<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1996
REGISTRATION NO. 333-04279
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
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
for 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(3)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.01 par
value)................ $ $244,375,000.00 $84,267.24
</TABLE>
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- -------------------------------------------------------------------------------
(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.
(3) $55,172.41 was previously wired to the Securities and Exchange Commission
in connection with the filing of the Registration Statement on May 22,
1996. An additional $29,094.83 has been wired to the Securities and
Exchange Commission in connection with the filing of this Amendment No. 1.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 AUGUST 14, 1996
SHARES
[LOGO OF ICON ICON FITNESS CORPORATION
ICON APPEARS HERE]
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."
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) Certain Selling Stockholders have 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 Selling Stockholders will be $ , $ and $ ,
respectively. The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling
Stockholders" and "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, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
-----------
The date of this Prospectus is , 1996.
<PAGE>
[Motion photo of a woman opening and closing the Space Saver
treadmill's fold - for - storage feature.]
----------------
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;
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; and HealthRider(R), aeROBICRider(TM),
SportRider(TM), and LifeRider(TM), which are owned by HealthRider, Inc.
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>
[Motion photo of a man exercising on an upright power rower.]
[Photo of the male host of the Company's television advertising
spot for the Space Saver treadmill holding a cellular telephone
and standing next to the Space Saver treadmill.]
<PAGE>
[Photo of a woman exercising on a [Photo of a woman exercising
stair-stepping machine.] on a treadmill.]
[Photo of a man performing a bench [Photo of a woman standing next
press on a weight-lifting machine.] to a treadmill.]
[Photo of a man exercising on a [Photo of a woman exercising
treadmill.] on an upright rowing machine.]
<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. Prior to the Recapitalization, the
Recapitalized Companies were wholly owned subsidiaries of Weider Health and
Fitness ("WHF"). Except as otherwise specified, references herein to years are
to the Company's fiscal year, which ends on May 31 of each calendar year. For
example, "1996" refers to the fiscal year ended May 31, 1996. Industry data is
based on the calendar year, however. The principal executive offices of the
Company are located at 1500 South 1000 West, Logan, Utah 84321. IHF Capital is
a Delaware corporation incorporated in 1994.
THE COMPANY
The Company is one of the largest manufacturers and marketers of fitness
equipment in the United States. The Company's focus is to address consumers'
interest in a healthy, active lifestyle with a broad range of high quality
products at a variety of price/value relationships specifically targeted to
meet different consumers' health and fitness needs. The Company's line of home
fitness aerobic products includes treadmills, upright rowers, exercise bikes,
stair steppers and cross country skiers, and its line of anaerobic fitness
products includes home gyms, weight benches and recently introduced abdominal
machines. The Company also offers trampolines, recreational sports products,
sports medicine products and fitness accessories. The Company markets the
majority of its products under the brand names ProForm, Image, Weslo, Weider,
WeiderCare, Legend, JumpKing, and Lifestyler (a private label brand
manufactured for Sears).
Founded in 1977, the Company has been a pioneer in the fitness equipment
industry since 1980 and has focused on developing innovative, high-quality
fitness products. The Company estimates that its U.S. net sales (prior to its
planned acquisitions of HealthRider, Inc. ("HealthRider") and certain related
manufacturing assets which will be acquired prior to the closing of the
Offering and which are described below under the headings "--Pursuing Growth
Opportunities" and "HealthRider Acquisition") represented approximately 30% of
total wholesale domestic home fitness equipment sales in calendar 1995. In the
first quarter of fiscal 1996, the Company began to directly market its products
in Europe. In 1996, the Company had net sales of $747.6 million versus $202.4
million in 1991, reflecting compound annual growth in net sales of 29.9% and an
increase in 1996 net sales of 40.8% from 1995 net sales of $530.8 million. The
Company had a net loss of $12.9 million and net income of $1.6 million in 1995
and 1996, respectively. The Company believes that from 1991 to 1996 its sales
growth rate exceeded the industry growth rate due to the Company's emphasis on
product innovation through research and development, its multiple distribution
channels and its flexible manufacturing capacity.
Based on industry trade association data, the Company believes that retail
sales of fitness equipment in the U.S. grew from approximately $.4 billion in
calendar 1980 to approximately $2.6
3
<PAGE>
billion in calendar 1993, $2.8 billion in calendar 1994 and $2.9 billion in
calendar 1995. The growth of the fitness equipment industry can be attributed
primarily to increased consumer emphasis on health, fitness and weight
management. In particular, the medical community's promotion of exercise as a
means of preventing cardiovascular disease and maintaining health and the diet
industry's recognition of the need to incorporate exercise as a component of
weight management programs have prompted consumers to place greater emphasis on
health and fitness. The Company believes that several other factors have
contributed to the growth of the fitness equipment industry, including product
innovation at attractive price/value relationships, growth in infomercials and
cable television shows which promote exercise and fitness and favorable
demographic trends. The Company believes that sales of home fitness equipment
have also benefitted from consumers' desire to spend more time at home.
The Company's strategy is to expand its market leadership position by, among
other things:
DEVELOPING INNOVATIVE, HIGH-QUALITY PRODUCTS
A key element of the Company's strategy is product innovation and
development. The Company evaluates new product concepts on an ongoing basis and
seeks to respond to the desires and needs of consumers by frequently
introducing new products and repositioning old ones (i.e., selling a modified
product in a different price range). This focus on new products and innovation
enables the Company to begin selling early in a product's life cycle and, as
sales moderate, to extend product life cycles by introducing new features and
repositioning products within the Company's line of brands. In 1994, 1995 and
1996, approximately 40%, 42% and 52%, respectively, of the Company's net sales
were from products that were new, enhanced or repositioned. Recent examples of
the Company's product development include the introduction of the Space Saver
treadmill, which folds vertically for easy storage, the development of the
Cardio family of upright rowers, which significantly improved on upright rower
designs first marketed by others, and the introduction of the Company's
abdominal machines, which improved upon existing products manufactured by
others by adding a fold for storage feature. The Company believes that its
ability to identify industry trends and to quickly take a product from concept
to delivery gives it significant advantages over competitors.
TARGETING MULTIPLE DISTRIBUTION CHANNELS
The Company markets its products under multiple brands through multiple
distribution channels including specialty dealers, sporting goods chains,
department stores, discount merchants, warehouse clubs, catalogue showrooms
and, to a limited extent, infomercials and direct response marketing. The
Company believes the marketing of its products through multiple distribution
channels provides it with several competitive advantages including: (i) greater
growth and increased market access; (ii) the ability to maximize revenue
throughout a product's life cycle by repositioning products in different
channels and under different brand names as products mature; (iii) feedback on
market trends and changing consumer tastes; and (iv) reduced dependence on any
single channel of distribution.
POSITIONING ITS BRANDS
To enhance its distribution strategy, the Company targets its brands to
specific distribution channels. By marketing specific brands tailored to appeal
to different demographic groups, the Company is able to market products with
varying designs, features and price ranges and target these products to a wide
variety of consumers with different fitness needs and disposable incomes. The
Company believes its brand positioning strategy enables it to: (i) achieve
greater appeal to each market segment; (ii) promote price stability across its
product lines as brand segmentation minimizes conflicts between different
distribution channels; and (iii) provide high-quality products with the price
ranges and features desired by different demographic groups. The Company's
various brands are supported by distinct marketing and product strategies and,
in some cases, separate sales forces.
PROVIDING BROAD PRODUCT OFFERINGS
The Company manufactures and distributes a broad line of aerobic and
anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and
4
<PAGE>
fitness accessories. The Company offers a range of technological features, from
manual equipment to sophisticated programmable electronic products, in a
variety of price ranges. The Company's strategy of offering a broad range of
products enables it to: (i) offer categories of fitness products that appeal to
different demographic groups; (ii) respond quickly to changes in consumer
preferences and fitness trends; (iii) reduce its dependence on any single
product category; and (iv) participate in growth opportunities across a wide
variety of product categories.
UTILIZING FLEXIBLE, LOW-COST MANUFACTURING
The Company's manufacturing facilities are designed to be flexible in order
to permit the Company to shift its product mix quickly and efficiently. The
combination of internal manufacturing and assembly capacity and the Company's
access to third-party vendors has helped the Company meet customer demand on a
competitive basis. The design of these facilities provides the Company with the
flexibility to change production runs on short notice and to respond to
changing customer needs.
PURSUING GROWTH OPPORTUNITIES
The Company is seeking strategic acquisition opportunities which would
complement its existing business and provide an opportunity for growth. The
Company believes growth opportunities exist in its current domestic markets as
well as in selected international markets. The North American fitness equipment
market is significantly more developed than other markets around the world.
However, the Company began to directly market its products in the first quarter
of 1996 in the key European markets of the U.K., France, Italy and the Benelux
countries and is attempting to increase its market penetration in these and
other foreign countries. Prior to 1996, the Company had minimal foreign sales.
Net sales from international markets in the four quarters of 1996 were $6.0
million, $9.3 million, $7.8 million and $10.2 million, respectively. In keeping
with its strategy of pursuing growth opportunities, in July 1996, the Company
entered into definitive agreements: (i) to purchase substantially all the
assets and assume or refinance substantially all the liabilities of HealthRider
for approximately $16.8 million; (ii) to purchase certain other related
manufacturing assets of Parkway Manufacturing, Inc., ("Parkway"), including
Parkway's contract to manufacture and supply upright rowers to HealthRider, for
approximately $10.1 million; and (iii) to buy out the minority interest of
HealthRider's European subsidiary for approximately $1.4 million (of which $.7
million will be paid by HealthRider, $.6 million will be paid by the Company in
cash and $.1 million will be paid by the Company in inventory) (together, the
"HealthRider Acquisition"). Assuming the HealthRider Acquisition occurred at
June 30, 1996, the liabilities assumed or refinanced would have included
capital lease obligations of $19.3 million and revolving credit borrowings and
other long term debt of $11.8 million. For a description of certain accounts
payable and other accrued payables the Company will assume in connection with
the HealthRider Acquisition, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." In connection with the Recapitalization, the Company granted
certain exclusive and non-exclusive rights to distribute its products in
certain other international markets to Weider Sports Equipment Co., Ltd.
("Weider Sports"). The Company is negotiating to purchase certain assets of
Weider Sports. If the Weider Sports acquisition is completed, the Company will
reacquire distribution rights granted to Weider Sports in connection with the
Recapitalization subject to certain rights granted by Weider Sports to third
parties. The Company is also negotiating to purchase certain assets of a
Canadian manufacturing business affiliated with WHF ("CanCo"). See "Certain
Relationships and Related Transactions" "Business--Legal Proceedings--Proposed
Settlement of WHF Litigation" and "Risk Factors--Expansion Strategy."
HEALTHRIDER ACQUISITION
HealthRider, a designer, marketer and distributor of fitness equipment,
distributes its products through a national network of over 200 HealthRider
kiosks and stores in shopping malls, direct response advertising and third
party retailers. HealthRider had net sales of $241.4 million and $113.2
5
<PAGE>
million and net income of $13.6 million and a net loss of $3.6 million in
calendar 1995 and the first six months of calendar 1996, respectively.
HealthRider's flagship product is the HealthRider, a brand of upright rower. In
aggregate, and excluding freight related revenues, sales of upright rowers
(including the HealthRider) accounted for 94.4% and 93.4% of HealthRider's net
sales in calendar 1995 and the first six months of calendar 1996, respectively.
In calendar 1995 and the first six months of calendar 1996, purchases from
Parkway accounted for approximately 73.5% and 54.3%, respectively, of total
upright rower purchases by HealthRider. HealthRider experienced a substantial
and accelerated deterioration of its business during the first six months of
calender 1996. See "Risk Factors--Expansion Strategy; Acquisitions," and
"Management's Discussion and Analysis of Financial Condition--HealthRider," and
Note 1 to the HealthRider consolidated financial statements included herein.
As a result of the HealthRider Acquisition, the Company believes it will be
the leading maker and distributor of upright rowers in the United States with
its net sales of upright rowers, calculated on a pro forma basis as if the
HealthRider Acquisition had occurred on December 31, 1994, representing over
76% of all U.S. upright rower sales in calendar 1995. The Company estimates
that its U.S. net sales, calculated on the same pro forma basis represented
approximately 39% of total wholesale domestic home fitness equipment sales in
calendar 1995. The Company believes that the HealthRider Acquisition will
strengthen its position as a leading manufacturer and marketer of fitness
equipment in the United States. The Company's plan for integrating HealthRider
into its business includes (i) marketing a broad line of products such as
treadmills, stair steppers and cross-country skiing machines under the
HealthRider brand name through HealthRider's established distribution channels;
(ii) reducing direct response advertising with respect to HealthRider products
with the goal of enhancing the Company's return on its advertising investment;
and (iii) realizing synergies from the HealthRider Acquisition by integrating
the Company's and HealthRider's operations. The Company expects to increase its
net sales as a result of the HealthRider Acquisition, but by substantially less
than 100% of HealthRider's net sales. The Company will recognize a significant,
non-recurring, non-cash charge in the second and third quarters of 1997 related
to the fact that the Company's purchase accounting for the HealthRider
Acquisition will include writing-up the book value of the acquired HealthRider
inventory to fair market value less estimated sales costs, which will result in
higher cost of goods sold and lower gross profit until the acquired inventory
has been sold. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--HealthRider."
The HealthRider Acquisition will close prior to the closing of the Offering.
The Company will fund the HealthRider Acquisition through additional borrowings
under the Credit Agreement with General Electric Capital Corporation ("GE
Capital"), various other lenders and GE Capital, as Agent, as amended (the
"Credit Agreement"). See "Description of Certain Indebtedness."
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 the Credit Agreement. As a result of the Recapitalization, the Company
had a deficiency in stockholder's equity of $104.8 million as of May 31, 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
6
<PAGE>
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 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 that will be
derived from the actual initial public offering price for the Common Stock at a
ratio estimated (based on an assumed offering price of $ per share and a
valuation date of , 1996) to be 1.21573 and 9.17133 shares of Common Stock
per share of Class A Common Stock and Class L Common Stock, respectively; (ii)
assume no exercise of the Underwriters' over-allotment option; and (iii) assume
the exercise of warrants issued to purchasers of the Senior Subordinated Notes
and the Discount Notes to purchase 2,132,863 shares of Common Stock. 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."
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(a):
U.S. Offering................ shares
International Offering....... shares
------------
Total....................... shares
Common Stock to be outstanding
after this Offering(b)....... shares
Sources and uses of funds..... The net proceeds to the Company from this Of-
fering together with borrowings under the
Credit Agreement will be used for the redemp-
tion of certain indebtedness of the Company
(including indebtedness incurred in connec-
tion with the purchase of the Common Stock
and warrants to purchase Common Stock held by
WHF and certain other stockholders (collec-
tively the "WHF Stockholders")), to retire
all of the preferred stock of IHF Holdings
("IHF Holdings Preferred Stock") and options
to purchase IHF Holdings Preferred Stock, and
to fund the expected acquisitions of Weider
Sports and CanCo. See "Sources and Use of
Funds."
New York Stock Exchange, Inc.
("NYSE") symbol..............
</TABLE>
- --------
(a) Assumes that the Underwriters' over-allotment options are not exercised.
See "Underwriting."
(b) Excludes 1,731,119 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 approximately $4.33 per share and an additional 792,728
shares that may be issued upon exercise of options at an exercise price of
$.42903 per share.
7
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................... $254.1 $314.9 $403.0 $530.8 $747.6
------ ------ ------ ------ ------
Gross profit............................ 59.2 86.3 114.8 152.4 206.1
------ ------ ------ ------ ------
Operating expenses:
Selling, general and administrative and
other operating expenses.............. 46.9 64.6 83.5 105.0 148.7
Compensation expense attributable to
options............................... -- -- -- 39.0 (2) 2.8
------ ------ ------ ------ ------
Total operating expenses................ 46.9 64.6 83.5 144.0 151.5
------ ------ ------ ------ ------
Income from operations.................. 12.3 21.7 31.3 8.4 54.6
Interest expense........................ 4.9 5.5 6.2 21.5 36.5
Amortization of deferred financing fees. -- -- -- 1.7 3.5
Dividends on preferred stock of
subsidiary............................. -- -- -- 2.8 5.1
------ ------ ------ ------ ------
Income (loss) before income taxes....... 7.4 16.2 25.1 (17.6) 9.5
Provision for (benefit from) income
taxes.................................. 2.8 6.2 9.8 (4.7) 7.9
------ ------ ------ ------ ------
Net income (loss)....................... $ 4.6 $ 10.0 $ 15.3 $(12.9) $ 1.6
====== ====== ====== ====== ======
SUPPLEMENTARY INCOME STATEMENT DATA(3):
Supplemental pro forma net income................................... $ 13.1
======
Supplemental pro forma net income per common share.................. $
======
Supplemental pro forma weighted average common shares outstanding...
======
OTHER DATA:
Depreciation and amortization........... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7
Capital expenditures ................... 4.0 4.0 6.9 8.0 15.4
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
MAY 31, ------------------------
1995 ACTUAL AS ADJUSTED (3)
------- ------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................ $ 4.1 $ 19.3 $ 43.3
Working capital............................. 137.7 159.0 244.1
Total assets................................ 290.2 316.7 435.2
Total indebtedness.......................... 268.1 282.8 275.6
Preferred stock of subsidiary (including
accrued dividends)......................... 42.8 47.9 --
Stockholders' equity (deficit).............. (109.6) (104.8) 34.2
</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) Consists of accounting charges incurred in connection with the
Recapitalization as a result of the exchange by certain senior executives
of the Company of their options to purchase capital stock of the
Recapitalized Companies for $34.7 million of replacement options to
purchase Common Stock of IHF Capital and $4.0 million of replacement
options to purchase IHF Holdings Preferred Stock and related warrants to
purchase Common Stock of IHF Capital ( the "Preferred Warrants") and $.3
million of related payroll tax payments made by the Company. After the
Recapitalization, the Company redeemed $26.4 million of the $34.7 million
of replacement options (the "Redeemable Options").
(3) Reflects (i) the sale by IHF Capital of shares of Common Stock offered
hereby and an increase of $37.8 million in revolving credit borrowings and
the application of the estimated net proceeds therefrom to: (a) redeem
$35.0 million principal amount of Senior Subordinated Notes, all of the
Discount Notes, all of the IHF Holdings Preferred Stock and all of the
options to purchase IHF Holdings Preferred Stock, (b) pay $38.9 million in
connection with the purchase of the Common Stock and warrants to purchase
Common Stock held by the WHF Stockholders and (c) fund the expected
acquisitions of Weider Sports and CanCo and settlement expenses in
connection with the Proposed WHF Settlement (as defined) which together
total approximately $23.1 million, (ii) the HealthRider Acquisition
(including the refinancing of approximately $11.6 million of revolving
credit borrowings outstanding at June 30, 1996, the assumption of $.2
million of other long term debt and $19.3 million of capital lease
obligation outstanding at June 30, 1996 and the incurrence of approximately
$27.5 million of additional indebtedness to finance the HealthRider
Acquisition) and (iii) the effect of the Conversion, as if such
transactions occurred on May 31, 1996, and, for purposes of the per share
information (which includes all common stock equivalents), as if such
transactions had occurred on June 1, 1995. See "Unaudited Pro Forma
Financial Data," "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 1994, 1995 and 1996,
respectively. The Company's largest customer, Sears Roebuck ("Sears"),
accounted for approximately 34%, 31% and 34% of the Company's revenues in
1994, 1995 and 1996, respectively. The Company's second largest customer,
Sam's Warehouse Stores ("Sam's") accounted for approximately 13%, 12% and 8%
of the Company's revenues in 1994, 1995 and 1996, respectively. Accounts
receivable for the Company's two largest customers accounted for approximately
27% and 37% of total gross accounts receivable at May 31, 1995 and May 31,
1996, respectively. At May 31, 1996, Sears and Sam's accounted for
approximately 32% and 5%, respectively of the Company's gross accounts
receivable. A third customer, Service Merchandise Company, Inc., accounted for
approximately 11% of total gross accounts receivable at May 31, 1996 and 7% of
the Company's net sales for the year then ended. The level of the Company's
sales to these customers depends in large part on its relationship with these
customers and on consumers' continuing commitment to home fitness equipment
products and on the success of customers' efforts to market and promote the
Company's products, as well as the Company's competitiveness in terms of
price, quality, product innovation, customer service and other factors.
Consistent with industry practice, the Company does not have long term sales
agreements or other commitments as to levels of future sales. In addition, the
Company is not the exclusive supplier of fitness equipment to any of its major
customers. In connection with the HealthRider Acquisition, the Company intends
to offer its products directly to consumers through the acquired HealthRider
kiosk, store and direct response networks. The Company's direct sales to
consumers, particularly through kiosks and stores in malls where the Company's
existing customers have retail sales outlets, could adversely affect the
Company's sales and its relationship with existing customers.
In 1995 and 1996 approximately 91% and 97%, respectively, of the Company's
sales were to retailers. Several significant retailers maintain substantial
account balances payable to the Company. Retail businesses may be adversely
affected by unfavorable local, regional or national economic developments
which result in reduced consumer spending. There can be no assurance that an
economic downturn would not have a material adverse effect on the Company's
customers which could reduce the Company's sales volumes and gross margins or
result in defaults in accounts receivable from such customers. The loss of, or
a substantial decrease in the amount of purchases by, or a write-off of any
significant receivables due from, any of the Company's major customers or a
number of the Company's other customers would have a material adverse effect
on the Company's business. See "Business--Customers."
PRODUCT LIFE CYCLES; DEPENDENCE ON PRODUCT INNOVATION; DEPENDENCE ON
PARTICULAR PRODUCTS AND CONSUMER INTEREST IN FITNESS
Product life cycles can be short in the fitness industry and innovation is
an important component of competition. The Company's sales and gross margins
are dependent upon its success in innovating, developing and marketing new
products. Products tend to generate higher gross margins earlier in the
product life cycle (after an initial start-up period), when there are fewer
companies offering similar products, and tend to generate lower gross margins
over time as competition increases and consumer interest diminishes.
Accordingly, the Company strives to be among the first producers of attractive
new product categories (such as upright rowers) and to add new features to
existing products (such as the Space Saver feature recently added to its
treadmill line), which may increase gross margins by 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.
9
<PAGE>
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 1994, 1995 and 1996 of $252.6 million, $235.4 million and $289.9 million,
respectively, representing approximately 63%, 44% and 39%, 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
1995 and 1996 of $138.1 million and $259.1 million, respectively, representing
26% and 35% of the Company's net sales in such years. Had the HealthRider
Acquisition occurred on June 1, 1994, the Company would have had net sales of
upright rowers in 1995 and 1996 on a pro forma basis of $300.5 million and
$491.8 million, respectively, representing 44% and 49% of the Company's pro
forma net sales in such periods. The Company's upright rower sales declined to
$30.3 million during the fourth quarter of 1996, compared to $67.7 million
during the fourth quarter of 1995. In addition, HealthRider's upright rower
sales have declined substantially in calendar 1996. The decline in sales of
upright rowers by the Company and HealthRider may indicate a weakening of
market demand for upright rowers. The Company would be adversely affected if
it experienced a significant decline in the popularity of certain significant
products such as its motorized treadmills or a continued decline in sales of
its upright rowers and one or more similarly popular products were not
developed and introduced by the Company in a timely manner. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Business--Products."
RISKS ASSOCIATED WITH SUBSTANTIAL AMOUNTS OF INDEBTEDNESS
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 total of $110.8 million of principal on the Senior Subordinated
Notes and Discount Notes outstanding as of October 30, 1996. As of May 31,
1996, on a pro forma basis after giving effect to the Offering, the
application of the net proceeds therefrom, the Proposed WHF Settlement (as
defined) with WHF and its affiliates and the HealthRider Acquisition, the
Company would have had outstanding total indebtedness (including capital lease
obligations) of approximately $275.6 million and stockholders' equity of
approximately $34.2 million. If the Company consummates additional
acquisitions, it is likely to incur additional indebtedness. The Company's
existing 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
10
<PAGE>
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, 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 in compliance with or
has obtained waivers of compliance with respect to 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 companies exporting fitness products to
the U.S. and, in its direct sales efforts, with major retailers or
distributors. Competitors in these areas include Precor Inc., CML Group Inc.
(under the NordicTrack(R) brand), LifeFitness, Inc. and Diversified Products
Corporation ("DP") and Roadmaster Industries Inc. ("Roadmaster"), which are
commonly owned. The Company also believes that Reebok International Ltd. will
begin marketing home fitness equipment in the U.S. In Europe, the Company
competes principally with Tunturi, Inc. and Kettler Int'l Inc., a number of
Asian importers and some of its domestic competitors. The Company's products
also indirectly compete with outdoor fitness, sporting goods and other
recreational products. Competitors in these product areas include Huffy
Corporation, Canstar Sports Inc. (a subsidiary of Nike Inc.) and Rollerblade,
Inc. Certain competitors are better capitalized than the Company and may have
greater financial and other resources than those available to the Company. In
addition, there are no significant technological, manufacturing or marketing
barriers to entry into the fitness equipment or 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; ACQUISITIONS
An important part of the Company's strategy is to increase its sales by,
among other things: (i) developing innovative, high-quality products; (ii)
utilizing multiple distribution channels; (iii) positioning its brands to
address specific distribution channels; (iv) providing broad product
offerings; (v) maintaining low-cost flexible manufacturing; and (vi) pursuing
growth opportunities in domestic and international markets, including through
acquisitions. Each of these efforts requires significant
11
<PAGE>
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.
The Company entered into definitive agreements for the HealthRider
Acquisition in July 1996, and will close the acquisition prior to the closing
of the Offering. HealthRider experienced a substantial and accelerating
deterioration of its business in the first six months of calendar 1996.
HealthRider increased its selling expense for infomercials to $14.5 million
(net of a write-off of video production costs of $1.6 million) in the first
quarter of 1996 compared to $8.5 million in the first quarter of 1995 and
committed to purchase substantially increased volumes of inventory in
anticipation of sales increases. Despite these expenditures, HealthRider's
total sales increased only modestly to $75.0 million in the first quarter of
1996 from $57.9 million in the first quarter of 1995, while its total
infomercial sales decreased by $8.6 million in the same period. These events
compounded working capital difficulties that HealthRider was already
experiencing, causing HealthRider to reduce selling expense for infomercials
to $5.7 million in the second quarter of 1996 from $10.8 million in the second
quarter of 1995, which contributed to substantial declines in HealthRider's
sales. HealthRider reported net sales in the second quarter of 1996 of $38.1
million compared to $59.2 in the second quarter of 1995. HealthRider also
reported an operating loss for the first half of 1996 of $4.6 million compared
to operating income for the first half of 1995 of $16.5 million. HealthRider's
inventory at June 30, 1996 was $23.1 million compared to $5.5 million at June
30, 1995. Inventory in the health and fitness industry is usually at its
lowest point in the spring and early summer. The Company believes that the
decline in HealthRider's sales is due in part to (i) a general weakening of
market demand for upright rowers and (ii) the partial saturation of the
audience that can be reached through infomercials.
The Company believes that the HealthRider Acquisition constitutes an
attractive opportunity, given the purchase price. However, there can be no
assurance in this regard. See "Management Discussion and Analysis of Financial
Condition and Results of Operations--HealthRider" and Note 1 to the
HealthRider Financial Statements included herein.
