Data but are not reflected in the Unaudited Pro Forma
Consolidated Statement of Operations Data. The net extraordinary loss,
assuming the above described events occur on May 31, 1996 will be $12.9
million.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 2, MARCH 2,
1996 ADJUSTMENTS 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................. $594,213 $ -- $594,213
Cost of sales.......................... 432,682 -- 432,682
-------- ------- --------
Gross profit......................... 161,531 -- 161,531
-------- ------- --------
Operating expenses.....................
Selling.............................. 69,806 -- 69,806
Research and development............. 4,782 -- 4,782
General and administrative........... 35,179 -- 35,179
-------- ------- --------
Total operating expense............ 109,767 -- 109,767
-------- ------- --------
Income from operations................. 51,764 -- 51,764
Interest expense....................... 27,434 (7,364)(a) 20,070
Amortization of deferred financing
fees.................................. 2,638 (995)(a) 1,643
Dividends on minority interest in
cumulative redeemable preferred stock
of a subsidiary....................... 3,825 (3,825)(b) --
-------- ------- --------
Income before taxes.................... 17,867 12,184 30,051
Provision for income taxes............. 10,000 2,579 (c) 12,579
-------- ------- --------
Net income............................. $ 7,867 $ 9,605 $ 17,472
======== ======= ========
Pro forma net income per common share.. $ (h)
========
Pro forma weighted average common
shares outstanding.................... (h)
========
Supplemental pro forma net income per
common share.......................... $ (i)
========
Supplemental pro forma weighted average
common shares outstanding............. (i)
========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEAR ENDED YEAR ENDED
MAY 31, 1995 ADJUSTMENTS MAY 31, 1995
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................ $530,774 $ -- $530,774
Cost of sales........................ 378,322 -- 378,322
-------- -------- --------
Gross profit....................... 152,452 -- 152,452
-------- -------- --------
Operating expenses
Selling............................ 68,706 -- 68,706
Research and development........... 5,163 -- 5,163
General and administrative......... 31,097 866 (g) 31,963
Compensation expense attributable
to options........................ 39,046 (39,046)(d) --
-------- -------- --------
Total operating expense.......... 144,012 (38,180) 105,832
-------- -------- --------
Income from operations............... 8,440 38,180 46,620
Interest expense..................... 21,495 (3,243)(a) 22,247
3,995 (e)
Amortization of deferred financing 1,741 (646)(a) 2,022
fees................................ 927 (f)
Dividends on minority interest in
cumulative redeemable preferred
stock of a subsidiary............... 2,804 (2,804)(b) --
-------- -------- --------
Income (loss) before taxes........... (17,600) 39,951 22,351
Provision for income taxes........... (4,719) 13,339 (c) 8,620
-------- -------- --------
Net income (loss) before extraordi-
nary charges and gains.............. $(12,881) $ 26,612 $ 13,731
======== ======== ========
Pro forma net loss per common share.. $ (h)
========
Pro forma weighted average common
shares outstanding.................. (h)
========
Supplemental pro forma income per
common share........................ $ (i)
========
Supplemental pro forma weighted
average common shares outstanding... (i)
========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
12 MONTHS ENDED 12 MONTHS ENDED
MARCH 2, MARCH 2,
1996(1) ADJUSTMENTS 1996
--------------- ----------- ---------------
<S> <C> <C> <C>
Net sales........................ $708,551 $ -- $708,551
Cost of sales.................... 508,751 -- 508,751
-------- ------- --------
Gross profit................... 199,800 -- 199,800
-------- ------- --------
Operating expenses
Selling........................ 91,485 -- 91,485
Research and development....... 6,083 -- 6,083
General and administrative..... 44,692 -- 44,692
-------- ------- --------
Total operating expense...... 142,260 -- 142,260
-------- ------- --------
Income from operations........... 57,540 -- 57,540
Interest expense................. 33,461 (9,395)(a) 24,066
Amortization of deferred financ-
ing fees........................ 3,447 (1,282)(a) 2,165
Dividends on minority interest in
cumulative redeemable preferred
stock of a subsidiary .......... 5,100 (5,100)(b) --
-------- ------- --------
Income before taxes.............. 15,532 15,777 31,309
Provision for income taxes....... 8,982 3,266 (c) 12,248
-------- ------- --------
Net income....................... $ 6,550 $12,511 $ 19,061
======== ======= ========
Pro forma net income per common
share........................... $ (h)
========
Pro forma weighted average common
shares outstanding.............. (h)
========
Supplemental pro forma net income
per common share................ $ (i)
========
Supplemental pro forma weighted
average common shares
outstanding..................... (i)
========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
- --------
(1) Represents the twelve months beginning March 4, 1995 and ending March 2,
1996. Provision for income taxes has been adjusted to reflect the
approximate effective tax rate of 40% on pre-tax income, excluding book
deductions for (i) dividends on the IHF Holdings Preferred Stock which
will be redeemable in connection with the Offering, (ii) interest expense
attributable to amortization of debt discount arising from the warrants
issued in connection with the Senior Subordinated Notes and the Discount
Notes, and (iii) non-deductible interest on the Discount Notes which will
be redeemable in connection with the Offering. The effective rate differs
from the combined federal and state statutory rate of 38% as a result of
no benefit being recorded for losses on the Company's European
subsidiaries in the first nine months of fiscal 1996.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
(a) Represents (i) elimination of the interest expense, including amortization
of the discount attributable to warrants issued to the original purchasers
of the Discount Notes and Senior Subordinated Notes, resulting from the
use of a portion of the net proceeds from the Offering to redeem all of
the Discount Notes and $35.0 million principal amount of the Senior
Subordinated Notes, (ii) elimination of amortization of deferred financing
fees related to such redeemed notes, and (iii) additional interest expense
(at a rate of 8.50%) on the required $40.5 million of additional
borrowings under the Revolving Credit Facility. Including amortization of
the financing fees ascribed to the redeemed Senior Subordinated Notes and
the Discount Notes and the discount attributable to the warrants issued
therewith, the effective interest rate on the Discount Notes is 17.7% and
the effective interest rate on the Senior Subordinated Notes is 16.4%.
(b) Represents elimination of the cumulative dividends recorded during the
period on the IHF Holdings Preferred Stock and options to purchase IHF
Holdings Preferred Stock to be redeemed in connection with the Offering.
(c) Represents the additional income tax expense resulting from the pro forma
adjustments to income, excluding the adjustments to the cumulative
dividends recorded during the period, the adjustments related to non-
deductible interest on the Discount Notes, and adjustments related to the
amortization of the debt discount attributable to the warrants issued in
connection with the Discount Notes and the Senior Subordinated Notes which
do not give rise to tax deductions, at a 38% effective rate.
(d) Represents elimination of compensation expense attributable to the
redemption of the Redeemable Options for $26.4 million, including payroll
taxes of $0.3 million and the $12.3 million non-cash exchange of options
to purchase capital stock of the Recapitalized Companies for management
options to purchase capital stock of IHF Capital and IHF Holdings
Preferred Stock in conjunction with the Recapitalization.
(e) Represents interest on the portion of the Senior Subordinated Notes which
will not be redeemed upon the Offering as if such Senior Subordinated
Notes had been outstanding for the entire period presented.
(f) Represents amortization of deferred financing fees related to (i) the
portion of the Senior Subordinated Notes which will not be redeemed upon
the closing of the Offering, as if such Senior Subordinated Notes were
outstanding for the entire period presented, and (ii) the Credit
Agreement, as if the agreement were in effect for the entire period
presented.
(g) Represents amortization of $0.5 million with respect to the non-compete
agreements entered into with certain members of management, as if such
non-compete agreements had been executed at the beginning of period
presented and payment of annual management fees charged by Bain Capital of
$0.4 million in conjunction with the Recapitalization as if such
management fees had been paid for the entire period presented.
(h) Reflects the Conversion only (includes all common stock equivalents as
defined in Note 2 to the Consolidated Financial Statements).
(i) Reflects the events described in items (i) through (viii) under the
heading "Unaudited Pro Forma Financial Data" above, as if such
transactions had occurred on June 1, 1994 (includes all common stock
equivalents as defined in Note 2 to the Consolidated Financial
Statements).
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
MARCH 2, MARCH 2,
1996 ADJUSTMENTS 1996
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash................................. $ 3,183 $ -- $ 3,183
Accounts receivable, net............. 215,438 -- 215,438
Inventories.......................... 98,899 -- 98,899
Deferred income taxes................ 3,821 10,600 (a) 14,421
Other assets......................... 6,338 -- 6,338
--------- --------- ---------
Total current assets............... 327,679 10,600 338,279
Property and equipment, net............ 29,921 -- 29,921
Deferred income taxes.................. 5,712 -- 5,712
Other assets........................... 27,565 (10,429)(a) 17,136
--------- --------- ---------
Total.............................. $ 390,877 $ 171 $ 391,048
========= ========= =========
LIABILITIES & EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt.... $ 2,752 $ -- $ 2,752
Accounts payable..................... 100,545 -- 100,545
Accrued expenses..................... 10,492 -- 10,492
Income taxes payable................. 5,185 -- 5,185
Interest payable..................... 4,231 (569)(b) 3,662
--------- --------- ---------
Total current liabilities.......... 123,205 (569) 122,636
--------- --------- ---------
Long-term debt......................... 322,795 (104,680)(b) 262,163
3,533 (a)
40,515 (b)
Minority interest in preferred stock of
subsidiary............................ 46,629 (40,000)(b) --
(6,629)(a)
Stockholder's equity (deficit)
Class L common stock, 1,200,000
shares authorized, 617,350 shares
outstanding, none outstanding on a
pro forma basis..................... 1 (1)(c) --
Class A common stock, 15,000,000
shares authorized, 7,747,461 shares
outstanding, none outstanding on a
pro forma basis..................... 8 (8)(c) --
Common stock, shares authorized,
shares outstanding on a pro
forma basis......................... -- 9 (c) 9
Additional paid-in capital........... 74,951 122,200 (b)(c) 197,151
Receivable from officers for purchase
of equity........................... (758) -- (758)
Cumulative translation adjustment.... (16) -- (16)
Accumulated deficit.................. (175,938) (14,199)(a) (190,137)
--------- --------- ---------
Total stockholder's equity (defi-
cit)............................. (101,752) 108,001 6,249
--------- --------- ---------
Total.............................. $ 390,877 $ 171 $ 391,048
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Represents the net extraordinary loss calculated at the pro forma balance
sheet data and expected actual date of redemption as follows (table in
thousands):
<TABLE>
<CAPTION>
MARCH 2, MAY 31,
1996 1996
-------- -------
<S> <C> <C>
Write-off of unamortized deferred financing fees.......... $10,429 $10,075
Redemption premium on the Discount Notes and Senior
Subordinated Notes....................................... 17,466 17,953
Write-off of unamortized discount on the redeemed Senior
Subordinated Notes and Discount Notes (1)................ 3,533 3,395
Preferred stock dividends expected to be forgiven (1)..... (6,629) (7,904)
------- -------
24,799 23,519
Income tax benefit........................................ (10,600) (10,650)
------- -------
$14,199 $12,869
======= =======
</TABLE>
--------
(1) Does not give rise to tax benefit.
(b) Represents amounts used to (i) redeem all of the Discount Notes ($70.1
million), (ii) redeem a portion of the Senior Subordinated Notes ($34.6
million), (iii) pay accrued interest on the redeemed portion of the Senior
Subordinated Notes ($0.6 million), (iv) redeem all of the IHF Holdings
Preferred Stock and all of the options to purchase IHF Holdings Preferred
Stock (at an assumed price of $40.0 million), and (iv) pay the redemption
premium on the Discount Notes and Senior Subordinated Notes ($17.5
million). Amounts required to effect these redemptions, in excess of the
net proceeds of the Offering before payment of the expenses of the
Offering ($150.4 million) and the purchase of the Common Stock held by the
former principal owners of the Company and certain other stockholders (at
an assumed price of $28.2 million) are assumed to be obtained through
additional borrowings under the Credit Agreement ($40.5 million).
(c) Represents (i) the net proceeds of the Offering of $150.4 million before
payment of the expenses of the offering, (ii) the Conversion and (iii) the
purchase of $28.2 million of the Common Stock and warrants to purchase
Common Stock held by the former principal owners of the Company and
certain other stockholders.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (1)
The selected consolidated financial data for the five years ended May 31,
1995 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,
1994 and ending March 4, 1995 and the period beginning June 1, 1995 and ending
March 2, 1996 and as of March 4, 1995 and March 2, 1996 have been derived from
the historical unaudited consolidated financial statements of the Company
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 the Company for such periods
and at such dates. The results of operations for the period beginning June 1,
1995 and ended March 2, 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 fourth fiscal quarter 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
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, NINE MONTHS ENDED
------------------------------------- -------------------
MARCH 4, MARCH 2,
1991(2) 1992 1993 1994 1995 1995 1996
------- ------- ------ ------ ------- -------- --------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $202.4 $254.1 $314.9 $403.0 $ 530.8 $416.4 $ 594.2
Cost of sales.......... 153.4 194.9 228.6 288.2 378.4 302.2 432.7
------ ------ ------ ------ ------- ------ -------
Gross profit........... $ 49.0 $ 59.2 $ 86.3 $114.8 $ 152.4 $114.2 $ 161.5
OPERATING EXPENSES:
Selling................ 20.7 25.1 38.5 52.1 68.7 47.0 69.8
Research and
development........... 1.5 1.2 1.6 2.8 5.2 3.9 4.7
General and
administrative........ 14.1 20.6 24.5 28.6 31.1 21.6 35.2
Compensation expense
attributable to
options............... -- -- -- -- 39.0(3) 39.0(3) --
------ ------ ------ ------ ------- ------ -------
Total operating
expenses.............. 36.3 46.9 64.6 83.5 144.0 111.5 109.7
------ ------ ------ ------ ------- ------ -------
Income from operations. $ 12.7 $ 12.3 $ 21.7 $ 31.3 $ 8.4 $ 2.7 $ 51.8
Interest expense....... 4.7 4.9 5.5 6.2 21.5 15.5 27.5
Amortization of
deferred financing
fees.................. -- -- -- -- 1.7 1.0 2.6
Dividends on subsidiary
preferred stock....... -- -- -- -- 2.8 1.5 3.8
------ ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes.......... $ 8.0 $ 7.4 $ 16.2 $ 25.1 $ (17.6) $(15.3) $ 17.9
Provision for (benefit
from) income taxes.... 3.1 2.8 6.2 9.8 (4.7) (5.2) 10.0
------ ------ ------ ------ ------- ------ -------
Net income (loss)...... $ 4.9 $ 4.6 $ 10.0 $ 15.3 $ (12.9) $(10.1) $ 7.9
====== ====== ====== ====== ======= ====== =======
Pro forma net income
(loss) per common
share (4)............. $ $
======= =======
Pro forma weighted
average common shares
outstanding (4).......
======= =======
Supplemental pro forma
net income (loss) per
common share (5)...... $ $
======= =======
Supplemental pro forma
weighted average
common shares
outstanding (5).......
======= =======
OTHER DATA:
Depreciation and
amortization.......... $ 1.7 $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 8.1 $ 14.7
Capital expenditures... 3.3 4.0 4.0 6.9 8.0 7.1 11.6
<CAPTION>
MAY 31,
-------------------------------------
MARCH 4, MARCH 2,
1991(2) 1992(2) 1993 1994 1995 1995 1996
------- ------- ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash................... $ 0.5 $ 0.2 $ 0.2 $ 0.1 $ 4.1 $ 0.4 $ 3.2
Working capital........ 12.1 64.2 24.8 97.8 138.1 187.3 204.5
Total assets........... 90.5 110.3 151.7 184.7 290.2 313.4 390.9
Total indebtedness..... 39.6 52.0 72.4 65.4 268.1 303.2 325.5
Preferred stock of
subsidiary (including
account dividends).... -- -- -- -- 42.8 41.5 46.6
Stockholders' equity
(deficit)............. 26.3 30.2 39.8 54.5 (109.2) (101.6) (101.8)
</TABLE>
27
<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 IHF Capital and its
subsidiaries.
(2) The results of operations of WeiderCare are not included in operating and
other data for the fiscal year ended May 31, 1991, and other data and the
balance sheet data of WeiderCare are not included in balance sheet data
for May 31, 1991 and 1992. Such results of operations, other data and
balance sheet data are immaterial to the combined operating, balance sheet
and other data for such years and at such dates.
(3) 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 $0.3 million of related payroll tax payments made
by IHF Capital. After the Recapitalization, the Company redeemed the
Redeemable Options.
(4) Reflects the Conversion only and includes all common stock equivalents as
defined in Note 2 to the Consolidated Financial Statements.
(5) Reflects (i) the sale by IHF Capital of shares of Common Stock offered
hereby and an increase of $40.5 million in revolving credit borrowings and
the application of the estimated net proceeds therefrom to redeem $35.0
million principal amount of Senior Subordinated Notes, all of the Discount
Notes, all of the IHF Holdings Preferred Stock, all of the options to
purchase IHF Holdings Preferred Stock and the Common Stock and warrants to
purchase Common Stock held by the former principal owners of the Company
and certain other stockholders, and (ii) the effect the Conversion, as if
such transactions occurred on March 2, 1996, and, for purposes of the per
share information (which includes all common stock equivalents), as if
such transactions had occurred on June 1, 1994. See "Selected Consolidated
Financial Data" and "Sources and Uses of Funds" and Note 2 to the
"Consolidated Financial Statements."
28
<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, fiscal 1995 ended on May
31, 1995.
OVERVIEW
The Company, is one of the largest manufacturers and marketers of fitness
equipment in the United States and in the first quarter of fiscal 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 fiscal 1991 to $530.8 million in fiscal 1995. 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.
Margins. 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. For example, during the first nine months of fiscal 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. 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.
Direct Sales; European Operations. In fiscal 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 traditional national advertising of its brands as opposed to
direct marketing. Following 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 fiscal 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 the nine months ended March 2, 1996 and the
balance sheet at March 2, 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 $0.3 million. Such redemption resulted in a $26.7 million cash
29
<PAGE>
compensation expense for the period in which the redemption occurred, which
was included in the computation of the loss in fiscal 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 that may be realized when, and if, the options are exercised.
In connection with the Offering, the Company expects to recognize an
extraordinary loss in the first quarter of fiscal 1997 of approximately $12.9
million (assuming the closing of this Offering occurs on June 1, 1996)
relating to: (i) the redemption of all of the IHF Holdings Preferred Stock and
options to purchase IHF Holdings Preferred Stock without the payment of
accrued dividends (extraordinary gain of $7.9 million assuming a redemption
price of $40.0 million); (ii) the premium paid upon redemption of all of the
Discount Notes and $35.0 million principal amount of the Senior Subordinated
Notes (extraordinary loss of $18.0 million) and the write-off of the deferred
financing costs related to such redeemed notes (extraordinary loss of $10.1
million) and an aggregate related tax benefit of $10.7 million; and (iii) the
write-off of unamortized discount on the warrants sold in connection with the
Senior Subordinated Notes and the Discount Notes (extraordinary loss of $3.4
million). In addition, in the fourth quarter of fiscal 1996, the Company will
recognize a non-recurring expense of $3.9 million relating to a $2.8 million
fee to terminate the annual management fees payable to Bain Capital, expenses
of $3.9 for deferred compensation expenses, $ relating to additional stock
option grants and $.5 million relating to the settlement of certain
litigation.
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company
expressed as a percentage of net sales for fiscal 1993, 1994 and 1995 and for
the nine months ended March 4, 1995 and March 2, 1996.
<TABLE>
<CAPTION>
NINE
YEAR ENDED MAY 31, MONTHS ENDED
---------------------- ------------------
MARCH 4, MARCH 2,
1993 1994 1995 1995 1996
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 72.6 71.5 71.3 72.6 72.8
------ ------ ------ ----- -----
Gross profit........................ 27.4 28.5 28.7 27.4 27.2
------ ------ ------ ----- -----
Operating expenses:
Selling............................. 12.2 12.9 12.9 11.3 11.8
Research and development............ 0.5 0.7 1.0 .9 .8
General and administrative.......... 7.8 7.2 5.9 5.2 5.9
Stock option compensation expense... -- -- 7.3 9.4 --
------ ------ ------ ----- -----
Total operating expenses............ 20.5 20.8 27.1 26.8 18.5
------ ------ ------ ----- -----
Income from operations.............. 6.9 7.7 1.6 0.6 8.7
Interest expense and amortization of
debt financing..................... 1.7 1.5 4.4 3.9 5.1
Dividends on subsidiary preferred
stock.............................. -- -- .5 .4 .6
------ ------ ------ ----- -----
Income before income taxes.......... 5.2 6.2 (3.3) (3.7) 3.0
Provision (benefit) for income
taxes.............................. 2.0 2.4 (.9) (1.3) 1.7
------ ------ ------ ----- -----
Net income (loss)................... 3.2% 3.8% (2.4%) (2.4%) 1.3%
====== ====== ====== ===== =====
</TABLE>
FIRST NINE MONTHS OF FISCAL 1996 COMPARED TO THE FIRST NINE MONTHS OF FISCAL
1995
Net sales were $594.2 million in the first nine months of fiscal 1996,
compared to $416.4 million in the first nine months of fiscal 1995. This
increase of $177.8 million, or 42.7% was attributable to sales increases of
$158.4 million in the Company's Cardio family of upright rowers and treadmills
sales increases of $19.0 million. Treadmill sales during the first nine months
of fiscal 1996 were $242.3 million, or 40.8% of sales. These increases were
slightly offset by decreases in several of the Company's product offerings.
European sales totaled $23.1 million in the first nine months of fiscal 1996.
30
<PAGE>
Gross profit for the first nine months of fiscal 1996 was $161.5 million, or
27.2% of net sales, compared to $114.2 million, or 27.4% of net sales, for the
first nine months of fiscal 1995. The percentage decrease is due primarily to
the fact that sales to retailers, which have lower gross profit than direct
sales, made up a greater percent of total sales in the first nine months of
fiscal 1996 than in the comparable period of fiscal 1995.
Selling expenses were $69.8 million, or 11.8% of net sales, in the first
nine months of fiscal 1996 compared to $47.0 million, or 11.3% of net sales,
for the first nine months of fiscal 1995. The increase in selling expense as a
percentage of net sales primarily relates to direct response video productions
totaling $2.2 million, which were written off in the second and third quarters
of fiscal 1996 (these productions failed to generate adequate sales response
and were therefore expensed causing sales expense to increase $1.1 million
over the same period of fiscal 1995) and selling expenses of the European
subsidiaries (which were not operating in fiscal 1995), which totaled $4.8
million. Increase in sales volumes resulted in promotional activity (i.e.,
advertising) with retailers increasing by $10.9 million and warranty
expenditures increasing by $4.3 million in the first nine months of fiscal
1996 compared to the same period in fiscal 1995. Sales commissions also
increased by $1.5 million due to the increase in sales volume. Bad debt
expense has increased by $1.4 million to provide for potential write-offs
associated with increasing trade receivable balances.
Research and development expense was $4.8 million or .8% of net sales, for
the first nine months of 1996 compared to $3.9 million, or 0.9% of net sales,
for the first nine months of 1995. This dollar increase is related to on-going
development of both current and future product offerings.
General and administrative expense totaled $35.2 million, or 5.9% of net
sales, for the first nine months of fiscal 1996 compared to $21.6 million, or
5.2% of net sales, for the first nine months of fiscal 1995. Legal expenses
increased during the first nine months of fiscal 1996 by $2.9 million over the
same period during the prior year. These legal expenses have resulted from
certain patent defense actions, product liability claims and legal fees
associated with the WHF Litigation. See "Business--Legal Proceedings."
Amortization of noncompete agreements following the Recapitalization were $.4
million higher in the first nine months of fiscal 1996 compared to the first
nine months of fiscal 1995. Bonus expense increased by $0.8 million due to
higher profits. Expenditures under the Company's self-insured health plan
increased by $0.7 million. In the first nine months of fiscal 1995, a
reduction was recorded in general and administrative expense for the receipt
of a $2.7 million management fee for services provided to Weider Sporting
Goods, Inc. ("WSG"). Following the Recapitalization, fees under the WSG
management agreement stopped. General and administrative expenses for the
European subsidiaries totaled $3.5 million. Other increases totaling $2.6
million have occurred following the Recapitalization to service the increase
in sales. The major increases include: personnel cost, management fees paid to
Bain Capital (which will not continue after fiscal 1996), increased management
information systems expenditures, additional facility rental and other
administrative expenses.
A compensation expense of $39.0 million, attributable to the exchange of
options in conjunction with the Recapitalization, was incurred in the second
quarter of fiscal 1995 with no comparable expense in fiscal 1996.
As a result of the foregoing factors, operating income increased to $51.8
million, or 8.7% of net sales, in the first nine months of fiscal 1996, from
operating income of $2.7 million or 0.6% of net sales, in the first nine
months of fiscal 1995.
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 $33.9 million in the first nine months of
fiscal 1996 from $17.9 million for first nine months of fiscal 1995. Interest
expense has increased due to the Company's high level of borrowing incurred in
connection with the Recapitalization. The expense in the first nine months of
fiscal 1995, represented only 110 days
31
<PAGE>
interest expense on debt used to finance the Company's Recapitalization. In
addition, in the first nine months of fiscal 1996, the Company recorded
interest expense of $3.8 million, compared to $1.5 million in the same period
of fiscal 1995, related to dividends accruing on IHF Holdings Preferred Stock
which was issued in connection with the Recapitalization and is held by
affiliates of the Company. The Company plans to redeem all of the outstanding
Discount Notes, all of the IHF Holdings Preferred Stock (including options to
purchase IHF Holdings Preferred Stock) and $35.0 million principal amount of
Senior Subordinated Notes with proceeds of the Offering, which should reduce
interest expense going forward. This decrease will be somewhat offset by an
increase in interest expense resulting from an additional $40.5 million in
revolving credit borrowing.
The income tax provision was $10.0 million for the first nine months of
fiscal 1996 compared with a tax benefit of $5.2 million for the first nine
months of fiscal 1995. The effective tax rate for the first nine months of
fiscal 1996 differs from that used for the fiscal year ended May 31, 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 the current
nine month period for the losses incurred in connection with the newly
established European subsidiaries of the Company.
As a result of the foregoing factors, net income was $7.9 million for the
first nine months of fiscal 1996 compared to a net loss of $10.1 million
during the same period of fiscal 1995.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net sales increased by $127.8 million, or 31.7%, from $403.0 million in
fiscal 1994 to $530.8 million in fiscal 1995. The increase was primarily
attributable to sales of $138.1 million of the Company's Cardio family of
upright rowers which was introduced in October 1994 and was marketed through
direct response infomercials and other distribution channels. Treadmill sales
during 1995 were $255.6 million compared to $256.8 million in 1994.
Gross profit for fiscal 1995 was $152.5 million, or 28.7% of net sales,
compared to $114.8 million, or 28.5% of net sales, for fiscal 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 fiscal 1995
compared to $52.1 million, or 12.9% of net sales, for fiscal 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
fiscal 1995 compared to $2.9 million, or 0.7% of net sales, for fiscal 1994.
The increase was primarily related to the development of new products and
product concepts.
General and administrative expense totaled $31.1 million, or 5.9% of net
sales, for fiscal 1995 compared to $28.6 million, or 7.2% of net sales, for
fiscal 1994. The reduction in general and administrative expense as a percent
of net sales was largely due to the receipt in fiscal 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 fiscal 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 fiscal 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 Class A and Class L Common Stock of the
Company 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.
32
<PAGE>
As a result of the foregoing factors, operating income decreased by $22.8
million in fiscal 1994 to $8.4 million in fiscal 1995.
Interest expense and amortization of deferred financing fees increased to
$23.2 million in fiscal 1995 from $6.2 million for fiscal 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 197 days of fiscal 1995. In addition, in fiscal 1995, the
Company recorded an expense of $2.8 million related to dividends accruing on
the IHF Holdings Preferred Stock issued in connection with the
Recapitalization that is held by affiliates of the Company.
The income tax benefit was $4.7 million for fiscal 1995 compared with a
provision of $9.8 million for fiscal 1994. The benefit for fiscal 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, net income decreased to a net loss of
$12.9 million for fiscal 1995 compared to net income of $15.3 million during
the same period of 1994.
FISCAL 1994 COMPARED WITH FISCAL 1993
Net sales increased $88.1 million, or 28%, to $403.0 million in fiscal 1994
from $314.9 million in fiscal 1993. Growth in sales of treadmills accounted
for $73.2 million of the increase and the growth in treadmill sales
represented both higher unit sales and higher average sales prices. Treadmill
sales represented approximately 67% of the Company's net sales in fiscal 1994
compared to 62% in fiscal 1993. Sales in fiscal 1994 also increased over
fiscal 1993 due to an $11.1 million increase in the sale of trampolines. The
remaining portion of the fiscal 1994 sales increase was primarily attributable
to increased sales of home gyms through direct response marketing.
Gross profit increased by $28.5 million to $114.8 million, or 28.5% of net
sales, in fiscal 1994 compared to $86.3 million, or 27.4% of net sales, in
fiscal 1993. The improvement in gross profit as a percentage of net sales
primarily reflects increased unit output per labor hour expended and increased
utilization of plant capacity, especially in the fourth quarter of fiscal
1994. To a lesser extent, the introduction of product innovations and the
resulting increase in average unit prices also contributed to the improvement.
Selling expenses increased by $13.6 million to $52.1 million in fiscal 1994
and, as a percentage of net sales, increased to 12.9% from 12.2% in fiscal
1993. The dollar and percentage increases were primarily attributable to
greater use of direct response marketing, which increased the Company's
television and print advertising, order fulfillment and shipping costs. A
substantial portion of the increase in advertising costs was attributable to
higher rates for the purchase of commercial television air time, and a
substantial portion of the increase in order fulfillment costs was due to an
increased tendency of direct response customers to request additional product
information before making a purchasing decision. The remainder of the increase
in selling expenses in fiscal 1994 was attributable to increases in commission
expenses and advertising allowances incurred in connection with increased
sales volume.
Research and development expenses increased by $1.2 million to $2.9 million
in fiscal 1994. Increased efforts to develop electronic components for future
products accounted for $0.6 million of the dollar increase and development of
prototypes and samples was primarily responsible for the remainder of the
increase.
General and administrative expenses increased by $4.1 million, or 17.0%, to
$28.6 million, or 7.2% of net sales in fiscal 1994, from $24.4 million, or
7.8% of net sales, in fiscal 1993. The dollar increase was primarily
attributable to $2.1 million of additional management bonuses (based on
improved profitability), $0.7 million of increased salary and employee benefit
expenses and $0.6 million
33
<PAGE>
of additional product liability insurance premiums. The remainder of the
increase was the result of higher expenses in other areas (including legal,
management information systems and order entry) required to service the
increase in sales volume. The fiscal 1994 increase in general and
administrative expenses was partially offset by the reduction of $0.9 million
in corporate allocations paid to WHF in fiscal 1993.
As a result of the foregoing factors, income from operations increased $9.6
million, or 43.8%, to $31.3 million in fiscal 1994 from $21.7 million in
fiscal 1993. Income from operations also increased as a percentage of net
sales to 7.7% in fiscal 1994 from 6.9% in fiscal 1993.
Interest expense increased to $6.2 million in fiscal 1994 from $5.5 million
in fiscal 1993. The increase was primarily due to higher average borrowings
during the year needed to support the Company's increased sales volume and, to
a lesser extent, increases in borrowing rates during the second half of the
year.
As a result of the foregoing factors, net income increased by $5.3 million,
or 52.0%, to $15.3 million in fiscal 1994 from $10.0 million in fiscal 1993.
SEASONALITY
The following are the net sales and operating income of the Company by
quarter for fiscal years 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales
Fiscal 1996................................ $124.8 $228.5 $240.9 $ --
Fiscal 1995................................ 70.6 163.0 182.8 114.4
Fiscal 1994................................ 53.3 116.2 124.0 109.5
Fiscal 1993................................ 46.9 90.7 111.9 65.4
Operating Income
Fiscal 1996................................ $ 6.4 $ 20.0 $ 25.4 $ --
Fiscal 1995................................ 2.6 (22.9)(1) 22.9 5.8
Fiscal 1994................................ 0.4 9.9 11.3 9.7
Fiscal 1993................................ 1.5 7.6 7.6 5.0
</TABLE>
- --------
(1) Includes $39.0 million in one-time compensation expense attributable to
the exchange and partial redemption of management options.
Historically, the Company has sold a majority of its products to customers
in its second and third fiscal quarters (i.e., from September through
February). Increased sales and distribution typically have occurred in the
Christmas retail season and the beginning of a new calendar year because of
increased promotions by customers, increased consumer purchases and seasonal
changes that prompt people to exercise inside. The Company has in the past,
from time to time, incurred net losses in the first and fourth quarters of its
fiscal year. If actual sales for a quarter do not meet or exceed projected
sales for that quarter, expenditures and inventory levels could be
disproportionately high for such quarter and the Company's cash flow for that
quarter and future quarters could be adversely affected. The timing of large
orders from customers and the mix of products sold may also contribute to
periodic fluctuations. While seasonality has been the trend, it may not be
indicative of the results to be expected for this fiscal year or for any
future years.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of fiscal 1996, the Company used $39.9 million of
cash in operating activities and borrowed approximately $51.0 million under
the Revolving Credit Facility primarily to
34
<PAGE>
finance increases in inventory and accounts receivables which were due to
increased sales volume. During the first nine months of fiscal 1996, the
Company had a net decrease in cash of $0.9 million. The Company also used
$11.6 million of cash in the first nine months of fiscal 1996 for capital
expenditures primarily related to upgrades in plant and tooling, purchases of
additional manufacturing equipment and building expansion.
In fiscal 1995, the Company used $31.7 million of cash in operating
activities primarily as a result of increases in working capital, particularly
inventories, and other operating assets of $36.0 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
Revolving Credit Facility of $66.4 million and net proceeds from the issuance
of stock of $39.0 million. The Company also used $8.0 million in cash in
fiscal 1995 for capital expenditures related to tooling and manufacturing
equipment. During fiscal 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 purchases of merchandise inventory and accounts
receivable in advance of the Christmas and post-holiday selling season.
Generally, in the period from November through February, the Company's working
capital borrowings remain at their highest level and then are paid down to
their lowest annual levels by April.
At March 2, 1996, Health & Fitness had $124.6 million of revolving credit
borrowings under the Credit Agreement. Advances under the Revolving Credit
Facility are based upon 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 March 2, 1996, Health & Fitness had
$35.4 million of additional indebtedness available to be drawn on a revolving
credit basis under the Credit Agreement. Management believes that the seasonal
borrowings have peaked and that availability under the Credit Agreement is
adequate to meet the Company's obligations in the near term. 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, all of which Health & Fitness
believes it was in compliance with as of the date hereof. The Company is
renegotiating its Credit Agreement to provide for additional borrowings in
order to meet the Company's longer term needs. See "Description of Certain
Indebtedness."
The Company's longer term liquidity needs include required quarterly
amortization payments on the term loans under the Credit Agreement, consisting
of $0.7 million from March 31, 1996, $1.0 million from March 31, 1997 and
greater amounts on or after March 31, 1998. See Note 8 to the Consolidated
Financial Statements included herein.
The Company made capital expenditures of approximately $11.6 million during
the first nine months of fiscal 1996. 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 expects to make research and development expenditures in fiscal
1996 of approximately $7.9 million, of which approximately $4.8 million had
been made as of March 2, 1996.
35
<PAGE>
In August 1995, the Company gave notice of its intention to exercise the
CanCo Option, which is subject to the satisfactory completion of various
conditions, including due diligence. The CanCo Option provides that its
exercise will cost approximately $5.0 million. The purchase of the CanCo
assets has not yet been completed due to complications related to the WHF
litigation. See "Business--Legal Proceedings." The Company can terminate its
obligation to purchase CanCo's assets anytime prior to the execution of a
definitive purchase and sale agreement.
The Company believes that, upon renegotiation of its Credit Agreement, 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.
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. Purchases of
inventory from Canada are settled in Canadian dollars and therefore the
Company is subject to fluctuations in the value of the Canadian dollar which
could have an impact on the Company's operating results. In connection with
the importation of products and components from Canada, the Company from time
to time engages in hedging transactions by entering into forward contracts for
the purchase of Canadian dollars which are designed to protect against such
fluctuations. The Company's hedging transactions do not subject it to exchange
rate risk because gains and losses on these contracts offset losses and gains
on the transaction being hedged. The unhedged portion of purchases from Canada
is not significant.
In addition, the Company, in the first quarter of fiscal 1996, began to
directly market its products in the European market. With respect to countries
other than the United States, the United Kingdom, France, Germany, the Benelux
countries, Italy, Austria, Switzerland and Mexico, the Company has granted
Weider Sports certain exclusive and non-exclusive rights to distribute certain
of the Company's products. Under this distribution agreement, Weider Sports
purchases the Company's products in U.S. dollars and, therefore, the Company
is 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. Therefore, the Company has been, and expects to be increasingly,
subject to the fluctuations in the European 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.
36
<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 points specifically targeted to meet
different consumers' health and fitness needs. The Company's line of home
fitness aerobic products includes upright rowers, treadmills, exercise bikes,
stair steppers and cross country skiers, and its line of anaerobic fitness
products includes home gyms and weight benches. 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 represented
approximately 28% of total wholesale domestic home fitness equipment sales in
calendar 1994. In the first quarter of fiscal 1996, the Company began to
directly market its products in Europe. In fiscal 1995, the Company had net
sales of $530.8 million versus $202.4 million in fiscal 1991, reflecting
compound annual growth in net sales of 27.3%. For the first nine months of
fiscal 1996, the Company had net sales of $594.2 million, compared to $416.4
million in the comparable prior year period, representing an increase of
42.7%. The Company believes that from 1991 to 1995 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.
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 at a different price point). 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 fiscal 1994 and
1995 and the first nine months of fiscal 1996 approximately 45%, 46% and 45%,
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 and the development of the Cardio family of upright rowers
which significantly improved on upright rower designs first marketed by
others. The Company believes that its ability to identify industry trends and
to take a product from concept to delivery quickly 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; and
(iii) feedback on market trends and changing consumer tastes.
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<PAGE>
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 points 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
points 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, at a variety of price points. 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 and
geographic 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 fiscal 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 believes there may be acquisition opportunities which would
complement its existing business and provide an opportunity for growth, and at
any time the Company may be in discussions concerning one or more possible
acquisitions. In addition, 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, in the first quarter of fiscal 1996,
the Company began 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 countries. Prior to
fiscal 1996, the Company had minimal foreign sales. Net sales from
international markets in the first three quarters of fiscal 1996 were $6.0
million, $9.3 million and $7.8 million, respectively. The Company has granted,
subject to certain conditions, certain exclusive and non-exclusive rights to
distribute its products in certain other international markets to Weider
Sports. In addition, the Company is considering offering services that
complement its product offerings, such as on-line personal training services.