In the past, affiliates of 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 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. Weider Sports currently
distributes the Company's products in certain other countries. The Company is
negotiating to purchase certain assets of Weider Sports. If the Weider Sports
acquisition is completed, the Company will reacquire distribution rights
granted to Weider Sports in connection with the Recapitalization, subject to
certain rights granted by Weider Sports to third parties. See "Certain
Relationships and Related Transactions" and "Business--Legal Proceedings--WHF
Litigation" and "--Proposed Settlement of WHF Litigation." The Company does
not have significant experience in conducting business in European and other
foreign markets, and fitness products have not yet been widely accepted in
these markets. The Company's European operations are not currently profitable.
There can be no assurance that the Company will be successful in selling its
products outside of the U.S. Furthermore, increased targeting of international
markets exposes the Company to the general risks of doing business abroad,
including barriers to trade such as quotas, taxes, duties and other trade
restrictions, currency fluctuations and changes in U.S. and foreign
regulations applicable to the export of the Company's products. The Company
does not currently hedge against foreign currencies other than the Canadian
dollar.
The Company is also negotiating to purchase certain assets of CanCo. See
"Business--Legal Proceedings--Proposed Settlement of WHF Litigation." The
Company believes there may be other acquisition opportunities which could
complement its existing business, although the Company has no other
acquisition agreements and is not engaged in any discussions regarding other
acquisitions,
12
<PAGE>
except for the expected Weider Sports and CanCo acquisitions. Any such
acquisitions, including the expected Weider Sports and CanCo acquisitions and
the HealthRider Acquisition will require integration of such businesses with
the Company's current operations. The HealthRider Acquisition, will involve
additional borrowings under the Credit Agreement, and any future acquisitions,
including the expected Weider Sports and CanCo acquisitions, may involve
additional borrowings. There can be no assurance that HealthRider or any other
business that the Company may acquire in the future, including Weider Sports
and CanCo, 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", "--HealthRider
Acquisition" 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 located in Canada, China, Taiwan and various other
countries, the Company is subject to the general risks of doing business
abroad, particularly with respect to its purchases from China, including
delays in shipment, work stoppages, adverse fluctuations in currency exchange
rates, increases in import duties and tariffs, changes in foreign regulations,
changes in most-favored-nation status and political instability. In addition,
although the Company seeks to maintain dual sources for the materials and
components required for its products, the Company relies on single sources for
certain of its component parts and finished products, including treadmills and
upright rowers. To further control manufacturing and delivery problems
associated with sourcing delays, the Company asks its electronics vendors to
maintain specified inventory levels for some long lead-time components.
Sourcing delays have been occasionally experienced in the past with new
product introductions. In addition, the Company has identified alternative
sources for many key raw materials and components. Despite these precautions,
however, the Company's ability to deliver its products on time is susceptible
to disruptions in its supply of raw materials and components, in part because
of the time needed to retool alternative component manufacturers to produce
required components. In particular, the imposition of trade sanctions on China
could have a material adverse effect on the Company. The occurrence of any of
the risks relating to its foreign suppliers or the loss of certain of these
suppliers could adversely affect the Company's business until alternative
supply arrangements could be secured, particularly if such loss occurred
during the Company's key production periods. There can be no assurance that
the Company would be able to obtain products and supplies on satisfactory
terms should any of these risks materialize. 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 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
13
<PAGE>
that quarter, expenditures and inventory levels could be disproportionately
high for such quarter and the Company's cash flow and earnings for that
quarter and future quarters could be adversely affected. The timing of large
orders from customers and the mix of products sold may also contribute to
quarterly or other periodic fluctuations. 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. Although
the Company entered into employment agreements with Messrs. Watterson and
Stevenson which extend through November 1999, they are able to terminate their
employment for cause at any time or without cause upon six months' notice.
However, the employment agreements contain a non-competition clause which runs
for at least two years (which the Company can extend to four years at its
option) from the date of the executive's termination. In addition to the
provisions of their employment agreements, Messrs. Watterson and Stevenson
have entered into separate non-competition agreements with the Company that
run through November 1998. See "Management-Employment Agreements" and "Certain
Relationships and Related Transactions."
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of the Offering, the Company's executive officers
and directors (including affiliates of Bain Capital), and entities with which
they are affiliated, together will beneficially own approximately % ( %
on a fully diluted basis) of the outstanding shares of Common Stock (with
affiliates of Bain Capital owning approximately % of the outstanding shares
of Common Stock), assuming that the Underwriters' over-allotment option is not
exercised. Affiliates of Bain Capital may sell up to shares if the
Underwriters' over-allotment option is exercised. All current stockholders and
warrantholders have entered into a stockholders agreement (the "Stockholders
Agreement") which includes an agreement with respect to how they will vote on
certain matters, including the election of directors, which effectively
results in Bain 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. The voting
provisions of the Stockholders Agreement will expire on November 14, 2004.
This concentration of ownership and voting power may have the effect of
delaying or preventing a change in control of the Company. 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. As of May 31, 1996, the Company had $1.5 million in
reserves for product liability related losses. The Company currently carries
an occurrence-based product liability insurance policy. The 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
annually. 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. HealthRider has an
insurance policy which provides coverage through October 26, 1996 of $10
million per occurrence and $10 million in the aggregate annually. 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
14
<PAGE>
respect to the nature and extent of manufacturers' and distributors' liability
for personal injuries, there is also no assurance that the product liability
insurance of the Company is or will be adequate to cover such claims. In
addition, there can be no assurance that the Company's insurers will be
solvent when required to make payments on claims. Furthermore, there can be no
assurance that insurance will remain available or, if available, that it will
not be prohibitively expensive. The loss of insurance coverage or claims
exceeding that coverage could have a material adverse effect on the Company's
results of operations and financial condition. In addition, the Consumer
Products Safety Commission has conducted an inquiry and made claims relating
to defects in certain of HealthRider's products. Although no consumer
litigation has resulted from such defects to date, there can be no assurance
that consumer litigation will not result. See "Business--Legal Proceedings."
FRAUDULENT CONVEYANCE RISK REGARDING HEALTHRIDER ACQUISITION
In the event of a bankruptcy or similar proceeding relating to, or a lawsuit
by or on behalf of unpaid creditors of, HealthRider, a court may review the
HealthRider Acquisition under relevant federal and state fraudulent conveyance
statutes (the "fraudulent conveyance statutes"). Generally, if a court were to
find either (i) that HealthRider entered into the HealthRider Acquisition with
the intent ("fraudulent intent"), which in certain circumstances may be
presumed, of hindering, delaying or defrauding its current or future creditors
or (ii) that, after giving effect to the HealthRider Acquisition, HealthRider
both (a) received (or was deemed to have received under applicable law) less
than reasonably equivalent value or fair consideration for or in connection
with the transfer of assets and liabilities as part of the HealthRider
Acquisition and (b) (1) was insolvent on the date such transfer was made or
was rendered insolvent as a result such transfer, (2) was engaged or about to
engage in a business or transaction for which its assets constituted
unreasonably small capital or (3) intended to incur, or believed that it would
incur, debts beyond its ability to pay as such debts matured (as all of the
foregoing terms are defined in or interpreted under the fraudulent conveyance
statutes) (the circumstances that meet the requirements of this clause (ii)
are referred to herein as "constructive fraud"), such court could, under
certain fraudulent conveyance statutes, unwind the HealthRider Acquisition or
require the Company to make additional payments with respect thereto. In
addition, while the Company believes that it is paying fair value for the
assets acquired, HealthRider will not be prohibited from paying dividends and
making other payments to its stockholders. Such dividends or payments would
reduce the assets available to satisfy the claims of creditors of HealthRider
and therefore enhance the risk of a bankruptcy, reorganization or similar
proceeding involving, or lawsuit on behalf of creditors of, HealthRider.
ENVIRONMENTAL CONSIDERATIONS
The Company's operations are subject to federal, state and local
environmental and health and safety laws and regulations that impose workplace
standards and limitations on the discharge of pollutants into the environment
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances
and wastes. The nature of the Company's manufacturing and assembly operations
expose it to the risk of claims with respect to environmental matters, and
although compliance with local, state and federal requirements relating to the
protection of the environment has not had a material adverse effect on the
Company's financial condition or results of operations, there can be no
assurance that material costs or liabilities will not be incurred in
connection with such environmental matters. Future events, such as changes in
existing laws and regulations or enforcement policies or the discovery of
contamination on sites owned or operated by the Company, may give rise to
additional compliance costs or operational interruptions which could have a
material adverse effect on the Company's financial condition. See "Business--
Environmental Matters."
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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 10,000,000 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 occurrence 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."
16
<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"), but, under certain circumstances, may be sold
without registration pursuant to Rule 144 at varying times. In addition to the
shares of Common Stock offered hereby, substantially all shares of Common
Stock will be eligible for sale in the public market beginning 180 days after
the date of this Prospectus. 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
Securities Act. Such registration statement will become effective immediately
upon filing. As of the closing of the Offering, options to purchase 1,731,119
shares of Common Stock will be outstanding under the Company's 1994 Stock
Option Plan (with an average exercise price of $4.33 per share) and options to
purchase 792,728 shares of the Company's Common Stock will be outstanding
(with an exercise price of $.42903 per share). In addition, as of the closing
of the Offering, 1,002,977 shares of Common Stock will be authorized for
future grants under the Company's 1996 Stock Option Plan. 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.
17
<PAGE>
SOURCES AND USES OF FUNDS
Based on assumed gross proceeds of $200.0 million, the net proceeds from the
Offering to the Company are estimated to be approximately $188.0 million,
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 (i) redeem $35.0 million principal
amount of the Senior Subordinated Notes, all of the Discount Notes, all of the
outstanding IHF Holdings Preferred Stock and options to purchase IHF Holdings
Preferred Stock (all of which are held by affiliates of the Company); (ii) pay
$38.9 million in connection with the repurchase of the shares of Common Stock
and warrants held by the WHF Stockholders; (iii) repay indebtedness incurred
in connection with the HealthRider Acquisition; (iv) fund the expected
acquisitions of Weider Sports and CanCo and pay settlement expenses of
approximately $9.7 million in connection with the Proposed WHF Settlement; and
(v) pay expenses of the Offering. 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
---------------- (IN MILLIONS)
<S> <C>
Net Proceeds of the Offering.................................. $188.0
Borrowings under the Credit Agreement......................... 81.3
------
Total......................................................... $269.3
======
<CAPTION>
USES OF FUNDS
-------------
<S> <C>
Redemption of Senior Subordinated Notes(1).................... $ 40.1
Redemption of Discount Notes(2)............................... 90.8
Redemption of IHF Holdings Preferred Stock(3)................. 35.2
Repurchase of Common Stock and warrants from the WHF
Stockholders(4).............................................. 38.9
HealthRider Acquisition(5).................................... 39.2
Weider Sports and CanCo Acquisitions and Settlement
Expenses(6).................................................. 23.1
Offering Expenses............................................. 2.0
------
Total....................................................... $269.3
======
</TABLE>
- --------
(1) Includes a redemption premium of 12.25% over face value and $.8 million of
accrued interest at October 30, 1996.
(2) Includes a redemption premium of 14.00% over accreted value at October 30,
1996.
(3) The IHF Holdings Preferred Stock will be redeemed at face value less a
$4.3 million discount and the options to purchase IHF Holdings Preferred
Stock will be redeemed at face value less the exercise price and less a
$.5 million discount. See "Business--Legal Proceedings--Proposed
Settlement of WHF Litigation."
(4) Prior to the Offering, the Company will repurchase the Common Stock and
warrants to purchase Common Stock held by the WHF Stockholders for $38.9
million. See "Business--Legal Proceedings--Proposed Settlement of WHF
Litigation" and "Description of Certain Indebtedness."
(5) Includes the acquisition price of HealthRider of $16.8 million, the buyout
of the Parkway manufacturing contract and the purchase of certain other
manufacturing assets for $10.1 million, the buyout of the minority
interest in HealthRider's European subsidiary for approximately $1.4
million (of which $.7 million will be paid by HealthRider, $.6 million
will be paid by the Company in cash and $.1 million will be paid by the
Company in inventory) and the refinancing of HealthRider's revolving
credit indebtedness of $11.6 million as of June 30, 1996. Does not include
the assumption of $.2 million of other long term debt and $19.3 million of
capital lease obligations outstanding as of June 30, 1996. The actual
amount of refinanced revolving credit indebtedness will be the amount
outstanding on the date of the closing of the HealthRider Acquisition
which will occur prior to the Offering.
(6) In connection with the Proposed WHF Settlement, the Company expects to
acquire certain assets of Weider Sports and CanCo from WHF and its
affiliates and to pay certain litigation settlement expenses. See
"Business--Pursuing Growth Opportunities", "--Manufacturing and
Purchasing" and "--Proposed Settlement of the WHF Litigation." If the
Proposed WHF Settlement is not consummated these funds will be used for
working capital requirements, or the Company will reduce its borrowings
under the Credit Agreement.
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.
18
<PAGE>
CAPITALIZATION
The following table sets forth as of May 31, 1996 (i) the actual
consolidated capitalization of the Company and (ii) the consolidated
capitalization as adjusted to reflect (a) the sale by the Company of
shares of Common Stock offered hereby (at an assumed price to public of $
per share), (b) the application of the estimated net proceeds to the Company
from the Offering (after deducting the underwriting discount and estimated
offering expenses), together with borrowings under the Credit Agreement, 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 pay $38.9 million in connection with
the repurchase of the Common Stock and warrants to purchase Common Stock held
by the WHF Stockholders; (c) the effect of the HealthRider Acquisition; and
(d) the expected acquisitions of Weider Sports and CanCo and payment of
expected settlement expenses in connection with the Proposed WHF Settlement
which together total approximately $23.1 million, as if such transactions had
occurred on May 31, 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. For a
description of the actual amounts that are expected to be paid in connection
with these transactions, see "Sources and Uses of Funds" and Note (c) to the
Unaudited Pro Forma Consolidated Balance Sheet.
<TABLE>
<CAPTION>
AS OF MAY 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN MILLIONS)
<S> <C> <C>
Short-term debt, consisting of current portions of long-
term debt and capital lease obligations................ $ 3.1 $ 4.3 (1)
Long-term liabilities (excluding current portion):
Capital lease obligations............................. -- 18.1 (1)
Revolving credit borrowings........................... 80.0 157.0
Term loans............................................ 31.2 31.2
Senior Subordinated Notes............................. 99.3 65.0 (2)
Discount Notes........................................ 69.2 -- (3)
------- -------
Total long-term liabilities........................... 279.7 271.3
------- -------
Minority interest in preferred stock of Subsidiary...... 47.9 -- (4)
Stockholders' equity:
Common Stock and additional paid-in-capital........... 77.7 224.8
Receivable from officers for purchase of equity....... (.7) (.7)
Cumulative translation adjustment..................... .4 .4
Accumulated deficit................................... (182.2) (190.3)(5)
------- -------
Total stockholders' equity (deficit).................. (104.8) 34.2
------- -------
Total Capitalization................................ $ 225.9 $ 309.8
======= =======
</TABLE>
- --------
(1) Reflects $19.3 million of HealthRider's capitalized lease obligations
($1.2 million of which represents the current portion) to be assumed in
connection with the HealthRider Acquisition.
(2) Reflects the redemption of $35.0 million principal amount of Senior
Subordinated Notes at a premium of 12.25% over face value plus accrued
interest of $1.7 million at May 31, 1996.
(3) Reflects the redemption of the Discount Notes at a premium of 14.00% over
accreted value at May 31, 1996.
(4) Reflects the redemption of (a) the IHF Holdings Preferred Stock at face
value less a $4.3 million discount and (b) the options to purchase IHF
Holdings Preferred Stock at face value less the exercise price and a $.5
million discount. See "Business--Legal Proceedings--Proposed Settlement of
WHF Litigation."
(5) The change in accumulated deficit of $8.1 million represents the net
extraordinary loss, including related tax benefits, on the foregoing
redemptions as further described in "Unaudited Pro Forma Financial Data."
19
<PAGE>
DILUTION
As of May 31, 1996 the Company had a pro forma net tangible book deficiency
of $146.3 million or $13.46 per share of Common Stock, after giving effect to
the Conversion and the repurchase of the Common Stock and warrants to purchase
Common Stock held by the WHF Stockholders for $38.9 million. Pro forma net
tangible book deficiency per share represents the amount of total tangible
assets less total liabilities (including the increase in borrowings of $38.9
million in conjunction with the above described repurchase) 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 May 31, 1996, other than the receipt and application by
the Company of the net proceeds from the sale of the shares of Common
Stock offered hereby at an assumed offering price of $ per share as
described in "Sources and Uses of Funds," and the issuance of 2,132,863 shares
of Common Stock upon exercise of warrants issued in connection with the Senior
Subordinated Notes and the Discount Notes, the pro forma net tangible book
value of the Company would have been $41.7 million 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 May
31, 1996 before the Offering.............................. $(13.46)(1)
Increase per share attributable to the exercise of war-
rants.....................................................
Increase per share attributable to new investors...........
-------
Pro forma net tangible book value per share as of May 31,
1996 after the Offering..................................... $
-----
Dilution per share purchased in the Offering................. $
=====
</TABLE>
The following table summarizes, on the same pro forma basis as of May 31,
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(1)(2)...... 12,965,314 % $ 41,288,000 17% $3.18
New Investors............ 200,000,000 83
---------- --- ------------ --- -----
Total.................. 100% $241,288,000 100% $
========== === ============ === =====
</TABLE>
Other than as noted above, the foregoing computations assume the exercise of
no stock options or warrants after May 31, 1996. As of that date, there were
outstanding options to purchase 1,731,119 shares of Common Stock, at a
weighted average exercise price of $3.11 per share. 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 7,004,798 shares and 3,827,653 shares,
respectively, of Common Stock upon the closing of the Offering and the
repurchase for $38.9 million of the Common Stock and warrants to purchase
Common Stock held by the WHF Stockholders.
(2) Includes 2,132,863 shares issued or issuable pursuant to the exercise of
the warrants issued in connection with the Senior Subordinated Notes and
the Discount Notes.
20
<PAGE>
BACKGROUND
On November 14, 1994, the Company effected the Recapitalization in which,
(i) the shareholders of the Recapitalized Companies (the "Original
Shareholders") contributed their capital stock of the Recapitalized Companies
to the Company, in exchange for $21.9 million of Common Stock of IHF Capital,
$36.0 million of IHF Holdings Preferred Stock and Preferred Warrants, and
$159.3 million of demand promissory notes (the "Shareholder Notes"); (ii)
certain senior executives of the Company exchanged their options to purchase
capital stock of the Recapitalized Companies for $34.7 million of replacement
options to purchase Common Stock of IHF Capital, of which $26.4 million were
redeemable 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 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 7.86244
shares of Common Stock of IHF Capital at an exercise price of $.00823 per
share and one warrant to purchase 5.93134 shares of Common Stock of IHF
Capital at an exercise price of $.00109 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 2.40144
shares of Common Stock of IHF Capital at an exercise price of $.00823 per
share and one warrant to purchase 1.81162 shares of Common Stock of IHF
Capital at an exercise price of $.00109 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
WHF Litigation." The Company also executed non-compete agreements with WHF and
certain key executives under which it made total payments of $6.5 million. In
addition, after the Recapitalization, the Company redeemed the Redeemable
Options for $26.4 million.
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.
21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following pages present the unaudited pro forma consolidated results of
operations of the Company for the year ended May 31, 1996, as well as the
balance sheet as of May 31, 1996, adjusted to reflect the following events:
(i) the sale of shares of Common Stock offered hereby, resulting in
net proceeds of approximately $188.0 million after deducting the
underwriting discount;
(ii) the Conversion (based on an assumed offering price of $ per
share) and the conversion of options to purchase Class A and Class L Common
into options to purchase Common Stock;
(iii) the redemption of $35.0 million principal amount of the Senior
Subordinated Notes with a total redemption price of $41.0 million at May
31, 1996, which reflects $1.7 million of accrued interest thereon and a
12.25% premium over the principal amount being redeemed (the total
redemption price would be $40.1 million at October 30, 1996);
(iv) the redemption of all of the Discount Notes with a total redemption
price of $85.6 million at May 31, 1996, which reflects a redemption premium
of $13.3 million equivalent to 114.0% of the accreted value of the Discount
Notes at May 31, 1996 (the total redemption price would be $90.8 million at
October 30, 1996);
(v) the redemption of all of the IHF Holdings Preferred Stock and options
to purchase IHF Holdings Preferred Stock at a price of $35.2 million
(representing a $4.8 million discount from face value, and the forgiveness
of $7.9 million of accrued dividends thereon) at May 31, 1996 (accrued
dividends to be forgiven would be $9.6 million at September 30, 1996);
(vi) the repurchase of the Common Stock and warrants to purchase Common
Stock owned by the WHF Stockholders at a price of $38.9 million;
(vii) the borrowing under the Credit Agreement of $23.1 million which is
expected to fund the acquisitions of Weider Sports and CanCo and settlement
expenses in connection with the Proposed WHF Settlement (the acquisitions
are not reflected in the unaudited pro forma financial data because they
are not significant);
(viii) the payment of $2.0 million of fees and expenses relating to the
Offering;
(ix) the additional borrowings under the Credit Agreement of $37.8
million (and a corresponding increase in interest expense), together with
the net proceeds of the Offering required to effect items (iii) through
(viii) above (assuming items (iii) and (iv) occur on October 30, 1996 and
all other events occur on September 30, 1996, additional borrowings would
be $42.2 million) (items (iii) and (iv) are assumed to occur one month
following the other items because of applicable notice requirements in
connection with the redemption of the Senior Subordinated Notes and the
Discount Notes); and
(x) the HealthRider Acquisition, including the refinancing of
approximately $11.6 million of revolving credit borrowings outstanding at
June 30, 1996, the assumption of $.2 million of other long term debt and
$19.3 million of capital lease obligations outstanding at June 30, 1996 and
the incurrence of approximately $27.5 million of additional indebtedness to
finance the HealthRider Acquisition. The contractual cash purchase price of
$27.5 million includes $16.8 million payable to HealthRider, $10.1 million
payable to Parkway and $.6 million payable by the Company to the minority
shareholder of HealthRider's European subsidiary. Although the Pro Forma
Statements of Operations Data includes all historical HealthRider revenue,
the Company expects that HealthRider revenues in the periods subsequent to
the HealthRider Acquisition will decline substantially.
The Unaudited Pro Forma Consolidated Statement of Operations gives effect to
the events described above as if they had occurred on June 1, 1995. The
Unaudited Pro Forma Consolidated Balance Sheet data give effect to the events
described above as if they had occurred on May 31, 1996.
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.
22
<PAGE>
In connection with the events described above (and assuming they occurred on
May 31, 1996), the Company would have incurred extraordinary debt
extinguishment costs consisting of (i) $10.1 million relating to the write-off
of the unamortized balance of deferred financing costs on the redeemed
Discount Notes and Senior Subordinated Notes; (ii) $3.4 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) $18.0 million representing the premium for early redemption of the
redeemed Discount Notes and Senior Subordinated Notes; offset by (i)
forgiveness of $7.9 million of dividends on the IHF Holdings Preferred Stock
and (ii) a discount of $4.3 million off of the face value of the IHF Holdings
Preferred Stock and a discount of $.5 million off of the face value less the
exercise price of the options to purchase IHF Holdings Preferred Stock. Such
charges, which aggregate $8.1 million (net of related tax benefit of $10.7
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 September 30, 1996 (except for the redemption of the Discount
Notes and Senior Subordinated Notes which is assumed to occur on October 30,
1996) will be approximately $6.6 million (which is net of a related tax
benefit of $10.9 million). The unaudited pro forma financial data do not
include the following charges which the Company expects to incur in the second
and third quarters of fiscal 1997: (i) a non-recurring expense of $2.8 million
representing a fee to terminate the annual management fee payable to Bain
Capital in accordance with the Bain Management Agreement (as defined);
(ii) approximately $5.0 million of integration expenses in connection with the
HealthRider Acquisition; (iii) higher cost of goods sold and lower gross
profit until the inventory acquired in the HealthRider Acquisition has been
sold (due to the fact that the Company's purchase accounting for the
HealthRider Acquisition will include writing-up the book value of the acquired
HealthRider inventory to fair market value less estimated sales costs); and
(iv) approximately $ million in settlement expenses related to the Proposed
WHF Settlement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HEALTHRIDER
STATEMENT OF
COMPANY OPERATIONS PRO FORMA
YEAR ENDED TWELVE MONTHS ADJUSTMENTS YEAR ENDED
MAY 31, ENDED ----------------------- MAY 31,
1996 JUNE 30, 1996(A) COMBINED ACQUISITIONS OFFERING 1996
---------- ---------------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $747,577 $237,565 $985,142 $ -- $ -- $985,142(b)
Cost of sales........... 541,443 87,612 629,055 -- -- 629,055(c)
-------- -------- -------- ------- -------- --------
Gross profit.......... 206,134 149,953 356,087 -- -- 356,087
-------- -------- -------- ------- -------- --------
Operating expenses
Selling............... 93,924 131,801 225,725 -- -- 225,725
Research and develop-
ment................. 6,759 -- 6,759 -- -- 6,759
General and adminis-
trative.............. 48,055 17,562 65,617 -- -- 65,617
Compensation expense
attributable to op-
tions................ 2,769 -- 2,769 -- -- 2,769
-------- -------- -------- ------- -------- --------
Total operating ex-
pense.............. 151,507 149,363 300,870 -- -- 300,870
-------- -------- -------- ------- -------- --------
Income from operations.. 54,627 590 55,217 -- -- 55,217
Interest expense........ 36,527 1,405 37,932 2,333 (d) (10,199)(e) 30,066
Amortization of deferred
financing fees......... 3,483 -- 3,483 -- (1,349)(e) 2,134
Dividends on minority
interest in cumulative
redeemable preferred
stock of a subsidiary . 5,100 -- 5,100 -- (5,100)(f) --
Other income............ -- (2,264) (2,264) -- -- (2,264)
-------- -------- -------- ------- -------- --------
Income before taxes..... 9,517 1,449 10,966 (2,333) 16,648 25,281
Provision (benefit) for
income taxes........... 7,896 1,405 9,301 (887)(g) 3,738 (g) 12,152
-------- -------- -------- ------- -------- --------
Net income.............. $ 1,621 $ 44 $ 1,665 $(1,446) $ 12,910 $ 13,129
======== ======== ======== ======= ======== ========
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.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
(a) HealthRider's fiscal year end is December 31. For purposes of the pro
forma presentation, the twelve month period ended June 30, 1996 is
included and represents the period comparable to that presented for the
Company. In the opinion of management, these unaudited financial
statements include all adjustments necessary for a fair presentation of
the periods presented and have been prepared on a basis consistent with
HealthRider's audited consolidated financial statements.
(b) The Company expects to increase its net sales as a result of the
HealthRider Acquisition, but by substantially less than 100% of
HealthRider's net sales.