See "--Legal Proceedings," "Certain Relationships and Related Transactions"
and "Risk Factors--Expansion Strategy."
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 $0.4
billion in calendar 1980 to approximately $2.1 billion, $2.1 billion, $2.6
billion and $2.7 billion in calendar 1991, 1992, 1993 and 1994, respectively.
38
<PAGE>
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 incorporation of 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 home 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 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 1.0 million
in 1994, and have totaled over 38 million units. Unit sales of treadmills have
increased from 0.8 million in 1989 to 2.3 million units in 1994. The Company's
sales of treadmills have been relatively flat for fiscal 1995 and the first
nine months of 1996. However, sales of the Company's Cardio family of upright
rowers which was introduced in the second quarter of fiscal 1994 were
1,049,343 units in fiscal 1995 and 1,859,733 units in the first nine months of
fiscal 1996.
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<PAGE>
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.
1994 INDUSTRY CONSUMER DEMOGRAPHICS*
<TABLE>
<CAPTION>
CROSS
EXERCISE STAIR CLIMBERS/ COUNTRY MULTIPURPOSE
TREADMILLS BIKES STEPPERS SKIERS HOME GYMS
---------- -------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C>
CONSUMERS BY AGE GROUP
Under 34................ 16.9 24.1 36.8 29.1 33.3
35-64................... 66.0 62.4 57.6 60.3 51.7
Over 65 Multiple........ 17.1 13.5 5.5 10.6 15.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
CONSUMERS BY INCOME
GROUP
Under 25,000............ 13.8 20.4 22.3 6.7 21.1
25-35,000............... 12.7 13.1 24.8 10.1 10.9
Over 35,000............. 73.5 66.5 52.9 83.2 68.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
</TABLE>
Source: National Sporting Goods Association
* For purposes of consumer demographics, data on upright rowers, such as the
Cardioglide, was not collected by the National Sporting Goods Association
and, therefore, are not presented in the table.
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 fiscal 1995 and the first nine months of
fiscal 1996, the Company's sales through retailers were approximately 90% and
98%, respectively, of total sales.
The Company believes the marketing of products through multiple distribution
channels provides it with several competitive advantages, including: (i)
greater growth opportunities by participating in all distribution channels,
(ii) the ability to maximize revenue throughout a product's life cycle by
repositioning the product from higher to lower brand niches as the product
matures and (iii) the ability to appeal to each market segment through the
marketing of specific brands designed to meet differing needs. The latter
capability is an important factor since different categories of fitness
equipment products appeal to different demographic groups.
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<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.............. 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
fiscal 1995 and the first nine months of fiscal 1996:
ICON HEALTH AND FITNESS, INC.
SALES BY DISTRIBUTION CHANNEL
FOR NINE MONTHS ENDED MARCH 2, 1996
<TABLE>
<CAPTION>
DISTRIBUTION CHANNEL %
-------------------- ---
<S> <C>
Department Stores...................................................... 46
Catalog Showrooms...................................................... 13
Discount Retailers..................................................... 11
Sporting Goods Stores.................................................. 12
Warehouse Clubs........................................................ 12
Mail Order............................................................. 3
Direct Response........................................................ 2
Other.................................................................. 2
---
Total................................................................
===
</TABLE>
FOR THE FISCAL YEAR ENDED 1996
<TABLE>
<CAPTION>
DISTRIBUTION CHANNEL %
-------------------- ---
<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>
In addition to providing superior market access, the Company's presence
across multiple distribution channels provides a valuable source of feedback on
changing consumer tastes and market trends, enabling the Company to anticipate
industry trends and develop innovative products.
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<PAGE>
MARKETING
The Company's primary sales and marketing group is based in Logan, Utah. For
certain of its products, the Company augments the efforts of this group with
smaller sales forces based in Colorado and Texas. The Company employs
approximately 130 sales and marketing personnel. Such personnel are
compensated on the basis of salary and a bonus based on the Company's
profitability. In addition, the Company utilizes 22 outside sales agents, who
are compensated on the basis of their sales.
Starting in fiscal 1992, the Company sold products directly to consumers
through direct response television infomercials and print media campaigns. The
Company believes that direct response marketing helps educate consumers about
new products, increasing brand name awareness and stimulating sales through
traditional distribution channels. The expansion of the Company's direct
response marketing required a greater investment than traditional advertising,
and therefore greater risk, as a result of the cost of creating infomercials
and purchasing media time and space. In the first nine months of fiscal 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 national advertising as opposed to direct
response advertising.
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 recently
commenced its own sales operations 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 first three quarters of fiscal 1996 were $6.0
million, $9.3 million and $7.8 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. The Company has granted, subject to
certain conditions, certain exclusive and non-exclusive rights to distribute
its products in certain other international markets to Weider Sports. See "--
Legal Proceedings--WHF Litigation", "--Proposed 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 Warehouse Clubs ("Sams"). In fiscal 1995, these customers
collectively generated an aggregate of $229.5 million in net sales for the
Company and accounted for approximately 31% and 12%, respectively, of the
Company's total net sales. In the first nine months of fiscal 1996, these
customers accounted for approximately 34% and 8%, respectively, of the
Company's total net sales. In fiscal 1995, Sam's accounted for approximately
94% 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 fiscal 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
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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, product
innovation, customer service and other factors. The Company is not the
exclusive supplier of fitness equipment to any of its major 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 complete 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 points. 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,
43
<PAGE>
books and towels, magnetic resistance and total body conditioning, which
combines upper and lower body workouts. Other features offered by the
Company's stair steppers include the Speed Link adjustable resistance system,
multi-window electronic monitors and programmable electronics. Retail price
points for the Company's stair steppers range from $99 to $499.
CROSS-COUNTRY SKIING MACHINES. The Company's cross-country skiing machines
feature motivational fitness monitors, stowaway design, the Company's patented
INSYNC Dual Action System, adjustable incline and adjustable resistance.
Retail price points for the Company's cross-country skiing machines range from
$99 to $199.
ANAEROBIC PRODUCTS.
Under the Image, ProForm, Weslo and Weider brand names, the Company offers
anaerobic products, which are designed to develop muscle tone and strength.
HOME GYMS. The Company's home gyms range from traditional cast iron or vinyl
plate weight stack units to programmable electronic units that use "smart
cards" to store a user's personalized fitness regimen in electronic memory.
New technology and innovation within this category include home gyms which
integrate aerobic crosstraining components such as stair steppers and
electronic adjustability allowing simple adjustment in one pound increments
with digital feedback. Selected units are designed to allow multiple users to
use the equipment simultaneously. The Company's home gyms range in retail
price from $99 to $1,499.
WEIGHTS AND BENCHES. The Company offers a range of weight benches to
specialty fitness dealers through the Image brand and markets a complete line
of weights and benches under the Weider and ProForm brand names. Retail price
points of these products range from $79 to $299.
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 77 patents
and has 50 patent applications pending. The Company had research and
development expenses of $2.9 million, $5.2 million and $4.8 million in fiscal
1994, fiscal 1995 and the first nine months of fiscal 1996, respectively, and
has budgeted $7.9 million for research and development for all of fiscal 1996.
44
<PAGE>
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 fiscal 1994, 1995 and the first
nine months of fiscal 1996, approximately 45%, 46% and 45%, 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 and the development of the Cardio family of upright rowers which
significantly improved on upright rower designs first marketed by others. 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 fiscal 1995, 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 "--Proposed 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.
As of March 2, 1996 the Company had open orders of approximately $38.3
million. The Company expects to ship substantially all of such orders during
the fourth quarter of fiscal 1996.
The Company has given notice of its intention to exercise the CanCo Option
subject to satisfactory completion of various conditions including due
diligence. Under the CanCo Option, the Company may terminate its obligation to
purchase CanCo's assets any time prior to closing of such purchase. The
Closing of the CanCo option has been delayed due to complications related to
the WHF Litigation. See "Business--Legal Proceedings" and "Certain
Relationships and Related Transactions" and Note 15 of the Notes to the
Consolidated Financial Statements.
The Company follows a dual sourcing strategy on many of its components to
minimize the impact of sourcing disruptions. For example, the Company obtains
steel tubing from two to three vendors. When practical, the Company chooses
vendors that will supply the Company exclusively in the fitness equipment
category. The Company's two primary sources of electronic components, for
example, do
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<PAGE>
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 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.
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. The Company is currently expanding 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 fiscal 1994, the Company received ISO
9001 certification for its Logan, Smithfield and Clearfield 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.
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., HealthRider, Inc. and DP and
Roadmaster, which are commonly owned. 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
46
<PAGE>
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 77 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 operations exposes it to the risk of
claims with respect to environmental matters and there can be no assurance
that material costs or liabilities will not be incurred in connection with
such claims. 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. 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". In
these proceedings WHF, Weider Sports and WSG claim, among other things:
(i) they are entitled to various economic adjustments under agreements related
to the Recapitalization, (ii) the Company has intentionally
47
<PAGE>
violated territorial limitations and various other terms of the Distribution
Agreement under which Weider Sports was granted exclusive rights to distribute
the Company's products in certain foreign markets, (iii) certain of the
directors and executive officers of the Company have breached their fiduciary
duties to the Company and its minority stockholders, (iv) certain of the
Company's customers have tortiously interfered with Weider Sports' rights
under the Distribution Agreements, (v) the Company has violated its duties to
WHF and its affiliates under the License Agreement, and (vi) the Company has
violated its duties to WSG under the WSG Management Agreement. The relief
sought by WHF, Weider Sports and WSG in these proceedings includes alleged
compensatory damages, punitive damages and preliminary and permanent
injunctive relief requiring the Company to honor its alleged obligations.
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 has 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, which proceedings and counterclaim assert the following
claims: (i) WHF and its affiliates have improperly sourced products (including
Weider branded products), (ii) WHF and its affiliates have infringed the
Company's rights to the "Weider" trademark, (iii) the Company is entitled to
economic adjustments under the agreements related to the Recapitalization,
(iv) WHF has violated territorial limits and other terms of the Distribution
Agreement, (v) Weider has breached its obligations under the CanCo Option, and
(vi) Weider has failed to grant the Company control over CanCo as required.
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, which joint request remains pending. The other legal
proceedings described above are also still pending.
The Company does not believe the outcome of its legal disputes with WHF and
its affiliates will have a material adverse effect upon the Company's results
of operations and financial position.
PROPOSED SETTLEMENT OF WHF LITIGATION
The Company and WHF and its affiliates have discussed a non-binding
understanding (the "Proposed Settlement") which outlines the terms of a
possible settlement of the litigation between the parties which would involve
amendments to the agreements currently existing between the Company and WHF
and its affiliates. See "Certain Relationships and Related Transactions." The
significant terms of the Proposed Settlement are outlined below. If the
parties reach a definitive settlement agreement, such definitive agreement may
differ from the Proposed Settlement. The parties are under no obligation to
reach a definitive settlement agreement, and there can be no assurance that
one will be so reached.
Under the Proposed Settlement, the Company would have the right within
twelve months of the closing of the settlement, and, assuming the consummation
of the Offering or certain other events, the obligation, to purchase the IHF
Holdings Preferred Stock held by WHF and certain other stockholders for $ .
48
<PAGE>
The Company also would have under the Proposed Settlement the obligation to
purchase, upon the successful completion this Offering at least fifty percent
of the Common Stock held by WHF and certain other stockholders and the right
to purchase up to all of the Common Stock and warrants to purchase Common
Stock held by WHF and certain other stockholders (the "WHF Position") at a
price per share or per warrant (less the exercise price in the case of the
warrants) equal to the Initial Public Offering Price less an amount equal to
the Underwriting Discount less an additional 10% discount. If less than all of
the WHF Position is purchased, WHF and its affiliates would have rights to
participate in future Common Stock offerings on a priority basis.
Pursuant to the Proposed Settlement, the Company would acquire the assets,
excluding cash and fixed assets but including the rights to distribute the
Company's products, relating to the sports equipment business lines of Weider
Sports for approximately $ million and the assumption of certain
liabilities. The Company would, under the Proposed Settlement, also acquire
specified CanCo assets and assume specified CanCo liabilities in accordance
with the CanCo Option, except that the purchase price would equal
approximately $ million, notwithstanding the purchase price stated in the
CanCo Option which is estimated at $5.0 million. The Company would also,
subject to an environmental audit, acquire two CanCo plants which are
currently leased by other WHF affiliates to CanCo in exchange for the
assumption of the existing $1.1 million (Cdn.) mortgage on the properties and
the payment of $ (Cdn.). The Company would also receive 10% of CanCo's
profits from November 14, 1994 to the date of the closing of a definitive
settlement.
Upon the purchase of the WHF Preferred Stock and at least 50% of the WHF
Common Stock, WHF representation on the Company's board of directors will
cease. Pursuant to the Proposed Settlement, the Company would make a payment
of approximately $4.25 million to WHF and its affiliates as prepayment in full
under its brand license agreements with them. The Proposed Settlement would
also involve an amendment to the WSG Management Agreement under which the
Company would receive a $3.0 million payment, subject to certain adjustments.
In addition, the Proposed Settlement provides that Ben Weider will serve as a
consultant to, and ambassador for, the Company for five years, with an annual
compensation of approximately $ , and that the Company will provide office
space and three assistants for Mr. Weider. The Proposed 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. The Company currently carries an occurrence-based product
liability insurance policy. The policy provides coverage for the period from
September 1, 1995 to September 30, 1996 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. The Company believes that its insurance
is generally adequate to cover product liability claims. Previously, the
Company maintained similar occurrence based policies with somewhat lower
coverage limits and higher deductibles. 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 remain 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."
49
<PAGE>
FTC PRELIMINARY INVESTIGATION
The Federal Trade Commission ("FTC") is conducting a preliminary
investigation to determine whether the Company may have made excessive
advertising claims with respect to its "Cross Walk" treadmill products (which
constitute a substantial portion of the Company's sales), in violation of the
Federal Trade Act. The FTC has asked the Company to voluntarily provide
information and documents and the Company has complied with this request.
The Company believes that its advertising for the CrossWalk products was
appropriately substantiated, and therefore that the Company did not make
excessive advertising claims. If the FTC were to conclude otherwise and issue
a complaint following its investigation, it may seek relief in the form of a
consent decree, a cease and desist order, civil monetary penalties and/or
consumer redress in the form of, among other things, refunds to consumers and
public notification respecting the advertisements, if any, which the FTC
concludes were excessive. Management does not believe that this matter will
have a material adverse effect on its results of operations or financial
position, however there can be no assurance in this regard.
TONY LITTLE'S SETTLEMENT
The Company had an agreement with Tony Little Enterprises, Inc. ("Tony
Little") pursuant to which it had the exclusive right to market home fitness
products under the Tony Little's(R) brand through December 31, 1997 and
annually thereafter so long as the Company continued to make minimum royalty
payments. In May 1996, the Company and Tony Little terminated their agreement.
The Company will pay Tony Little a royalty on sales of its existing inventory
of Tony Little's branded products.
JANE FONDA SETTLEMENT
The Company had entered into two agreements with certain entities affiliated
with Jane Fonda (the "Fonda Entities") to be the exclusive licensee of the
Jane Fonda(TM) brand name for fitness equipment and accessories in the U.S.
and Canada through November 30, 1996. In August 1995, the Company was served
with a complaint filed by the Fonda Entities, which sought the cancellation of
the licensing agreements and certain other damages. In May 1996, the Company
entered into a settlement with the Fonda Entities under which it will pay
$412,500 directly to them (which was reserved in the third quarter of fiscal
1996), will pay an additional $120,000 for advertising of their products and
the license agreements were cancelled.
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.
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.
50
<PAGE>
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.............. 40,000 Leased (Expires 4/96) 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 (Expires 11/96) Warehouse
</TABLE>
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.
51
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages as of
May 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott R. Watterson............ 40 Chairman of the Board and Chief Executive
Officer
Gary E. Stevenson............. 40 President, Chief Operating Officer and
Director
Eric Weider................... 32 Vice Chairman of the Board
Robert C. Gay................. 44 Vice Chairman of the Board
Richard Renaud................ 49 Director
Ronald P. Mika................ 35 Director
Geoffrey S. Rehnert........... 38 Director
S. Fred Beck.................. 38 Chief Financial and Accounting Officer,
Vice President and Treasurer
Lynn C. Brenchley............. 49 Vice President, Business Development
David J. Watterson............ 37 Vice President, Marketing and Research and
Development
Jon M. White.................. 48 Vice President, Manufacturing
William T. Dalebout........... 47 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.
ERIC WEIDER. Mr. Weider became Vice Chairman of the Board of Directors of
the Company effective as of the Recapitalization Closing. Mr. Weider has been
a member of the Board of Directors of WHF since 1988. Mr. Weider has worked in
an executive capacity for WSG since 1988 and became its chief executive
officer in 1990. Mr. Weider earned his M.B.A. at the University of Toronto.
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 Capital since February 1989.
RONALD P. MIKA. Mr. Mika became a Director of the Company effective as of
the Recapitalization Closing. Mr. Mika has been a Principal of Bain Capital
since December 1992 and was an associate of Bain Capital from August 1989
through November 1992.
GEOFFREY S. REHNERT. Mr. Rehnert became a Director of the Company effective
as of the Recapitalization Closing. Mr. Rehnert has been a Managing Director
of Bain Capital since April 1993 and has been a General Partner of Bain
Capital since 1986. Mr. Rehnert is also a director of GT Bicycles, Inc.,
Worldcorp, Inc., FTD, Inc., and U.S. Order, Inc.
52
<PAGE>
RICHARD RENAUD. Mr. Renaud became a Director of the Company effective as of
the Recapitalization Closing. Mr. Renaud has been a member of the Board of
Directors of WHF since 1986 and became Chairman in July 1994 and President and
Chief Executive Officer in January 1994. Mr. Renaud is also currently a
director of a number of companies, including CS Resources Limited (of which he
is Chairman), an oil and gas company; Marleau Lemire, Inc., an investment
bank; MPACT Immedia Inc., an electronic data interchange company; and Micro-
Tempus Inc., a conductivity company. From January 1987 to May 1992, he served
as Vice Chairman of Dundee Bancorp Inc., a merchant bank and asset management
company, and continues to serve as a director of that company. Mr. Renaud is a
chartered accountant.
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.
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.
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal 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)... 1995 325,000 423,704 447,279 2,402,060(4)
Chairman of the Board
and Chief 1994 450,000 1,968,144 900
Executive Officer
Gary E. Stevenson(3).... 1995 300,000 423,704 368,014 1,901,400(4)
President and Chief
Operating Officer 1994 400,000 1,405,817 1,000
S. Fred Beck............ 1995 160,000 105,926 52,843 2,981
Chief Financial and
Accounting Officer 1994 125,000 71,121 788
Vice President and
Treasurer
David J. Watterson...... 1995 195,000 105,926 52,843 2,450
Vice President,
Marketing and Research 1994 167,000 71,121 650
and Development
Jon M. White............ 1995 100,500 105,926 35,229 2,351
Vice President,
Manufacturing 1994 90,500 71,121 409
</TABLE>
- --------
(1) Options to purchase shares of the Company's Class A Common Stock. Share
numbers in this table are on a pre-Conversion basis.