(c) In conjunction with the HealthRider Acquisition, the Company will
recognize a significant, non-recurring, non-cash charge in the second and
third quarters of 1997 related to the fact that the Company's purchase
accounting for the HealthRider Acquisition will include writing-up the
book value of the acquired HealthRider inventory to fair market value less
estimated sales costs, which will result in higher cost of goods sold and
lower gross profit until the acquired inventory has been sold. The effect
of this charge is not reflected in the unaudited pro forma consolidated
statement of operations.
(d) Represents additional interest expense on the $27.5 million additional
borrowings under the Credit Agreement incurred in order to effect the
HealthRider Acquisition.
(e) 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 $37.8 million of additional
borrowings under the Credit Agreement. 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%.
(f) 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.
(g) Represents the additional income tax expense (benefit) resulting from the
pro forma adjustments to income at a 38% effective rate. Income tax
adjustments exclude the impact of 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.
(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 (x) under the heading
"Unaudited Pro Forma Financial Data" above, as if such transactions had
occurred on June 1, 1995 (includes all common stock equivalents as defined
in Note 2 to the Consolidated Financial Statements).
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY HEALTHRIDER
HISTORICAL BALANCE ADJUSTMENTS PRO FORMA
MAY 31, SHEET AT ----------------------- MAY 31,
1996 JUNE 30, 1996 COMBINED ACQUISITIONS OFFERING 1996
---------- ------------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................. $ 19,313 $ 867 $ 20,180 $ -- $ 23,100 (a) $ 43,280
Accounts receivable,
net.................. 126,869 22,877 149,746 -- -- 149,746
Inventories........... 95,922 23,082 119,004 27,658 (b) -- 146,662
Deferred income taxes. 5,240 7,204 12,444 -- 10,663 (c) 23,107
Income tax receivable. 882 2,128 3,010 -- -- 3,010
Other assets.......... 4,770 3,280 8,050 -- -- 8,050
-------- ------- --------- ------- -------- --------
Total current as-
sets............... 252,996 59,438 312,434 27,658 33,763 373,855
Property and equipment,
net.................... 32,312 27,329 59,641 (19,996)(b) -- 39,645
Deferred income taxes... 5,489 -- 5,489 -- -- 5,489
Other assets............ 25,930 1,648 27,578 (1,243)(b) (10,075)(c) 16,260
-------- ------- --------- ------- -------- --------
Total............... $316,727 $88,415 $ 405,142 $ 6,419 $ 23,688 $435,249
======== ======= ========= ======= ======== ========
LIABILITIES & EQUITY
(DEFICIT)
Current Liabilities:
Current portion of
long-term debt....... $ 3,065 $ 43 $ 3,108 $ -- $ -- $ 3,108
Current portion of
capital leases....... -- 1,158 1,158 -- -- 1,158
Accounts payable...... 73,652 21,072 94,724 (1,800)(b) -- 92,924
Accrued expenses...... 11,424 17,022 28,446 -- -- 28,446
Income taxes payable.. -- -- -- -- -- --
Interest payable...... 5,815 -- 5,815 -- (1,706)(a) 4,109
-------- ------- --------- ------- -------- --------
Total current lia-
bilities........... 93,956 39,295 133,251 (1,800) (1,706) 129,745
-------- ------- --------- ------- -------- --------
Long-term portion of
capital lease
obligations............ -- 18,149 18,149 -- -- 18,149
Long-term debt.......... 279,693 11,740 (1) 291,433 27,450 (b) (106,870)(a) 253,192
3,395 (c)
37,784 (a)
Minority interest in
preferred stock of
subsidiary............. 47,904 -- 47,904 -- (35,222)(a) --
(12,682)(c)
Stockholder's equity
(deficit)
Class L common stock,
1,200,000 shares au-
thorized, 617,350
shares outstanding,
none outstanding on a
pro forma basis...... 1 -- 1 -- (1)(d) --
Class A common stock,
15,000,000 shares
authorized, 7,761,804
shares outstanding,
none outstanding on a
pro forma basis...... 8 -- 8 -- (8)(d) --
Common stock,
60,000,000 shares
authorized,
shares outstanding on
a pro forma basis.... -- 101 101 (101)(e) 25 (d) 25
Additional paid-in
capital.............. 77,721 729 78,450 (729)(e) 147,084 (a)(d) 224,805
Receivable from
officers for purchase
of equity............ (758) (35) (793) 35 (e) -- (758)
Cumulative translation
adjustment........... 386 43 429 (43)(e) -- 386
Accumulated deficit... (182,184) 18,393 (163,791) (18,393)(e) (8,111)(c) (190,295)
-------- ------- --------- ------- -------- --------
Total stockholder's
equity (deficit).. (104,826) 19,231 (85,595) (19,231) 138,989 34,163
-------- ------- --------- ------- -------- --------
Total............... $316,727 $88,415 $ 405,142 $ 6,419 $ 23,688 $435,249
======== ======= ========= ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
(1) Includes $11,567 of revolving credit borrowings, due April 1999, classified
as current liabilities in HealthRider's balance sheet at June 30, 1996 as a
result of HealthRider's failure to comply with certain loan covenants.
These amounts will be assumed under the Company's Credit Agreement upon the
closing of the acquisition.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Represents amounts that, as of May 31, 1996, would have been used to (i)
redeem all of the Discount Notes ($72.2 million principal); (ii) redeem a
portion of the Senior Subordinated Notes ($34.6 million principal); (iii)
pay accrued interest on the redeemed portion of the Senior Subordinated
Notes ($1.7 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 $35.2 million); (v) pay the redemption premium on the
Discount Notes and Senior Subordinated Notes ($18.0 million); (vi) pay
$38.9 million in connection with the purchase of the Common Stock and
warrants to purchase Common Stock held by the WHF Stockholders; and (vii)
effect the expected acquisitions of Weider Sports and CanCo for
approximately $13.4 million and pay settlement expenses of approximately
$9.7 million in connection with the Proposed WHF Settlement. Actual
amounts used for these purposes will be higher when the transactions
actually occur. In addition, the actual purchase price of Weider Sports
and CanCo will be allocated to the assets and liabilities acquired, and
the settlement expenses will be expensed, on the date these transactions
close. Amounts required to effect these redemptions, in excess of the net
proceeds of the Offering ($186.0 million), are assumed to be obtained
through additional borrowings under the Credit Agreement ($37.8 million).
(b) Under purchase accounting, the total purchase price will be allocated to
the acquired assets and liabilities of HealthRider based on their relative
fair values as of the closing date of the HealthRider Acquisition.
Accordingly, the final allocations will be different from the amounts
reflected herein, and such differences may be significant. The contractual
cash purchase price of $27.5 million includes $16.8 million payable to
HealthRider, $10.1 million payable to Parkway and $.6 million payable by
the Company to the minority shareholder of HealthRider's European
subsidiary.The amount and components of the estimated price along with the
allocation of the estimated purchase price to liabilities assumed as
though the HealthRider Acquisition occurred on June 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Contractual purchase price--cash paid............................. $ 27,450
Contractual purchase price--inventory transferred................. 150
Estimated fees and expenses....................................... 1,000
--------
$ 28,600
========
Book value of HealthRider at June 30, 1996........................ $ 19,231
Elimination of certain liabilities not assumed.................... 2,800
Additional inventory purchased from Parkway....................... 1,600
Additional manufacturing assets purchased from Parkway............ 2,500
Estimated write-up of inventories................................. 26,208
Estimated write-down of fixed assets.............................. (22,496)
Estimated write-down of other long term assets.................... (1,243)
--------
$ 28,600
========
</TABLE>
(c) Represents the pro forma net extraordinary loss and related tax benefit
calculated at May 31, 1996.The table below shows these amounts at May 31,
1996 and at the expected actual dates of redemption (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
AND
MAY 31, OCTOBER 30,
1996 1996
-------- ------------
<S> <C> <C>
Write-off of unamortized deferred financing fees..... $ 10,075 $ 9,441
Redemption premium on the Discount Notes and Senior
Subordinated Notes.................................. 17,986 19,347
Write-off of unamortized discount on the redeemed
Senior Subordinated Notes and Discount Notes (1).... 3,395 3,148
Preferred stock dividends to be forgiven and discount
upon
redemption (1)...................................... (12,682) (14,382)
-------- --------
18,774 17,554
Income tax (benefit)................................. (10,663) (10,939)
-------- --------
$ 8,111 $ 6,615
======== ========
</TABLE>
--------
(1) Does not give rise to tax benefit.
(d) Represents (i) the net proceeds of the Offering of $186.0 million (after
the payment of $2.0 million of expenses of the Offering); (ii) the
Conversion; and (iii) the purchase of $38.9 million of the Common Stock
and warrants to purchase Common Stock held by the WHF Stockholders.
(e) Represents elimination of the existing HealthRider equity structure upon
the closing of the HealthRider Acquisition.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
THE COMPANY--HISTORICAL
The selected consolidated financial data for the Company for the five years
ended May 31, 1996 have been derived from the historical audited consolidated
financial statements of the Company (formerly known as Weslo, ProForm, and
WeiderCare) and subsidiaries. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Financial Data" and the
introduction and notes thereto, and the historical consolidated financial
statements of the Company and the notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, (1)
----------------------------------------
1992 1993 1994 1995 1996
------- ------ ------ ------- -------
(IN MILLIONS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales........................ $254.1 $314.9 $403.0 $ 530.8 $ 747.6
Cost of sales.................... 194.9 228.6 288.2 378.4 541.5
------ ------ ------ ------- -------
Gross profit..................... 59.2 86.3 114.8 152.4 206.1
Operating Expenses:
Selling.......................... 25.1 38.5 52.1 68.7 93.9
Research and development......... 1.2 1.6 2.8 5.2 6.8
General and administrative....... 20.6 24.5 28.6 31.1 48.0
Compensation expense attributable
to options...................... -- -- -- 39.0(2) 2.8 (3)
------ ------ ------ ------- -------
Total operating expenses......... 46.9 64.6 83.5 144.0 151.5
------ ------ ------ ------- -------
Income from operations........... 12.3 21.7 31.3 8.4 54.6
Interest expense................. 4.9 5.5 6.2 21.5 36.5
Amortization of deferred
financing fees.................. -- -- -- 1.7 3.5
Dividends on subsidiary preferred
stock........................... -- -- -- 2.8 5.1
------ ------ ------ ------- -------
Income (loss) before income
taxes........................... 7.4 16.2 25.1 (17.6) 9.5
Provision for (benefit from)
income taxes.................... 2.8 6.2 9.8 (4.7) 7.9
------ ------ ------ ------- -------
Net income (loss)................ $ 4.6 $ 10.0 $ 15.3 $ (12.9) $ 1.6
====== ====== ====== ======= =======
Pro forma net income per common
share (4)....................... $
=======
Pro forma weighted average common
shares outstanding (4)..........
=======
SUPPLEMENTAL INCOME STATEMENT
DATA:(5)
Supplemental pro forma net
income.......................... $ 13.1
=======
Supplemental pro forma net income
per
common share.................... $
=======
Supplemental pro forma weighted
average common shares
outstanding.....................
=======
OTHER DATA:
Depreciation and amortization.... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7
Capital expenditures............. 4.0 4.0 6.9 8.0 15.4
<CAPTION>
MAY 31, (1)
----------------------------------------
1992(1) 1993 1994 1995 1996
------- ------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash............................. $ .2 $ .2 $ .1 $ 4.1 $ 19.3
Working capital.................. 64.2 24.8 97.8 137.7 159.0
Total assets..................... 110.3 151.7 184.7 290.2 316.7
Total indebtedness............... 52.0 72.4 65.4 268.1 282.8
Preferred stock of subsidiary
(including accrued dividends)... -- -- -- 42.8 47.9
Stockholders' equity (deficit)... 30.2 39.8 54.5 (109.6) (104.8)
</TABLE>
28
<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. The balance sheet data of WeiderCare are not included in
balance sheet data for May 31, 1992. Such balance sheet data are
immaterial to the combined balance sheet at that date.
(2) Consists of accounting charges incurred in connection with the
Recapitalization as a result of the exchange by certain senior executives
of the Company of their options to purchase capital stock of the
Recapitalized Companies for $34.7 million of replacement options to
purchase Class A and Class L Common Stock of the Company and $4.0 million
of replacement options to purchase IHF Holdings Preferred Stock and the
Preferred Warrants and $.3 million of related payroll tax payments made by
IHF Capital. After the Recapitalization, the Company redeemed the
Redeemable Options.
(3) Consists of compensation expense attributable to the difference between
the fair value of the underlying stock and the exercise price of related
options granted to certain members of management.
(4) 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 $37.8 million in revolving credit
borrowings and the application of the estimated net proceeds therefrom to:
(a) redeem $35.0 million principal amount of Senior Subordinated Notes,
all of the Discount Notes, all of the IHF Holdings Preferred Stock and all
of the options to purchase IHF Holdings Preferred Stock, (b) pay $38.9
million in connection with the repurchase of the Common Stock and warrants
to purchase Common Stock held by the WHF Stockholders, and (c) fund the
expected acquisitions of Weider Sports and CanCo and settlement expenses
in connection with the Proposed WHF Settlement which together total
approximately $23.1 million, (ii) the HealthRider Acquisition (including
the refinancing of approximately $11.6 million of revolving credit
borrowings outstanding at June 30, 1996, the assumption of $.2 million of
other long term debt and $19.3 million of capital lease obligations
outstanding at June 30, 1996 and the incurrence of approximately $27.5
million of additional indebtedness to finance the HealthRider Acquisition)
and (iii) the effect of the Conversion, as if such transactions occurred
on May 31, 1996, and, for purposes of the per share information (which
includes all common stock equivalents), as if such transactions had
occurred on June 1, 1995. See "Selected Consolidated Financial Data" and
"Sources and Uses of Funds" and Note 2 to the "Consolidated Financial
Statements."
29
<PAGE>
HEALTHRIDER--HISTORICAL
The selected consolidated financial data for HealthRider for each of the
three years in the period ended December 31, 1995 and as of December 31, 1994
and 1995 have been derived from the historical audited consolidated financial
statements of HealthRider and its subsidiaries. The selected consolidated
financial data for the six months ended June 30, 1995 and June 30, 1996 and as
of June 30, 1996 have been derived from the historical unaudited consolidated
financial statements of HealthRider which in the opinion of management,
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the consolidated results of operations and
financial position of HealthRider for such periods and at such date.
HealthRider's sales have decreased substantially during the six months ended
June 30, 1996 and its operating loss and net loss have increased
substantially. Accordingly, HealthRider's results of operations for the six
months ended June 30, 1996 are not indicative of the results of operations to
be expected for the full year. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--HealthRider," and the historical consolidated
financial statements of HealthRider and the notes thereto contained elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE
ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------- -----------------
JUNE 30, JUNE 30,
1993 1994 1995 1995 1996
----- ------ ------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales .......................... $21.2 $106.6 $241.4 $117.0 $113.2
Cost of sales ...................... 7.1 37.5 84.5 40.3 43.5
----- ------ ------ ------ ------
Gross profit ....................... 14.1 69.1 156.9 76.7 69.7
Operating Expenses:
Selling and marketing ............ 12.0 48.4 119.3 53.3 65.8
General and administrative ....... 1.1 5.0 15.9 6.8 8.5
----- ------ ------ ------ ------
Total operating expenses ........... 13.1 53.4 135.2 60.1 74.3
----- ------ ------ ------ ------
Income (loss) from operations ...... 1.0 15.7 21.7 16.6 (4.6)
Interest expense ................... (.7) (1.1) (.1) (.1) (1.3)
Other Income, net................... .1 .7 2.1 .9 1.1
----- ------ ------ ------ ------
Income (loss) before income taxes .. .4 15.3 23.7 17.4 (4.8)
Provision (benefit) for income tax-
es ................................ .1 6.4 10.1 7.5 (1.2)
----- ------ ------ ------ ------
Net Income (loss)................... $ .3 $ 8.9 $ 13.6 $ 9.9 $ (3.6)
===== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
31,
----------- JUNE 30,
1994 1995 1996
----- ----- --------
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash..................................................... $ 1.2 $ .5 $ .9
Working Capital.......................................... 3.9 15.4 8.6
Total Assets............................................. 21.7 64.7 88.4
Total Indebtedness....................................... 1.1 .8 31.1
Stockholders' Equity..................................... 8.7 22.7 19.2
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the historical audited and
unaudited consolidated financial statements and the related notes thereto
appearing elsewhere in this Prospectus. Certain of the information contained
in this summary and elsewhere in this Prospectus, including under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and information with respect to the Company's plans and strategy
for its business are forward-looking statements. For a discussion of important
factors that could cause actual results to differ materially from the forward-
looking statements, see "Risk Factors."
The Company's fiscal year ends on May 31 of the corresponding calendar year.
For example, 1996 ended on May 31, 1996.
OVERVIEW
The Company is one of the largest manufacturers and marketers of fitness
equipment in the United States and in the first quarter of 1996, commenced
direct marketing of its products in Europe. The Company's fitness products are
targeted to home use. The Company's sales grew from $202.4 million in 1991 to
$747.6 million in 1996. The Company believes that during that period its
growth rate exceeded the industry growth rate due to the Company's emphasis on
product innovation through research and development, its broad distribution
strategy and its flexible manufacturing capacity. While the Company's growth
rate to date has been high, its annual percentage increase in domestic sales
cannot be expected to continue at historical levels.
Recent Acquisition. In July 1996, the Company entered into definitive
agreements in connection with the HealthRider Acquisition. Unless otherwise
noted, management's discussion and analysis of the financial condition of the
Company and results of its operations does not include the HealthRider
Acquisition. For more information regarding the HealthRider Acquisition,
including information with respect to the effect of purchase accounting (and
its expected effect on margins during the second and third quarters of 1997),
the cost of integrating HealthRider into the Company's business and
HealthRider's cost of sales and selling expense (which are materially
different from the Company's), see "--HealthRider." For more information
regarding the potential Weider Sports and CanCo acquisitions, see "Business--
Litigation--Proposed Settlement of WHF Litigation."
Margins. The Company's sales and gross margins depend upon its success in
innovating, developing and marketing new products. Products tend to generate
higher gross margins earlier in the product life cycle (after production
efficiencies have been realized following an initial start-up period), when
there are fewer companies offering similar products, and tend to generate
lower gross margins over time as competition increases and consumer interest
diminishes. For example, during 1996, the Company's gross margins on its
Cardio family of upright rowers, first introduced by the Company in October
1994 in response to consumer interest in other companies' upright rowers,
substantially exceeded gross margins on its exercise bike product line, a more
mature product. However, the Company's sales of upright rowers declined from
$67.7 million during the fourth quarter of 1995 to $30.3 million during the
fourth quarter of 1996, and gross margins on the Company's upright rowers have
begun and are expected to continue to decline. Accordingly, the Company
strives to be among the first producers of attractive new product categories
(such as upright rowers) and to add new features to existing products (such as
the Space Saver feature recently added to its treadmill line which had not yet
achieved full production efficiencies by the end of 1996), which may increase
gross margins by reinvigorating demand and differentiating the Company's
products from similar products offered by its competitors. Life cycles may
vary significantly in duration from product to product.
31
<PAGE>
Direct Sales; European Operations. In 1992, the Company began selling
products directly to the public through television infomercials and print
media campaigns (i.e., direct marketing). Products sold through direct
marketing are sold at retail prices and therefore at higher gross margins than
products sold through the Company's other distribution channels. However,
direct marketing sales have higher associated selling, advertising,
distribution and other roll-out expenses. The Company is currently focusing
principally on 30 and 60 second television advertisements designed to enhance
both retail and direct response sales of its products as opposed to 30 minute
infomercials. Notwithstanding the foregoing, the Company will continue to
utilize direct response marketing with respect to HealthRider products. After
the Recapitalization, the Company began selling Weider branded products (for
which it pays royalties). See "Business--Marketing," "--Legal Proceedings" and
"Certain Relationships and Related Transactions."
During the first quarter of 1996, the Company established its own sales
operations in Europe. Prior to that, the Company's products were distributed
in Europe primarily by affiliates of WHF, an affiliate of the Company. The
Company's European operations have been consolidated in the statement of
operations for 1996 and the balance sheet at May 31, 1996. The Company's
European operations are not currently profitable, and there can be no
assurance that the Company will be successful in selling its products in non-
U.S. markets.
Non-Recurring Items and Other Expected Expenses. The Company incurred a
$39.0 million compensation expense with respect to the exchange of management
stock options in connection with the Recapitalization, including the
redemption of the Redeemable Options at a price of $26.4 million and related
tax payments of $.3 million. Such redemption resulted in a $26.7 million cash
compensation expense for the period in which the redemption occurred, which
was included in the computation of the loss in 1995. The Company also recorded
a $12.3 million non-cash compensation expense at the Recapitalization Closing
as a result of the exchange of options to purchase capital stock of the
Recapitalized Companies for $4.0 million of options to buy IHF Holdings
Preferred Stock and $8.3 million of options to buy Common Stock and the
Company also recorded an offsetting tax benefit to account for the future tax
benefit when, and if, such options are exercised. In connection with the
redemption of the options to buy IHF Holdings Preferred Stock, the Company
will realize a tax benefit related to the redemption price of such options of
$3.5 million and a non-taxable extraordinary gain of $.5 million.
In connection with the Offering and related transactions, the Company
expects to recognize a net extraordinary loss in the second quarter of 1997 of
approximately $6.6 million (assuming the closing of this Offering occurs on
September 30, 1996) relating to: (i) the redemption of all of the IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock at a
discount from face value and the forgiveness of accrued dividends
(extraordinary gain of $14.4 million assuming a redemption price of $35.2
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 $19.3 million) and the write-off of the deferred
financing costs related to such redeemed notes (extraordinary loss of $9.4
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 $3.1 million); and (iv) an aggregate related tax
benefit of $10.9 million. In addition, in the second quarter of 1997, the
Company will recognize a non-recurring expense of $2.8 million representing a
fee to terminate the annual management fee payable to Bain Capital in
accordance with the Bain Management Agreement (as defined) and, in the second
and third quarters of 1997, expects to incur (i) approximately $5.0 million of
integration expenses in connection with the HealthRider Acquisition; (ii)
higher cost of goods sold and lower gross profit until the inventory acquired
in the HealthRider Acquisition has been sold (due to the fact that the
Company's purchase accounting for the HealthRider Acquisition will include
writing-up the book value of the acquired HealthRider inventory to fair market
value less estimated sales costs); and (iii) approximately $ million in
settlement expenses related to the Proposed WHF Settlement.
32
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company
expressed as a percentage of net sales for 1994, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 71.5 71.3 72.4
------ ------ ------
Gross profit........................................... 28.5 28.7 27.6
------ ------ ------
Operating expenses:
Selling................................................ 12.9 12.9 12.6
Research and development............................... .7 1.0 .9
General and administrative............................. 7.2 5.9 6.4
Stock option compensation expense...................... -- 7.3 .4
------ ------ ------
Total operating expenses............................... 20.8 27.1 20.3
------ ------ ------
Income from operations................................. 7.7 1.6 7.3
Interest expense and amortization of debt financing.... 1.5 4.4 5.3
Dividends on subsidiary preferred stock................ -- .5 .7
------ ------ ------
Income before income taxes............................. 6.2 (3.3) 1.3
Provision (benefit) for income taxes................... 2.4 (.9) 1.1
------ ------ ------
Net income (loss)...................................... 3.8% (2.4%) .2%
====== ====== ======
</TABLE>
YEAR ENDED MAY 31, 1996 COMPARED TO THE YEAR ENDED MAY 31, 1995
Net sales increased by $216.8 million, or 40.8%, from $530.8 million in 1995
to $747.6 million in 1996. The increase was primarily attributable to sales
increases of $121.0 million of the Company's Cardio family of upright rowers
and increases of $72.0 million in treadmill sales. During 1996, upright rower
sales were $259.1 million or 34.7% of net sales, and treadmill sales were
$312.4 million, or 41.8% of net sales. Upright rower sales during the fourth
quarter of 1996 declined to $30.3 million, compared to $67.7 million during
the fourth quarter of 1995. Direct European sales, which began during the
first quarter of 1996, totaled $33.3 million.
Gross profit for 1996 was $206.1 million, or 27.6% of net sales, compared to
$152.5 million, or 28.7% of net sales, for 1995. Gross profit as a percentage
of net sales declined due to an increased proportion of sales to retailers
which generate a lower gross profit percentage than direct sales. Direct
response sales decreased from 9% of total sales in 1995 to 3% of total sales
in 1996.
Selling expenses were $93.9 million, or 12.6% of net sales, in 1996 compared
to $68.7 million, or 12.9% of net sales, in 1995. The dollar increase in
selling expenses resulted primarily from increased variable selling expenses
directly related to increased sales volume and selling expenses of the
European subsidiaries (which were not operating in 1995). Promotional activity
(i.e., advertising) with retailers increased by $11.6 million and warranty
expenditures increased by $5.6 million in 1996 compared to 1995. Sales
commissions also increased by $.7 million due to the increase in sales volume.
Bad debt expense increased by $1.1 million to provide for potential write-offs
associated with increased trade receivable balances.
Research and development expense was $6.8 million, or .9% of net sales, for
1996 compared to $5.2 million, or 1.0% of net sales, for 1995. This dollar
increase is related to on-going development of both current and future product
offerings.
33
<PAGE>
General and administrative expense totaled $48.1 million, or 6.4% of net
sales, for 1996 compared to $31.1 million, or 5.9% of net sales, for 1995.
Legal expenses increased during 1996 by $3.5 million over the same period
during the prior year. These legal expenses have resulted from certain patent
defense actions, product liability claims and legal fees associated with the
WHF Litigation. See "Business--Legal Proceedings." General and administrative
expenses in 1996 for the European subsidiaries totaled $5.4 million.
Expenditures under the Company's self-insured health plan increased by $.8
million. A $2.7 million management fee derived from monthly profits earned
under management agreements for services provided to Weider Sporting Goods,
Inc. ("WSG") through November 14, 1995 was recorded in 1995 with no
corresponding amount in 1996. This fee was recorded as an offset against
general and administrative expense incurred on behalf of WSG and was
nonrecurring. Following the Recapitalization, fees under the WSG agreement
stopped. Other increases totaling $4.6 million have occurred following the
Recapitalization to service the increase in sales. The major increases
include: personnel cost, management fees paid to Bain Capital (which will not
continue after 1996), increased management information systems expenditures,
additional facility rental and other administrative expenses.
Compensation related to management stock options resulted in an expense of
$2.8 million in 1996 compared to $39.0 million of compensation expense in
1995.
As a result of the foregoing factors, operating income increased to $54.6
million, or 7.3% of net sales, in 1996, from operating income of $8.4 million,
or 1.6% of net sales, in 1995.
Interest expense (which includes the accrual of dividends on IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock) and
amortization of deferred financing fees increased to $45.1 million in 1996
from $26.0 million for 1995. Interest expense has increased due to the
Company's high level of borrowing incurred in connection with the
Recapitalization. Moreover, borrowings incurred in connection with the
Recapitalization were outstanding for all of 1996, but were outstanding for
only 197 days in 1995. In addition, in 1996, the Company recorded interest
expense of $5.1 million, compared to $2.8 million in 1995, related to
dividends accruing on IHF Holdings Preferred Stock which was issued in
connection with the Recapitalization and 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 would reduce interest expense going
forward. This decrease will be partially offset by an increase in interest
expense resulting from an additional $76.8 million in revolving credit
borrowings (calculated on a pro forma basis at May 31, 1996), which will
result from the transactions referred to under "Unaudited Pro Form Financial
Data." The decrease in interest expense may also be offset by increased
working capital borrowings to service increased sales.
The income tax provision was $7.9 million for 1996 compared with a tax
benefit of $4.7 million for 1995. The effective tax rate for 1996 differs from
that used for 1995 as a result of the non-deductibility of the dividends on
IHF Holdings Preferred Stock and the fact that no income tax benefit was
recognized in 1996 for the losses incurred in connection with the Company's
newly established European subsidiaries.
As a result of the foregoing factors, net income increased to $1.6 million
for 1996 compared to a net loss of $12.9 million for 1995.
YEAR ENDED MAY 31, 1995 COMPARED TO THE YEAR ENDED MAY 31, 1994
Net sales increased by $127.8 million, or 31.7%, from $403.0 million in 1994
to $530.8 million in 1995. The increase was primarily attributable to sales of
$138.1 million of the Company's Cardio family of upright rowers which was
introduced in October 1994 and was marketed through direct response
infomercials and other distribution channels. Treadmill sales during 1995 were
$240.4 million compared to $256.8 million in 1994.
34
<PAGE>
Gross profit for 1995 was $152.5 million, or 28.7% of net sales, compared to
$114.8 million, or 28.5% of net sales, for 1994. Gross profit was positively
impacted by higher margins on new products sold through direct response
marketing, primarily the Cardio family of upright rowers, which were offset by
declining margins on certain mature product lines.
Selling expenses were $68.7 million, or 12.9% of net sales, in 1995 compared
to $52.1 million, or 12.9% of net sales, for 1994. The dollar increases in
selling expenses resulted from increased variable selling expenses directly
related to increased sales volume and increased expenditures on direct
marketing efforts (e.g. video production costs).
Research and development expense was $5.2 million, or 1.0% of net sales, for
1995 compared to $2.9 million, or .7% of net sales, for 1994. The increase was
primarily related to the development of new products and product concepts.
General and administrative expense totaled $31.1 million, or 5.9% of net
sales, for 1995 compared to $28.6 million, or 7.2% of net sales, for 1994. The
reduction in general and administrative expense as a percent of net sales was
largely due to the receipt in 1995 of a $2.7 million management fee derived
from monthly fees earned under management agreements for services provided to
WSG through November 14, 1994. This fee was recorded in 1995 as an offset
against general and administrative expense incurred on behalf of WSG and will
be nonrecurring.
A $39.0 million compensation expense was incurred in 1995 with respect to
management stock options. This expense consists of accounting charges incurred
in connection with the Recapitalization as a result of the exchange by certain
senior executives of the Company of their options to purchase capital stock of
the Recapitalized Companies for $34.7 million of replacement options to
purchase Common Stock and $4.0 million of replacement options to purchase IHF
Holdings Preferred Stock and $.3 million of related payroll tax payments made
by the Company. After the Recapitalization, the Company redeemed the
Redeemable Options for $26.4 million in cash.
As a result of the foregoing factors, operating income decreased by $22.8
million from $31.2 million in 1994 to $8.4 million in 1995.
Interest expense and amortization of deferred financing fees increased to
$23.2 million in 1995 from $6.2 million for 1994. The increased expense was
due to increased borrowings related to the Recapitalization and, to a lesser
extent, increases in interest rates and higher working capital borrowings. The
borrowings incurred in connection with the Recapitalization were outstanding
for 198 days of 1995. In addition, in 1995, the Company recorded an expense of
$2.8 million related to dividends accruing on the IHF Holdings Preferred Stock
issued in connection with the Recapitalization that is held by affiliates of
the Company.
The income tax benefit was $4.7 million for 1995 compared with a provision
of $9.8 million for 1994. The benefit for 1995 resulted from the recognition
of a deferred tax asset for the net operating loss generated in that year. The
combined federal and state income tax rate is assumed to be 38% which is
consistent with historical rates.
As a result of the foregoing factors, net income decreased to a net loss of
$12.9 million for 1995 compared to net income of $15.3 million during the same
period of 1994.
35
<PAGE>
SEASONALITY
The following are the net sales and operating income of the Company by
quarter for years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales
1996...................................... $124.8 $228.5 $240.9 $153.4
1995...................................... 70.6 163.0 182.8 114.4
1994...................................... 54.1 115.4 124.0 109.5
Operating Income
1996...................................... $ 6.4 $ 20.0 $ 25.4 $ 2.8
1995...................................... 2.6 (22.9)(1) 22.9 5.8
1994...................................... .4 9.9 11.3 9.7
Net Income (Loss)
1996...................................... $ (3.4) $ 4.2 $ 7.1 $ (6.3)
1995...................................... .9 (16.3)(1) 5.3 (2.8)
1994...................................... (.6) 5.0 5.9 5.0
</TABLE>
- --------
(1) Includes $39.0 million in one-time compensation expense attributable to
the exchange and partial redemption of management options.
Historically, the Company has sold a majority of its products to customers
in its second and third fiscal quarters (i.e., from September through
February). Increased sales and distribution typically have occurred in the
Christmas retail season and the beginning of a new calendar year because of
increased promotions by customers, increased consumer purchases and seasonal
changes that prompt people to exercise inside. The Company has in the past,
from time to time, incurred net losses in the first and fourth quarters of its
fiscal year. If actual sales for a quarter do not meet or exceed projected
sales for that quarter, expenditures and inventory levels could be
disproportionately high for such quarter and the Company's cash flow for that
quarter and future quarters could be adversely affected. The timing of large
orders from customers and the mix of products sold may also contribute to
periodic fluctuations. While seasonality has been the trend, it may not be
indicative of the results to be expected for this fiscal year or for any
future years.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company generated $24.5 million of cash from operating
activities and borrowed approximately $6.4 million under the Credit
Agreement's revolving credit facility primarily to finance increases in
accounts receivable. The Company used $15.4 million in cash for capital
expenditures related to upgrades in plant and tooling, purchases of additional
manufacturing equipment and building expansion and $.7 million for repayments
of long term debt. In addition, the effect of exchange rates increased the
Company's cash balances at May 31, 1996 by $.4 million. As a result of the
foregoing factors, the Company had a net increase in cash of $15.2 million
from May 31, 1995 to May 31, 1996.
In 1995, the Company used $31.3 million of cash in operating activities
primarily as a result of increases in working capital, particularly
inventories, and other operating assets of $35.6 million. The Company made
distributions of $166.7 million to its shareholders as part of the
Recapitalization and used $58.2 million to make payments on long-term
indebtedness. These uses of cash were financed primarily with the proceeds of
long-term borrowing that totaled $195.0 million, net borrowings under the
Credit Agreement of $66.4 million and net proceeds from the issuance of stock
of $38.6 million. The Company also used $8.0 million in cash in 1995 for
capital expenditures related to tooling and manufacturing equipment. During
1995, the Company had a net increase in cash of $4.0 million.
The Company's primary short-term liquidity needs consist of financing
seasonal merchandise inventory buildups and paying cash interest expense under
its Credit Agreement and on the Senior
36
<PAGE>
Subordinated Notes. The Company's principal source of financing for seasonal
merchandise inventory buildup and increased receivables during the past
several years has been revolving lines of credit with various financial
institutions. Since the Recapitalization Closing, its principal source of
financing for such needs has been revolving credit borrowings under the Credit
Agreement. The Company's working capital borrowing needs are typically at
their lowest level in April through June, increase somewhat through the summer
and sharply increase from September through November to finance accounts
receivable and purchases of inventory in advance of the Christmas and post-
holiday selling season. Generally, in the period from November through
February, the Company's working capital borrowings remain at their highest
level and then are paid down to their lowest annual levels by April.
At May 31, 1996, Health & Fitness had $80.0 million of revolving credit
borrowings outstanding under the Credit Agreement. Advances under the Credit
Agreement's revolving credit facility are subject to the amount of Eligible
Accounts and Eligible Inventory (each as defined in the Credit Agreement) of
Health & Fitness. Health & Fitness' ability to make revolving credit
borrowings under the Credit Agreement expires on November 14, 1999. At May 31,
1996, Health & Fitness had $48.8 million of additional indebtedness available
to be drawn on a revolving credit basis under the Credit Agreement. Revolving
credit borrowings have primarily been used to increase inventory levels, to
finance normal trade credit for customers, to make interest payments on debt
issued in connection with the Recapitalization and to make capital
expenditures. The Credit Agreement contains a number of covenants, with which
Health & Fitness believes it was in compliance or as to which it has obtained
waivers of compliance as of the date hereof. The Company expects to amend the
Credit Agreement to permit total borrowings of up to $310 million in order to
meet the Company's longer term needs. There can be no assurance that the
Company will be able to increase its available credit under the Credit
Agreement. The Company believes that, upon amendment 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. See "Risk
Factors--Risks Associated with Substantial Amounts of Indebtedness."
The Company's longer term liquidity needs include (a) required quarterly
amortization payments on the term loans under the Credit Agreement, consisting
of $.7 million from March 31, 1996, $1.0 million from March 31, 1997 and
greater amounts on or after March 31, 1998 and (b) payments of interest and
principal on the Senior Subordinated Notes. See Note 8 to the Consolidated
Financial Statements included herein.
The Company made capital expenditures of approximately $15.4 million during
fiscal 1996 and expects to make capital expenditures of approximately $12.3
million (including $2.9 million for HealthRider) in 1997. Such expenditures
are primarily for expansion of physical plant, purchases of additional or
replacement manufacturing equipment and revisions and upgrades in plant
tooling. The Company also made research and development expenditures in 1996
of approximately $6.8 million, and expects to make research and development
expenditures of approximately $7.8 million in 1997.
If the Company completes the acquisition of assets from Weider Sports or
CanCo, it will fund such acquisitions with borrowings under the Credit
Agreement.
HealthRider had operating lease payments (generally short term) for kiosks
and stores of approximately $5.6 million in the six months ended June 30,
1996. HealthRider also had non-cancellable long term operating lease
obligations of $5.3 million as of December 31, 1995. In addition, as of June
30, 1996, HealthRider had capitalized lease payment obligations (including
interest) of approximately $38.0 million. The Company is assuming these
liabilities in connection with the
37
<PAGE>
HealthRider Acquisition. It is currently expected that the Company will also
assume accounts payable and other accrued payables of approximately $38
million in connection with the HealthRider Acquisition which will become due
and payable within 60 to 90 days after the closing of the HealthRider
Acquisition. The Company will fund such payments with borrowings under the
Credit Agreement.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Although the Company cannot accurately predict the precise effect of
inflation on its operations, it does not believe that inflation has had a
material effect on sales or results of operations in recent years. The Company
does import some finished products and components from Canada and Asia. All
purchases from Asia are fixed in U.S. dollars and, therefore, the Company is
not subject to foreign currency fluctuations on such purchases, although the
Company's vendors may respond to foreign currency fluctuations by seeking to
raise their prices. Purchases of inventory from Canada are settled in Canadian
dollars and therefore the Company is subject to fluctuations in the value of
the Canadian dollar which could have an impact on the Company's operating
results. In connection with the importation of products and components from
Canada, the Company from time to time engages in hedging transactions by
entering into forward contracts for the purchase of Canadian dollars which are
designed to protect against such fluctuations. The Company's hedging
transactions do not subject it to exchange rate risk because gains and losses
on these contracts offset losses and gains on the transaction being hedged.
The unhedged portion of purchases from Canada is not significant.
In addition, the Company, in the first quarter of 1996, began to directly
market its products in the 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. If the Company completes the acquisition of certain assets of Weider
Sports, including Weider Sports' rights under the distribution agreement, the
Company will make sales in other foreign countries in local currencies.
Therefore, the Company has been, and expects to be increasingly, subject to
the fluctuations in the foreign currency market which could have an impact on
the Company's operating results. As sales volume in Europe grows, the Company
may begin to try to manage related foreign currency exchange risk through
hedging transactions.
HEALTHRIDER
OVERVIEW
The Company entered into definitive agreements for the HealthRider
Acquisition in July 1996, and will close the acquisition prior to the closing
of the Offering. HealthRider experienced a substantial and accelerating
deterioration of its business in the first six months of calendar 1996.
HealthRider increased its selling expense for infomercials to $14.5 million
(net of a write-off of video production costs of $1.6 million) in the first
quarter of 1996 compared to $8.5 million in the first quarter of 1995 and
committed to purchase substantially increased volumes of inventory in
anticipation of sales increases. Despite these expenditures, HealthRider's
total sales increased only modestly to $75.0 million in the first quarter of
1996 from $57.9 million in the first quarter of 1995, while its total
infomercial sales decreased by $8.6 million in the same period. These events
compounded working capital difficulties that HealthRider was already
experiencing, causing HealthRider to reduce selling expense for infomercials
to $5.7 million in the second quarter of 1996 from $10.8 million in the second
38
<PAGE>
quarter of 1995, which contributed to substantial declines in HealthRider's
sales. HealthRider reported net sales in the second quarter of 1996 of $38.1
million compared to $59.2 in the second quarter of 1995. HealthRider also
reported an operating loss for the first half of 1996 of $4.6 million compared
to operating income for the first half of 1995 of $16.5 million. HealthRider's
inventory at June 30, 1996 was $23.1 million compared to $5.5 million at June
30, 1995. Inventory in the health and fitness industry is usually at its
lowest point in the spring and early summer. The Company believes that the
decline in HealthRider's sales is due in part to a general weakening of market
demand for upright rowers and the partial saturation of the audience that can
be reached through infomercials. The Company also believes that HealthRider's
working capital crisis was exacerbated by lower than expected revenues, by
higher per minute costs of infomercials and by more lenient payment terms and
deferred payment plans. The Company expects to terminate these plans upon
consummation of the HealthRider Acquisition.
The HealthRider Acquisition is structured as an asset purchase and will be
accounted for under the purchase method of accounting. The Company expects to
write-up the book value of inventory and to write-down the historical book
value of property, plant and equipment and other long-term assets acquired.
In addition, the HealthRider Acquisition is expected to result in expenses
of approximately $5.0 in the second and third quarters of 1997 related to the
integration of HealthRider into the Company's business. These expenses are
expected to include the cost of severance, plant relocation expenses, expenses
associated with closing unprofitable kiosks and other fees and expenses. The
majority of integration related expenses is expected to be expensed in the
second and third quarters of 1997.
The Company's plan for integrating HealthRider into its business includes:
(i) marketing a broad line of products such as treadmills, stair steppers and
cross-country skiing machines under the HealthRider brand name through
HealthRider's established distribution channels; (ii) reducing direct response
advertising with respect to HealthRider products with the goal of enhancing
the Company's return on its advertising investment; and (iii) realizing
synergies from the HealthRider Acquisition by integrating the Company's and
HealthRider's operations.
Following the HealthRider Acquisition, the Company expects to increase its
net sales, but by substantially less than 100% of HealthRider's net sales. The
Company expects to recognize significant, non-recurring, non-cash charges in
the second and third quarters of 1997 related to the fact that the Company's
purchase accounting for the HealthRider Acquisition will include writing-up
the book value of the acquired HealthRider inventory to fair market value less
estimated sales costs, which will result in higher cost of goods sold and
lower gross profit until the acquired inventory has been sold. Following the
sale of the acquired inventory, the Company may be able to improve
profitability through greater manufacturing efficiency. The Company also
expects that its overall selling expenses will rise as a result of
HealthRider's direct response advertising. This may be offset somewhat through
cost savings on combined overhead.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1995.
Net sales of HealthRider consist of product sales plus freight, less
discounts and return allowances. Net sales of HealthRider increased from $57.9
million in the first quarter of 1995 to $75.0 million during the first quarter
of 1996 but decreased from $59.1 million in the second quarter of 1995 to
$38.2 million during the second quarter of 1996, resulting in an aggregate
decrease in net sales for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995 of
39
<PAGE>
$3.8 million. This decrease reflects a $29.7 million decrease in net sales
through direct response marketing due to a reduction of demand through this
distribution channel, despite an increase of $2.5 million in selling expense
for direct response marketing (including the write-off of infomercial
production costs of $1.6 million). The decrease in sales through the direct
response marketing channel in the first six months of calendar 1996 was
partially offset by a $15.1 million increase in net sales through HealthRider
kiosks and stores which increased from $36.0 million to $51.1 million, a $4.7
million increase in sales through third-party retailers which increased from
$25.0 million to $29.7 million, and a $6.1 million increase attributable to
sales of a newly created subsidiary in Europe. The increase in the number of
HealthRider kiosks and retail stores from approximately 130 to approximately
225 and the introduction of several accessory items account for the majority
of the increase in net sales through the HealthRider kiosks and retail stores.
The number of kiosks and stores at June 30, 1996 decreased from December 31,
1995 due to seasonal changes in demand. The total number of fitness machines
sold by HealthRider increased from approximately 306,000 in the first two
quarters of 1995 to approximately 336,000 in the first two quarters of 1996.
Gross profits of HealthRider decreased from $76.7 million to $69.7 million
and, as a percentage of net sales, decreased from 65.5% during the first six
months of 1995 to 61.6% during the first six months of 1996. The percentage
decrease was primarily due to modifications to the "1996 HealthRider" upright
rower that increased HealthRider's costs and a decrease in sales of the
HealthRider upright rower (a higher margin product) as a percentage of total
sales from 77.3% to 68.9% for the respective six month periods, in part as a
result of the introduction of lower margin machines (i.e., the SportRider and
LifeRider) subsequent to June 30, 1995.
Selling and marketing expenses of HealthRider increased from $53.3 million
during the first six months of 1995 to $65.8 million during the first six
months of 1996. As a percentage of net sales, selling and marketing expenses
increased from 45.6% to 58.2% from the first six months of calendar 1995 to
the first six months of calendar 1996. The increase is primarily due to lower
than expected revenues from an increased level of infomercial advertising from
$19.3 million in the first six months of 1995 to $20.2 million in the first
six months of 1996 (not including the write-off of $1.6 million in first
quarter 1996 in direct response infomercial production costs). The increase
was also affected by an increase in HealthRider's bad debt expense from $3.1
million in the first six months of 1995 to $3.7 million in the first six
months of 1996 to reflect higher anticipated losses related to a 10 month
payment plan introduced in November 1995. The Company expects to terminate
this plan upon consummation of the HealthRider Acquisition.
General and administrative expenses of HealthRider increased from $6.8
million to $8.5 million during the first six months of 1996. As a percentage
of net sales, general and administrative expenses increased from 5.8% to 7.5%.
The dollar increase in general and administrative expenses reflect increases
in payroll for administrative, financial and customer service personnel,
professional services, and other costs related to HealthRider's growth. The
increase as a percentage of sales is also due to the lower than anticipated
sales.
As a result of the foregoing factors, HealthRider reported an operating loss
of $4.6 million in the six months ended June 30, 1996 compared to operating
income of $16.5 million in the six months ended June 30, 1995.
Interest expense of HealthRider increased from less than $.1 million during
the first six months of 1995 to $1.3 million during the first six months of
1996. This increase was due to borrowings on a revolving line of credit and
increased capital lease obligations during the first six months of 1996.
Other income, which consists primarily of finance charges paid by customers,
of HealthRider increased from $.9 million during the first six months of 1995
to $1.1 million during the first six months of 1996. The increase in other
income was primarily due to an increase in sales of HealthRiders to customers
purchasing the HealthRider on the installment plan, pursuant to which interest
is charged. The Company expects to terminate this plan upon consummation of
the HealthRider Acquisition.
40
<PAGE>
As a result of the foregoing factors, HealthRider reported a net loss of
$3.6 million in the first six months of 1996 compared to net income of $9.9
million in the same period of 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994.
Net sales of the HealthRider consist of product sales plus freight, less
discounts and return allowances. Net sales increased from $106.6 million
during 1994 to $241.4 million during 1995. The increase in net sales was due
to a $72.6 million increase in net sales through HealthRider kiosks which
increased from $19.3 million to $91.9 million, a $34.0 million increase in net
sales through third party retailers which increased from $24.8 million to
$58.8 million, a $27.1 million increase in net sales through direct-response
advertising which sales increased from $62.5 million to $89.6 million and a
$1.1 million increase attributed to the start up of a subsidiary in Europe in
the fourth quarter of 1995. The continued increase in the number of
HealthRider kiosks and stores from approximately 140 to approximately 250
during 1995 and the introduction of a number of accessory items account for
the increase in net sales through the HealthRider kiosks and stores. The
increase in net sales through third-party retailers was due to increased sales
of the aeROBICRider and the introduction of the SportRider and other private
labeled machines during 1995. The increase in net sales through direct-
response advertising was primarily due to the successful introduction of
HealthRider's third television infomercial and increased media spending at a
higher level of efficiency. The total number of all fitness machines sold by
HealthRider increased from approximately 275,000 during 1994 to approximately
695,000 during 1995.
Gross profit of HealthRider as a percentage of net sales increased slightly
from 64.8% to 65.0% during 1995. The increase was due to the addition of
higher margin accessory items to the product line and lower product costs due
to overseas production of certain products.
Selling and marketing expenses increased from $48.4 million to $119.3
million during 1995. As a percentage of net sales, selling and marketing
expenses increased from 45.4% to 49.4% during 1995. This increase reflects the
overall increase in advertising in conjunction with HealthRider's sales growth
along with general increases in bad debt expense, warranty expense and other
expenses. In 1995 marketing related expenses were $113.1 million, bad debt
expenses were $4.9 million and warranty expenses were $1.3 million.
General and administrative expenses of HealthRider increased from $5.0
million to $15.9 million during 1995. As a percentage of net sales, general
and administrative expenses increased from 4.7% during 1994 to 6.6% during
1995. The dollar and percentage increase in general and administrative
expenses reflect increases in payroll for administrative, financial and
customer service personnel, professional services, and other costs related to
HealthRider's growth.
As a result of the foregoing factors, income from operations increased $6.1
million, or 38.9%, to $21.8 million in 1995 from $15.7 million in 1994. Income
from operations decreased as a percentage of net sales to 9.0% in 1995 from
14.8% in 1994.
Interest expense decreased from $1.1 million to $.1 million during 1995.
This decrease was primarily due to the decrease in average outstanding debt
balances and interest expense incurred on a note payable to a stockholder of
$.7 million during 1994. Principal and interest on this note payable to the
stockholder were paid in full during 1994.
Other income of HealthRider increased from $.7 million to $2.1 million
during 1995. The increase in other income was primarily due to the increase in
customers purchasing HealthRider upright rowers on the installment plan,
pursuant to which interest is charged.
As a result of the foregoing factors, net income increased by $4.7 million,
or 52.8%, to $13.6 million in 1995 from $8.9 million in 1994.
41
<PAGE>
BUSINESS
OVERVIEW
The Company is one of the largest manufacturers and marketers of fitness
equipment in the United States. The Company's focus is to address consumers'
interest in a healthy, active lifestyle with a broad range of high quality
products at a variety of price/value relationships specifically targeted to
meet different consumers' health and fitness needs. The Company's line of home
fitness aerobic products includes treadmills, upright rowers, exercise bikes,
stair steppers and cross country skiers, and its line of anaerobic fitness
products includes home gyms, weight benches and recently introduced abdominal
machines. The Company also offers trampolines, recreational sports products,
sports medicine products and fitness accessories. The Company currently
markets the majority of its products under the brand names ProForm, Image,
Weslo, Weider, WeiderCare, Legend, JumpKing, and Lifestyler (a private label
brand manufactured for Sears).
Founded in 1977, the Company has been a pioneer in the fitness equipment
industry since 1980 and has focused on developing innovative, high-quality
fitness products. The Company estimates that its U.S. net sales (prior to the
planned HealthRider Acquisition) represented approximately 30% of total
wholesale domestic home fitness equipment sales in calendar 1995. In the first
quarter of 1996, the Company began to directly market its products in Europe.
In 1996, the Company had net sales of $747.6 million versus $202.4 million in
1991, reflecting compound annual growth in net sales of 29.9% and an increase
in 1996 net sales of 40.8% from 1995 net sales of $530.8 million. The Company
had a net loss of $12.9 million and net income of $1.6 million in 1995 and
1996, respectively. The Company believes that from 1991 to 1996 its growth
rate exceeded the industry growth rate due to the Company's emphasis on
product innovation through research and development, its multiple distribution
channels and its flexible manufacturing capacity. While the Company's growth
rate to date has been high, its annual percentage increase in domestic sales
cannot be expected to continue at historical levels.
BUSINESS STRATEGY
The Company's strategy is to expand its market leadership position by, among
other things:
DEVELOPING INNOVATIVE, HIGH-QUALITY PRODUCTS
A key element of the Company's strategy is product innovation and
development. The Company evaluates new product concepts on an ongoing basis
and seeks to respond to the desires and needs of consumers by frequently
introducing new products and repositioning old ones (i.e., selling a modified
product in a different price range). This focus on new products and innovation
enables the Company to begin selling early in a product's life cycle and, as
sales moderate, to extend product life cycles by introducing new features and
repositioning products within the Company's line of brands. In 1994, 1995 and
1996, approximately 40%, 42% and 52%, respectively, of the Company's net sales
were from products that were new, enhanced or repositioned. Recent examples of
the Company's product development include the introduction of the Space Saver
treadmill, which folds vertically for easy storage, the development of the
Cardio family of upright rowers, which significantly improved on upright rower
designs first marketed by others, and the introduction of the Company's
abdominal machines, which improved upon existing products manufactured by
others by adding a fold for storage feature. The Company believes that its
ability to identify industry trends and to quickly take a product from concept
to delivery gives it significant advantages over competitors.
TARGETING MULTIPLE DISTRIBUTION CHANNELS
The Company markets its products under multiple brands through multiple
distribution channels including specialty dealers, sporting goods chains,
department stores, discount merchants, warehouse
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clubs, catalogue showrooms and, to a limited extent, infomercials and direct
response marketing. The Company believes the marketing of its products through
multiple distribution channels provides it with several competitive advantages
including: (i) greater growth and increased market access; (ii) the ability to
maximize revenue throughout a product's life cycle by repositioning products
in different channels and under different brand names as products mature;
(iii) feedback on market trends and changing consumer tastes; and (iv) reduced
dependence on any single channel of distribution.
POSITIONING ITS BRANDS
To enhance its distribution strategy, the Company targets its brands to
specific distribution channels. By marketing specific brands tailored to
appeal to different demographic groups, the Company is able to market products
with varying designs, features and price ranges and target these products to a
wide variety of consumers with different fitness needs and disposable incomes.
The Company believes its brand positioning strategy enables it to: (i) achieve
greater appeal to each market segment; (ii) promote price stability across its
product lines as brand segmentation minimizes conflicts between different
distribution channels; and (iii) provide high-quality products with the price
ranges and features desired by different demographic groups. The Company's
various brands are supported by distinct marketing and product strategies and,
in some cases, separate sales forces.
PROVIDING BROAD PRODUCT OFFERINGS
The Company manufactures and distributes a broad line of aerobic and
anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and fitness accessories. The Company offers
a range of technological features, from manual equipment to sophisticated
programmable electronic products, in a variety of price ranges. The Company's
strategy of offering a broad range of products enables it to: (i) offer
categories of fitness products that appeal to different demographic groups;
(ii) respond quickly to changes in consumer preferences and fitness trends;
(iii) reduce its dependence on any single product category; and (iv)
participate in growth opportunities across a wide variety of product
categories.