(2) Reflects amounts contributed by the Company for the benefit of the named
executive officers under the Company's 401(k) Plan and 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.
(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 $2.3 and $1.8 million received by Scott Watterson and Gary
Stevenson, respectively, in connection with a four-year agreement to not
compete with the Company in certain specified businesses.
54
<PAGE>
The following table sets forth information concerning options granted to
each of the named executive officers in the last fiscal year.
OPTIONS GRANTED IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS GRANTED OPTION TERM($)(3)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR(2) PRICE($/SH) DATE 5% 10%
---- ---------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott R. Watterson...... 356,691 31.8 0.10 11/14/04 22,432 56,847
90,588 8.1 30.87(5) 11/14/04 0 0
Gary E. Stevenson....... 277,426 24.8 0.10 11/14/04 17,450 44,222
90,588 8.1 30.87(5) 11/14/04 0 0
S. Fred Beck(4)......... 45,294 4.0 0.10 11/14/04 2,849 7,220
7,549 0.7 30.87(6) 11/14/04 0 0
David J. Watterson(4)... 45,294 4.0 0.10 11/14/04 2,849 7,220
7,549 0.7 30.87(6) 11/14/04 0 0
Jon M. White(4)......... 30,196 2.7 0.10 11/14/04 1,899 4,813
5,033 0.4 30.87(6) 11/14/04 0 0
</TABLE>
- --------
(1) This table does not include warrants and options issued in connection with
the Recapitalization in exchange for previously outstanding options to
purchase stock of the Recapitalized Companies including those which the
Company 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.
All options are to purchase shares of the Company's Class A Common Stock.
Share numbers in this table are on a pre-Conversion basis.
(2) Excluding options issued in connection with the Recapitalization in
exchange for previously outstanding options of the Recapitalized
Companies. During fiscal 1995, options covering 1,120,769 shares of the
Company's Class A Common Stock were issued to employees.
(3) 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, 1995 there was no market for the Company's Common
Stock. For purposes of the calculations in this table, the fair value of
the Company's Class A Common Stock was assumed to be $.10 at the date of
grant. These were the values ascribed to such shares in the
Recapitalization. Except for this Offering, there have been no arm's-
length sales of the Company's Common Stock since the closing of the
Recapitalization.
(4) One third of the options granted to these employees vest each year on
November 14 and all such options will vest upon the earlier of a change of
control or the consummation of this Offering. As of the end of fiscal
1995, none of these options had vested.
(5) The exercise price with respect to these options was reset in March 1996
to $8.92, which was the then current fair value of the Class A Common
Stock.
(6) The exercise price with respect to these options was reset in September
1995 to $5.80, which was the then current fair value of the Class A Common
Stock.
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The following table sets forth information as of May 31, 1995, concerning
options of the Company exercised by each of the named executive officers in
fiscal 1995 and year end option values.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
SHARES ACQUIRED ON EXERCISE (#) VALUE REALIZED ($)(2)
---------------------------------- -------------------------
CLASS A CLASS L CLASS A CLASS L
NAME COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
- ---- ---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Scott R. Watterson...... 2,412,256 154,389 189,690 14,682,250
Gary E. Stevenson....... 1,876,199 120,080 151,614 11,415,450
</TABLE>
- --------
(1) This table includes the exercise of warrants and options issued in
connection with the Recapitalization in exchange for previously
outstanding options to purchase stock of the Recapitalized Companies.
Share numbers in this table are on a pre-Conversion basis.
(2) As of May 31, 1995 there was no market for the Company's Common Stock. For
purposes of this table, the fair value of the Company's Class A Common
Stock was assumed to be $.10 and the fair value of Class L Common Stock
was assumed to be $99.00 at the time of exercise. These were the values
ascribed to such shares in the Recapitalization. Except for the Offering,
there have been no arm's-length sales of the Company's Common Stock since
the closing of the Recapitalization.
FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
NUMBER OF UNEXERCISED MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(2)
------------------------------ --------------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------ --------------------------------
IHF IHF
HOLDINGS CLASS A CLASS L HOLDINGS CLASS A CLASS L
SERIES COMMON COMMON SERIES COMMON COMMON
NAME PREFERRED(3) STOCK STOCK PREFERRED(3) STOCK STOCK
- ---- ------------ -------- -------- ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Scott Watterson......... 585.8/0 90,588/0 48,620/0 2,250,000/0 0/0 4,622,069/0
Gary Stevenson.......... 455.6/0 90,588/0 37,815/0 1,750,000/0 0/0 3,594,890/0
S. Fred Beck(4)......... 0/52,843 0/0
David J. Watterson(4)... 0/52,843 0/0
Jon M. White(4)......... 0/35,229 0/0
</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. Share numbers in this table are on a pre-
conversion basis.
(2) As of May 31, 1995 there was no market for the Company's Common Stock or
IHF Holdings Preferred Stock. For purposes of the calculations in this
table, the fair value of the Company's Class A Common Stock was assumed to
be $.10, the fair value of its Class L Common Stock was assumed to be
$99.00, and the fair value of IHF Holdings Preferred Stock is assumed to
be $4,000 at the close of fiscal 1995. These were the values ascribed to
such shares in the Recapitalization. Except for this Offering, there have
been no other arm's-length sales of the Company's Common Stock or IHF
Holding's Preferred Stock since the Closing of the Recapitalization.
(3) It is expected that all of Messrs. Watterson's and Stevenson's options on
their IHF Holdings Preferred Stock will be redeemed in connection with
this Offering.
(4) One third of these options vested on November 14, 1995.
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<PAGE>
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 1,200,000 shares of Class A Common Stock have been reserved
for issuance under the Stock Option Plan, which is administered by the Board
of Directors.
1996 STOCK OPTION PLAN
The Company plans to adopt an IHF Capital, Inc. 1996 Stock Option Plan (the
"1996 Stock Option Plan") which will provide for the grant to certain eligible
employees of either incentive stock options, non-qualified options or both.
The 1996 Stock Option Plan is subject to approval by the vote of a majority of
the Company's stockholders and will otherwise satisfy the requirements of Rule
16b-3 of the 1934 Act. All options issued pursuant to the 1996 Stock Option
Plan will have an exercise price equal to the then current market value of the
Company's Common Stock. The 1996 Stock Option Plan will provide that options
may be granted during fiscal 1997 for an equivalent of approximately 825,000
shares of Class A Common Stock and that options may thereafter by granted in
each fiscal year for five years for up to 1% of the capital stock of the
Company that will be outstanding immediately after the Offering. The 1996
Stock Option Plan will terminate on May 31, 2002 and will be administered by
the Board of Directors.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not maintain a compensation committee during fiscal 1995.
Messrs. Scott Watterson's and Stevenson's fiscal 1995 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 fiscal 1995, 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 have discussed certain proposed
amendments to the employment agreements which have not yet been agreed to (as
proposed to be 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
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<PAGE>
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 fiscal 1996, 1.4% for
fiscal 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 fiscal
1995 and which level for fiscal 1995 and 1996 is 3% of net sales.
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 upon six months' notice. 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 and pay the executive his salary, benefits and bonus
for the lesser of the balance of the notice period or the unexpired portion of
the term. Upon termination by the Company 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 executive under certain
circumstances or 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 in the case of disability 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 is terminated without cause
except that the Company may at its option extend such period for up to
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 Mr. Watterson and
$1.24 million in the case of Mr. 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 1996 STOCK OPTION GRANTS
Mr. Scott R. Watterson and Mr. Gary E. Stevenson were each granted fully
vested options to purchase 38,347 shares of Class A Common Stock in June 1995
at an exercise price of $5.80 per share, (which is believed to be at least the
then current fair value of the Class A Common Stock). In May 1996 Messrs.
Scott Watterson, Gary Stevenson, Fred Beck, David Watterson and David White
were granted fully vested options
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<PAGE>
to purchase 341,053, 246,316, 54,736, 54,736 and 32,837 shares of Class A
Common Stock, respectively, at an exercise price of $5.80 per share (which was
below the then current fair market value of the Class A Common Stock).
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 the Company redeemed
after the 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 the Company 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 the Company in the
case of Mr. Stevenson at an exercise price of $0.00397 per share of Class A
Common Stock and $3.93482 per share of Class L Common Stock; (iii) options to
purchase 585.8 shares of Series A-2 IHF Holdings Preferred Stock in the case
of Mr. Watterson and 455.6 shares of Series A-2 IHF Holdings Preferred Stock
in the case of Mr. Stevenson, with each such share of Series A-2 IHF Holdings
Preferred Stock having a liquidation preference as of the Closing of the
Recapitalization of $4,000 per share and each such option having an exercise
price of $158.98 per share; and (iv) Warrants to purchase 25,478 shares of
Class A Common Stock of the Company in the case of Mr. Watterson and Warrants
to purchase 19,816 shares of Class A Common Stock of the Company in the case
of Mr. Stevenson, with each Warrant having been exercised at a strike price of
$.10 per share. The per share price of Class A Common Stock paid in the
Recapitalization was $0.10, and the per share price of Class L Common Stock
paid in the Recapitalization was $99.00. See "Principal and Selling
Shareholders." Messrs. Watterson and Stevenson also received employee stock
options under the Company's 1994 Stock Option Plan. The Company reimbursed
$199,000 of Messrs. Watterson's and Stevenson's legal fees and expenses in
connection with the Recapitalization and has maintained and will continue to
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 also receive a consulting fee from CanCo equal to an
aggregate of 14% of its pretax earnings until the Company's option to acquire
CanCo's assets is exercised (and the purchase is closed) or expires. 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 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 the Company. 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 the Company 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 the Company in the
amount of $77,491.48 and the par value in cash. Messrs. Beck, David Watterson,
White and Dalebout donated certain of their shares to the Church of Jesus
Christ of Latter Day Saints from which the Company received repurchase
options. The Company exercised these options in January of 1995. Upon
exercise, the Company received 45,950 shares of its Class A Common Stock and
4,595 shares of its Class L Common Stock in exchange for $459,500 in
connection with shares originally issued to Mr. Beck; 45,100 shares of its
Class A Common Stock and 4,510 shares of its Class L Common Stock in exchange
for $451,000 in connection with shares originally issued to Mr. David
Watterson; and 44,900 shares of its Class A Common Stock and 4,490 shares of
its Class L Common Stock in exchange for $449,000 in connection with shares
originally issued to each of
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<PAGE>
Messrs. White and Dalebout. 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 the Company. All members of the Company's senior
management also participate in the Company's 1994 Stock Option Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the agreements summarized below,
including the definitions therein of certain terms. It is currently
contemplated that certain of those agreements may be amended. See "Business--
Legal Proceedings--Proposed Settlement of WHF Litigation."
MASTER TRANSACTION AGREEMENT. The Original Shareholders, the optionholders
of the Recapitalized Companies and the Company are 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 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 will pay a royalty with respect to the U.S. and Other
Trademark Rights equal to 2% of sales of Licensed
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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%. The Company has the right to prepay this royalty
at any time. When the royalty has been paid in full, the Company will have a
perpetual, fully paid up license to such U.S. and Other Trademark Rights. If
the royalty has not been paid in full by the tenth anniversary of the
Recapitalization Closing, or if sales of the Licensed Products in any fiscal
year during the term of the WHF License fall below $5 million Cdn. and the
royalty is not thereupon paid in full, the Company's rights under the WHF
License will terminate and such rights will revert to the Licensor. See
"Business--Legal Proceedings."
PURCHASE OPTION. Under the CanCo Option the Company has 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 is 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 and
affiliates of WHF. In fiscal 1993, 1994 and 1995, and the first nine months of
fiscal 1996, the Company purchased $3.3 million, $7.4 million, $26.4 million
and $42.8 million, respectively, of products from CanCo. All such purchases by
the Company have been and will continue to be on an arm's length basis at any
time when the CanCo Option has not been exercised. The Company will provide
management services to CanCo for so long as it has the right to exercise the
CanCo Option and will receive a management fee equal to 10% of CanCo's pre-tax
earnings before such fee, including reasonable out of pocket expenses. No
management fees were received from CanCo in fiscal 1995 or in the first nine
months of fiscal 1996. Scott Watterson and Gary Stevenson are entitled to
receive from CanCo an aggregate of 14% of its pre-tax earnings up to the time
that the Canco Option is exercised and closed or expires. In August 1995, the
Company gave notice of its intention to exercise the CanCo Option, under which
it may purchase CanCo's assets, subject to various conditions. The purchase of
the CanCo assets has not yet been completed due to complications related to
WHF litigation. See "Business--Legal Proceedings" and Note 15 of the Notes to
the Consolidated Financial Statements. The Company may terminate its
obligation to purchase CanCo's assets any time prior to executing a final
puchase and sale agreement.
EUROPEAN OPERATIONS. The Company purchased certain fixed assets for
approximately $0.2 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 $0.2 million
in the first nine months of fiscal 1996.
INTERNATIONAL DISTRIBUTION ARRANGEMENTS. Prior to the beginning of fiscal
1996, the Company sold products to affiliates of WHF for international
distribution, primarily in Europe. In fiscal 1993, 1994 and 1995 sales by the
Company to such affiliates of WHF aggregated $2.7 million, $4.9 million and
$8.8 million, respectively. Since the beginning of fiscal 1996, the Company
has been selling its products directly in Europe.
The Company has entered into an agreement with Weider Sports, an affiliate
of the Company, under which Weider Sports has 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 does not have distribution rights with respect to
certain of the Company's products, including products sold under third party
brand names.
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Weider Sports' rights are non-exclusive for countries where sales were less
than $20,000 Cdn. annually in the two years ending in May 1994 and will become
non-exclusive for any country if, after June 1, 1996, sales in that country
are less than the greater of (x) $20,000 Cdn. or (y) 65% of the average sales
in that country during the three years ending in May 1994. Weider Sports has
the option of maintaining its exclusivity by paying the amount of any
shortfall in the minimum performance level but may exercise this right only
once for each country. There is a dispute between Weider Sports and the
Company regarding which countries are exclusive under the distribution
agreement.
If Weider Sports loses its exclusive status for a country and subsequently
achieves sales levels in that country that exceed the targeted levels, then
Weider Sports will regain its exclusive status for that country unless
exclusive distribution arrangements for that country have previously been
established with another party. Weider Sports has a right of first refusal on
any exclusive distributorship arrangement that the Company proposes to award
to a third party in a country where Weider Sports has non-exclusive rights and
will forfeit its distribution rights for that country if it does not exercise
its right of first refusal.
Notwithstanding these distribution arrangements, the Company may sell
products to U.S. retailers who make purchasing decisions in the U.S. for
distribution into Weider Sport's exclusive territory. The Company may also
sell non-Weider branded products through other distributors in Japan, Korea
and Taiwan. The Company must pay Weider Sports a commission on such sales and
must satisfy certain procedural requirements in connection with such sales.
Under these distribution arrangements, the Company is generally required to
make sales to Weider Sports on terms and conditions, including price, payment
terms and delivery terms that are as favorable as those extended to any third
party and that are as favorable as those prevailing on August 1, 1994.
The agreement with Weider Sports also provides that Weider Sports and the
Company will use their best efforts to negotiate amendments to the
distribution agreement in good faith to reflect market terms and conditions
for similar arrangements which shall be effective upon the completion of the
Offering.
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 fiscal 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 provides management services to
Weider Europe and since the Recapitalization Closing has been acting as Weider
Europe's agent to maintain and liquidate the inventory and is servicing and
collecting the accounts receivable of Weider Europe. Weider Europe has not
paid any fees under the management agreement.
NONCOMPETE AGREEMENTS. In connection with the closing of the
Recapitalization, the Company entered into noncompete agreements with WHF
under which the Company paid WHF $2.4 million in the aggregate for its
agreement not to compete with the Company in certain specified businesses for
a five-year term. In addition, the Company entered into four year agreements
with Messrs. Watterson and Stevenson not to compete with the Company in
certain specified businesses for which they received $2.3 million and $1.8
million, respectively.
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TAX SHARING AGREEMENT. For federal income tax purposes, the taxable income
of IHF Holdings and Health & Fitness is included in a single consolidated
federal income tax return, and ICON currently files a separate federal income
tax return. Such taxable income may also be 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, ICON and their affiliates to provide that each
such company will pay its separate company tax liability calculated as if it
were not included in consolidated, combined or unitary returns with its
parent. In connection with the Merger, the Tax Sharing Agreement will be
amended.
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 fiscal 1993,
1994, 1995, and the first nine months of fiscal 1996 the Recapitalized
Companies purchased $134,000, $132,000, $283,000 and $36,000, respectively, of
such advertising.
MANAGEMENT FEES. WHF received aggregate management fees from the Company of
$1.0 million, $0.4 million and nothing in fiscal 1993, 1994 and 1995,
respectively. 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 for an annual fee of $800,000 plus
reimbursement of reasonable out-of-pocket expenses. In fiscal 1995 and the
first nine months of fiscal 1996, the Company paid Bain IV $.4 and $.6
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 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, 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.
REIMBURSEMENT OF ORIGINAL SHAREHOLDER EXPENSES. 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 $1.3 million and $0.4 million in fiscal 1993 and
1994, respectively and paid nothing to WHF since the beginning of fiscal 1995.
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 0.5% and
remain outstanding. In connection with the purchase of stock in the
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.
63
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table and notes thereto set forth certain information with
respect to the beneficial ownership of the Company's outstanding shares of
Common Stock immediately prior to the Offering by (i) each person known to the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock of the Company, (ii) each director and named executive officer of the
Company individually and (iii) all directors and named executive officers of
the Company as a group. For a description of the Common Stock of the Company,
see "Description of Capital Stock."
<TABLE>
<CAPTION>
PERCENTAGE
PRIOR TO PERCENTAGE
THE AFTER THE
NAMES NUMBER(1)(2) OFFERING OFFERING
----- ------------ ---------- ----------
<S> <C> <C> <C>
Scott R. Watterson+..........................
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Gary E. Stevenson+...........................
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
S. Fred Beck(4)..............................
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
David S. Watterson(5)........................
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Jon M. White(6)..............................
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Eric Weider+(7)..............................
c/o Weider Health and Fitness
21100 Erwin Street
Woodland Hills, California 91367
Richard Renaud+(8)...........................
c/o TNG Corporation
1 Place Ville Marie
Suite 3200
Montreal, Quebec H3B 3Y2 Canada
Robert C. Gay+(9)............................
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Ronald P. Mika+(9)...........................
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF PRIOR TO PERCENTAGE
BENEFICIAL THE AFTER THE
NAMES OWNERSHIP(1)(2) OFFERING OFFERING
----- --------------- ---------- ----------
<S> <C> <C> <C>
Geoffrey S. Rehnert+(9)..................
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
The Bain Funds (9).......................
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Weider Health and Fitness (8)............
21100 Erwin Street
Woodland Hills, California 91367
Greyfriars Ltd. .........................
167 Regent Street
London W1, England
All directors and executive officers as a
group (10 persons)......................
</TABLE>
- --------
* Less than one percent.
+ Director of the Company.
(1) 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 Securities Exchange Act of 1934. All current shareholders and
warrantholders of the Company are parties to a Stockholders Agreement
pursuant to which they have agreed to vote for two directors selected by
certain shareholders affiliated with management, two directors selected by
WHF and its affiliates and all remaining directors as selected by 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"). They have
also agreed to vote to fix the number of directors as set by the Bain
Funds and to cast their votes with respect to certain matters, including
the disposition of the Company's assets, as directed by the Bain Funds.
The Stockholders Agreement also provides for certain "drag-along", "tag-
along" and registration rights. See "Description of Capital Stock--
Stockholders Agreement." 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.
(2) Assumes no exercise of the Underwriters' over-allotment option and does
not give effect to purchases, if any, by such persons in the Offering.
(3) Assumes that the Underwriters' over-allotment option is not exercised.
(4) Excludes shares of Common Stock subject to purchase upon exercise of
options that are not exercisable within 60 days after , 1996.
(5) Excludes shares of Common Stock subject to purchase upon exercise of
options that are not exercisable within 60 days after , 1996.
(6) Excludes shares of Common Stock subject to purchase upon exercise of
options that are not exercisable within 60 days after , 1996.
(7) Includes shares of Common Stock held directly by WHF and shares of
Common Stock subject to purchase upon exercise of warrants held directly
by WHF. Mr. Weider is a director and executive officer of WHF. Excludes
shares held by Greyfriars Ltd., which is an indirect wholly-owned
subsidiary of a trust of which Mr. Weider is a beneficiary.
(8) Includes shares of Common Stock held directly by WHF and shares of
Common Stock subject to purchase upon exercise of warrants held directly
by WHF. Mr. Renaud is Chairman and Chief Executive Officer of WHF.
(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.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of shares of Common Stock, $0.01 par value per share
and shares of Preferred Stock, $0.01 par value per share. The discussion
herein describes the Company's capital stock, its Amended and Restated
Certificate of Incorporation and its Bylaws, each as anticipated to be in
effect upon consummation of the Conversion and the Offering. The following
summary of certain provisions of the Company's capital stock describes all
material provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, the form of Amended and Restated Certificate
of Incorporation and the Bylaws of the Company that are included as exhibits
to the Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
Certain provisions described herein may have the effect of impeding
stockholder actions with respect to certain business combinations and the
election of new members to the Board. As such, the provisions could have the
effect of discouraging open market purchases of the Company's Common Stock
because they may be considered disadvantageous by a stockholder who desires to
participate in a business combination or elect a new director.
COMMON STOCK
Immediately prior to the Offering, there were shares of Common Stock
outstanding held of record by stockholders. There will be shares of
Common Stock outstanding after giving effect to the sale of the shares of
Common Stock offered hereby assuming no exercise of the Underwriters' over-
allotment option.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights, and therefore holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the remaining shares will not be able to elect any directors. The
Bylaws of the Company provide for a classified Board of Directors where one
class of directors is elected each year for a term extending to the third
succeeding annual meeting of stockholders after such election. The Amended and
Restated Certificate of Incorporation will require that any action required or
permitted to be taken by the Company's stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
consent in writing. Additionally, the Amended and Restated Certificate of
Incorporation will require that special meetings of the stockholders of the
Company be called only by a majority of the Board or by certain officers. The
Amended and Restated Bylaws will provide that stockholders seeking to bring
business before or to nominate directors at any annual meeting of stockholders
must provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal
executive offices of the Company not less than 60 days nor more than 90 days
prior to such meeting or, if less than 70 days' notice was given for the
meeting, within ten days following the date on which such notice was given.
The Bylaws also will specify certain requirements for a stockholder's notice
to be in proper written form. These provisions will restrict the ability of
stockholders to bring matters before the stockholders or to make nominations
for directors at meetings of stockholders. The effect of these provisions may
make it more difficult to effect a change of control of the Board of Directors
or take action by the stockholders.
The holders of Common Stock are entitled to receive such lawful dividends as
may be declared by the Board of Directors subject to the prior rights of the
holders of any Preferred Stock and the restrictions contained in the Credit
Agreement and the Senior Subordinated Notes Indenture. See "Dividend Policy."
The shares of Common Stock will not be redeemable or convertible, and the
holders thereof will have no preemptive or subscription rights to purchase any
securities of the Company. In the event of liquidation, dissolution or winding
up of the Company, the holders of shares of Common Stock will be entitled to
receive pro rata all of the remaining assets of the Company available for
66
<PAGE>
distribution to its stockholders. There are no sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable, and shares of Common Stock to be issued pursuant
to the Offering shall be fully paid and nonassessable.
The Company has applied for the Common Stock to be approved for listing on
the NYSE.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. The Board of Directors has the
authority, without further action by the stockholders, to issue the shares of
Preferred Stock in one or more series and to fix the rights, preferences and
privileges thereof, including voting rights, dividend rights, terms of
redemption, redemption prices, liquidation preferences, number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. Although it presently has no intention to
do so, the Board of Directors, without stockholder approval, could issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock and reduce the amount of funds
available for the potential payment of dividends on shares of Common Stock.
This provision may be deemed to have a potential anti-takeover effect, and the
issuance of Preferred Stock in accordance with such provision may delay or
prevent a change of control of the Company.
DELAWARE LAW
Section 203. Following the consummation of the Offering, the Company will be
subject to the "business combination" provisions of the DGCL. In general, such
provisions prohibit a publicly-held Delaware corporation from engaging in
various "business combination" transactions with any "interested stockholder"
for a period of three years after the date of the transaction in which the
person became an "interested stockholder," unless (i) either the transaction
or the transaction pursuant to which the stockholder became an "interested
stockholder" is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or subsequent to such date
the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" is defined to include
mergers, asset sales and other transactions resulting in financial benefit to
a stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. Such restrictions would not apply
to those who were "interested stockholders" prior to the consummation of the
Offering. The statute could prohibit or delay mergers or other takeover or
change in control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company. In addition, the Amended and
Restated Certificate of Incorporation will provide that the affirmative vote
of at least 80% of the outstanding voting stock is required for a business
combination between the Company or any subsidiary and the beneficial owner of
more than five percent of the outstanding voting stock unless such transaction
(i) has been approved by a majority of the disinterested directors or (ii)
involves a person who, as of the effectiveness of the Offering, was the
beneficial owner of more than five percent of the outstanding voting stock of
the Company or any affiliate thereof.
Limitations on Liability and Indemnification of Officers and Directors. The
DGCL provides that a corporation may limit the liability of each director to
the corporation or its stockholders for monetary
67
<PAGE>
damages except for liability (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 that involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The Company's Amended and
Restated Certificate of Incorporation will provide that, to the fullest extent
permitted by Delaware law, no director of the Company shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duties as a director. The effect of these provisions is to eliminate
the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against
a director for breach of fiduciary duty as a director (including breaches
resulting from grossly negligent conduct). This provision does not exonerate
the directors from liability under federal securities laws nor does it limit
the availability of non-monetary relief in any action or proceeding against a
director. In addition, the Amended and Restated Certificate of Incorporation
will provide that the Company shall, to the fullest extent not prohibited by
Delaware Law, indemnify its officers and directors against liabilities, cost
and expenses as provided by Delaware Law. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or others pursuant to the foregoing provisions, the Company has been
informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Company's Common Stock is
Fleet National Bank.
STOCKHOLDERS AGREEMENT
The summary herein of certain provisions of the Stockholders Agreement is
not complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the Stockholders Agreement, a copy of which is
available upon request to the Company.
GENERAL
The Company and all current holders of Common Stock of the Company and all
holders of warrants to purchase the Company's Common Stock (the
"Participants") have entered into the Stockholders Agreement.
RIGHTS AND OBLIGATIONS TO SELL
The Stockholders Agreement provides that, upon any transfer (by merger, sale
or otherwise) by the Bain Funds and their affiliates of at least 10% of the
Company's Common Stock then held by the Bain Funds and their affiliates to any
person other than the current holders of the Company's Common Stock, each
Participant will have the right to sell the same percentage of his or her
shares of Common Stock as the Bain Funds and their affiliates are selling to
the purchaser, on the same terms and conditions as the Bain Funds and their
affiliates. In addition, in the case of a sale of all of the Company's Common
Stock then held by the Bain Funds and their affiliates, such sellers will have
the right to cause each Participant to sell their shares of Common Stock to
the purchaser on the same terms and conditions as the Bain Funds and their
affiliates. Provisions of the Stockholders Agreement relating to rights and
obligation to sell Common Stock expire when the public float of the Company's
Common Stock (excluding shares issued in exchange for IHF Holdings Preferred
Stock, if any) exceeds $200 million as measured over a five day trading
period.
REGISTRATION RIGHTS
Pursuant to the Stockholders Agreement, the Bain Funds have the right to
demand registration under the Securities Act of the Company's Common Stock
held by them at any time. Each of two
68
<PAGE>
groups of the Original Shareholders that are Participants have the right to
demand two registration of the Company's Common Stock, the first at any time
after 4 years of the Recapitalization Closing and the second at any time five
and one half years or more after the Recapitalization Closing. Persons holding
an aggregate of at least 25% of the shares issued upon exercise of the
Company's warrants issued with the Discount Notes and Senior Subordinated
Notes ("Warrant Shares") (excluding any such shares which have been sold in a
public market) have the right to demand, in aggregate, up to two registrations
under the Securities Act of the Common Stock held by them, at any time 180
days or more after the closing of this Offering. This right will terminate on
such date, if any, when all Warrant Shares (excluding shares which have been
sold in a public market) are freely resaleable under Rule 144(k) and no holder
thereof holds more than 1% of all outstanding Common Stock of the Company. In
addition, after November 14, 2001, Scott Watterson and Gary Stevenson will
each have the right to demand registration under the Securities Act of the
Common Stock held by each of them on an unlimited number of occasions;
provided that (i) the holder exercising demand registration rights
beneficially owns, directly or indirectly, more than 5% of the outstanding
Common Stock of the Company, (ii) certain of such holder's demand registration
rights have been previously exercised, and (iii) such holder has been cut back
in connection with the exercise of at least one of such other previously
exercised registration rights. All of the Participants' demand registration
rights will be suspended for 180 days following the Offering or any other
public offering of the Company's Common Stock (other than pursuant to a shelf
registration statement).
For purposes of the registration rights provisions of the Stockholders
Agreement, Warrant Shares held by certain officers of the Company, the
Original Shareholders and affiliates of Bain Capital will be treated as though
they were not Warrant Shares.
The Stockholders Agreement also provides that each Participant has the
right, subject to reduction as set forth in next sentence, to require the
Company to cause such Participant's Shares to be included in any public
offering of the Company's Common Stock (other than pursuant to a shelf
registration statement). However, if the aggregate number of shares of Common
Stock which the Participants elect to include exceeds the number which, in the
opinion of the managing underwriter, can be sold in such offering without
materially adversely affecting the public offering, the number of such shares
sold in such an offering shall be allocated, first to the Company, second pro
rata to the holders of the Company's Common Stock held by Participants,
including holders of Warrant Shares (other than shares previously sold under
Rule 144 or under a registration statement) and third pro rata to the holders
of other shares.
In addition, the Stockholders Agreement requires the Company to file within
13 months after the Closing of this Offering, and as soon as practicable
thereafter, cause to become effective, and maintain the effectiveness of, a
shelf registration statement covering resale of the Warrant Shares; this
requirement will lapse on such date, if any, as all Warrant Shares (excluding
any such shares which have been sold in a public market) are freely resaleable
under Rule 144(k) and no holder thereof holds more than 1% of all the
Company's Common Stock.
VOTING RIGHTS
The Stockholders Agreement requires Participants to vote their shares to fix
the number of directors of the Board of Directors of the Company at a number
equal to or greater than seven as determined by the Bain Funds and to elect as
its directors two individuals nominated by WHF and its affiliates, two
individuals nominated by certain members of management and the individuals
nominated by the Bain Funds to fill the remaining number of director
positions. The Stockholders Agreement further provides that the Bain Funds may
direct the voting of all Participant Shares with respect to certain liquidity
events, including a sale of a substantial portion of the assets of the Company
and its subsidiaries, an offering of its securities, a merger or consolidation
and a change of control.The Stockholders Agreement provides that all
Participants will be deemed to have granted proxies to vote their shares to
implement all of the foregoing voting provisions.
69
<PAGE>
The limitations on voting rights, and grant of proxies, expire upon the
occurrence of the earliest of certain events or, if no such events have
occurred, on November 14, 2004.
OTHER
The Stockholders Agreement contains customary provisions regarding
indemnification and contribution in the event of losses caused by the
misstatement of any information or the omission of any information required to
be provided in a registration statement filed under the Securities Act. The
Stockholders Agreement also requires the Company to pay certain of the
expenses associated with any registration and offering of the Company's Common
Stock. In connection with this Offering, the Proposed Settlement and the
proposed amendments to the Employment Agreements, certain changes may be made
to the Stockholders Agreement.
DESCRIPTION OF CERTAIN INDEBTEDNESS
At March 2, 1996, Health & Fitness had $124.6 million of revolving credit
borrowings under the Credit Agreement. Advances under the Revolving Credit
Facility provided under the Credit Agreement are based upon 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) $160,000,000 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. The Over Advance Amount equals the lesser of (i) $15 million
in the first year after the closing of the Recapitalization (the
"Recapitalization Closing"), $10 million in the second year after the
Recapitalization Closing, $5 million in the third year after the
Recapitalization Closing and zero thereafter, (ii) Health & Fitness' EBITDA
for the trailing 12-month period ending as of the last day of the preceding
month and (iii) 85% of Health & Fitness' book value of accounts (which are not
Eligible Accounts) plus 60% of the book value of inventory (which is not
Eligible Inventory) (with a seasonal increase to 70% of such inventory in
effect during the months of June through November of each year). Health &
Fitness' ability to make revolving credit borrowings under the Credit
Agreement expires on November 14, 1999. At March 2, 1996, Health & Fitness had
$35.4 million of additional indebtedness available to be drawn on a revolving
credit basis under the Credit Agreement. Health & Fitness also has two term
loan facilities under the Credit Agreement. The Term Loan A Facility provides
for borrowings of $17,500,000 advanced at closing of the Recapitalization,
with a final maturity date of November 14, 1999. The amortization schedule for
the Term Loan A Facility calls for quarterly payments of $625,000 commencing
March 31, 1996, $937,500 commencing March 31, 1997, $1,250,000 commencing
March 31, 1998 and $1,562,500 commencing March 31, 1999. The Term Loan B
Facility provides for borrowings of $17,500,000 advanced at closing of the
Recapitalization, with a final maturity date of November 14, 2001. The
amortization schedule for the Term Loan B Facility calls for quarterly
installments of $62,500 commencing March 31, 1996 and $1,562,500 commencing
March 31, 2000 with the balance of $5,562,500 due at maturity. The Credit
Agreement contains a number of covenants all of which Health & Fitness was in
compliance with as of the date hereof. The Company intends to attempt to
renegotiate its Credit Agreement to provide for additional borrowings.
After this Offering, Health & Fitness will have outstanding $66.25 million
(face value) in Senior Subordinated Notes which are unsecured senior
subordinated obligations of Health & Fitness. They mature on July 15, 2002 and
bear interest at the rate of 13.00% per annum. The Senior Subordinated Notes
Indenture contains 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.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
In addition to the shares of Common Stock offered hereby, there will be
shares of Common Stock outstanding as of the effective date of the
Prospectus, all of which existing shares are "restricted shares" (the
"Restricted Shares") under the Securities Act. Beginning 180 days after the
date of this Prospectus, Restricted Shares will become eligible for sale
in the public market pursuant to the expiration of certain lock-up agreements
with the Company, subject to the volume, holding period and other restrictions
of Rule 144 promulgated under the Securities Act. In connection with the
Recapitalization, the Company entered into the Stockholders Agreement with its
officers, directors and principal stockholders, which, subject to the lock-up
agreements, requires the Company to register an offering of Common Stock held
by such persons or their transferees at their request, subject to certain
conditions and restrictions. The Stockholders Agreement allows the parties
thereto and their transferees to include their Common Stock in a registered
offering of Common Stock initiated by the Company or by another stockholder of
the Company. The Stockholders Agreement also requires the Company to file
within 13 months after the Closing of this Offering, and as soon as
practicable thereafter, to cause to become effective, and maintain the
effectiveness of a shelf registration statement covering resale of the Warrant
Shares. See "Stockholders Agreement."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated including affiliates) who has beneficially owned
Restricted Shares for at least two years (which is currently proposed to be
amended to one year) is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock (approximately shares
immediately after the Offering) or the average weekly trading volume during
the four calendar weeks preceding such a sale.
Under Rule 144(k), if a period of at least three years (which the Commission
has proposed to amend to two years) has elapsed since the later of the date
Restricted Shares were acquired from the Company or the date they were
acquired from an affiliate of the Company, as applicable, then a holder of
such Restricted Shares who is not an affiliate of the Company at the time of
the sale and who has not been an affiliate of the Company for at least three
months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
After 180 days after this Offering, the Company intends to file a
registration statement on Form S-8 under the Act to register shares of Common
Stock reserved for issuance under the 1994 Stock Option Plan and the 1996
Stock Option Plan, thus permitting the resale of shares issued under the plans
by non-affiliates in the public market without restriction under the Act. Such
registration statement will become effective immediately upon filing. As of
the closing of the Offering, options to purchase shares of Common Stock
will be outstanding under the Company's stock option plans and shares of
Common Stock will be available for future grants.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market or the perception that such sales may occur could adversely
affect prevailing market prices and adversely affect the Company's ability to
raise additional capital in the capital markets at a time and price favorable
to the Company. See "Stockholders Agreement," "Risk Factor--Shares Eligible
for Future Sale" and "--No Prior Public Market."
71
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters of the U.S. Offering
named below (the "U.S. Underwriters"), and each of such U.S. Underwriters, for
whom Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation
and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives, has severally agreed to purchase from the Company the number
of shares of Common Stock opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
----
Total.....................................................
====
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters" and, together with the U.S. Underwriters,
the "Underwriters") providing for the concurrent offer and sale of shares
of Common Stock in an international offering outside the United States. The
offering price and aggregate underwriting discounts and commissions per share
for the two offerings are identical. The closing of the U.S. Offering made
hereby is a condition to the closing of the International Offering, and vice
versa. The representatives of the International Underwriters are Goldman Sachs
International, Donaldson, Lufkin, & Jenrette Securities Corporation and
Merrill Lynch International.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between
72
<PAGE>
that, as part of the distribution of the shares offered as a part of the
International Offering, and subject to certain exceptions, it will (i) not,
directly or indirectly, offer, sell or deliver shares of Common Stock (a) in
the United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to
any U.S. persons, and (ii) cause any dealer to whom it may sell such shares at
any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
This prospectus may be used by Underwriters and dealers in connection with
offers and sales of the Company's Common Stock, including shares initially
sold in the International Offering, to persons located in the United States.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock solely to cover over-allotments, if any. If
the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
shares of Common Stock offered. The Company has granted the International
Underwriters a similar option exercisable for 30 calendar days after the date
of this Prospectus to purchase up to an aggregate of shares of additional
Common Stock.
The Company has agreed that during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the
date of the Prospectus, not to offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee
stock option plans existing, or on the conversion or exchange of convertible
or exchangeable securities outstanding, on the date of this Prospectus) which
are substantially similar to the Common Stock or which are convertible or
exchangeable into securities which are substantially similar to the Common
Stock, without the prior written consent of the representatives, except for
the Common Stock offered in connection with the U.S. Offering and
International Offering. The Company's officers, directors and certain
stockholders, have agreed not to sell, contract to sell, pledge or otherwise
dispose of or agree to dispose of any shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or establish a
"put equivalent position" with respect to the Common Stock within the meaning
of Rule 16a-1(h) under the Securities Exchange Act of 1934 for a period of 180
days after the date of this Prospectus, without the prior written consent of
the representatives of the U.S. Underwriters.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was negotiated among the Company and the
representatives of the U.S. Underwriters and the International Underwriters.