UTILIZING FLEXIBLE, LOW-COST MANUFACTURING
The Company's manufacturing facilities are designed to be flexible in order
to permit the Company to shift its product mix quickly and efficiently. The
combination of internal manufacturing and assembly capacity and the Company's
access to third-party vendors has helped the Company meet customer demand on a
competitive basis. The Company uses over 1,500,000 square feet of total
domestic manufacturing capacity, and, in 1995, the Company manufactured or
assembled over 80% of its products at its production facilities in Utah, Texas
and Colorado. The design of these facilities provides the Company with the
flexibility to change production runs on short notice and to respond to
changing customer needs.
PURSUING GROWTH OPPORTUNITIES
The Company is seeking strategic acquisition opportunities which would
complement its existing business and provide an opportunity for growth. The
Company believes growth opportunities exist in its current domestic markets as
well as in selected international markets. The North American fitness
equipment market is significantly more developed than other markets around the
world. However, in the first quarter of 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 1996, the Company had minimal
foreign sales. Net sales from international markets in the four quarters of
fiscal 1996 were $6.0 million, $9.3 million, $7.8 million and $10.2 million,
respectively. In keeping with its strategy of pursuing growth opportunities,
in July 1996, the Company entered into definitive agreements: (i) to purchase
43
<PAGE>
substantially all the assets and assume substantially all the liabilities of
HealthRider for approximately $16.8 million; (ii) to purchase certain other
related manufacturing assets of Parkway, including Parkway's contract to
manufacture and supply upright rowers to HealthRider, for approximately $10.1
million; and (iii) to buy out the minority interest of HealthRider's European
subsidiary for approximately $1.4 million (of which $.7 million will be paid
by HealthRider, $.6 million will be paid by the Company in cash and $.1
million will be paid by the Company in inventory). Assuming the HealthRider
Acquisition occurred at June 30, 1996, the liabilities assumed would have
included capital lease obligations of $19.3 million and revolving credit
borrowings and other long term debt of $11.8 million. In addition, for a
description of certain accounts payable and other accrued payables the Company
will assume in connection with the HealthRider Acquisition, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." In connection with the Recapitalization, the
Company granted certain exclusive and non-exclusive rights to distribute its
products in certain other international markets to Weider Sports. The Company
is negotiating to purchase certain assets of Weider Sports. If the Weider
Sports acquisition is completed, the Company will reacquire distribution
rights granted to Weider Sports in connection with the Recapitalization
subject to certain rights granted by Weider Sports to third parties. The
Company is also negotiating to purchase certain assets of CanCo. In addition,
the Company is considering offering services that complement its product
offerings, such as on-line personal training services. See "--Legal
Proceedings--Proposed Settlement of WHF Litigation," "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 $.4
billion in calendar 1980 to approximately $2.1 billion, $2.1 billion, $2.6
billion, $2.8 billion and $2.9 billion in calendar 1991, 1992, 1993, 1994 and
1995, respectively.
The growth of the fitness equipment industry can be attributed primarily to
increased consumer emphasis on health, fitness and weight management. In
particular, the medical community's promotion of exercise as a means of
preventing cardiovascular disease and maintaining health and the diet
industry's recognition of the need to incorporate exercise as a component of
weight management programs have prompted consumers to place greater emphasis
on health and fitness. The Company believes that several other factors have
also contributed to the growth of the fitness equipment industry, including
product innovation at attractive price/value relationships, growth in
infomercials and cable television shows which promote exercise and fitness and
favorable demographic trends. The Company believes that sales of home fitness
equipment have also benefited from consumers' desire to spend more time at
home. The Company competes with recreational and exercise activities offered
by fitness clubs, as well as with a number of domestic manufacturers, domestic
direct importers, foreign companies exporting fitness products to the U.S.
and, in its limited direct sales efforts, with major retailers or
distributors. The Company's products also compete indirectly, but effectively,
with outdoor fitness, sporting goods and other recreational products.
While the total fitness equipment market has experienced strong overall
growth, individual product categories within the market have exhibited varying
life cycles and rates of growth. Traditional rowers experienced a relatively
short product life cycle. Since 1984, unit sales of traditional rowers have
equaled or exceeded 1.7 million units in only two years, with peak sales of
1.8 million in 1985 and 1986 and marginal sales in 1994 and 1995, and totaled
less than 10 million units over this period. In contrast, unit sales of
exercise bikes since 1984 have equaled or exceeded 1.7 million units in each
of the years up to 1993, with peak unit sales of 3.3 million in 1986 and sales
of .9 million in 1995, and have totaled over 38 million units. Unit sales of
treadmills have increased from .8 million in 1989 to 2.5 million units in
1995. The Company's sales of treadmills have been relatively flat for 1995 and
1996. However, sales of the Company's Cardio family of upright rowers which
was introduced in the second quarter of 1994 were approximately 1.0 million
units in 1995 and approximately 2.2 million units in
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<PAGE>
1996. Calculated on a pro forma basis as if the HealthRider Acquisition
occurred on May 31, 1994, the Company's unit sales of upright rowers would
have been approximately 1.5 million and approximately 2.9 million in 1995 and
1996, respectively.
Different categories of fitness equipment products appeal to different
demographic groups. In general, home fitness equipment products tend to appeal
to higher income groups, with over 65% of purchasers having household income
exceeding $35,000. The Company believes that the aging of the baby-boom
generation and the resulting increase in the 35-64 year old segment in the
U.S. population has led to growth in sales of home fitness equipment.
1995 INDUSTRY CONSUMER DEMOGRAPHICS
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Age
------------------------------------------------
Product (0-34) (35-64) (65+)
- -------
<S> <C> <C> <C>
Treadmills 13.3 71.5 15.2
Exercise Bikes 28.6 50.5 20.9
Stairstepper 27.5 63.7 8.8
Cross Country Skiers 27.1 62.0 10.9
Home Gyms 45.6 42.1 12.3
Upright Rower 19.1 65.0 5.6
<CAPTION>
Income
------
Product $0-25,000 $25,000 - 35,000 $35,000+
- ------- --------- ---------------- --------
<S> <C> <C> <C>
Treadmills 23.4 10.6 66.0
Exercise Bikes 26.1 18.2 55.7
Stairstepper 16.6 14.1 69.3
Cross Country Skiers 24.0 11.1 64.9
Home Gyms 29.5 15.9 54.6
Upright Rower 19.9 14.6 65.6
</TABLE>
Source: National Sporting Goods Association
DISTRIBUTION AND MARKETING
DISTRIBUTION
The Company markets its products under multiple brands through multiple
distribution channels, including specialty dealers, sporting goods chains,
department stores, warehouse clubs, discount merchants, catalogue showrooms
and direct response marketing. In 1995 and 1996, the Company's sales through
retailers were approximately 91% and 97%, respectively, of total sales.
The Company believes the marketing of products through multiple distribution
channels provides it with several competitive advantages, including: (i)
greater growth opportunities by participating in all distribution channels;
(ii) the ability to maximize revenue throughout a product's life cycle by
repositioning the product from higher to lower brand niches as the product
matures; and (iii) the ability to appeal to each market segment through the
marketing of specific brands designed to meet differing needs. The latter
capability is an important factor since different categories of fitness
equipment products appeal to different demographic groups.
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<PAGE>
The following chart lists examples of the Company's brand names, price
positioning, distribution channels and customers within each channel:
<TABLE>
<CAPTION>
BRAND NAMES PRICE POSITIONING DISTRIBUTION CHANNELS CUSTOMER EXAMPLES
----------- ----------------- --------------------- -----------------
<S> <C> <C> <C>
Image................... High Specialty Dealers Busy Body
ProForm................. Middle Department Stores J.C. Penney
Sporting Goods Chains Sports Authority
Direct Response Individuals
Lifestyler(1)........... Middle Department Store Sears
Weslo/Weider............ Entry Level Discounters Wal-Mart and Target
Warehouse Clubs Sam's
Catalogue Showrooms Service Merchandise
</TABLE>
- --------
(1) The Lifestyler brand name is owned by Sears.
The Company targets its brands to specific distribution channels. For
example, the Company's products are sold under the Image name through specialty
dealers, under the ProForm name through sporting goods chains, under the
Lifestyler name through Sears, under the Weslo name through catalogue
showrooms, warehouse clubs and discount merchants, and under the ProForm and
Legend names through the Company's direct marketing campaigns. The Company's
various brands are supported by distinct marketing and product strategies and,
in some cases, separate sales forces.
The following charts summarize the Company's sales by distribution channel in
1995 and 1996
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <S> <C>
DEPARTMENT STORES 45% DEPARTMENT STORES 47%
WAREHOUSE CLUBS 17% WAREHOUSE CLUBS 11%
SPORTING GOODS STORES 11% SPORTING GOODS STORES 10%
CATALOGUE SHOWROOMS 10% CATALOGUE SHOWROOMS 12%
DIRECT RESPONSE 9% DIRECT RESPONSE 3%
DISCOUNT RETAILERS 4% DISCOUNT RETAILERS 12%
MAIL ORDER 3% MAIL ORDER 3%
OTHER 1% OTHER 2%
</TABLE>
In addition to providing superior market access, the Company's presence
across multiple distribution channels provides a valuable source of feedback on
changing consumer tastes and market trends, enabling the Company to anticipate
industry trends and develop innovative products.
46
<PAGE>
MARKETING
The Company's primary sales and marketing group is based in Logan, Utah. For
certain of its products, the Company augments the efforts of this group with
smaller sales forces based in Colorado and Texas. The Company employs
approximately 130 sales and marketing personnel. Such personnel are
compensated on the basis of salary and a bonus based on the Company's
profitability. In addition, the Company utilizes 22 outside sales agents, who
are compensated on the basis of their sales.
Starting in 1992, the Company sold products directly to consumers through
direct response television infomercials and print media campaigns. The Company
believes that direct response marketing can help educate consumers about new
products, increase brand name awareness and stimulate sales through
traditional distribution channels. The expansion of the Company's direct
response marketing required a greater investment than traditional 30 to 60
second television advertisements, and therefore greater risk, as a result of
the cost of creating infomercials and purchasing media time and space. In
1996, the Company wrote off $2.2 million of direct response video productions
because they failed to generate adequate sales. The Company is currently
focusing principally on traditional 30 to 60 second television advertisements
designed to enhance both retail and direct response sales of its products as
opposed to 30 minute infomercials.
INTERNATIONAL MARKETS
The North American fitness equipment market is significantly more developed
than other markets around the world, and the Company believes growth
opportunities exist in selected international markets. The Company began, in
the first quarter of 1996, to directly market its products in the key European
markets of the U.K., France, Italy and the Benelux countries and is attempting
to increase its market penetration in these and other foreign markets. Net
sales from international markets in the four quarters of 1996 were $6.0
million, $9.3 million, $7.8 million and $10.2 million, respectively. The
Company's penetration of these markets is lower and its operating costs are
higher than in the U.S., and the Company's European operations are not
currently profitable. There can be no assurance that the Company will be
successful in selling its products in non-U.S. markets. In connection with the
Recapitalization, the Company granted certain exclusive and non-exclusive
rights to distribute its products in certain other international markets to
Weider Sports. The Company is negotiating to purchase certain assets of Weider
Sports. If the Weider Sports acquisition is completed, the Company will
reacquire distribution rights granted to Weider Sports in connection with the
Recapitalization, subject to certain rights granted by Weider Sports to third
parties. 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. In 1995, these customers collectively generated an aggregate
of $229.5 million in net sales for the Company and accounted for approximately
31% and 12%, respectively, of the Company's total net sales. In 1996, these
customers accounted for approximately 34% and 8%, respectively, of the
Company's total net sales. In 1995 and 1996, Sam's accounted for approximately
94% and 70%, respectively, of net sales at the Company's JumpKing subsidiary.
Although sales to Sears still account for a substantial portion of the
Company's net sales, the percentage of net sales has decreased substantially
in the past several years from approximately 68% in 1989. Nevertheless, the
dollar amount of the Company's net sales to Sears has increased during this
time period.
The Company has more than 2,500 customers, excluding sales to individual
consumers through direct response channels of distribution. Consistent with
industry practice, the Company generally does not have long-term purchase
agreements or other commitments from its customers as to levels of
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<PAGE>
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. In
connection with the HealthRider Acquisition, the Company intends to offer
products directly to consumers through the acquired kiosks, stores and direct
response networks. The Company's direct sales to consumers, particularly
through kiosks and stores in malls where the Company's existing customers have
retail sales outlets, could adversely affect the Company's sales and its
relationship with existing customers. The loss of, or a substantial decrease
in the amount of purchases by, or a write-off of any significant receivables
due from, any of the Company's major customers or a number of the Company's
other customers would have a material adverse effect on the Company's
business. See "Risk Factors--Reliance on Major Customers; Exposure to the
Retail Industry."
PRODUCTS
The Company manufactures and distributes a broad line of aerobic and
anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and fitness accessories. The Company offers
a range of technological features from manual equipment to sophisticated
programmable electronic products at a variety of price ranges. The appeal of
various products in the fitness industry has changed over time, and the
Company has shifted its product mix to meet consumer demand. The Company
intends to continue to adjust its product lines to respond to changes in
market demand.
AEROBIC PRODUCTS.
The Company offers aerobic products, which are designed to promote
cardiovascular fitness, under the Image, ProForm, Weslo and Lifestyler brand
names.
CARDIO FAMILY OF UPRIGHT ROWERS. The Company introduced its Cardio family
of upright rowers under the Weslo brand in October 1994. The Cardio family of
upright rowers exercises both the arms and legs while providing both an
aerobic and anaerobic workout through variable resistance. Models retail at
price points ranging from $169-$299.
MOTORIZED TREADMILLS. The Company is the leading domestic producer of
motorized treadmills. Motorized treadmills allow users to run at speeds of up
to 10 mph. The features offered by the Company's motorized treadmills include
programmable speed and incline, electronic feedback on speed, elapsed time,
distance traveled and calories burned, and cross-training upper body exercise
functions. The Company recently introduced its line of Space Saver treadmills
which fold vertically for easy storage. The retail price points of the
motorized treadmills range from $199 to $2,000.
MANUAL TREADMILLS. The Company's manual treadmills allow the user to walk or
run slowly in place, and certain of the Company's manual treadmill models
include electronic feedback on speed, elapsed time and distance traveled. The
retail price points of the Company's manual treadmills range from $149 to
$299.
EXERCISE BIKES. The Company offers exercise bikes featuring adjustable air
resistance or flywheel resistance, electronic monitors which display elapsed
time, speed, distance and calories burned, and dual or triple action design
which allows the user to exercise upper body, lower body or both
simultaneously. Some units add motivational electronics and programmable
resistance which allow users to design their own workouts. Some higher end
units also contain an electromagnetic drive mechanism which creates less
noise, offers smoother action and requires less maintenance than traditional
motorized drives. Retail price points of the Company's exercise bikes range
from $79 to $799.
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<PAGE>
STAIR STEPPERS. Various stair stepper machines sold by the Company offer
adjustable resistance, self-leveling pedals, motivational fitness monitors,
accessory stations to hold water bottles, books and towels, magnetic
resistance and total body conditioning, which combines upper and lower body
workouts. Other features offered by the Company's stair steppers include the
Speed Link adjustable resistance system, multi-window electronic monitors and
programmable electronics. Retail price points for the Company's stair steppers
range from $99 to $499.
CROSS-COUNTRY SKIING MACHINES. The Company's cross-country skiing machines
feature motivational fitness monitors, stowaway design, the Company's patented
INSYNC Dual Action System, adjustable incline and adjustable resistance.
Retail price points for the Company's cross-country skiing machines range from
$99 to $199.
ANAEROBIC PRODUCTS.
Under the Image, ProForm, Weslo and Weider brand names, the Company offers
anaerobic products, which are designed to develop muscle tone and strength.
HOME GYMS. The Company's home gyms range from traditional cast iron or vinyl
plate weight stack units to programmable electronic units that use "smart
cards" to store a user's personalized fitness regimen in electronic memory.
New technology and innovation within this category include home gyms which
integrate aerobic crosstraining components such as stair steppers and
electronic adjustability allowing simple adjustment in one pound increments
with digital feedback. Selected units are designed to allow multiple users to
use the equipment simultaneously. The Company's home gyms range in retail
price from $99 to $1,499.
WEIGHTS AND BENCHES. The Company offers a range of weight benches to
specialty fitness dealers through the Image brand and markets a complete line
of weights and benches under the Weider and ProForm brand names. Retail price
points of these products range from $79 to $299.
ABDOMINAL MACHINES.
The Company introduced its first abdominal machine in April 1996. This
product is designed for isolation of the abdominal muscle groups. Retail
prices of the Company's abdominal products range from $49 to $99.
OTHER PRODUCTS.
RECREATIONAL SPORTS PRODUCTS. JumpKing, Inc., a subsidiary of the Company,
manufactures and markets a trampoline line that includes both mini-trampolines
for indoor home exercise use and full-sized trampolines for outdoor home
recreational use. The mini-trampoline retails at approximately $25; full-sized
trampolines have retail price points ranging from $239 to $399.
SPORTS MEDICINE PRODUCTS. The Company markets a line of sports medicine
products under the WeiderCare brand name, including support wraps, neoprene
supports, back support belts and hot and cold packs. These products are sold
through channels of distribution that are not able to carry large exercise
units due to floor space limitations, such as drugstore chains, supermarkets
and pro shops. These products are also sold to corporate and industrial users.
EXERCISE ACCESSORIES. The Company offers a limited line of back support
belts and workout gloves and has introduced a line of exercise accessories,
including ankle and hand weights, grip devices and aerobic exercise step
decks.
PRODUCT INNOVATION AND DEVELOPMENT
Product and design innovation has contributed significantly to the Company's
growth. On an on-going basis, the Company evaluates new product concepts and
seeks to respond to the desires and
49
<PAGE>
needs of consumers by frequently introducing new products and repositioning
existing products. The Company has 110 full-time employees in the research and
development area, holds 83 patents and has 50 patent applications pending. The
Company had research and development expenses of $2.9 million, $5.2 million
and $6.8 million in 1994, 1995 and 1996, respectively, and has budgeted $7.8
million for research and development for 1997.
The Company conducts most of its research and development in 40,000 square
feet of space in Logan, Utah. This facility includes plastic, mechanical and
electrical engineering capabilities that are used in creating proprietary
designs and features. The Company also augments its internal research and
development effort by selectively evaluating new products with certain of its
key customers, who then provide feedback on acceptance by potential end-users.
This effort has the added benefit of enhancing the Company's relationships
with key customers.
This focus on new products and innovation enables the Company to begin
selling early in a product's lifecycle and, as sales moderate, to extend
product life cycles by introducing new features and repositioning products
within the Company's line of brands (i.e., selling a product, with
modifications, at a different price point). In 1994, 1995 and 1996,
approximately 40%, 42% and 52%, respectively, of the Company's sales were from
products that were new, enhanced or repositioned. Recent examples of the
Company's product developments are the introduction of the Space Saver
treadmill, which folds vertically for easy storage, the development of the
Cardio family of upright rowers, which significantly improved on upright rower
designs first marketed by others, and the introduction of the Company's
abdominal machines, which improved upon existing products manufactured by
others by adding a fold for storage feature. The Company believes that its
ability to take a product from concept to delivery quickly gives it
significant advantages over its competitors.
The Company's research and development teams have helped develop many of the
innovative features that have encouraged consumers to purchase and use fitness
equipment. Results of the Company's product development program include: (i)
various electronics systems, which provide motivational feedback and
personalized fitness routines; (ii) upright rowers with hydraulic shocks;
(iii) treadmills which fold for easy storage; and (iv) treadmills with upper
body resistance. In addition, the Company was the first to market successfully
cross-training home gyms equipped with aerobic stepping functions.
MANUFACTURING AND PURCHASING
In 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. The Company is negotiating to purchase certain
assets of CanCo for an amount which is expected to equal approximately one
half of the historical net book value of its inventory, fixed assets and
equipment at the date of acquisition. See "Business--Legal Proceedings" and
"Certain Relationships and Related Transactions" and Note 15 of the Notes to
the Consolidated Financial Statements.
As of May 31, 1996 the Company had open orders of approximately $40.6
million compared to approximately $57.0 million as of May 31, 1995. The
Company expects to ship substantially all of such orders during the first
quarter of 1997.
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<PAGE>
The Company follows a dual sourcing strategy on many of its components to
minimize the impact of sourcing disruptions. For example, the Company obtains
steel tubing from two to three vendors. When practical, the Company chooses
vendors that will supply the Company exclusively in the fitness equipment
category. The Company's two primary sources of electronic components, for
example, do not supply any other fitness equipment companies. To further
control manufacturing and delivery problems associated with sourcing delays,
the Company asks its electronics vendors to maintain specified inventory
levels for some long lead-time components, although sourcing delays have been
occasionally experienced in the past with new product introductions. In
addition, the Company has identified alternative sources for many key raw
materials and components. Despite these precautions, however, the Company's
ability to deliver its products on time is susceptible to disruptions in its
supply of raw materials and components, in part because it may take as long as
approximately three months to retool alternative component manufacturers to
produce required components. Since the Company purchases certain components
and finished products from foreign suppliers located in Canada, China, Taiwan
and various other countries, the Company is subject to the general risks of
doing business abroad, particularly with respect to its purchases from China,
including delays in shipment, work stoppages, adverse fluctuations in currency
exchange rates, increases in import duties and tariffs, changes in foreign
regulations, changes in most-favored-nation status and political instability.
In particular, the imposition of trade sanctions on China could have a
material adverse effect on the Company. See "Risk Factors--Reliance on Certain
Suppliers."
Sales to the Company's customers are highly price sensitive. The Company
sets many product prices on an annual basis but purchases raw materials and
components under purchase orders providing components for periods less than
one year. Accordingly, the Company sets prices for many products before it has
complete knowledge of the costs of raw materials and components and sometimes
before product development is complete and production costs have been firmly
established. After it has established prices, the Company may be unable to
pass cost increases along to its customers or to compete as effectively if it
seeks to pass such costs along.
The Company utilizes more than 1,500,000 square feet for manufacturing,
including a 300,000 square foot facility in Logan where the majority of the
Company's treadmills are manufactured or assembled. In the past, the Logan
facility has also manufactured stair steppers, exercise bikes and home gyms.
The Company constructed its Logan plant in 1990 and equipped the facility with
modern manufacturing and assembly features, including fully integrated metal
fabrication, powder coat painting, robotic welding and injection molding
equipment. The facility, like the Company's other manufacturing facilities,
was designed to permit flexible and efficient changes in the products being
manufactured to match customer demand. 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 1994, the Company received ISO 9001
certification for its Logan facilities. ISO is a nonprofit association that
monitors industrial companies' manufacturing processes, quality assurance
controls, personnel management and customer service in order to improve plant
efficiency, product quality, customer satisfaction and company profitability.
HEALTHRIDER ACQUISITION
In keeping with its strategy of pursuing growth opportunities, in July 1996,
the Company entered into definitive agreements: (i) to purchase substantially
all the assets and assume or refinance substantially all the liabilities of
HealthRider for approximately $16.8 million; (ii) to purchase certain
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<PAGE>
other related manufacturing assets of Parkway, including Parkway's contract to
manufacture and supply upright rowers to HealthRider for approximately $10.1
million; and (iii) to buy out the minority interest of HealthRider's European
subsidiary for approximately $1.4 million (of which $.7 million will be paid
by HealthRider, $.6 million will be paid by the Company in cash and $.1
million will be paid the Company in inventory). Assuming the HealthRider
Acquisition occurred at June 30, 1996, the liabilities assumed or refinanced
would have included capital lease obligations of $19.3 million and revolving
credit borrowings and other long term debt of $11.8 million. For a description
of certain accounts payable and other accrued payables the Company will assume
in connection with the HealthRider Acquisition, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." HealthRider, a designer, marketer and distributor of
fitness equipment based in Salt Lake City, Utah, distributes its products
through a national network of over 200 HealthRider kiosks and stores in
shopping malls, direct response advertising and third party retailers.
HealthRider had net sales of $241.4 million and $113.2 million and net income
of $13.6 million and net loss of $3.6 million in calendar 1995 and the first
six months of calendar 1996, respectively. HealthRider was the first company
to market upright rowers. Its flagship product is the HealthRider, a brand of
upright rower. HealthRider also markets upright rowers under the aeROBICRider,
SportRider and LifeRider brand names. In aggregate, and excluding related
freight revenues, upright rowers (including the HealthRider) accounted for
94.4% and 93.4% of HealthRider's net sales in calendar 1995 and the first six
months of calendar 1996, respectively. In calendar 1995 and for the first six
months of 1996, purchases from Parkway accounted for approximately 73.5% and
54.3%, respectively, of total upright rower purchases by HealthRider.
As a result of the HealthRider Acquisition, the Company believes it will be
the leading maker and distributor of upright rowers in the United States with
its net sales of upright rowers, calculated on a pro forma basis as if the
HealthRider Acquisition had occurred on December 31, 1994, representing over
76% of all U.S. upright rower sales in calendar 1995. The Company estimates
that its U.S. net sales, calculated on the same pro forma basis represented
approximately 39% of total wholesale domestic home fitness equipment sales in
calendar 1995. The Company believes that the HealthRider Acquisition will
strengthen its position as a leading manufacturer and marketer of fitness
equipment in the United States. The Company's plan for integrating HealthRider
into its business includes: (i) marketing a broad line of products such as
treadmills, stair steppers and cross-country skiing machines under the
HealthRider brand name through HealthRider's established distribution
channels; (ii) reducing direct response advertising with respect to
HealthRider products with the goal of enhancing the Company's return on its
advertising investment; and (iii) realizing synergies from the HealthRider
Acquisition by integrating the Company's and HealthRider's operations. The
Company's direct sales to consumers, particularly through the acquired kiosks
in malls where the Company's existing customers have retail sales outlets,
could adversely affect the Company's sales and its relationship with its
existing customers.
The Company expects to increase its net sales as a result of the HealthRider
Acquisition, but by substantially less than 100% of HealthRider's net sales.
The Company will also recognize a significant, non-recurring, non-cash charge
in the first two quarters of 1997 related to fact that the Company's purchase
accounting for the HealthRider Acquisition will include stepping-up the
acquired HealthRider inventory to fair market value less estimated sales
costs, which will result in higher cost of goods sold and lower gross profit
until the acquired inventory has been sold. See "Management's Discussion and
Analysis of Operations and Financial Condition and Results of Operations--
HealthRider." HealthRider experienced a substantial deterioration of its
business in the quarter ended March 31, 1996, which has since accelerated. See
"Risk Factors--Expansion Strategy; Acquisitions" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--HealthRider."
The Company will close the HealthRider Acquisition prior to the closing of
the Offering and will fund the HealthRider Acquisition through additional
borrowings under the amended Credit Agreement. See "Description of Certain
Indebtedness."
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COMPETITION
The fitness equipment market is highly competitive. It is characterized by
frequent introduction of new products, often accompanied by major advertising
and promotional campaigns. The Company believes that the principal competitive
factors affecting its business include price, quality, brand name recognition,
product innovation, marketing resources and customer service.