Among the factors considered in determining the initial public offering price
of the Common Stock, in addition to prevailing market conditions, was the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Company has applied for the Common Stock to be approved for listing on
the NYSE. In order to meet one of the requirements for listing on the NYSE,
the U.S. Underwriters have undertaken to sell lots of 100 or more Shares to a
minimum of 2000 beneficial owners.
73
<PAGE>
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Ropes & Gray, Boston,
Massachusetts. Certain legal matters with respect to the validity of the
shares of the Common Stock will be passed upon for the Underwriters by
Shearman and Sterling, New York, New York.
EXPERTS
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows of the Company and subsidiaries for each of the two years in
the period ended May 31, 1994 and the consolidated balance sheet of the
Company and its subsidiaries as of May 31, 1994 and the related financial
statement schedule have been audited by Deloitte and Touche LLP, independent
auditors, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows of the Company and its subsidiaries for the year ended May 31,
1995 and the consolidated balance sheet of the Company and its subsidiaries as
of May 31, 1995 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.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock 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 Common Stock 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 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.
Health & Fitness and IHF Holdings have been reporting companies under the
Securities Exchange Act of 1934.
74
<PAGE>
IHF CAPITAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Price Waterhouse LLP ............................................. F-2
Report of Deloitte & Touche LLP ............................................ F-3
Consolidated Financial Statements:
Consolidated Balance Sheet ............................................... F-4
Consolidated Statements of Operations .................................... F-5
Consolidated Statement of Stockholders' Equity (Deficit) ................. F-6
Consolidated Statements of Cash Flows .................................... F-7
Notes to Consolidated Financial Statements ............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of IHF Capital, Inc.
In our opinion, the accompanying consolidated financial statements listed in
the index on page F-1 present fairly, in all material respects, the financial
position of IHF Capital, Inc. (to be renamed ICON Fitness Corporation and
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, 1995 and the results of their operations and
their cash flows for the year 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 audit. We conducted our audit 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 audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
August 29, 1995, except Notes 10 and 15
which are as of May 21, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
IHF Capital, Inc.:
We have audited the accompanying consolidated balance sheet of IHF Capital,
Inc. (to be renamed ICON Fitness Corporation) (formerly known as Weslo, Inc.,
ProForm Fitness Products, Inc. and American Physical Therapy, Inc.) and its
subsidiaries as of May 31, 1994, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the two
years in the period 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 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of IHF Capital,
Inc. and its subsidiaries as of May 31, 1994, and the consolidated results of
their operations and their cash flows for each of the two years in the period
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>
IHF CAPITAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES
(NOTE 1) COMPANY
------------- ----------------------------------
MARCH 2,
1996
MARCH 2, (UNAUDITED)
MAY 31, MAY 31, 1996 AS ADJUSTED
1994 1995 (UNAUDITED) (NOTE 2)
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash......................... $ 95 $ 4,099 $ 3,183 $ 3,183
Accounts receivable, net..... 100,219 114,325 215,438 215,438
Inventories.................. 54,206 95,635 98,899 98,899
Deferred income taxes........ 2,809 7,588 3,821 3,821
Other assets................. 3,864 5,600 6,338 6,338
-------- --------- --------- ---------
Total current assets....... 161,193 227,247 327,679 327,679
Property and equipment, net... 20,219 23,144 29,921 29,921
Deferred income taxes......... -- 3,121 5,712 5,712
Long-term receivables, net.... 3,034 -- -- --
Other assets.................. 210 36,673 27,565 27,565
-------- --------- --------- ---------
$184,656 $ 290,185 $ 390,877 $ 390,877
======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term
debt........................ $ 261 $ 688 $ 2,752 $ 2,752
Accounts payable............. 45,796 73,968 100,545 100,545
Interest payable............. -- 5,035 4,231 4,231
Accrued expenses............. 12,596 9,350 10,492 10,492
Income taxes payable......... -- 130 5,185 5,185
Payable to Weider............ 4,697 -- -- --
-------- --------- --------- ---------
Total current liabilities.. 63,350 89,171 123,205 123,205
-------- --------- --------- ---------
Long-term debt, at May 31,
1994 includes $62,245 due to
Weider....................... 65,181 267,427 322,795 322,795
Deferred income taxes......... 1,593 -- -- --
Minority interest in cumula-
tive redeemable preferred
stock of subsidiary.......... -- 42,804 46,629 46,629
Stockholders' equity (defi-
cit):
Cumulative preferred stock,
$100 par value, 100,000
shares authorized, 65,492
shares issued and
outstanding at May 31,
1994........................ 6,549 -- -- --
Class L common stock, par
value, $.001, 1,200,000
shares authorized, 617,350
shares issued and
outstanding (liquidation
preference $64.5 million
and $69.4 million at May
31, 1995 and March 2, 1996,
respectively); none
outstanding on a pro forma
basis at March 2, 1996...... -- 1 1 --
Class A common stock, par
value $.001, 15,000,000
shares authorized,
7,717,265 shares issued and
outstanding at May 31, 1995
and 7,747,461 issued and
outstanding at March 2,
1996; none outstanding on a
pro forma basis at March 2,
1996........................ -- 8 8 --
Common stock; $.01 par
value, 2,050,000 shares
authorized, 748,161 shares
issued and outstanding; no
par value, 10,000 shares
authorized, 1,000 shares
issued and outstanding at
May 31, 1994................ 2 -- -- --
Common stock, par value
$.01, shares authorized,
shares outstanding upon
the conversion of the Class
A and Class L common into
Common stock on a pro forma
basis at March 2, 1996...... -- -- -- 9
Additional paid-in capital... 1,177 74,948 74,951 74,951
Receivable from officers for
purchase of equity.......... (101) (369) (758) (758)
Cumulative translation
adjustment.................. -- -- (16) (16)
Retained earnings
(accumulated deficit)....... 46,905 (183,805) (175,938) (175,938)
-------- --------- --------- ---------
Total stockholders' equity
(deficit)................. 54,532 (109,217) (101,752) (101,752)
-------- --------- --------- ---------
Commitments and contingencies
(Note 13).................... -- -- -- --
-------- --------- --------- ---------
$184,656 $ 290,185 $ 390,877 $ 390,877
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
IHF CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES (NOTE 1) COMPANY
------------------- -----------------------------------
FOR THE NINE
YEAR ENDED MAY 31, MONTHS ENDED
------------------- YEAR ENDED -----------------------
MAY 31, MARCH 4, MARCH 2,
1993 1994 1995 1995 1996
--------- --------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 314,889 $ 403,016 $ 530,774 $ 416,436 $594,213
Cost of sales........... 228,575 288,208 378,322 302,254 432,682
--------- --------- --------- --------- --------
Gross profit............ 86,314 114,808 152,452 114,182 161,531
--------- --------- --------- --------- --------
Operating expenses:
Selling................ 38,462 52,116 68,706 47,028 69,806
Research and
development........... 1,693 2,863 5,163 3,862 4,782
General and
administrative........ 24,433 28,578 31,097 21,583 35,179
Compensation expense
attributable to
options............... -- -- 39,046 39,046 --
--------- --------- --------- --------- --------
Total operating
expenses........... 64,588 83,557 144,012 111,519 109,767
--------- --------- --------- --------- --------
Income from operations.. 21,726 31,251 8,440 2,663 51,764
Interest expense........ 5,473 6,224 21,495 15,467 27,434
Dividend on cumulative
redeemable preferred
stock of a subsidiary
held by minority
interest............... -- -- 2,804 1,529 3,825
Amortization of deferred
financing fees......... -- -- 1,741 932 2,638
--------- --------- --------- --------- --------
Income (loss) before
income taxes........... 16,253 25,027 (17,600) (15,265) 17,867
Provision for (benefit
from) income taxes..... 6,216 9,766 (4,719) (5,172) 10,000
--------- --------- --------- --------- --------
Net income (loss)....... $ 10,037 $ 15,261 $ (12,881) $ (10,093) $ 7,867
========= ========= ========= ========= ========
Pro forma income (loss)
per common and common
equivalent share
(unaudited)............ $ $
========= ========
Weighted average shares
used in computation of
pro forma income (loss)
per common and common
equivalent share
(unaudited)............
========= ========
</TABLE>
The accompany notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
IHF CAPITAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE RECEIVABLE
PREFERRED CLASS L CLASS A FROM
STOCK COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL OFFICERS FOR CUMULATIVE
---------------- -------------- ---------------- --------------- PAID-IN PURCHASE TRANSLATION
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL OF EQUITY ADJUSTMENT
------- ------- ------- ----- --------- ----- -------- ----- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recapitalized
Companies
Balance, June 1,
1992............ 65,492 $ 6,549 -- $-- -- $-- 741,753 $ 2 $ 1,076 $ -- $--
Preferred stock
dividends....... -- -- -- -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ---- --------- ---- -------- ---- ------- ----- ----
Balance, May 31,
1993............ 65,492 6,549 -- -- -- -- 741,753 2 1,076 -- --
Preferred stock
dividends....... -- -- -- -- -- -- -- -- -- -- --
Exercise of
stock options... -- -- -- -- -- -- 7,408 -- 101 (101) --
Net income...... -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ---- --------- ---- -------- ---- ------- ----- ----
Company
Balance, May 31,
1994............ 65,492 $ 6,549 -- $-- -- $-- 749,161 $ 2 $ 1,177 $(101) $--
Preferred stock
dividends....... -- -- -- -- -- -- -- -- -- -- --
Equity exchanges
and distribu-
tions to stock-
holders......... (65,492) (6,549) 225,360 -- 2,253,600 2 (749,161) (2) 21,357 -- --
Issuance of
Class L and
Class A common
stock to new in-
vestors and man-
agement......... -- -- 410,075 1 4,100,750 4 -- -- 41,003 (657) --
Issuance of re-
placement war-
rants and op-
tions to pur-
chase shares of
Class L and
Class A common
stock........... -- -- -- -- -- -- -- -- 34,700 -- --
Options exer-
cised, shares
called and can-
celled.......... -- -- -- -- -- -- -- -- (26,356) -- --
Issuance of war-
rants to pur-
chase shares of
Class L and
Class A common
stock in con-
junction with
debt offering... -- -- -- -- -- -- -- -- 4,806 -- --
Exercise of op-
tions and war-
rants to pur-
chase Class A
common stock.... -- -- -- -- 1,543,765 2 -- -- 69 -- --
Class A and
Class L common
stock called and
cancelled....... -- -- (18,085) -- (180,850) -- -- -- (1,808) 389 --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ---- --------- ---- -------- ---- ------- ----- ----
Balance, May 31,
1995............ -- $ -- 617,350 $ 1 7,717,265 $ 8 -- $-- $74,948 $(369) $--
Issuance of com-
mon stock on
option exercise
(unaudited)..... -- -- -- -- 30,196 -- -- -- 3 -- --
Payments to of-
ficers for Class
A and Class L
common stock
called and can-
celled (unau-
dited) -- -- -- -- -- -- -- -- -- (389) --
Foreign currency
translation
(unaudited)..... -- -- -- -- -- -- -- -- -- -- (16)
Net income (un-
audited)........ -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ---- --------- ---- -------- ---- ------- ----- ----
Balance, March
2, 1996
(unaudited)..... -- $ -- 617,350 $ 1 7,747,461 $ 8 -- $-- $74,951 $(758) $(16)
======= ======= ======= ==== ========= ==== ======== ==== ======= ===== ====
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------ -------------
<S> <C> <C>
Recapitalized
Companies
Balance, June 1,
1992............ $ 22,669 $ 30,296
Preferred stock
dividends....... (531) (531)
Net income...... 10,037 10,037
------------ -------------
Balance, May 31,
1993............ 32,175 39,802
Preferred stock
dividends....... (531) (531)
Exercise of
stock options... -- --
Net income...... 15,261 15,261
------------ -------------
Company
Balance, May 31,
1994............ $ 46,905 $ 54,532
Preferred stock
dividends....... (243) (243)
Equity exchanges
and distribu-
tions to stock-
holders......... (217,586) (202,778)
Issuance of
Class L and
Class A common
stock to new in-
vestors and man-
agement......... -- 40,351
Issuance of re-
placement war-
rants and op-
tions to pur-
chase shares of
Class L and
Class A common
stock........... -- 34,700
Options exer-
cised, shares
called and can-
celled.......... -- (26,356)
Issuance of war-
rants to pur-
chase shares of
Class L and
Class A common
stock in con-
junction with
debt offering... -- 4,806
Exercise of op-
tions and war-
rants to pur-
chase Class A
common stock.... -- 71
Class A and
Class L common
stock called and
cancelled....... -- (1,419)
Net loss........ (12,881) (12,881)
------------ -------------
Balance, May 31,
1995............ $(183,805) $(109,217)
Issuance of com-
mon stock on
option exercise
(unaudited)..... -- 3
Payments to of-
ficers for Class
A and Class L
common stock
called and can-
celled (unau-
dited) -- (389)
Foreign currency
translation
(unaudited)..... -- (16)
Net income (un-
audited)........ 7,867 7,867
------------ -------------
Balance, March
2, 1996
(unaudited)..... $(175,938) $(101,752)
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
IHF CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES
(NOTE 1) COMPANY
-------------------- ----------------------------------
YEAR ENDED FOR THE NINE MONTHS
YEAR ENDED MAY 31, MAY 31, ENDED
-------------------- ---------- -----------------------
MARCH 4, MARCH 2,
1993 1994 1995 1995 1996
--------- --------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....... $ 10,037 $ 15,261 $(12,881) $(10,093) $ 7,867
Adjustments to reconcile
net income (loss) to net
cash (used in) provided
by operating activities:
(Benefit) provision for
deferred taxes........ (615) (1,153) (9,493) (10,576) 1,176
Depreciation and amor-
tization.............. 3,433 4,010 11,579 8,081 14,726
Compensation expense
attributable to op-
tions................. -- -- 12,303 12,303 --
Interest expense at-
tributable to divi-
dends on preferred
stock held by minority
interest.............. -- -- 2,804 1,529 3,825
Changes in operating as-
sets and liabilities:
Accounts receivable.... (25,840) (32,559) (14,106) (55,859) (101,113)
Inventories............ (11,363) 726 (41,429) (23,098) (3,264)
Other assets........... (766) 1,217 (5,837) (2,731) 4,937
Accounts payable and
accrued expenses...... 7,539 25,844 29,961 8,121 26,916
Income taxes payable... -- -- 130 (1,652) 5,055
Payable to Weider...... 1,981 919 (4,697) (2,803) --
--------- --------- -------- -------- --------
Net cash (used in) pro-
vided by operating ac-
tivities.............. (15,594) 14,265 (31,666) (76,778) (39,875)
--------- --------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (4,034) (6,924) (7,977) (7,102) (11,637)
Payment for non-compete
agreements............. -- -- (4,070) (4,070) --
--------- --------- -------- -------- --------
Net cash used in in-
vesting activities.... (4,034) (6,924) (12,047) (11,172) (11,637)
--------- --------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings (payments) on
revolving loans and
lines of credit, net... 20,561 (68,925) 66,400 106,983 50,998
Proceeds from long-term
debt................... 219 105,197 194,999 194,999 --
Payments on long-term
debt................... (436) (43,222) (58,197) (58,197) --
Proceeds from issuance
of common stock........ -- -- 40,423 40,423 3
Repurchase of common
stock.................. -- -- (1,808) (1,808) --
Payments (borrowings)
from officers for eq-
uity purchases......... -- -- 389 389 (389)
Payments of dividends... (531) (531) (243) (243) --
Distributions to stock-
holders................ -- -- (166,738) (166,738) --
Payment of debt financ-
ing fees............... -- -- (27,508) (27,508) --
--------- --------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ 19,813 (7,481) 47,717 88,300 50,612
--------- --------- -------- -------- --------
Effect of exchange rate
changes on cash........ -- -- -- -- (16)
--------- --------- -------- -------- --------
Net increase (decrease)
in cash................ 185 (140) 4,004 350 (916)
Cash, beginning of peri-
od..................... 50 235 95 95 4,099
--------- --------- -------- -------- --------
Cash, end of period..... $ 235 $ 95 $ 4,099 $ 445 $ 3,183
========= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
BASIS OF PRESENTATION--The consolidated May 31, 1995 financial statements
include the accounts of IHF Capital, Inc. (to be renamed ICON Fitness
Corporation), its subsidiary IHF Holdings, Inc. ("IHF Holdings"), IHF
Holdings' wholly-owned subsidiary, ICON Health & Fitness, Inc. ("Health &
Fitness"), and Health & Fitness's wholly-owned subsidiaries (collectively, the
"Company"). The minority interest in IHF Holdings represents cumulative
redeemable preferred stock held by certain shareholders of the Company (Note
9). Other than the Senior Discount Notes (Note 8) and related deferred
financing fees and deferred income tax benefit and the redeemable preferred
stock (Note 9) issued by IHF Holdings, all assets and liabilities of the
Company are those of Health & Fitness.
The consolidated May 31, 1994 and 1993 financial statements of Weslo, Inc.
and its wholly-owned subsidiaries, of ProForm Fitness Products, Inc. and its
wholly-owned subsidiaries, and of American Physical Therapy, Inc.,
(collectively, the "Recapitalized Companies") all of which were majority-owned
subsidiaries of Weider Health and Fitness, Inc. ("WHF"), reflect the financial
position and 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 year ended May 31, 1995, 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 8), 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 14).
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, 1995. 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>
IHF CAPITAL, INC.
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 is 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.
LONG-TERM RECEIVABLES--Long-term receivables at May 31, 1994 consist of
trade receivables from two customers which have filed Chapter 11 bankruptcy.
These receivables are net of allowances of $1,487,000, which have been
provided to reduce the recorded balance to management's estimate of the net
realizable value of such long-term receivables. One of these receivables was
collected and the other receivable was exchanged for common stock in the
customer and written down to its estimated value at May 31, 1995.
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
Revolving Credit Facility (Note 8) 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 Revolving Credit Facility and the effective interest
method for costs associated with the Notes (Note 6).
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%, 34% and 31% of total
sales for the years ended May 31, 1993, 1994 and 1995, respectively. Sam's
accounted for approximately 12% of total sales for the years ended May 31,
1994 and 1995. Accounts receivable from these two customers accounted for
approximately 41%, 27% and 40% of total accounts receivable at May 31, 1994
and 1995 and March 2, 1996 (unaudited), respectively.
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.
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 on November 14, 1994, the Recapitalized
Companies were included as part of the consolidated tax return filed by WHF.
Taxes otherwise due to or refundable from the
F-9
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
taxing authorities calculated on a separate company basis have been reflected
as due to or from WHF. Subsequent to the Recapitalization, IHF Capital files a
separate return and Health & Fitness is 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 exchange rate risk because gains and losses on these contracts
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, 1994 and 1995 the Company had approximately $18
million Canadian and $19 million Canadian, respectively, of open forward
exchange contracts to sell Canadian dollars throughout fiscal years May 31,
1995 and 1996, respectively. The fair value of these forward exchange
contracts are based on quoted market prices. At May 31, 1994 and 1995 the
estimated unrealized gain (loss) on outstanding forward exchange contracts was
($106,000) and $210,000, respectively.
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, 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
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
13% Senior Subordinated Notes............................ $99,123 $112,388
15% Senior Secured Discount Notes........................ 60,347 70,014
</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.
UNAUDITED PRO FORMA INCOME (LOSS) PER SHARE--The calculation of pro forma
income (loss) per share and supplemental pro forma loss per share was
determined by dividing pro forma income (loss) by the pro forma weighted
average common and common equivalent shares outstanding after giving
retroactive effect to the exchange of equity instruments in conjunction with
the Recapitalization (Note 1) and the conversion of all Class L Common stock
and Class A Common stock into approximately shares and shares,
respectively of common stock upon the effectiveness of the Registration
Statement. In addition, in accordance with Securities and Exchange Commission
Staff Accounting Bulletin ("SAB") No. 83, shares issued and share options or
warrants granted within one year of or in contemplation of the anticipated IPO
have been included in the calculation of common share equivalents, using the
treasury stock method to determine the dilutive effect of the issuances, as if
they were outstanding for all periods presented. There are no dilutive common
equivalent shares other than those considered outstanding for all periods
presented in accordance with SAB No. 83.
F-10
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the proceeds from the Company's anticipated public offering will be
used to redeem the redeemable preferred stock held by a minority interest
(Note 9) and to retire the Senior Discount Notes of IHF Holdings and $35.0
million Principal Amount of the Senior Subordinated Notes of Health & Fitness
(Note 8). Accordingly, supplemental pro forma income (loss) per share is $
and $ for the year ended May 31, 1995 and the nine months ended March 2,
1996, respectively. The number of shares of Common Stock whose proceeds are to
be used to reduce the debt is . This calculation assumes the preferred
stock redemption and debt retirement had taken place at the later of the
beginning of the respective period or the issuance of the preferred stock or
debt. The amount of dividends and interest expense eliminated net of
additional interest on new debt obtained to affect the redemption and net of
tax benefits, is $ and $ for the nine months ended May 31, 1995 and the
year ended March 2, 1996, respectively.
UNAUDITED AS ADJUSTED BALANCE SHEET--The pro forma balance sheet as of March
2, 1996 gives effect to the conversion of all outstanding Class L and Class A
Common Stock into an aggregate shares of Common Stock as of the closing of
the Company's anticipated initial public offering.
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 nine months ended March 4, 1995 and
March 2, 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.
RECLASSIFICATIONS--Reclassifications have been made to the 1994 and 1993
financial statements to conform to the 1995 presentation. These
reclassifications had no effect on net income for 1994 and 1993.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- ---------------------
MAY 31, MAY 31, MARCH 2,
1994 1995 1996
------------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable...................... $103,498 $119,633 $227,227
Less allowances.......................... (3,279) (5,308) (11,789)
-------- -------- --------
$100,219 $114,325 $215,438
======== ======== ========
</TABLE>
F-11
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories consist of the following (table in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- -------------------
MARCH 2,
MAY 31, MAY 31, 1996
1994 1995 (UNAUDITED)
------------- ------- -----------
<S> <C> <C> <C>
Raw materials, principally parts and sup-
plies................................... $30,701 $36,472 $47,003
Finished goods........................... 23,505 59,163 51,896
------- ------- -------
$54,206 $95,635 $98,899
======= ======= =======
</TABLE>
Inventories are net of allowances of $72,000, $787,000 and $2,511,000 at May
31, 1994 and 1995 and at March 2, 1996 (unaudited), 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, NET
Property and equipment, net, consists of the following (table in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
ESTIMATED ------------- --------
USEFUL LIFE MAY 31, MAY 31,
(YEARS) 1994 1995
----------- ------------- --------
<S> <C> <C> <C>
Land..................................... -- $ 1,230 $ 1,230
Building and improvements................ up to 31 8,879 9,683
Equipment................................ 3-7 21,311 25,784
-------- --------
31,420 36,697
Less accumulated depreciation............ (11,201) (13,553)
-------- --------
$ 20,219 $ 23,144
======== ========
</TABLE>
For the years ended May 31, 1993, 1994 and 1995, the Company recorded
depreciation expense of $3,433,000, $4,010,000 and $5,052,000, respectively.
6. OTHER ASSETS
Other assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- -------
MAY 31, MAY 31,
1994 1995
------------- -------
<S> <C> <C>
Non-compete agreement................................. $-- $ 3,561
Deferred financing costs.............................. -- 25,767
Other................................................. 210 7,345
---- -------
$210 $36,673
==== =======
</TABLE>
At May 31, 1995, capitalized non-compete payments made to the Company's key
executives are net of accumulated amortization of $509,000.
F-12
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At May 31, 1995 capitalized deferred financing costs are net of accumulated
amortization of $1,741,000.
7. ACCRUED EXPENSES
Accrued expenses consists of the following (in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- -------
MAY 31, MAY 31,
1994 1995
------------- -------
<S> <C> <C>
Warranty............................................... $ 2,873 $2,470
Payroll and Commission................................. 2,278 3,928
Bonuses................................................ 5,507 1,229
Other.................................................. 1,938 1,723
------- ------
$12,596 $9,350
======= ======
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following (table in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- --------------------
MARCH 2,
MAY 31, MAY 31, 1996
1994 1995 (UNAUDITED)
------------- -------- -----------
<S> <C> <C> <C>
10.25% mortgage note, due September 1,
2005, collateralized by property....... $ 3,050 $ -- $ --
12% capital lease payable through
February 1995, collateralized by
equipment.............................. 56 -- --
Prime plus 0.75% mortgage note, due May
1996, collateralized by property....... 91 -- --
Payable to Weider --
6% variable revolving loan, unsecured. 7,245 -- --
7.28% senior note payable, unsecured.. 55,000 -- --
Revolving Credit Facility............... -- 73,645 124,643
Term Loan A Facility.................... -- 17,500 17,500
Term Loan B Facility.................... -- 17,500 17,500
13% Senior Subordinated Notes, face
amount $101,250 net of unamortized
discount of $2,127 at May 31, 1995 and
$2,002 at March 2, 1996 (unaudited).... -- 99,123 99,248
15% Senior Secured Discount Notes, face
amount $123,700 net of unamortized
discount of $63,353 at May 31, 1995 and
$57,044 at March 2, 1996 (unaudited) .. -- 60,347 66,656
------- -------- --------
65,442 268,115 325,547
Less current portion.................... 261 688 2,752
------- -------- --------
Total long-term debt................ $65,181 $267,427 $322,795
======= ======== ========
</TABLE>
CREDIT AGREEMENT
In connection with the Recapitalization (Note 1), the Company, through its
subsidiary Health & Fitness, entered into a Credit Agreement with a
syndication of banks. Borrowings under the Credit Agreement, consist of the
Revolving Credit Facility, the Term Loan A Facility, and the Term Loan B
F-13
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Facility, and are secured by a perfected first priority security interest in
the assets of the Company and its 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, 1995 Health & Fitness was in
compliance with these covenants.
Revolving Credit Facility
The agreement provides for borrowings of up to $160.0 million based upon a
percentage of eligible accounts receivable and inventories and expires on
November 14, 1999. Advances under the Revolving Credit Facility bear interest,
at Health & Fitness's option, at either (1) 2.75% plus the rate at which
certain Eurodollar deposits are offered in the interbank Eurodollar market
(the "LIBOR Rate") or (2) 1.75% plus the higher of (a) the highest of the most
recently published or announced prime corporate base, reference or similar
benchmark rate announced by Bankers Trust Company or (b) the published rate
for ninety-day dealer placed commercial paper (the "Index Rate") (9.4% as of
May 31, 1995). The Company is required to pay a fee of 0.5% per annum on the
average unused commitment under the Revolving Credit Facility. For the year
ended May 31, 1995, the Company paid an unused commitment fee of $42,000. As
of May 31, 1995, $43.4 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. Payments of $625,000 are due quarterly beginning March 31, 1996.
Quarterly payments increase to $937,500 beginning March 31, 1997, to
$1,250,000 beginning March 31, 1998, and to $1,562,000 beginning March 31,
1999, with the balance of $1,562,000 due at maturity on November 14, 1999.
Advances under 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 (9.125% as of May 31, 1995).
Term Loan B Facility
Under the Term Loan B Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $62,500 are 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 (9.625% as of May 31,
1995).
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 and $101,250,000 face amount (net proceeds of $100.0 million) of
13% Senior Subordinated Notes (the "Senior Subordinated Notes") through its
subsidiary Health & Fitness. The Senior Surbordinated 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
F-14
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 or the Company
at a redemption price equal to 112.25% of the principal, together with accrued
and unpaid interest at the redemption date. On or after November 15, 1998, the
Senior Subordinated Notes may be redeemed at the Company's option, in whole or
in part, at redemption prices ranging from 110% of principal amount in the
year ended November 14, 1999, to 100% of principal amount subsequent to
November 14, 2001, plus accrued and unpaid interest.
SENIOR SECURED DISCOUNT NOTES
In conjunction with the Recapitalization (Note 1), the Company issued
warrants to purchase 800,000 shares of Class A and 80,000 shares of Class L
Common Stock and $123,700,000 face amount (net proceeds of $60.0 million) of
15% Senior Secured Discount Notes (the "Discount Notes") through its
subsidiary 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 Holdings or the Company, at a redemption price of 114% of
the accreted value. 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 therein,
constitutes an event of default under the Credit Agreement, which could
require immediate payment of the Revolving Credit Facility, Term Loan A
Facility and Term Loan B Facility.
F-15
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FUTURE PAYMENTS
As of May 31, 1995, 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
1996............................................................... $ 688
1997............................................................... 3,063
1998............................................................... 4,312
1999............................................................... 5,562
2000............................................................... 6,500
Thereafter......................................................... 239,825
</TABLE>
9. CUMULATIVE REDEEMABLE PREFERRED STOCK--IHF HOLDINGS
Authorization and Issuance of Series A Cumulative Redeemable Preferred Stock
As part of the Recapitalization (Note 1), the Company's subsidiary 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
F-16
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Minority Interest in Preferred Stock of Subsidiary
Management anticipates that the option to redeem the Series A Preferred will
be exercised and, for the year ended May 31, 1995 and the nine months ended
March 2, 1996 has accrued dividends of $2.8 million and $3.8 million
(unaudited), respectively on the issued and outstanding preferred shares and
outstanding options. Dividends accrued to the minority shareholders of IHF
Holdings are charged to the Company's current operations.
10. STOCKHOLDERS' EQUITY
Preferred Stock
For the two years 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 (Note 1), the Company authorized
1,200,000 shares of Class L Common Stock ("Class L Common"), and 15,000,000
shares of Class A Common Stock ("Class A Common"), with par value of $0.001.
At the Recapitalization, 635,435 shares of Class L Common and 6,354,350 shares
of Class A Common were issued at values of $99.00 and $0.10, respectively, in
exchange for cash and equity in the Recapitalized Companies. All of the common
stock that was issued and outstanding prior to the Recapitalization was
retired as part of that transaction.
Conversion
Shares of Class L Common convert automatically to Class A Common upon an
initial public offering. Each share of Class L Common is convertible into
shares of Class A Common at a rate equivalent to the total of the issuance
price of Class L Common, plus an internal rate of return of 10% per annum,
plus any other distributions declared by the Board of Directors (in total, the
"Class L Minimum Payment Amount") divided by the public offering price of the
Class A Common. The conversion rate is also affected by any stock split, stock
dividend or other similar event.
Voting Rights
Holders of Class A Common are entitled to one vote per share. Holders of
Class L Common are entitled to a number of votes per share equal to the number
of Class A Common shares which would be received upon conversion of each
share.
F-17
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation Preference
The Class L Common retains a liquidation preference over the Class A Common
at a rate equal to the Class L Minimum Payment amount. Subsequent to
satisfying the liquidating preference of the Class L Common, the holders of
the Class A Common are entitled to a liquidating preference of $.10 per share.
All remaining distributions upon a liquidation are to be made ratably amongst
the Class A Common and Class L Common shareholders (based upon the number of
Class A Common shares into which each share of Class L Common stock is
convertible).
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 9), and options and warrants to purchase Class L Common and Class A
Common.
Options and warrants issued in connection with the Recapitalization to
purchase Class L Common and Class A Common consisted of the following:
(1) Options to purchase 360,904 shares of Class L Common at an exercise
price of $3.93482 per share with such price subject to certain anti-
dilutive protection adjustments as provided for in the option
agreement. 274,469 of these options were exercised and the shares
called and cancelled during the year ended May 31, 1995. Options to
purchase 86,435 shares of Class L Common are outstanding at May 31,
1995. The options expire May 31, 2004.
(2) Options to purchase 3,609,044 shares of Class A Common at an exercise
price of $0.00397 per share. These options were exercised and 2,744,690
of the shares called and cancelled during the year ended May 31, 1995.
None of the options are outstanding at May 31, 1995.
(3) Warrants to purchase 452,941 shares of Class A Common at an exercise
price of $0.10 per share with such price subject to certain anti-
dilutive protection adjustments as provided for in the warrant
agreement. 45,294 of these warrants were exercised during the year
ended May 31, 1995. Warrants to purchase 407,647 shares of Class A
Common are outstanding at May 31, 1995. The warrants expire November
14, 1999.
(4) Warrants to purchase 1,000,000 shares of Class A Common and 100,000
shares of Class L Common were issued in conjunction with the Senior
Subordinated Notes and Discount Notes (Note 8).
Compensation charges totaling $39.0 million were recorded relating to the
exchange of options and warrants (including $4.0 million related to the
issuance of the Series A-2 Preferred options (Note 9)).
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 provides
for the granting of options to purchase up to 1,200,000 shares of Class A
Common. The Board of Directors determines which individuals shall receive
options, the time period during which the options may be exercised, the
exercise price (which cannot be less than the fair market value of the Class A
Common 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.
F-18
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity under the 1994 Plan is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONED EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Options granted.................................... 1,120,769 $0.10-8.92
Options exercised.................................. (634,117) $0.10
---------
Outstanding at May 31, 1995........................ 486,652 $0.10-8.92
=========
</TABLE>
Of the total options outstanding under the 1994 Plan, 181,176 incentive
options are exercisable at May 31, 1995. All options under the 1994 Plan
become exercisable upon an initial public offering, subject to the approval of
the Board of Directors. At May 31, 1995, there are 79,231 options available
for future grant.
As of May 31, 1995, the Company has reserved 186,435 shares of Class L
Common and 1,973,530 shares of Class A Common for issuance upon exercise of
outstanding warrants and options.
In September 1995 and March 1996, the exercise price of all options granted
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 with no change
in the number of option share grants.
Stock Restrictions
The Company's stockholders and optionholders have entered into an agreement
which restricts the transfer or sale of shares by all investors until May 31,
1996 unless certain conditions are met. Subsequent to this date, these
restrictions continue to be applicable for shares held by certain stockholders
and optionholders. These same stockholders have been granted "tag along"
rights by which they may participate in the sale of shares to non-investors by
those stockholders not subject to the additional transfer and sale
restrictions. These restrictions lapse upon the closing of a public offering
of the Company's common stock.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------------- ----------
YEAR ENDED MAY 31, YEAR ENDED
------------------- MAY 31,
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal income taxes....................... $ 5,930 $ 9,193 $ 4,277
State income taxes......................... 901 1,726 497
-------- --------- -------
Total current............................ 6,831 10,919 4,774
-------- --------- -------
Deferred:
Federal income taxes....................... (550) (1,005) (8,466)
State income taxes......................... (65) (148) (1,027)
-------- --------- -------
Total deferred........................... (615) (1,153) (9,493)
-------- --------- -------
$ 6,216 $ 9,766 $(4,719)
======== ========= =======
</TABLE>
F-19
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for 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
--------------- ----------------------
NINE MONTHS
YEAR ENDED ENDED
MAY 31, YEAR ENDED MARCH 2,
--------------- MAY 31, 1996
1993 1994 1995 (UNAUDITED)
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Statutory federal income tax rate....... 34% 35% (35)% 35%
State tax provision (benefit)........... 5 5 (3) 4
Dividends on preferred stock............ -- -- 5 8
Other non-deductible items.............. -- -- 6 5
Foreign losses for which no benefit has
been recognized........................ -- -- -- 4
Other................................... (1) (1) -- --
------ ------ --- ---
Provision (benefit) for income taxes.... 38% 39% (27)% 56%
====== ====== === ===
</TABLE>
As of May 31, 1994 and 1995, the Company recorded gross deferred tax assets
and deferred tax liabilities as follows (in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- -------
MAY 31, MAY 31,
1994 1995
------------- -------
<S> <C> <C>
Gross deferred tax assets............................. $ 2,809 $13,579
Gross deferred tax liabilities........................ (1,593) (2,870)
------- -------
$ 1,216 $10,709
======= =======
</TABLE>
Net deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- -------
MAY 31, MAY 31,
1994 1995
------------- -------
<S> <C> <C>
Net operating loss carryforward....................... $ -- $ 3,767
Stock compensation expense............................ -- 4,642
Future deductible interest............................ -- 1,211
Depreciation.......................................... (1,002) (1,786)
Reserves and allowances............................... 2,259 2,942
Contribution of land.................................. (500) (500)
Uniform capitalization of inventory................... 604 879
Other, net............................................ (145) (446)
------- -------
$ 1,216 $10,709
======= =======
</TABLE>
At May 31, 1995, the Company has net operating loss carryforwards of
approximately $9.9 million which expire in 2010. Under the Tax Reform Act of
1986, certain substantial changes in the Company's ownership could result in an
annual limitation on the amount of net operating loss carryforwards which could
be utilized.
F-20
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------------ ----------
YEAR ENDED MAY 31, YEAR ENDED
------------------ MAY 31,
1993 1994 1995
------------------ ----------
<S> <C> <C> <C>
Cash paid during the period for:
Interest..................................... $ 4,980 $ 5,259 $12,188
Income taxes paid to WHF..................... 5,146 10,237 5,286
</TABLE>
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.
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.
13. 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, 1995 (table in
thousands):
<TABLE>
<S> <C>
FOR YEAR ENDED MAY 31:
1996................................................................ $2,879
1997................................................................ 2,238
1998................................................................ 1,801
1999................................................................ 1,338
2000................................................................ 179
------
Total............................................................. $8,435
======
</TABLE>
Rental expense for operating leases was approximately $1,805,000,
$1,767,000, and $2,890,000 for the years ended May 31, 1993, 1994, and 1995,
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,
F-21
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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, IHFH and Health
& Fitness and to IHF Capital's minority stockholders, and (iv) the Company has
violated its duties to WHF under the Management Agreement. 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 14). 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
operation 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 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 14).
The Company, based in part on discussions with legal counsel, does not
believe the outcome of its legal disputes with WHF and its affiliates will
have a material adverse effect upon the Company's results of operation and
financial position.
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, $900,000 and $1,500,000 at
May 31, 1994 and 1995, and March 2, 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,
1994 and 1995 and March 2, 1996, the Company had an accrual for estimated
warranty costs on products sold of approximately $2,873,000, $2,470,000 and
$3,350,000 (unaudited), 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
F-22
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributions up to 15% of total salary in 1995. Company contributions to the
two plans for the years ended May 31, 1993, 1994, and 1995 were $4,000,
$48,000, and $220,000, respectively.
14. 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 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 recorded revenues of $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. 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, 1993, 1994 and 1995, the Company purchased
approximately $3.3 million, $7.4 million and $26.4 million, respectively, of
products from WHF and had a trade payable of $3 million and $1.3 million at
May 31, 1994 and 1995, respectively.