The Company competes in the U.S. with recreational and exercise activities
offered by health clubs, as well as a number of domestic manufacturers,
domestic direct importers, foreign companies exporting fitness products to the
U.S. and, in its direct sales efforts, with major retailers and distributors.
Competitors in these areas include Precor Inc., CML Group Inc. (under the
NordicTrack(R) brand), LifeFitness, Inc. and DP and Roadmaster, which are
commonly owned. The Company also believes that Reebok International Ltd. will
begin marketing home fitness equipment in the U.S. In Europe, the Company
competes principally with Tunturi, Inc. and Kettler Int'l Inc., a number of
Asian importers and some of its domestic competitors. The Company's products
also indirectly compete with outdoor fitness, sporting goods and other
recreational products. Competitors in these product areas include Huffy
Corporation, Canstar Sports Inc. (a subsidiary of Nike Inc.), and Rollerblade,
Inc. Certain competitors are better capitalized than the Company and may have
greater financial and other resources than those available to the Company. In
addition, there are no significant technological, manufacturing or marketing
barriers to entry into the fitness equipment or the exercise accessory
markets, although many companies in the industry, including the Company, have
sought and received numerous patents in an effort to protect their competitive
position.
EMPLOYEES
The Company currently employs approximately 4,300 people, none of whom are
represented by labor unions. Factory employees are compensated through hourly
wages and a targeted incentive system. Managerial employees receive salaries
and bonuses tied to the achievement of performance targets. Approximately 110
employees are engaged in research and development, 130 in sales and marketing,
3,100 in manufacturing, 30 in purchasing and 930 in other areas.
TRADEMARKS AND PATENTS
The Company holds 83 patents and has 50 patent applications pending. The
Company believes that certain of its patents and registered and common law
trademarks and trade names have significant value and that some of its
trademarks enhance its ability to create demand for and market its products.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental and health and safety laws and regulations that impose workplace
standards and limitations on the discharge of pollutants into the environment
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances
and wastes. The nature of the Company's manufacturing and assembly operations
exposes it to the risk of claims with respect to environmental matters and
although compliance with local, state and federal requirements relating to the
protection of the environment has not had and is not expected to have a
material adverse effect on the Company's financial condition or results of
operation, there can be no assurance that material costs or liabilities will
not be incurred in connection with environmental matters. Future events, such
as changes in existing laws and regulations or enforcement policies or the
discovery of contamination 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."
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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 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.
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PROPOSED SETTLEMENT OF WHF LITIGATION
The Company and WHF and its affiliates are negotiating the terms of a
proposed settlement of the litigation between the parties (the "Proposed WHF
Settlement"), 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
WHF Settlement are outlined below. While the definitive settlement agreement
between the parties is not expected to differ materially from the Proposed WHF
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.
The Company will, in connection with the Proposed WHF Settlement, purchase
all of the Common Stock and warrants to purchase Common Stock held by the WHF
Stockholders (the "WHF Position") at an aggregate price of $38.9 million, or
approximately $ per share or per warrant (less the exercise price in the
case of the warrants).
Under the Proposed WHF Settlement, the Company would have the right within
twelve months of the closing of the Common Stock repurchase, 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 $31.7 million, which reflects a discount of $4.3 million and
the forgiveness of accrued dividends. The Company also expects to purchase the
options to purchase IHF Holdings Preferred Stock held by Messrs. Watterson and
Stevenson for $3.5 million, which reflects a discount of $.5 million and the
forgiveness of accrued dividends. The Company expects to repurchase this stock
and these options upon the closing of the Offering with proceeds of the
Offering. Upon the purchase of the WHF Preferred Stock, WHF's representation
on the Company's board of directors will cease.
Pursuant to the Proposed WHF Settlement, the Company would acquire the
assets relating to the sports equipment business lines of Weider Sports,
excluding cash and fixed assets but including the rights to distribute the
Company's products, and would acquire specified CanCo assets for approximately
$13.4 million and the assumption of certain liabilities. The purchase price
for Weider Sports would be subject to a working capital adjustment. As a
result of this purchase, the Company would reacquire distribution rights
granted to Weider Sports in connection with the Recapitalization, subject to
certain rights granted by Weider Sports to third parties. Pursuant to the
Proposed WHF Settlement, the Company would pay an additional $9.7 million of
settlement expenses to WHF and its affiliates, and the Company and WHF and its
affiliates would settle in cash all outstanding intercompany payables.
The Company would also, subject to further environmental review, 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 $.5 million. The Company would also receive 10%
of CanCo's profits from November 14, 1994 to the date of the closing of a
definitive settlement.
Pursuant to the Proposed WHF Settlement, the Company would make a payment of
approximately $3.93 million to WHF and its affiliates as prepayment in full
under its brand license agreements with them. The Proposed WHF 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 set-offs
of outstanding inter-company payables which are expected to aggregate at least
$1.5 million. In addition, the Proposed WHF 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 $475,000, and that the
Company will provide office space and three assistants for Mr. Weider. The
Proposed WHF Settlement also contains various miscellaneous provisions that
the Company does not believe are material.
55
<PAGE>
In connection with the Proposed WHF Settlement, the Company expects WHF and
its affiliates to (i) pay Messrs. Watterson and Stevenson an aggregate amount
of $3.7 million in exchange for the surrender of their options to purchase
stock of WHF and its affiliates and (ii) deposit an aggregate amount of $.5
million in a retirement plan for the benefit of Messrs. Watterson and
Stevenson. Messrs. Watterson and Stevenson would each receive 7% of CanCo's
profits from June 1, 1994 to the date of the closing of a definitive
settlement.
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. HealthRider has an insurance policy
which provides coverage through October 26, 1996 of $10 million per
occurrence, and $10 million in the aggregate annually. 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 "Risk Factors--Product Liability."
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.
The FTC is conducting a similar preliminary investigation of HealthRider to
determine whether HealthRider may have made excessive advertising claims with
respect to its products, in violation of the Federal Trade Act. The Company is
assuming all of HealthRider's liabilities in connection with this matter.
Management does not believe that this matter will have a material adverse
effect on its results of operations or financial position, however there can
be no assurance in this regard.
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CONSUMER PRODUCTS SAFETY COMMISSION INQUIRY
The Consumer Products Safety Commission has conducted an inquiry and made
claims relating to defects in certain of HealthRider's products. Remediation
has been undertaken by HealthRider. Although no consumer litigation has
resulted from such defects to date, there can be no assurance that consumer
litigation will not result. The Company is assuming all of HealthRider's
liabilities in connection with this matter.
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.
PROPERTIES
The location, square footage, status and primary use of the Company's
principal properties are set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE STATUS PRIMARY USES
-------- ------- ------ ------------
<S> <C> <C> <C>
Logan, UT............... 300,000 Owned Manufacturing, Offices, R&D
Offices, Manufacturing,
Logan, UT............... 150,793 Leased (Month to Month) Warehousing
Smithfield, UT.......... 82,300 Leased (Expires 9/98) Manufacturing
Clearfield, UT.......... 629,000 Leased (Month to Month) Manufacturing, Warehousing
Clearfield, UT.......... 329,075 Leased (Expires 6/99) Manufacturing, Warehousing
Clearfield, UT.......... 282,600 Leased (Expires 12/03) Warehouse
Millville, UT........... 13,000 Owned Manufacturing, Warehousing
Offices, Manufacturing,
Garland, TX............. 95,405 Leased (Expires 9/97) Warehousing
Dallas, TX.............. 40,000 Leased (Expires 9/97) Warehousing
Weatherford, TX......... 22,000 Leased (Expires 1/98) Offices, Manufacturing
Denver, CO.............. 61,000 Leased (Expires 4/99) Manufacturing, Warehousing
South Brunswick, NJ..... 181,000 Leased (Month to Month) Warehouse
South Brunswick, NJ..... 25,000 Leased (Month to Month) Warehouse
Englewood, CO........... 10,000 Leased (Expires 6/99) Sales Office
St. Jerome, QC.......... 134,000 Leased (Month to Month) Warehouse
Ste.-Therese, QC........ 10,000 Leased (Month to Month) Warehouse
Logan, UT............... 68,750 Leased (Expires 5/00) Warehouse
Smithfield, UT.......... 108,187 Leased (Expires 1/01) Warehouse
Warehouse, Offices,
Anzin, France........... 8,097 Leased (Expires 12/96) Apartment
Carrieres Sur Seine,
France................. 2,966 Leased (Expires 12/98) Warehouse, Office
Neailly Sur Seine,
France................. 262 Leased (Expires 9/98) Apartment
Leeds, UK............... 6,000 Leased (Expires 1/99) Offices
Perugia, Italy.......... 3,360 Leased (Expires 6/01) Offices
Perugia, Italy.......... 6,600 Leased (Expires 11/96) Warehouse
</TABLE>
In addition, in connection with the HealthRider Acquisition, the Company
expects to acquire short term leases for over 200 HealthRider kiosks and
stores.
The Company believes that its existing facilities are well maintained, in
good operating condition and adequate for its expected level of operations.
Although a number of the Company's facilities are rented on a month to month
basis, the Company does not anticipate difficulty in maintaining access to
facilities required for the conduct of its business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages as of
August 13, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott R. Watterson............ 41 Chairman of the Board and Chief Executive
Officer
Gary E. Stevenson............. 41 President, Chief Operating Officer and
Director
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............. 50 Vice President, Business Development
David J. Watterson............ 37 Vice President, Marketing and Research and
Development
Jon M. White.................. 48 Vice President, Manufacturing
William T. Dalebout........... 48 Vice President, Design
Brad H. Bearnson.............. 42 General Counsel and Secretary
</TABLE>
SCOTT R. WATTERSON. Mr. Watterson has served as President and Chief
Executive Officer of Weslo since he co-founded Weslo in 1977 and has served as
President and Chief Executive Officer of ProForm since 1988. Effective as of
the Recapitalization Closing, Mr. Watterson became Chairman of the Board and
Chief Executive Officer of the Company. David Watterson is Mr. Watterson's
brother.
GARY E. STEVENSON. Mr. Stevenson has served as Chief Operating Officer of
Weslo since he co-founded Weslo in 1977 and has served as Chief Operating
Officer of ProForm since 1988. Effective as of the Recapitalization Closing,
Mr. Stevenson became President, Chief Operating Officer and a Director of the
Company.
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 Venture Capital since February 1989. From 1988 through 1989,
Mr. Gay was a principal of Bain Venture Capital. In addition, Mr. Gay is a
director of Alliance Entertainment Corp., American Pad & Paper Company, GT
Bicycles, Inc., GS Industries, Inc. and its subsidiary GS Technologies
Operating Co., Inc., and Physio-Control International Corporation.
RONALD P. MIKA. Mr. Mika became a Director of the Company effective as of
the Recapitalization Closing. Mr. Mika has been a Principal of Bain Capital
since December 1992 and was an associate of Bain Capital from August 1989
through November 1992.
GEOFFREY S. REHNERT. Mr. Rehnert became a Director of the Company effective
as of the Recapitalization Closing. Mr. Rehnert has been a Managing Director
of Bain Capital since April 1993
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and has been a General Partner of Bain Capital since 1986. Mr. Rehnert is also
a director of GT Bicycles, Inc., Worldcorp, Inc., FTD, Inc., KollMorgen
Corporation and U.S. Order, Inc.
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.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
1996, 1995 and 1994 for Mr. Scott Watterson and the Company's other four most
highly compensated executive officers (collectively, the "named executive
officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------ COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)(2)
- --------------------------- ---- --------- --------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Scott R. Watterson(3)... 1996 450,000 690,660 571,378(4)(5) 22,791(6)
Chairman of the Board
and Chief 1995 325,000 423,704 543,770 2,402,060(7)
Executive Officer 1994 450,000 1,968,144 900
Gary E. Stevenson(3).... 1996 400,000 690,660 456,204(4)(8) 22,952(6)
President and Chief
Operating Officer 1995 300,000 423,704 447,406 1,901,400(7)
1994 400,000 1,405,817 1,000
S. Fred Beck............ 1996 168,000 149,000 75,722(9)(10) 1,578
Chief Financial and
Accounting Officer 1995 160,000 105,926 64,243 2,981
Vice President and
Treasurer 1994 125,000 71,121 788
David J. Watterson...... 1996 205,000 149,000 75,722(9)(10) 1,547
Vice President,
Marketing and Research 1995 195,000 105,926 64,243 2,450
and Development 1994 167,000 71,121 650
Jon M. White............ 1996 105,000 149,000 46,040(11)(12) 2,237
Vice President,
Manufacturing 1995 100,500 105,926 42,829 2,351
1994 90,500 71,121 409
</TABLE>
- --------
(1) Options to purchase shares of the Company's Common Stock. Share numbers
in this table are on a post-Conversion basis.
(2) Includes amounts contributed by the Company for the benefit of the named
executive officers under the Company's 401(k) Plan.
(3) The table does not reflect the consulting fees that Scott Watterson and
Gary Stevenson may receive from CanCo equal to an aggregate of 14% of its
pre-tax earnings up to the time that the Company's option to acquire
CanCo's assets is exercised and closed or expires. The Company has given
notice of its intention to exercise this option and may purchase the
assets of CanCo, subject to satisfactory completion of certain
conditions, including due diligence. The purchase of the CanCo assets has
not yet been completed due to complications related to the WHF
Litigation. See "Business--Legal Proceedings," "Certain Relationships and
Related Transactions," and Note 15 of the Notes to the Consolidated
Financial Statements. The Company may terminate its option to purchase
CanCo's assets any time prior to closing. Prior to the Recapitalization,
Scott Watterson and Gary Stevenson owned a 14% aggregate equity interest
in CanCo.
(4) Includes options for 110,131 shares of Common Stock granted in connection
with the Recapitalization at an exercise price of $25.39 per share, which
was substantially above market value. In March 1996 the exercise price of
these options was reset to $7.33716 per share, which was the then current
fair market value of the Common Stock.
(5) Includes options to purchase 414,628 shares of Common Stock at $4.77080
per share which were granted in May 1996 when the then current fair
market value of such stock was $7.33716 per share.
(6) Includes $19,722 and $19,802 paid on behalf of Scott Watterson and Gary
Stevenson, respectively, for legal fees and expenses.
(7) Includes $2.3 million and $1.8 million received by Scott Watterson and
Gary Stevenson, respectively, in connection with a four-year agreement to
not compete with the Company in certain specified businesses and also
includes $99,500 paid to each of Scott Watterson and Gary Stevenson by
the Company as reimbursement for legal fees and expenses incurred by them
in connection with the Recapitalization.
(8) Includes options to purchase 299,454 shares of Common Stock at $4.77080
per share which were granted in May 1996 when the then current fair
market value of such stock was $7.33716 per share.
(9) Includes options for 9,178 shares of Common Stock granted in connection
with the Recapitalization at an exercise price of $25.39215 per share,
which was substantially above market value. In September 1995 the
exercise price of these options was reset to $4.77080 per share, which
was the then current fair market value of the Common Stock.
(10) Includes options to purchase 66,544 shares of Common Stock at $4.77080
per share which were granted in May 1996 when the then current fair
market value of such stock was $7.33716 per share.
(11) Includes options for 6,119 shares of Common Stock granted in connection
with the Recapitalization at an exercise price of $25.39215 per share,
which was substantially above market value. In September 1995 the
exercise price of these options was reset to $4.77080 per share, which
was the then current fair market value of the Common Stock.
(12) Includes options to purchase 39,921 shares of Common Stock at $4.77080
per share which were granted in May 1996 when the then current fair
market value of such stock was $7.33716 per share.
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<PAGE>
The following table sets forth information concerning options granted to
each of the named executive officers in the last fiscal year:
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
MARKET POTENTIAL REALIZABLE VALUE AT
PRICE OF ASSUMED ANNUAL RATES
% OF TOTAL COMMON OF STOCK PRICE APPRECIATION
OPTIONS GRANTED STOCK ON FOR OPTION TERM($)(4)
OPTIONS TO EMPLOYEES IN EXERCISE DATE OF EXPIRATION -----------------------------
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) GRANT($/SH) DATE 0% 5% 10%
---- ---------- --------------- ----------- ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Scott R. Watterson 110,131 7.6 7.34(2) 7.34 11/14/04 -- 445,498 1,097,313
414,628 28.7 4.77 7.34 5/22/06 1,064,085 1,650,745 2,509,097
46,620 3.2 4.77 4.77 6/13/05 -- 122,622 302,033
Gary E. Stevenson 110,131 7.6 7.34(2) 7.34 11/14/04 -- 445,498 1,097,313
299,454 20.7 4.77 7.34 5/22/06 768,506 1,192,205 1,812,125
46,620 3.2 4.77 4.77 6/13/05 -- 122,622 302,033
S. Fred Beck(1) 9,178 .6 4.77(3) 4.77 11/14/04 -- 24,139 59,458
66,544 4.6 4.77 7.34 5/22/06 170,776 264,930 402,688
David J. Watterson(1) 9,178 .6 4.77(3) 4.77 11/14/04 -- 24,139 59,458
66,544 4.6 4.77 7.34 5/22/06 170,776 264,930 402,688
Jon M. White(1) 6,119 .4 4.77(3) 4.77 11/14/04 -- 16,094 39,641
39,921 2.8 4.77 7.34 5/22/06 102,451 158,936 241,579
</TABLE>
- --------
(1) 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 1996, one
third of these options had vested.
(2) The exercise price with respect to these options was reset in March 1996
from $25.39215 to $7.33716 per share, which was the then current fair
market value of the Common Stock.
(3) The exercise price with respect to these options was reset in September
1995 from $25.39215 to $4.77080 per share, which was the then current fair
market value of the Common Stock.
(4) These potential realizable values are based on assumed rates of
appreciation required by applicable regulations of the Commission. The
potential realizable values stated are not discounted to their present
value. As of May 31, 1996 there was no market for the Company's Common
Stock. Except for this Offering, there have been no arm's-length sales of
the Company's Common Stock since the closing of the Recapitalization.
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<PAGE>
The following table sets forth information as of May 31, 1996, concerning
options of the Company exercised by each of the named executive officers in
1996 and year end option values:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS AT
OPTIONS AT FY-END (#) FY-END ($)(2)(3)
------------------------- --------------------
SHARES ACQUIRED VALUE
ON EXERCISE (#) REALIZED ($)(2) EXERCISABLE EXERCISABLE
--------------- --------------- ------------------------- --------------------
IHF
HOLDINGS
COMMON COMMON SERIES COMMON COMMON
NAME STOCK STOCK PREFERRED(2)(3) STOCK STOCK
- ---- --------------- --------------- --------------- --------- --------------------
<S> <C> <C> <C> <C> <C>
Scott Watterson......... -- -- 585.8 1,017,288(4) 4,264,128
Gary Stevenson.......... -- -- 455.6 803,022(4) 3,284,011
S. Fred Beck............ 18,355 86,059 -- 112,432 460,658
David J. Watterson...... -- -- -- 130,787 593,822
Jon M. White............ 12,236 57,371 -- 70,513 295,707
</TABLE>
- --------
(1) This table includes options issued in connection with the Recapitalization
in exchange for previously outstanding options to purchase stock of the
Recapitalized Companies. Share numbers in this table are on a post-
Conversion basis and assume the vesting of all options scheduled to vest
upon the consumation of the Offering. There will be no unvested options on
the closing of the Offering.
(2) As of May 31, 1996 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 one share of the Company's Common Stock was
assumed to be $7.33716 at the close of 1996. 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) All of Messrs. Watterson's and Stevenson's options on their IHF Holdings
Preferred Stock will be redeemed in connection with the Offering.
(4) The options held by Messrs. Watterson and Stevenson include options for
445,910 and 346,818 shares of Common Stock, respectively, granted pursuant
to the Recapitalization.
1994 STOCK OPTION PLAN
In November 1994 the Company adopted the IHF Capital, Inc. 1994 Stock Option
Plan, as amended (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 851,011 shares. A total of 2,565,442 shares of Common Stock has been
authorized for issuance under the 1994 Stock Option Plan, which is
administered by the Board of Directors or a committee thereof, of which
834,323 shares have been issued and 1,731,119 represent outstanding stock
options as of the closing of the Offering.
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 under the 1934 Act. All options issued pursuant to the 1996 Stock Option
Plan are expected to have an exercise price equal to the then current market
value of the Company's Common Stock. The 1996 Stock Option Plan will provide
that options may be granted during fiscal 1997 for an equivalent of
approximately 1,002,977 shares of Common Stock and that options may thereafter
by granted in each
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<PAGE>
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
or a committee thereof.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not maintain a compensation committee during 1996. Messrs.
Scott Watterson's and Stevenson's 1996 compensation was determined prior to
the Recapitalization pursuant to employment contracts that had been in place
since 1989 and after the Recapitalization pursuant to the newly entered into
employment agreements described below. Messrs. Watterson and Stevenson
participated in the deliberations concerning the compensation of other
officers, and Mr. Beck participated in the deliberations concerning the
compensation of officers other than himself and Messrs. Watterson and
Stevenson. See "Certain Relationships and Related Transactions."
COMPENSATION OF DIRECTORS
The Company's directors did not receive any compensation for serving on its
Board of Directors in 1996, and are not entitled to receive compensation in
connection with their current service. Directors are reimbursed for their out-
of-pocket expenses incurred in connection with their service as directors. The
Company also maintains liability insurance policies for the Company's
directors. See "Certain Relationships and Related Transactions--Management
Fees."
EMPLOYMENT AGREEMENTS
Concurrent with the Recapitalization Closing, Scott Watterson and Gary
Stevenson entered into five-year employment agreements with the Company. The
Company and Messrs. Watterson and Stevenson 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 percentage
of pre-interest (excluding revolving credit interest), pre-tax, pre-bonus
consolidated profits of the Company not taking into account certain changes in
depreciation, amortization, or certain other changes due to the
Recapitalization, which percentage shall equal 1.3% for 1996, 1.4% for 1997
and thereafter a percentage established by the Board of Directors which cannot
be less than 1.4%; provided, however, no bonus will be paid unless the
Company's pre-interest (excluding revolving credit interest), pre-tax, pre-
bonus consolidated profits exceed a level to be set by the Board of Directors
based on budgets prepared by management for periods after 1995 and which level
for 1995 and 1996 is 3% of net sales.
Each executive's employment under his Employment Agreement terminates
automatically upon death or bankruptcy of the executive, and is terminable by
the Company for cause as provided in each agreement, upon six months'
disability, or without cause. For these purposes, "cause" includes willful
misconduct, gross negligence, commission of a crime involving material harm,
commission of a crime
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<PAGE>
of moral terpitude, willful insubordination and failure to comply with certain
covenants under the Employment Agreements. The provisions providing for
termination upon bankruptcy of the executive may not be enforceable under the
U.S. Bankruptcy Code, however. Each executive may similarly terminate his
employment immediately for cause as provided in his Employment Agreement or
for any reason upon six months' notice. In the event of termination by the
Company for cause or upon death or bankruptcy (if such termination is legally
enforceable), the executive is not entitled to further salary, benefits or
bonus. Upon termination by the executive, the Company may at its option
continue the executive's employment for the notice period or terminate the
executive's employment. Upon termination by the Company without cause or upon
termination by the executive with or without cause, the Company is obligated
to pay the executive his salary and bonus for a period of two years from the
date of termination. Upon termination by the Company upon the executive's
disability, the Company is obligated to pay as severance an amount equal to
one month's base salary then in effect for each calendar year or part thereof
elapsed since January 1, 1988, provided that such severance pay is reduced by
payments under applicable disability insurance.
The Employment Agreements prohibit the executives from engaging in outside
business activity during the term, except that the executive may sit on
outside business and charitable boards approved by the Board of Directors,
make passive investments in noncompeting businesses, as defined in the
Employment Agreement and spend up to five hours per week subject to a maximum
of 100 hours per year counseling noncompeting businesses in which he invests.
The Employment Agreements provide for customary confidentiality obligations
and, in addition, a noncompetition obligation for a period of four years
following termination (two years if the executive quits or is terminated
without cause except that the Company may at its option extend such period for
up to two additional years by paying the executive his salary and bonus during
the extended period). The Employment Agreements also limit each executive's
liability to the Company to the extent of such executive's salary, bonus and
other compensation received by the executive during the fiscal year in which
termination occurs plus any compensation which subsequently accrues to such
executive. This limitation does not apply in the case of an executive's theft,
fraud, embezzlement, violation of the confidentiality, notice, or non-
competition provisions of his Employment Agreement, breach of the executive's
non-competition agreement or certain other matters and is subject in any event
to a maximum liability of $1.24 million in the case of each of Messrs.
Watterson and Stevenson (including any liabilities under the indemnification
provisions of the Master Transaction Agreement, as defined below) for
violation of the confidentiality, notice upon resignation, and non-competition
provisions.
CERTAIN BENEFITS OF RECAPITALIZATION TO SENIOR MANAGEMENT
As a part of the Recapitalization, Mr. Scott Watterson and Mr. Gary
Stevenson received in exchange for their options to purchase Capital Stock of
Weslo and ProForm: (i) the Redeemable Options, which 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
591,087 shares of Common Stock (which have since been exercised) and 445,910
shares of Common Stock in the case of Mr. Watterson and 459,734 shares of
Common Stock (which have since been exercised) and 346,814 shares of Common
Stock in the case of Mr. Stevenson at an exercise price of $.00327 and
$.42904, respectively; (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 30,974 shares of Common Stock in the case of Mr.
Watterson and warrants to purchase 24,091 shares of Common Stock in the case
of Mr. Stevenson, with each warrant having been exercised at a strike price of
$.08226 per share. The average per share price of Common Stock paid in the
Recapitalization was $4.64. See "Principal and Selling Shareholders." Messrs.
Watterson and Stevenson also received
64
<PAGE>
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, 135,223 shares of Common Stock. Each of Messrs. Beck
and David Watterson also purchased 24,954 shares of 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 16,530 shares of
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 98,005 shares of its Common Stock in exchange for $459,500 in
connection with shares originally issued to Mr. Beck; 96,192 shares of its
Common Stock in exchange for $451,000 in connection with shares originally
issued to Mr. David Watterson; and 95,766 shares of its Common Stock in
exchange for $449,000 in connection with shares originally issued to each of
Messrs. White and Dalebout. Other members of management purchased an aggregate
of 176,601 shares of 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, although subject to, and qualified in its entirety by
reference to, the agreements summarized below, including the definitions
therein of certain terms, is complete in all material respects. It is
currently contemplated that certain of the agreements below 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.
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<PAGE>
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 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. The Company recorded license fees of
approximately $.5 million and $.5 million in 1995 and 1996, respectively,
under this agreement. The Company has accrued license fees payable to WHF of
$.5 million and $.1 million at May 31, 1995 and 1996, respectively. For a
description of a proposed amendment to the WHF License, see "Business--Legal
Proceedings--WHF Litigation" and "--Proposed Settlement of WHF Litigation."
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 1994, 1995, and 1996, the Company purchased $7.4
million, $26.4 million and $50.7 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 1995 or in 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
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<PAGE>
exercised and closed or expires. In August 1995, the Company gave notice of
its intention to exercise the CanCo Option, subject to various conditions. For
a description of a proposed amendment to the CanCo option agreement, see
"Business--Legal Proceedings--WHF Litigation" and "--Proposed Settlement of
WHF Litigation" and Note 15 of the Notes to the Consolidated Financial
Statements.