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 year
ended May 31, 1995, the Company recorded management fee expense of $400,000.
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 during 1995 under this
agreement.
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 $8.8 million for the year ended May
31, 1995 and had a trade receivable from WHF affiliates of $2.6 million at May
31, 1995. For the fiscal years ended May 31, 1994 and 1993, the Company
recorded revenue from sales to WHF of $4.9 million and $2.7 million,
respectively, and, at May 31, 1994, the Company had a trade receivable from
WHF affiliates of $1.9 million.
F-23
<PAGE>
IHF CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS
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 three
Canadian corporations (collectively "CanCo") owned by WHF and certain other
parties at a purchase price equal to the net book value of those assets. In
addition, the Company also has an option to acquire certain fixed assets 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 has not yet been completed due to complications
related to the WHF litigation (Note 13) and, therefore, the Company has not
been able to assess the significance of CanCo's operations. Based upon the
estimated purchase price of $5 million management does not believe the
acquisition of CanCo will be significant.
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.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATION 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.............................................................. 9
Sources and Uses of Funds................................................. 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Background................................................................ 19
Unaudited Pro Forma Financial Data........................................ 20
Selected Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 37
Management................................................................ 52
Certain Relationships and Related Transactions............................ 60
Principal Stockholders.................................................... 64
Description of Capital Stock.............................................. 66
Stockholders Agreement.................................................... 68
Description of Certain Indebtedness....................................... 70
Shares Eligible for Future Sale........................................... 71
Underwriting.............................................................. 72
Legal Matters............................................................. 74
Experts................................................................... 74
Additional Information.................................................... 74
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-----------
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS PROSPEC-
TUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
ICON FITNESS CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrants in
connection with the sale of the securities being registered. All amounts are
estimates except for the fees payable to the Securities and Exchange
Commission ("SEC").
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee................................................ $55,172.41
Printing and engraving expenses..................................... *
Legal fees and expenses of the Company.............................. *
Accounting fees and expenses........................................ *
Blue Sky and NASD filing fees....................................... *
Miscellaneous....................................................... *
----------
TOTAL............................................................. *
==========
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by
or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses actually and
reasonably incurred in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or such other court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (relating to unlawful payment of dividends and unlawful stock
purchase and redemption) or (iv) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE>
The Company's Amended and Restated 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. The Company's Amended and
Restated 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 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 14, 1994, the Company issued and sold to the Initial Purchasers
123,700 IHF Holdings Units consisting of an aggregate of $123,700,000 15%
Senior Secured Discount Notes due 2004, Series A of IHF Holdings and Warrants
to purchase 800,000 shares of Class A and 80,000 shares of Class L Common
Stock of the Company. These sales were exempt from registration under Section
4(2) of the Securities Act. The Initial Purchasers offered and sold those
securities for resale in transactions not requiring registration under the
Securities Act to persons they reasonably believed to be "Qualified
Institutional Buyers" as defined in Rule 144A under the Securities Act or
institutional "Accredited Investors" as defined in subparagraph (a)(1), (2),
(3) or (7) of Rule 501 under the Securities Act who delivered letters
containing certain representations and agreements to the Initial Purchasers.
The aggregate price to investors for those securities was $59,993,263, and the
Initial Purchasers received a discount of $2,399,731.
On November 14, 1994, the Company issued and sold to the Initial Purchasers
101,250 Health & Fitness Units consisting of an aggregate of $101,250,000 13%
Senior Subordinated Notes due 2002, Series A of Health & Fitness and Warrants
to purchase 200,000 shares of Class A and 20,000 shares of Class L Common
Stock of the Company. These sales were exempt from registration under Section
4(2) of the Securities Act. The Initial Purchasers offered those securities
for resale in transactions not requiring registration under the Securities Act
to persons they reasonably believed to be "Qualified Institutional Buyers" as
defined in Rule 144A under the Securities Act or institutional "Accredited
Investors" as defined in subparagraph (a)(1), (2), (3) or (7) of Rule 501
under the Securities Act who delivered letters containing certain
representations and agreements to the Initial Purchasers. The aggregate price
to investors for those securities was $100,005,638, and the Initial Purchasers
received a discount of $3,250,183.
On November 14, 1995, Mr. Beck exercised an option to purchase 15,098 shares
of Class A Common Stock at $.10 per share. Other employees exercised options
to purchase in aggregate 29,441 shares of Class A Common Stock at $.10 per
share. These options were granted under the Company's 1994 Stock Option Plan.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
Unless otherwise noted by an asterisk, the following exhibits were
previously filed with the Securities and Exchange Commission under the
Securities Act and are referred to and incorporated herein by reference to
such filings. Except as otherwise indicated, all exhibits are incorporated
herein by reference to the correspondingly numbered exhibit filed as part of
the Registration Statement ("Previous Registration Statement") on Form S-1 of
Health & Fitness and IHF Holdings, Inc., as amended, (Registration No. 33-
87930-01).
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1** Form of Underwriting Agreement.
3.1** Form of Amended and Restated Certificate of Incorporation.
3.2** Form of Amended and Restated By-laws.
4.1 Stockholders Agreement dated as of November 14, 1994 by and among
the Company, Health & Fitness, IHF Holdings each of the Bain Funds
named therein and certain other persons named therein. (1)
4.2** Form of Certificate Representing Common Stock.
5** Opinion of Ropes & Gray re legality.
10.1 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 Agreement of IHF Holdings and the Company dated November 14, 1994
in favor of General Electric Capital Corporation, as agent.
10.2 First Amended and Restated Master Transaction Agreement dated as of
October 12, 1994 among ICON 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 Adjustment Agreement dated as of November 14, 1994 between Weider
Health and Fitness and Health & Fitness.
10.4 Registration Rights Agreement dated November 14, 1994 among Health
& Fitness and IHF Holdings and Donaldson, Lufkin & Jenrette
Securities Corporation and Bear, Stearns & Co. (2)
10.5 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 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 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 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 Canada Exclusive License Agreement dated as of November 14, 1994
between Weider Sports Equipment Co., Ltd. and Health & Fitness.
10.10 Employment Agreement dated as of November 14, 1994 among the
Company, Health & Fitness, IHF Holdings and Gary E. Stevenson.
10.11 Employment Agreement dated as of November 14, 1994 among the
Company, Health & Fitness, IHF Holdings and Scott R. Watterson.
10.12 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 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.14 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 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 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 Advertising Space Contract dated as of November 14, 1994 between
Health & Fitness and Weider Publications, Inc.
10.18 Trade Payables Agreement dated as of November 14, 1994 between
Health & Fitness and IHF Holdings.
10.19 Tax Agreement dated as of November 14, 1994 among the Company and
its subsidiaries.
10.20 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 Warrant Agreement dated as of November 14, 1994 among the Company,
Weider Health and Fitness, Scott Watterson and Gary Stevenson.
10.22 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 The Company's Stock Subscription and Purchase Agreement dated as
of November 14, 1994 among the Company and the Subscribers named
therein.
10.24 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 The Company's Option Exchange Agreement dated as of November 14,
1994, among the Company, Scott Watterson and Gary Stevenson.
10.26 IHF Holdings Option Exchange Agreement dated as of November 14,
1994 among IHF Holdings, Scott Watterson and Gary Stevenson.
10.27 The Company's Employee Stock Option Plan dated as of November 14,
1994.
10.27.1 Form of Option Certificate for Management Options.
10.27.2 Form of Option Certificate for Performance Options.
10.28 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 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 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 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 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 Sublease dated as of June 1, 1994 between Weider Health and
Fitness and ProForm Fitness Products, Inc.
10.34 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. (3)
10.34A 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. (3)
10.35 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. (3)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.35A 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. (3)
10.36 Registration Rights Agreement dated November 14, 1994 between
Health & Fitness and Weider Health and Fitness with respect to the
Senior Subordinated Notes due 2002. (3)
11.1** Statement regarding computation of pro forma and supplemental pro
forma income per share.
21* Subsidiaries of the Registrant.
23.1* Consent and report on schedule of Deloitte & Touche LLP.
23.2* Consent of Price Waterhouse LLP.
23.3** Consent of Ropes & Gray (included in Exhibit 5).
24* Powers of Attorney (included on signature page).
27* Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
(1) Filed as Exhibit 10.4 to the Previous Registration Statement.
(2) Filed as Exhibit 4.3 to the Previous Registration Statement.
(3) Filed as part of Exhibit 4 to the Previous Registration Statement.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES OF THE COMPANY FOR THE THREE
YEARS ENDED MAY 31, 1995 ARE INCLUDED IN THIS REGISTRATION STATEMENT:
Schedule VIII Valuation and qualifying accounts for the years ended May 31,
1993, 1994 and 1995.
ITEM 17. 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 hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, IHF Capital, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah,
on the 21st day of May, 1996.
IHF CAPITAL, INC.
/s/ Scott R. Watterson
By: _________________________________
Name: Scott R. Watterson
Title: Chairman of the Board and
ChiefExecutive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 21st day of May, 1996. Each person whose
signatures appears below hereby authorizes and constitutes Scott R. Watterson,
S. Fred Beck, Robert C. Gay and Ronald P. Mika, and each of them acting
singly, his true and lawful attorneys with full power to them, and each of
them acting singly, to sign for him and in his name in the capacities
indicated below any and all amendments (including post-effect amendments) to
this Registration Statement and any Registration Statement filed pursuant to
Rule 462(b) of the Securities Act of 1933, and to file the same, with exhibits
thereto, and other documents in connection therewith, and he hereby ratifies
and confirms his signature as it may be signed by said attorneys, or any of
them, to any and all such amendments.
SIGNATURE TITLE
/s/ Scott R. Watterson Chairman of the Board of Directors and
- ------------------------------------- Chief Executive Officer (principal
SCOTT R. WATTERSON executive officer)
/s/ S. Fred Beck Vice President, Chief Financial and
- ------------------------------------- Accounting Officer and Treasurer
S. FRED BECK (principal financial and accounting
officer)
/s/ Gary E. Stevenson Director
- -------------------------------------
GARY E. STEVENSON
- ------------------------------------- Vice Chairman of the Board of
ERIC WEIDER Directors
/s/ Robert C. Gay Vice Chairman of the Board of
- ------------------------------------- Directors
ROBERT C. GAY
Director
- -------------------------------------
RICHARD RENAUD
/s/ Ronald P. Mika Director
- -------------------------------------
RONALD P. MIKA
/s/ Geoffrey S. Rehnert Director
- -------------------------------------
GEOFFREY S. REHNERT
II-6
<PAGE>
IHF CAPITAL, INC.
CONSOLIDATED SUPPLEMENTAL SCHEDULE VIII
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------------------- ------------
YEAR ENDED
YEARS ENDED MAY 31, MAY 31,
------------------------- ------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
ALLOWANCES FOR DOUBTFUL ACCOUNTS,
ADVERTISING AND CREDIT MEMOS:
Balance at Beginning of year.......... $ 1,608,000 $ 2,146,000 $ 3,279,000
Additions
Charged to Costs and Expenses (Al-
lowance for Doubtful Accounts and
Credit Memos)...................... 1,220,000 1,864,000 3,792,000
Charged to Costs and Expenses (Ad-
vertising)......................... 6,025,000 12,907,000 14,114,000
Recoveries on Accounts Charged Off.. -- -- --
Deductions
Accounts Charged Off (Allowance for
Doubtful Accounts and Credit
Memos)............................. (536,000) (1,163,000) (2,666,000)
Accounts Charged Off (Advertising).. (6,171,000) (12,475,000) (13,211,000)
----------- ------------ ------------
Balance at End of Year................ $ 2,146,000 $ 3,279,000 $ 5,308,000
=========== ============ ============
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
1** Form of Underwriting Agreement.
3.1** Form of Amended and Restated Certificate of
Incorporation.
3.2** Form of Amended and Restated By-laws.
4.1(1) Stockholders Agreement dated as of November 14, 1994 by
and among Health & Fitness, the Company, IHF Holdings
each of the Bain Funds named therein and certain other
persons named therein.
4.2** Form of certificate representing Common Stock.
5** Opinion of Ropes & Gray re legality.
10.1* 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* Agreement of IHF Holdings, Inc. and the Company, dated
November 14, 1994 in favor of General Electric Capital
Corporation, as agent.
10.2* 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* Adjustment Agreement dated as of November 14, 1994
between Weider Health and Fitness and Health & Fitness.
10.4(2) 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* 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* 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* 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* 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* Canada Exclusive License Agreement dated as of November
14, 1994 between Weider Sports Equipment Co., Ltd. and
Health & Fitness.
10.10* Employment Agreement dated as of November 14, 1994
among the Company, Health & Fitness, IHF Holdings and
Gary E. Stevenson.
10.11* Employment Agreement dated as of November 14, 1994
among the Company, Health & Fitness, IHF Holdings and
Scott R. Watterson.
10.12* 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* 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
10.14* 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* 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* 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* Advertising Space Contract dated as of November 14,
1994 between Health & Fitness and Weider
Publications, Inc.
10.18* Trade Payables Agreement dated as of November 14,
1994 between Health & Fitness and IHF Holdings.
10.19* Tax Agreement dated as of November 14, 1994 among the
Company and its subsidiaries.
10.20* 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* Warrant Agreement dated as of November 14, 1994 among
the Company, Weider Health and Fitness, Scott
Watterson and Gary Stevenson.
10.22* 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* The Company's Stock Subscription and Purchase
Agreement dated as of November 14, 1994 among the
Company and the Subscribers named therein.
10.24* 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* The Company's Option Exchange Agreement dated as of
November 14, 1994, among the Company, Scott Watterson
and Gary Stevenson.
10.26* IHF Holdings Option Exchange Agreement dated as of
November 14, 1994 among IHF Holdings, Scott Watterson
and Gary Stevenson.
10.27* The Company's Employee Stock Option Plan dated as of
November 14, 1994.
10.27.1* Form of Option Certificate for Management Options.
10.27.2* Form of Option Certificate for Performance Options.
10.28* 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* 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* 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
10.31* 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* 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* Sublease dated as of June 1, 1994 between Weider
Health and Fitness and ProForm Fitness Products, Inc.
10.34(3) 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(3) 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(3) 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(3) 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(3) Registration Rights Agreement dated November 14, 1994
between Health & Fitness and Weider Health and
Fitness with respect to the Senior Subordinated Notes
due 2002.
11.1** Statement regarding computation of pro forma and
supplemental pro forma income per share.
21 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 Ropes & Gray (included in Exhibit 5).
24 Powers of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- --------
* Filed as the correspondingly numbered exhibit to the Previous Registration
Statement.
** To be filed by amendment.
(1) Filed as Exhibit 10.4 to the Previous Registration Statement.
(2) Filed as Exhibit 4.3 to the Previous Registration Statement.
(3) Filed as part of Exhibit 4 to the Previous Registration Statement.
(b) Consolidated Financial Statement Schedules of the Company for the Three
Years Ended May 31, 1995 are included in this Registration Statement:
SCHEDULES
Schedule VIII Valuation and qualifying accounts for the years ended May 31,
1993, 1994 and 1995.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF IHF CAPITAL, INC.
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION TRADE NAMES
- ---- --------------- ---------------------------
<S> <C> <C>
IHF Holdings, Inc. Delaware
SUBSIDIARIES OF IHF HOLDINGS, INC.
<CAPTION>
JURISDICTION OF
NAME INCORPORATION TRADE NAMES
- ---- --------------- ---------------------------
<S> <C> <C>
ICON Health & Fitness, Inc. Delaware Proform Fitness Products
Proform Fitness
Proform
PROFORM
PFP
Proform/Weslo
Legend
American Physical Therapy
APT
WEIDERCARE
Legend Sporting Goods
Legend Sporting Goods, Inc.
Workout Warehouse
Image
Image ICON, Inc.
IMAGE
Weslo
WESLO
Legend
SUBSIDIARIES OF ICON HEALTH & FITNESS, INC.
<CAPTION>
JURISDICTION OF
NAME INCORPORATION TRADE NAMES
- ---- --------------- ---------------------------
<S> <C> <C>
Jumpking, Inc. Utah Jumpking
Silicone Products, Inc. Utah Silicone Products
SPI
Universal Technical Services Utah Universal
UTS
ICON International Holdings, Inc. Delaware
ICON OS, Inc. Virgin Islands
IHF (Holdings) Ltd. UK
ICON Fitness Lifestyle Ltd. UK
ICON Health & Fitness France Sarl France
ICON Health & Fitness France SA France
ICON Health & Fitness Italia Srl Italy
9004-7382 Quebec, Inc. Quebec, Canada
</TABLE>
<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 Registration Statement of IHF Capital, Inc. on
Form S-1 of our report dated July 15, 1994 (December 23, 1994 as to Note 1)
relating to the consolidated financial statements of IHF Capital, Inc. and
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 audits of the consolidated financial statements of the Company referred to
in our aforementioned report also included the consolidated financial
statement schedule of the Company for each of the two years in the period
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 audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as whole, presents fairly in all material respects
the information set forth therein.
Salt Lake City, Utah
May 21, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 29, 1995, except
Notes 10 and 15 which are as of May 21, 1996, relating to the financial
statements of IHF Capital, Inc. (to be renamed ICON Fitness Corporation and
formerly known as Weslo, Inc., ProForm Fitness Products, Inc., and American
Physical Therapy, Inc. and subsidiaries (the "Recapitalized Companies")),
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedules for the year ended May 31, 1995
listed under Item 16(b) of this Registration Statement when such schedules are
read in conjunction with the financial statements referred to in our report.
The audit referred to in such report also included these schedules. We also
consent to the references to us under the headings "Experts" in such
Prospectus.
Price Waterhouse LLP
Boston, Massachusetts
May 21, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated financial statements of IHF Capital for the year ended May 31, 1995
and the nine months ended March 2, 1996 and is qualified in its entirety by
reference to such financial information.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> MAY-31-1995 MAR-02-1996
<PERIOD-END> MAY-31-1995 MAR-02-1996
<CASH> 4,099,000 3,183,000
<SECURITIES> 0 0
<RECEIVABLES> 119,633,000 227,227,000
<ALLOWANCES> 5,308,000 11,789,000
<INVENTORY> 95,635,000 98,899,000
<CURRENT-ASSETS> 227,247,000 327,679,000
<PP&E> 36,697,000 48,334,000
<DEPRECIATION> 13,553,000 18,413,000
<TOTAL-ASSETS> 290,185,000 390,877,000
<CURRENT-LIABILITIES> 89,171,000 123,205,000
<BONDS> 267,427,000 322,795,000
0 0
0 0
<COMMON> 9,000 9,000
<OTHER-SE> (109,226,000) (101,761,000)
<TOTAL-LIABILITY-AND-EQUITY> 290,185,000 390,877,000
<SALES> 530,774,000 594,213,000
<TOTAL-REVENUES> 530,774,000 594,213,000
<CGS> 378,322,000 432,682,000
<TOTAL-COSTS> 144,012,000 109,767,000
<OTHER-EXPENSES> 26,040,000 33,897,000
<LOSS-PROVISION> 3,792,000 2,487,000
<INTEREST-EXPENSE> 23,236,000 30,072,000
<INCOME-PRETAX> (17,600,000) 17,867,000
<INCOME-TAX> (4,719,000) 10,000,000
<INCOME-CONTINUING> 12,881,000 7,867,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (12,881,000) 7,867,000
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