EUROPEAN OPERATIONS. The Company purchased certain fixed assets for
approximately $.2 million and assumed certain liabilities (primarily real
estate leases) of Weider Europe. It has also hired selected former employees
of Weider Europe and its affiliates. These assets and employees, supplemented
by the Company's domestic resources, have been used in establishing the
Company's presence in targeted European markets. The Company's recently
established European operations continue to obtain products and/or components
from affiliates of WHF and made purchases from such affiliates of $.4 million
in 1996.
INTERNATIONAL DISTRIBUTION ARRANGEMENTS. Prior to the beginning of 1996, the
Company sold products to affiliates of WHF for international distribution,
primarily in Europe. In 1994 and 1995 sales by the Company to such affiliates
of WHF aggregated $4.9 million and $8.8 million, respectively. Since the
beginning of 1996, the Company has been selling its products directly in
Europe.
In connection with the Recapitalization, the Company entered into an
agreement with Weider Sports, 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.
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 (i) $20,000 Cdn. or (ii) 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.
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<PAGE>
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.
The Company expects to purchase certain assets of Weider Sports. If this
acquisition is completed, the Company will reacquire the distribution rights
granted to Weider Sports in connection with the Recapitalization, subject to
certain rights granted by Weider Sports to third parties. See "Business--Legal
Proceedings--Proposed Settlement of WHF Litigation ".
WSG AND WEIDER EUROPE MANAGEMENT AGREEMENTS. The Company entered into an
agreement as of June 1, 1994 under which the Company provided certain
management services to WSG and acts as WSG's agent to maintain and liquidate
its inventory and service and collect the accounts receivable of WSG in return
for specified fees. For 1995, the Company was paid a management fee of $2.7
million. Following the Recapitalization, WSG stopped paying fees under to
management agreement and later terminated that agreement. See "Business--Legal
Proceedings."
In connection with the Recapitalization the Company and Weider Europe
entered into a substantially similar agreement which became effective as of
January 15, 1995 pursuant to which the Company 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.
It is expected that the WSG and Weider Europe Management Agreements will
terminate in connection with the Proposed WHF Settlement.
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.
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 1994, 1995, and
1996 the Recapitalized Companies purchased $.1 million, $.3 million and less
than $.1 million, respectively, of such advertising.
MANAGEMENT FEES. WHF received aggregate management fees from the Company of
$.4 million in 1994. Since the closing of the Recapitalization, pursuant to a
management agreement (the "Bain Management Agreement"), Bain Capital Partners
IV, L.P. ("Bain IV"), an affiliate of Bain Capital, provides management
consulting services to the Company including providing advice on strategic
68
<PAGE>
planning, development and acquisitions for an annual fee of $.8 million plus
reimbursement of reasonable out-of-pocket expenses. In 1995 and 1996, the
Company paid Bain IV $.4 and $.8 million, respectively, in consulting fees.
Prior to the Offering, the Company will recognize a non-recurring expense of
$2.8 million representing a fee to terminate the annual management fee payable
to Bain IV in accordance with the Bain Management Agreement. The Bain
Management Agreement includes customary indemnification provisions in favor of
Bain IV. In addition, if the Company enters into any acquisition transactions
involving at least $10.0 million, Bain IV will receive a fee in an amount
which will approximate 1% of the gross purchase price of the transaction
(including assumed debt).
STRUCTURING FEE. Pursuant to the Bain Management Agreement, on November 14,
1994 the Company paid to Bain IV a structuring fee of $3.5 million plus
reimbursement of out-of-pocket expenses in consideration of Bain IV's
assistance in facilitating certain debt financing for the Recapitalization.
Bain IV is also entitled to receive a fee equal to 1% of the gross purchase
price of the HealthRider Acquisition (including all assumed liabilities). As
of March 31, 1996 such fee would have been approximately $.6 million.
REIMBURSEMENT OF ORIGINAL SHAREHOLDER EXPENSES. In 1995, the Company
reimbursed $2.0 million of expenses incurred by WHF and the other Original
Shareholders in connection with the Recapitalization.
PRIOR RELATIONSHIPS. The Company had a number of relationships with
affiliates which were terminated at or prior to the closing of the
Recapitalization. The Recapitalized Companies paid corporate allocations to
WHF in an aggregate amount of $.4 million in 1994. The Company also made
payments to WHF in lieu of tax payments in amounts equal to the reported
earnings of the Company multiplied by the applicable tax rates for periods
through the Closing. In addition, WHF served as the Company's source of
revolving credit from October 1993 until October 1994, charging interest at
its cost of funds.
LOANS TO EMPLOYEES. In connection with the exercise of options prior to the
Recapitalization, ProForm accepted as partial payment notes in the amount of
$60,000 from each of Mr. Beck and Mr. David Watterson and $57,000 from each of
Mr. White and Mr. Dalebout. Such notes bear interest at prime plus .5% and
remain outstanding. In connection with the purchase of stock in the
Recapitalization, the Company accepted as partial payments, notes bearing
interest at a per annum rate equal to 7.5% in the amount of approximately
$117,000 from each of Mr. Beck and Mr. David Watterson and $77,500 from Mr.
White, $177,000, $177,000 and $134,500 remain outstanding from Messrs. Beck,
David Watterson and White, respectively.
WESTWIND II. In June 1996, the Company entered into an oral agreement with
FG Aviation, Inc. ("FG"), a company which is jointly owned by Messrs.
Watterson and Stevenson, whereby the Company will lease an airplane, a
Westwind II, from FG for a minimum of 400 hours per year at a fair market rate
(between $1,350 and $1,650 per hour, as adjusted by the Company's costs
associated with flight crews). Scheduled maintenance and insurance will be
paid for by FG and non-scheduled maintenance will be paid for by the Company.
Flight crews will be provided by the Company. In connection with this lease,
the Company advanced $.3 million to officers of the Company to be used as a
security deposit on the aircraft lease.
69
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
Certain Selling Stockholders have 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. 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 giving effect to the Conversion
immediately prior to and immediately following 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; (iii) all directors and named executive
officers of the Company as a group; and (iv) each of the Selling Stockholders.
For a description of the Common Stock, see "Description of Capital Stock."
Certain members of Senior Management together with the Bain Funds (as defined)
and certain former and current employees of Donaldson, Lufkin & Jenrette
Securities Corporation, one of the representatives of the Underwriters, have
elected to include certain of their shares of Common Stock in the
Underwriters' over-allotment option. Certain other of the Company's
stockholders and holders of the warrants issued in connection with the
issuance of the Senior Subordinated Notes and the Discount Notes may also
elect to include their shares of Common Stock in the Underwriters' over-
allotment option. Each such holder will be entitled to include its shares in
the proportion that the number of its shares which it has elected to include
in the Offering bears to the total number of shares offered by all Selling
Stockholders.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OFFERED
PERCENTAGE IN THE
NUMBER PRIOR PRIOR TO NUMBER PERCENTAGE OVER-
TO THE THE AFTER THE AFTER THE ALLOTMENT
NAMES OFFERING(1)(2) OFFERING OFFERING(1)(2) OFFERING(2) OPTION(3)
----- -------------- ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS
Scott R. 2,072,989 12.9 2,072,989
Watterson+(4)......
c/o ICON Health &
Fitness, Inc.
1500 South 1000
West
Logan, Utah 84321
Gary E. Stevenson+(5). 1,624,123 10.2 1,624,123
c/o ICON Health &
Fitness, Inc.
1500 South 1000
West
Logan, Utah 84321
S. Fred Beck.......... 192,960 1.3 192,960
c/o ICON Health &
Fitness, Inc.
1500 South 1000
West
Logan, Utah 84321
David S. Watterson.... 194,773 1.3 194,773
c/o ICON Health &
Fitness, Inc.
1500 South 1000
West
Logan, Utah 84321
Jon M. White.......... 138,738 * 138,738
c/o ICON Health &
Fitness, Inc.
1500 South 1000
West
Logan, Utah 84321
Eric Weider+(6)....... 2,333,167 15.0 --
c/o Weider Health
and Fitness
21100 Erwin Street
Woodland Hills,
California 91367
Richard Renaud+(7).... 2,298,694 14.7 --
c/o TNG Corporation
1 Place Ville Marie
Suite 3200
Montreal, Quebec
H3B 3Y2 Canada
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OFFERED
PERCENTAGE IN THE
NUMBER PRIOR PRIOR TO NUMBER PERCENTAGE OVER-
TO THE THE AFTER THE AFTER THE ALLOTMENT
NAMES OFFERING(1)(2) OFFERING OFFERING(1)(2) OFFERING(2) OPTION(3)
----- -------------- ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Robert C. Gay+(8)..... 7,663,482 50.8 7,663,482
c/o Bain Capital,
Inc.
Two Copley Place,
7th Floor
Boston,
Massachusetts 02116
Ronald P. Mika+(8).... 7,663,482 50.8 7,663,482
c/o Bain Capital,
Inc.
Two Copley Place,
7th Floor
Boston,
Massachusetts 02116
Geoffrey S. 7,663,482 50.8 7,663,482
Rehnert+(8)........
c/o Bain Capital,
Inc.
Two Copley Place,
7th Floor
Boston,
Massachusetts 02116
All directors and
executive officers
as a group (10
persons)........... 14,220,231 80.2 14,220,231
OTHER 5% STOCKHOLDERS
The Bain Funds (8).... 7,663,482 50.8 7,663,482
c/o Bain Capital,
Inc.
Two Copley Place,
7th Floor
Boston,
Massachusetts 02116
Weider Health and 2,298,694 14.7 --
Fitness (7)........
21100 Erwin Street
Woodland Hills,
California 91367
Greyfriars Ltd. ...... 1,958,091 13.0 --
167 Regent Street
London W1, England
OTHER SELLING
STOCKHOLDERS
Charles W. Robins and
Carolyn G. Robins.. 6,399 * 6,399
Patrick J. Fallon (9). 10,664 * 10,664
Daniel K. Flatley (9). 6,399 * 6,399
Douglas M. Hayes (9).. 5,332 * 5,332
Allen Matteson Davis
(9)................ 2,133 * 2,133
Robert E. Diemar, Jr.
(9)................ 2,133 * 2,133
Douglas I. Ostrover
(9)................ 5,332 * 5,332
Daniel and Gladys
Elkaim (9)......... 5,332 * 5,332
Citibank N.A. ........ 36,688 * 36,688
Oppenheimer Strategic
Income Fund........ 46,890 * 46,890
Oppenheimer Strategic
Bond Fund.......... 843 * 843
Oppenheimer High
Income Fund........ 5,134 * 5,134
Oppenheimer Multiple
Strategies Fund.... 4,213 * 4,213
Federated Bond Fund... 1,685 * 1,685
Federated High Yield
Portfolio.......... 1,053 * 1,053
Federated High Yield
Trust.............. 21,065 * 21,065
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OFFERED
PERCENTAGE IN THE
NUMBER PRIOR PRIOR TO NUMBER PERCENTAGE OVER-
TO THE THE AFTER THE AFTER THE ALLOTMENT
NAMES OFFERING(1)(2) OFFERING OFFERING(1)(2) OFFERING(2) OPTION(3)
----- -------------- ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Variable Investor
Series Trust--High
Income Bond Fund... 421 * 421
The Highlander Fund... 632 * 632
Federated High Income
Bond Fund, Inc. ... 15,799 * 15,799
Federated Strategic
Income Fund........ 421 * 421
Fidelity Adviser
Strategic
Opportunities Fund. 1,138 * 1,138
Variable Insurance
Products Fund:
High Income
Portfolio.......... 24,815 * 24,815
Fidelity Puritan Fund. 162,663 1.1 162,663
Fidelity Advisor High
Yield Fund......... 6,151 * 6,151
Fidelity Global Yield
Trust.............. 8,805 * 8,805
Fidelity Management
Trust Company...... 186,290 1.2 186,290
</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. For purposes of determining
exercisability of options and warrants, the table assumes the occurrence
of the Offering. 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. 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 exercised and does
not reflect the fact that additional shareholders may elect to participate
in the Underwriters' over-allotment option.
(4) Includes 1,055,701 shares of Common Stock held by Watermark Investments
L.C.
(5) Includes 821,101 shares of Common Stock held by Finmar Investments L.C.
(6) Includes 1,803,106 shares of Common Stock held directly by WHF and 495,589
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.
(7) Includes 1,803,106 shares of Common Stock held directly by WHF and 495,589
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.
(8) 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.
(9) Current or former employees of Donaldson, Lufkin & Jenrette Securities
Corporation, a representative of the Underwriters and an initial purchaser
of the Senior Subordinated Notes, Discount Notes and warrants to purchase
Common Stock issued in connection therewith.
72
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $0.01 par value per
share and 10,000,000 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, after giving effect to the Conversion,
the Proposed WHF Settlement and the exercise of all the outstanding warrants
to purchase Common Stock, there were 12,965,314 shares of Common Stock
outstanding held of record by 116 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
73
<PAGE>
Stock will be entitled to receive pro rata all of the remaining assets of the
Company available for 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.
74
<PAGE>
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 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
.
STOCKHOLDERS AGREEMENT
The summary herein of certain provisions of the Stockholders Agreement, is
complete in all material respects although it is subject to, and 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 and all holders of
warrants to purchase the Company's Common Stock (the "Participants") have
entered into the Stockholders Agreement.
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 groups of the Original Shareholders that
are Participants have the right to demand two registrations of the Company's
Common Stock, the first at any time after four 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. In addition, after November 14, 2001, Scott
Watterson and Gary Stevenson will each have the right to demand
75
<PAGE>
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; (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
395 days 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
After completion of the Offering, the Stockholders Agreement will require
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 five as
determined by the Bain Funds and to elect as its directors two individuals
nominated by certain members of management and the individuals nominated by
the Bain Funds to fill the remaining number of director positions. Prior to
completion of this Offering, the Stockholders Agreement requires Participants
to vote their shares to fix the number of directors of the Company at a number
equal to or greater than seven as determined by the Bain Funds and, in
addition to the directors described above, to elect as directors two
individuals nominated by WHF and its affiliates. 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.
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.
76
<PAGE>
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 WHF Settlement and the
proposed amendments to the Employment Agreements, certain changes may be made
to the Stockholders Agreement.
DESCRIPTION OF CERTAIN INDEBTEDNESS
At May 31, 1996, Health & Fitness had $80.0 million of revolving credit
borrowings under the Credit Agreement. Advances under the revolving credit
facility provided under the Credit Agreement are subject to the amount of
Eligible Accounts and Eligible Inventory (each as defined in the Credit
Agreement) of Health & Fitness and may not at any time exceed the lesser of
(i) $160 million or (ii) 85% of Eligible Accounts plus 60% of Eligible
Inventory (with a seasonal increase to 70% of Eligible Inventory in effect
during the months of June through November of each year) plus, the Over
Advance Amount. 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 May 31, 1996, Health & Fitness had
$48.8 million of additional indebtedness available to be drawn on a revolving
credit basis under the Credit Agreement. Health & Fitness also has two term
loan facilities under the Credit Agreement. The Term Loan A Facility provides
for borrowings of $17,500,000 advanced at closing of the Recapitalization,
with a final maturity date of November 14, 1999. The amortization schedule for
the Term Loan A Facility calls for quarterly payments of $625,000 commencing
March 31, 1996, $937,500 commencing March 31, 1997, $1,250,000 commencing
March 31, 1998 and $1,562,500 commencing March 31, 1999. The Term Loan B
Facility provides for borrowings of $17,500,000 advanced at closing of the
Recapitalization, with a final maturity date of November 14, 2001. The
amortization schedule for the Term Loan B Facility calls for quarterly
installments of $62,500 commencing March 31, 1996 and $1,562,500 commencing
March 31, 2000 with the balance of $5,562,500 due at maturity. The Credit
Agreement contains a number of covenants. At May 31, 1996, the Company was in
compliance with all its financial covenants except for the capital expenditure
limitation for the year ended May 31, 1996 with respect to which its lender
waived compliance. Management believes that the Company will be in compliance
with its financial covenants through 1997 and, therefore, borrowings under the
Credit Agreement have been classified as long-term, exclusive of amounts due
within one year under the Term Loan A Facility and Term Loan B Facility. The
Company expects to amend the Credit Agreement to permit the application of a
portion of the proceeds of the Offering as described herein prior to the
repayment of debt under the Credit Agreement, and expects to further amend the
Credit Agreement to permit total borrowings of up to $310 million in order to
meet the Company's long term needs. There can be no assurance that the Company
will be able to increase its available credit under the Credit Agreement.
After this Offering and the redemption of $35 million (face value) of Senior
Subordinated Notes and the Discount Notes, Health & Fitness will have
outstanding $66.25 million (face value) of Senior Subordinated Notes which are
unsecured senior subordinated obligations of Health & Fitness. They
77
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE
In addition to the shares of Common Stock offered hereby, there will be
12,965,314 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, substantially all the 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 1,731,119 shares of Common
Stock will be outstanding under the Company's 1994 Stock Option Plan (with an
average per share exercise price of $4.33) and options to purchase 792,728
shares of the Company's Common Stock will also be outstanding (with a per
share exercise price of $.42903). In addition, as of the closing of the
Offering, 1,002,977 shares of Common Stock will be authorized for future
grants under the 1996 Stock Option Plan.
78
<PAGE>
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."
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 the year ended May 31, 1994
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the Registration Statement, and are included in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
In May 1995 the Board replaced Deloitte & Touche LLP as the independent
auditors for the Company. Deloitte & Touche LLP's reports on the Company's
financial statements for the past two years prior to the change in auditors
did not contain any adverse opinion or disclaimer of opinion and have not been
qualified in any way. During the Company's two most recent fiscal years and
the subsequent interim periods prior to the change in auditors, there have
been no disagreements with Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure and no event has occurred that is required to be disclosed by Item
304(a)(1)(iv) of Regulation S-K. During the Company's two most recent fiscal
years and the subsequent interim periods prior to the change in auditors, the
Company consulted with Price Waterhouse LLP regarding the accounting treatment
of the Recapitalization. Deloitte & Touche LLP agreed with the Company's
accounting treatment of the Recapitalization.
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows of the Company and its subsidiaries for each of the two years
in the period ended May 31, 1996 and the consolidated balance sheet of the
Company and its subsidiaries as of May 31, 1995 and 1996 included in this
Prospectus and the financial statement schedule included in the Registration
Statement have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, appearing elsewhere herein, given on the
authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of HealthRider and subsidiaries as of
December 31, 1994 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto which
includes an explanatory paragraph with respect to the Company's ability to
continue as a going concern, and are included in this Prospectus in reliance
upon the authority of said firm as experts in accounting and auditing.
79
<PAGE>
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 Commission maintains a World Wide Web site (http://www.sec.gov.)
that contains reports, proxy and information statements and other information
regarding registrants that submit electronic filings to the Commission.
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and a report thereon by the
Company's independent accountants and quarterly reports containing unaudited
consolidated financial data for the first three quarters of each fiscal year.
Health & Fitness and IHF Holdings have been reporting companies under the
Securities Exchange Act of 1934.
80
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
IHF CAPITAL, INC.
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 Statements of Stockholders' Equity (Deficit) ............... F-6
Consolidated Statements of Cash Flows ................................... F-7
Notes to Consolidated Financial Statements .............................. F-8
HEALTHRIDER, INC. AND SUBSIDIARIES
Report of Arthur Andersen LLP.............................................. F-24
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................. F-25
Consolidated Statements of Income........................................ F-26
Consolidated Statements of Stockholders' Equity.......................... F-27
Consolidated Statements of Cash Flows.................................... F-28
Notes to Consolidated Financial Statements............................... F-29
</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 balance sheet, and related
consolidated statements of operations, of stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of 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, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
August 13, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
IHF Capital, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and of cash flows of 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 for the year ended May 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated results of operations and cash flows
of IHF Capital, Inc. and its subsidiaries for the year ended May 31, 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
July 15, 1994
(December 23, 1994 as to Note 1)
F-3
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY
-------------------
MAY 31,
1995 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 4,099 $ 19,313
Accounts receivable, net................................. 114,325 126,869
Inventories.............................................. 95,635 95,922
Deferred income taxes.................................... 7,588 5,240
Other assets............................................. 5,600 4,770
Prepaid income taxes..................................... -- 882
--------- --------
Total current assets................................... 227,247 252,996
Property and equipment, net............................... 23,144 32,312
Deferred income taxes..................................... 3,121 5,489
Other assets.............................................. 36,673 25,930
--------- --------
$ 290,185 $316,727
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt........................ $ 688 $ 3,065
Accounts payable......................................... 73,968 73,652
Interest payable......................................... 5,035 5,815
Accrued expenses......................................... 9,739 11,424
Income taxes payable..................................... 130 --
--------- --------
Total current liabilities.............................. 89,560 93,956
--------- --------
Long-term debt............................................ 267,427 279,693
Minority interest in cumulative redeemable preferred stock
of subsidiary............................................ 42,804 47,904
Stockholders' equity (deficit):
Class L common stock, par value, $.001, 1,200,000 shares
authorized, 617,350 shares issued and outstanding
(liquidation preference $64.5 million and $71.2 million
at May 31, 1995 and May 31, 1996, respectively)......... 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 7,761,804 issued and outstanding at
May 31, 1996............................................ 8 8
Additional paid-in capital............................... 74,948 77,721
Receivable from officers for purchase of equity.......... (758) (758)
Cumulative translation adjustment........................ -- 386
Accumulated deficit...................................... (183,805) (182,184)
--------- --------
Total stockholders' equity (deficit)................... (109,606) (104,826)
--------- --------
Commitments and contingencies (Notes 12, 13 and 14)....... -- --
--------- --------
$ 290,185 $316,727
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES
(NOTE 1) COMPANY
------------- -------------------
YEAR ENDED
MAY 31, YEAR ENDED MAY 31,
------------- -------------------
1994 1995 1996
------------- --------- --------
<S> <C> <C> <C>
Net sales.................................... $403,016 $ 530,774 $747,577
Cost of sales................................ 288,208 378,322 541,443
-------- --------- --------
Gross profit................................. 114,808 152,452 206,134
-------- --------- --------
Operating expenses:
Selling..................................... 52,116 68,706 93,924
Research and development.................... 2,863 5,163 6,759
General and administrative.................. 28,578 31,097 48,055
Compensation expense attributable to
options.................................... -- 39,046 2,769
-------- --------- --------
Total operating expenses................. 83,557 144,012 151,507
-------- --------- --------
Income from operations....................... 31,251 8,440 54,627
Interest expense............................. 6,224 21,495 36,527
Dividends on cumulative redeemable preferred
stock of a subsidiary held by minority
interest.................................... -- 2,804 5,100
Amortization of deferred financing fees...... -- 1,741 3,483
-------- --------- --------
Income (loss) before income taxes............ 25,027 (17,600) 9,517
Provision for (benefit from) income taxes.... 9,766 (4,719) 7,896
-------- --------- --------
Net income (loss)............................ $ 15,261 $ (12,881) $ 1,621
======== ========= ========
Pro forma income per common and common
equivalent share (unaudited)................ $
========
Weighted average shares used in computation
of pro forma income 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.
(TO BE RENAMED ICON FITNESS CORPORATION)
CONSOLIDATED STATEMENTS 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, 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) -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ---- --------- ---- -------- ---- -------- ----- ----
Balance, May 31,
1995............ -- -- 617,350 1 7,717,265 8 -- -- $ 74,948 (758) --
Issuance of
Class A common
stock on option
exercises....... -- -- -- -- 44,539 -- -- -- 4 -- --
Compensation re-
lated to issu-
ance of options
to management... -- -- -- -- -- -- -- -- 2,769 -- --
Foreign currency
translation .... -- -- -- -- -- -- -- -- -- -- 386
Net income ..... -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ---- --------- ---- -------- ---- -------- ----- ----
Balance, May 31,
1996............ -- $ -- 617,350 $ 1 7,761,804 $ 8 -- $-- $ 77,721 $(758) $386
======= ======= ======= ==== ========= ==== ======== ==== ======== ===== ====
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------ -------------
<S> <C> <C>
RECAPITALIZED
COMPANIES
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....... -- (1,808)
Net loss........ (12,881) (12,881)
------------ -------------
Balance, May 31,
1995............ (183,805) (109,606)
Issuance of
Class A common
stock on option
exercises....... -- 4
Compensation re-
lated to issu-
ance of options
to management... -- 2,769
Foreign currency
translation .... -- 386
Net income ..... 1,621 1,621
------------ -------------
Balance, May 31,
1996............ $(182,184) $(104,826)
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES
(NOTE 1) COMPANY
------------- -----------------------
YEAR ENDED YEAR ENDED
MAY 31, MAY 31,
------------- ------------------
1994 1995 1996
------------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................ $15,261 $(12,881) $ 1,621
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Benefit from deferred taxes............. (1,153) (9,493) (20)
Depreciation and amortization........... 4,010 5,561 7,205
Amortization of deferred financing fees
and debt discount...................... -- 6,018 12,458
Compensation expense attributable to op-
tions.................................. -- 12,303 2,769
Interest expense attributable to
dividends on preferred stock held by
minority interest...................... -- 2,804 5,100
Changes in operating assets and liabili-
ties:
Accounts receivable..................... (32,559) (14,106) (12,544)
Inventories............................. 726 (41,429) (287)
Other assets............................ 1,217 (5,837) 7,073
Accounts payable and accrued expenses... 25,844 30,350 2,149
Income taxes............................ -- 130 (1,012)
Payable to Weider....................... 919 (4,697) --
------- -------- --------
Net cash provided by (used in) operating
activities............................. 14,265 (31,277) 24,512
------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment...... (6,924) (7,977) (15,356)
Payment for non-compete agreements....... -- (4,070) --
------- -------- --------
Net cash used in investing activities... (6,924) (12,047) (15,356)
------- -------- --------
FINANCING ACTIVITIES:
Borrowings (payments) on revolving loans
and lines of credit, net................ (68,925) 66,400 6,355
Proceeds from long-term debt............. 105,197 194,999 --
Payments on long-term debt............... (43,222) (58,197) (687)
Proceeds from issuance of common stock... -- 40,422 4
Repurchase of common stock............... -- (1,808) --
Payments of dividends.................... (531) (243) --
Distributions to stockholders............ -- (166,737) --
Payment of debt financing fees........... -- (27,508) --
------- -------- --------
Net cash provided by (used in) financing
activities............................. (7,481) 47,328 5,672
------- -------- --------
Effect of exchange rate changes on cash.. -- -- 386
------- -------- --------
Net (decrease) increase in cash.......... (140) 4,004 15,214
Cash, beginning of period................ 235 95 4,099
------- -------- --------
Cash, end of period...................... $ 95 $ 4,099 $ 19,313
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
BASIS OF PRESENTATION--The consolidated May 31, 1996 and 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' 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
8). Other than the Senior Discount Notes (Note 7) and related deferred
financing fees and deferred income tax benefit and the redeemable preferred
stock (Note 8) issued by IHF Holdings, all assets and liabilities of the
Company are those of Health & Fitness.
The consolidated May 31, 1994 financial statements of Weslo, Inc. and its
wholly-owned subsidiaries, ProForm Fitness Products, Inc. and its wholly-owned
subsidiaries, and American Physical Therapy, Inc., (collectively, the
"Recapitalized Companies") all of which were majority-owned subsidiaries of
Weider Health and Fitness, Inc. ("WHF"), reflect the results of operations as
if they had been combined since inception on a basis similar to a pooling of
interests.
DESCRIPTION OF BUSINESS--The Company is principally involved in the
development, manufacturing and distribution of home fitness equipment
throughout the United States. For the years ended May 31, 1995 and 1996, the
majority of the Company's revenues were derived from the sale of aerobic
fitness equipment. The Company primarily sells its products to retailers and,
to a limited extent, to end-users through direct response advertising efforts.
THE RECAPITALIZATION--On November 14, 1994 the recapitalization (the
"Recapitalization") took place as follows: (1) the existing shareholders of
the Recapitalized Companies contributed their capital stock of the
Recapitalized Companies to IHF Capital and IHF Holdings in exchange for $21.9
million of Class A and Class L Common Stock of IHF Capital, $36.0 million of
IHF Holdings Preferred Stock, warrants to purchase Class A Common Stock of IHF
Capital, and $159.3 million of demand promissory notes of Health & Fitness
(the "Shareholder Notes"); (2) certain senior executives of the Company
exchanged their options to purchase capital stock of the Recapitalized
Companies for $34.7 million of replacement options and warrants to purchase
Class A and Class L Common Stock of IHF Capital and $4.0 million of options to
purchase preferred stock of IHF Holdings; (3) affiliates of Bain Capital, Inc.
("Bain Capital") and certain other parties purchased $40.4 million of Class A
and Class L Common Stock of IHF Capital, (4) the 13% Senior Subordinated Notes
and 15% Senior Secured Discount Notes were issued (Note 7), the proceeds of
which were used to repay the Shareholder Notes; and (5) Health & Fitness
caused the Recapitalized Companies to be merged with and into itself. As a
result of the Recapitalization, IHF Holdings owns all of the outstanding
capital stock of Health & Fitness, and IHF Capital owns all of the outstanding
common stock of IHF Holdings.
Concurrent with the closing of the Recapitalization, the Company obtained
exclusive licenses to market certain fitness equipment and certain non-
ingestive sports medicine products under the "Weider" and related brand names
(Note 13).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All significant intercompany accounts and
transactions have been eliminated in the consolidation of the Company.
CASH--Substantially all of the Company's cash is held by two banks at May
31, 1996. The Company does not believe that as a result of this concentration
it is subject to any unusual credit risk beyond the normal risk associated
with commercial banking relationships.
F-8
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES--Inventories include freight-in, materials, labor, and
manufacturing overhead costs and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the respective assets. Expenditures for renewals and improvements are
capitalized, and maintenance and repairs are charged to operations.
NON-COMPETE AGREEMENTS--Included in long-term other assets are capitalized
costs associated with non-compete agreements the Company entered into with
certain key executives of the Company for a four year term. These assets are
being amortized using the straight-line method over the life of the agreements
(Note 6).
DEFERRED FINANCING COSTS--As part of the Recapitalization, the Company
deferred certain debt issuance costs relating to the establishment of the
Credit Agreement (Note 7) and the issuance of the 13% Senior Subordinated
Notes and the 15% Senior Secured Discount Notes (collectively referred to as
the "Notes"). These costs are capitalized in long-term other assets and are
being amortized using the straight-line method for costs associated with the
Credit Agreement and the effective interest method for costs associated with
the Notes (Note 6).
ADVERTISING COSTS--The Company expenses the costs of advertising as
incurred, except for direct response advertising, which is capitalized and
amortized over its expected period of future benefit, generally twelve months.
Direct response advertising costs consist primarily of costs to produce
infomercials for the Company's products. At May 31, 1995 and 1996, $1,651,000
and $1,422,000, respectively, were included in other current assets. For the
years ended May 31, 1994, 1995 and 1996, total advertising expense was
approximately $14,646,000, $23,846,000 and $22,537,000, respectively.
REVENUE RECOGNITION--The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs, and warranty costs associated with these
sales.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially expose
the Company to concentration of credit risk include trade accounts receivable.
To minimize this risk, ongoing credit evaluations of customers' financial
condition are performed and reserves are maintained; however, collateral is
not required. A significant portion of the Company's sales in the retail
sector are made to two customers, Sears Roebuck ("Sears") and Sam's Wholesale
Clubs ("Sam's"). Sears accounted for approximately 34%, 31% and 34% of total
sales for the years ended May 31, 1994, 1995, and 1996, respectively. Sam's
accounted for approximately 12% of total sales for the years ended May 31,
1994 and 1995. Accounts receivable from these two customers accounted for
approximately 27% of total gross accounts receivable at May 31, 1995. Accounts
receivable from Sears accounted for 32% of total gross accounts receivable at
May 31, 1996, and accounts receivable from a third customer, Service
Merchandise Company, Inc., accounted for 11% of gross accounts receivable at
May 31, 1996.
RESEARCH AND DEVELOPMENT COSTS--Research and product development costs are
expensed as incurred. Research and development activities include the design
of new products and product enhancements and are performed by both internal
and external sources.
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.
F-9
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to the Recapitalization, the Recapitalized Companies were included as
part of the consolidated tax return filed by WHF. Taxes otherwise due to or
refundable from the taxing authorities calculated on a separate company basis
have been reflected as due to or from WHF. Subsequent to the Recapitalization,
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 significant exchange rate risk because gains and losses on
these contracts partially offset losses and gains on the assets and
transactions being hedged. Unrealized gains and losses on these contracts are
deferred and accounted for as part of the hedged transactions. Cash flows from
these contracts are classified in the Statement of Cash Flows in the same
category as the hedged transactions. As of May 31, 1995 and 1996 the Company
had approximately $19 million Canadian and $25 million Canadian, respectively,
of open forward exchange contracts to sell Canadian dollars throughout fiscal
years May 31, 1996 and 1997, respectively. The fair value of these forward
exchange contracts are based on quoted market prices. At May 31, 1995 and 1996
the estimated unrealized gain on outstanding forward exchange contracts was
$210,000 and $163,000, respectively. For the years ended May 31, 1994, 1995
and 1996, the Company recognized gains of $0, $160,000 and $169,000,
respectively, upon the settlement of foreign currency transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial instruments
including cash, accounts receivable, accounts payable, accrued liabilities and
long-term debt approximate book values at May 31, 1995 and 1996, except for
the long-term debt included in the following table. The carrying amount for
the Senior Subordinated Notes and the Senior Secured Discount Notes was
established based on market conditions at the time the debt was issued. The
estimated fair value for the long-term notes is based on quoted market prices
(in thousands).
<TABLE>
<CAPTION>
MAY 31, 1995 MAY 31, 1996
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
13% Senior Subordinated Notes........ $99,123 $112,388 $99,298 $112,894
15% Senior Secured Discount Notes.... 60,347 70,014 69,147 85,353
</TABLE>
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses for the periods presented. Actual results could differ
from those estimates.
UNAUDITED PRO FORMA INCOME PER SHARE--The calculation of pro forma income
per share was determined by dividing pro forma income 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
F-10
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
has not yet decided how it will adopt SFAS 123 during 1997.
RECLASSIFICATIONS--Reclassifications have been made to the 1994 and 1995
financial statements to conform to the 1996 presentation. These
reclassifications had no effect on net income for 1994 or 1995.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------ ---
1995 1996
-------- --------
<S> <C> <C>
Accounts receivable.................................. $119,633 $134,464
Less allowances...................................... (5,308) (7,595)
-------- --------
$114,325 $126,869
======== ========
4. INVENTORIES
Inventories consist of the following (table in thousands):
<CAPTION>
MAY 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Raw materials, principally parts and supplies........ $ 36,472 $ 26,264
Finished goods....................................... 59,163 69,658
-------- --------
$ 95,635 $ 95,922
======== ========
</TABLE>
Inventories are net of allowances of $787,000 and $2,122,000 at May 31, 1995
and 1996, respectively. These allowances are established based on management's
estimates of inventory, held at year end, that is potentially obsolete or for
which its market value is below cost.
5. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (table in thousands):
<TABLE>
<CAPTION>
ESTIMATED MAY 31,
USEFUL LIFE ------------------
(YEARS) 1995 1996
----------- -------- --------
<S> <C> <C> <C>
Land......................................... -- $ 1,230 $ 1,230
Building and improvements.................... up to 31 9,683 11,235
Equipment.................................... 3-7 25,784 37,191
Construction in progress..................... -- -- 2,397
-------- --------
36,697 52,053
Less accumulated depreciation................ (13,553) (19,741)
-------- --------
$ 23,144 $ 32,312
======== ========
</TABLE>
F-11
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the years ended May 31, 1994, 1995 and 1996, the Company recorded
depreciation expense of $4,010,000, $5,052,000, and $6,188,000, respectively.
6. OTHER ASSETS
Other assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Non-compete agreements...................................... $ 3,561 $ 2,544
Deferred financing costs.................................... 25,767 22,284
Other....................................................... 7,345 1,102
------- -------
$36,673 $25,930
======= =======
</TABLE>
At May 31, 1995 and 1996, capitalized non-compete payments made to the
Company's key executives are net of accumulated amortization of $509,000 and
$1,526,000, respectively.
At May 31, 1995 and 1996 capitalized deferred financing costs are net of
accumulated amortization of $1,741,000 and $5,224,000, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Revolving Credit Facility................................. $ 73,645 $ 80,000
Term Loan A Facility...................................... 17,500 16,875
Term Loan B Facility...................................... 17,500 17,438
13% Senior Subordinated Notes, face amount $101,250 net of
unamortized discount of $2,127 at May 31, 1995 and $1,952
at May 31, 1996.......................................... 99,123 99,298
15% Senior Secured Discount Notes, face amount $123,700
net of unamortized discount of $63,353 at May 31, 1995
and $54,553 at May 31, 1996 ............................. 60,347 69,147
-------- --------
268,115 282,758
Less current portion...................................... 688 3,065
-------- --------
Total long-term debt.................................. $267,427 $279,693
======== ========
</TABLE>
CREDIT AGREEMENT
In connection with the Recapitalization (Note 1), the Company, through its
subsidiary Health & Fitness, entered into a Credit Agreement with a syndicate
of banks. Borrowings under the Credit Agreement, consist of the Revolving
Credit Facility, the Term Loan A Facility, and the Term Loan B Facility, and
are secured by a perfected first priority security interest in the assets of
the Company's subsidiaries. Under the terms of the Credit Agreement, Health &
Fitness must comply with certain restrictive covenants, which include the
requirement that Health & Fitness maintain minimum amounts of profitability,
solvency, and liquidity. In addition, the Credit Agreement restricts Health &
Fitness from making certain payments, including dividend payments, to its
shareholders. At May 31, 1996, the Company was in compliance with all its
financial covenants except for the capital expenditure limitation for the year
ended May 31, 1996 with respect to which its lender waived compliance.
Management
F-12
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
believes that the Company will be in compliance with its financial covenants
through 1997 and, therefore, borrowings under the Credit Agreement have been
classified as long-term, exclusive of amounts due within one year under the
Term Loan A Facility and Term Loan B Facility.
Revolving Credit Facility
The agreement provides for borrowings of up to $160.0 million based upon a
percentage of eligible accounts receivable and inventories and expires on
November 14, 1999. Advances under the Revolving Credit Facility bear interest,
at Health & Fitness's option, at either (1) 2.75% plus the rate at which
certain Eurodollar deposits are offered in the interbank Eurodollar market
(the "LIBOR Rate") or (2) 1.75% plus the higher of (a) the highest of the most
recently published or announced prime corporate base, reference or similar
benchmark rate announced by Bankers Trust Company or (b) the published rate
for ninety-day dealer placed commercial paper (the "Index Rate") (8.25% as of
May 31, 1996 under the LIBOR rate option). The Company is required to pay a
fee of 0.5% per annum on the average unused commitment under the Credit
Agreement. For the years ended May 31, 1995 and 1996, the Company paid an
unused commitment fee of $42,000 and $196,000, respectively. As of May 31,
1996, $48.8 million was available to be borrowed under the Revolving Credit
Facility.
Term Loan A Facility
Under the Term Loan A Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $625,000 became due beginning March 31, 1996.
Quarterly payments increase to $937,500 beginning March 31, 1997, to
$1,250,000 beginning March 31, 1998, and to $1,562,500 beginning March 31,
1999, with the balance of $1,562,500 due at maturity on November 14, 1999.
Advances under the Term Loan A Facility bear interest, at the Company's
option, at a rate equal to either (1) 3.00% per annum plus the LIBOR Rate or
(2) 2.25% per annum plus the Index Rate (8.5% as of May 31, 1996 under the
LIBOR rate option).
Term Loan B Facility
Under the Term Loan B Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $62,500 became due beginning March 31, 1996.
Quarterly payments increase to $1,562,500 beginning March 31, 2000 through
September 30, 2001, and the balance of $5,562,500 is due at maturity on
November 14, 2001. Advances under the Term Loan B Facility bear interest, at
the Company's option, at a rate equal to either (1) 3.50% per annum plus the
LIBOR Rate or (2) 2.75% per annum plus the Index Rate (9.0% as of May 31, 1996
under the LIBOR rate option).
A portion of the proceeds from the Credit Agreement were used to repay the
long-term debt outstanding prior to the Recapitalization.
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 Subordinated Notes are unsecured and
bear interest at 13%, payable January 15 and July 15 through the maturity date
of July 15, 2002. The warrants have an exercise price of $0.01 per share and
expire on November 14, 1999. In conjunction with the sale, $968,000 of the
issuance price was ascribed to the warrants and is included in the total
discount on the notes. This discount is being amortized using the effective
interest method.
Upon certain asset sales, the Company may be obligated to purchase the
Senior Subordinated Notes with the net cash proceeds of the asset sales at a
redemption price of 100% of principal plus accrued and unpaid interest. Prior
to November 15, 1997, up to $35 million of principal of the Senior
F-13
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, as defined in the note agreement. The Company is required to use at
least 50% of the net proceeds of any such public offering for such redemption.
On or after November 15, 1999, the Discount Notes may be redeemed at the
Company's option, in whole or in part, at redemption prices ranging from
107.5% of principal amount in the year ended November 14, 2000, to 100% of
principal amount subsequent to November 14, 2001, plus accrued and unpaid
interest.
CHANGE IN CONTROL
Upon a change in control, as defined in the indentures with respect to the
Notes, each holder of the Senior Subordinated Notes and Discount Notes may
require the Company to repurchase all or a portion of such holder's notes at a
cash purchase price equal to 101% of the principal amount, plus accrued and
unpaid interest, if any, to the date of repurchase. The Credit Agreement
provides that the occurrence of a change of control, as defined therein,
constitutes an event of default under the Credit Agreement, which could
require immediate payment of the Revolving Credit Facility, Term Loan A
Facility and Term Loan B Facility.
FUTURE PAYMENTS
As of May 31, 1996, the scheduled future principal payments of long-term
debt (excluding the Credit Agreement) are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDED MAY 31
1997.............................................................. $ 3,065
1998.............................................................. 4,312
1999.............................................................. 5,562
2000.............................................................. 6,438
2001.............................................................. 6,250
Thereafter........................................................ 233,636
</TABLE>
F-14
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. 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 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 years ended May 31, 1995 and 1996 has accrued
dividends of $2.8 million and $5.1 million, respectively on the issued and
outstanding preferred shares and outstanding options. Dividends accrued to the
minority shareholders of IHF Holdings are charged to the Company's current
operations.
F-15
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCKHOLDERS' EQUITY
Preferred Stock
For the year ended May 31, 1994 and through November 14, 1994, the
Recapitalized Companies had issued and outstanding preferred stock held by WHF
on which dividends cumulated quarterly at $2.50 per share. Dividends of
$531,000 were accrued and payable to WHF at May 31, 1994. For the period from
June 1, 1994 to November 14, 1994, $243,000 of dividends had accrued and were
paid in conjunction with the Recapitalization (Note 1). In conjunction with
the Recapitalization, the preferred stock was exchanged for stock of IHF
Holdings and IHF Capital.
Common Stock and Additional Paid-In Capital
In conjunction with the Recapitalization (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.
As of May 31, 1996, the Company has reserved 186,435 shares of Class L
Common and 2,831,581 shares of Class A Common for issuance upon exercise of
outstanding warrants and options.
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 2.5% per quarter,
plus any other distributions declared by the Board of Directors (in total, the
"Class L Minimum Payment Amount") divided by the net public offering price per
share of the Class A Common, plus one, subject to certain adjustments. 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.
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
F-16
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in exchange for receivables from officers. As part of the Recapitalization
(Note 1), all remaining options to purchase shares in the Recapitalized
Companies were exchanged for options to purchase shares of Series A Preferred
(Note 8), and options and warrants to purchase 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,
1996. 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, 1996.
(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, 1996. 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), all of which are
outstanding at May 31, 1996.
Compensation charges, including related payroll taxes, totaling $39.0
million were recorded in the year ended May 31, 1995, relating to the exchange
of options and warrants (including $4.0 million related to the issuance of the
Series A-2 Preferred options (Note 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
originally provided 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. In 1996, the plan was amended, subject to certain waivers of notice and
shareholder approval, to provide for the granting of up to 2,110,207 shares of
Class A Common.
Activity under the 1994 Plan is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF
OPTIONED EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Granted............................................ 1,146,331 $0.10-8.92
Exercised.......................................... (634,117) $0.10
---------
Outstanding at May 31, 1995........................ 512,214 $0.10-8.92
Granted............................................ 963,876 $5.80-8.92
Cancelled.......................................... (7,617) $.10-$5.80
Exercised.......................................... (44,539) $0.10
---------
Outstanding at May 31, 1996........................ 1,423,934 $.10-$8.92
</TABLE>
F-17
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Of the total options outstanding under the 1994 Plan, 1,210,859 are
exercisable at May 31, 1996. All options under the 1994 Plan become
exercisable upon an initial public offering, subject to the approval of the
Board of Directors. At May 31, 1996, there were no options available for
future grant under the 1994 Plan.
In September 1995 and March 1996, the exercise price of all performance
options granted in 1995 under the 1994 Plan with an original exercise price
per share of $30.87 were reset to exercise prices per share ranging from $5.80
to $8.92 which represented the fair value on the date of the reset with no
change in the number of option share grants or vesting periods. The original
exercise price of $30.87 per share for these performance options was
established by the Board of Directors at the time of the Recapitalization to
provide incentives to key members of management.
During the year ended May 31, 1996, the Company recorded compensation
expense of $2,769,000 equivalent to the difference between the fair market
value of the underlying securities and the exercise price of related options
granted. Such option grants were fully vested upon grant.
Stock Restrictions
The Company's stockholders and optionholders entered into an agreement which
restricted the transfer or sale of shares by all investors until May 31, 1996
unless certain conditions were 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.
10. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- ---------------
YEAR ENDED MAY
31,
YEAR ENDED ---------------
MAY 31,1994 1995 1996
------------- ------- ------
<S> <C> <C> <C>
Current:
Federal income taxes........................ $ 9,193 $ 4,277 $6,946
State income taxes.......................... 1,726 497 595
Foreign income taxes........................ -- -- 375
------- ------- ------
Total current............................. 10,919 4,774 7,916
------- ------- ------
Deferred:
Federal income taxes........................ (1,005) (8,466) (18)
State income taxes.......................... (148) (1,027) (2)
------- ------- ------
Total deferred............................ (1,153) (9,493) (20)
------- ------- ------
$ 9,766 $(4,719) $7,896
======= ======= ======
</TABLE>
F-18
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for (benefit from) income taxes differs from the amount
computed by applying the statutory federal income tax rate to income (loss)
before taxes as follows:
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- ---------------------
YEAR ENDED MAY 31,
YEAR ENDED ---------------------
MAY 31,1994 1995 1996
------------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate....... 35% (35)% 35%
State tax provision (benefit)........... 5 (3) 6
Dividends on preferred stock............ -- 5 19
Other non-deductible items.............. -- 6 8
Foreign losses for which no benefit has
been recognized........................ -- -- 15
Other................................... (1) -- --
--- --------- --------
Provision for (benefit from) income tax-
es..................................... 39% (27)% 83%
=== ========= ========
</TABLE>
As of May 31, 1995 and 1996, the Company recorded gross deferred tax assets
and deferred tax liabilities as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Gross deferred tax assets.................................. $13,579 $15,506
Gross deferred tax liabilities............................. (2,870) (3,972)
------- -------
10,709 11,534
Valuation allowance........................................ ( -- ) (805)
------- -------
$10,709 $10,729
======= =======
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets
related to foreign net operating loss carryforwards since realization of these
future benefits is not sufficiently assured.
Net deferred tax assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Domestic net operating loss carryforward................... $ 3,767 $ --
Foreign net operating loss carryforward.................... -- 805
Stock compensation expense................................. 4,642 5,694
Future deductible interest................................. 1,211 3,766
Depreciation............................................... (1,786) (2,730)
Reserves and allowances.................................... 2,942 3,770
Contribution of land....................................... (500) (500)
Uniform capitalization of inventory........................ 879 937
Other, net................................................. (446) (208)
------- -------
10,709 11,534
Valuation allowance........................................ ( -- ) (805)
------- -------
$10,709 $10,729
======= =======
</TABLE>
In the year ended May 31, 1996, the Company realized income tax benefits of
$3,470,000 and $297,000 for the use of federal and state net operating loss
carryforwards, respectively. At May 31, 1996, the Company had approximately
$2.4 million of foreign net operating loss carryforwards available to reduce
future foreign taxable income.
F-19
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
COMPANY
---------------
RECAPITALIZED YEAR ENDED
COMPANIES MAY 31,
------------- ---------------
YEAR ENDED
MAY 31, 1994 1995 1996
------------- ------- -------
<S> <C> <C> <C>
Cash paid during the period for (in thou-
sands):
Interest.................................. $ 5,259 $12,188 $25,191
Income taxes.............................. 10,237 5,286 8,928
</TABLE>
For the year ended May 31, 1994 and the period from June 1, 1994 through
November 14, 1994, income tax payments were made to WHF.
Non-cash investing and financing activities
As part of the Recapitalization (Note 1): (1) the existing shareholders of
the Recapitalized Companies contributed their capital stock of these Companies
(recorded value of $7.7 million) to IHF Capital, IHF Holdings, and Health &
Fitness in exchange for common stock of IHF Capital, preferred stock of IHF
Holdings, warrants to purchase common stock of IHF Capital (aggregate fair
value of $58.8 million), and the Shareholder Notes ($159.3 million), and (2)
certain senior executives of the Company exchanged their options to purchase
capital stock of the Recapitalized Companies for $34.7 million of replacement
options to purchase common stock of IHF Capital and $4.0 million of warrants
to purchase preferred stock of IHF Holdings. Subsequent to the closing of the
Recapitalization, the Company redeemed certain of the options exchanged by the
executives as part of the Recapitalization for $26.4 million.
In conjunction with the issuance of the Senior Subordinated Notes and the
Discount Notes (Note 8), the Company issued warrants to purchase common stock
of IHF Capital. These warrants were ascribed values of $968,000 and
$3,838,000, respectively, and were recorded as additional discounts on the
Notes with an offsetting credit to additional paid-in capital.
12. COMMITMENTS AND CONTINGENCIES
LEASES--The Company has noncancelable operating leases, primarily for
computer and production equipment, that expire over the next five years. These
leases generally contain renewal options for periods ranging from three to
five years and require the Company to pay all executory costs such as
maintenance and insurance. Future minimum payments under noncancelable
operating leases consist of the following at May 31, 1996 (table in
thousands):
<TABLE>
<S> <C>
FOR YEAR ENDED MAY 31:
1997............................................................... $ 6,009
1998............................................................... 4,945
1999............................................................... 2,936
2000............................................................... 1,189
2001............................................................... 426
Thereafter ........................................................ --
-------
Total............................................................ $15,505
=======
</TABLE>
Rental expense for operating leases was approximately $1,767,000, $2,890,000
and $2,513,000 for the years ended May 31, 1994, 1995 and 1996, respectively.
F-20
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WEIDER LITIGATION--On August 28, 1995, WHF and its affiliates commenced a
number of legal proceedings against the Company, its affiliates and all of the
non-WHF directors and commenced arbitration proceedings against the Company.
WHF and its affiliates claim, among other things: (i) they are entitled to
various economic adjustments under agreements related to the Recapitalization,
(ii) the Company has intentionally violated territorial limitations and
various other terms of the distribution agreement under which WHF was granted
exclusive rights to distribute the Company's products in certain international
territories, (iii) the directors and executive officers of the Company have
breached their fiduciary duties to IHF Capital, IHF Holdings and Health &
Fitness and to IHF Capital's minority stockholders, and (iv) the Company has
violated its duties to WHF under the Management Agreement (Note 13). In
addition, WHF and its affiliates seek to recover compensatory damages of at
least $25 million, punitive damages of $35 million and injunctive relief
requiring the Company to honor its alleged obligations. On August 28, 1995,
WHF sought, and was denied, a temporary restraining order relating to alleged
violations of the Distribution Agreement (Note 13). The Company intends to
defend vigorously against the claims of WHF and its affiliates. The Company,
based in part on discussions with legal counsel, does not believe the outcome
of the WHF litigation will have material adverse effect upon the Company's
results of operations and financial position.
The Company, on August 28, 1995, initiated a lawsuit against WHF and its
affiliates seeking a preliminary injunction forbidding WHF to continue
production and marketing of illicit copies of one of the Company's most
significant product lines. The Company intends to assert all claims that it
may have against WHF and its affiliates, including claims that: (i) WHF and
its affiliates have improperly sourced products (including WHF branded
products), (ii) WHF and its affiliates have infringed the Company's rights to
the "WHF" trademark, (iii) the Company is entitled to economic adjustments
under the agreements related to the Recapitalization and (iv) WHF has violated
territorial limits and other terms of the Distribution Agreement (Note 13).
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 and $1,500,000 at May 31,
1995 and 1996, respectively.
The Company is involved in various other claims, potential unasserted
claims, and legal actions, including several patent infringement claims,
arising in the ordinary course of business. In the opinion of management, the
ultimate outcome of these matters will not have a material adverse effect on
the Company's financial position and results of operations and, accordingly,
no amounts have been accrued in the financial statements.
WARRANTY--The Company warrants its products against defects in materials and
workmanship for a period of 90 days after sale to the end-user. As of May 31,
1995 and 1996, the Company had an accrual for estimated warranty costs on
products sold of approximately $2,470,000 and $3,200,000, respectively, which
is included in accrued expenses in the accompanying balance sheet.
RETIREMENT PLANS--All employees who have met minimum age and service
requirements are eligible to participate in one of two 401(k) savings plans.
Participants may make tax deferred contributions up to 15% of total salary.
Company contributions to the two plans for the years ended May 31, 1994, 1995
and 1996 were $48,000, $220,000 and $233,000, respectively.
F-21
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. RELATED PARTY TRANSACTIONS
RECAPITALIZATION EXPENSES--The Company reimbursed $2.0 million of expenses
incurred by Weider, Bain Capital, and other shareholders in connection with
the financing related to the Recapitalization. In addition, the Company paid
Bain Capital a fee of $3.5 million for services provided in structuring the
Recapitalization (Note 1).
MANAGEMENT FEES--The Company received $2.7 million in the year ended May 31,
1995 as a fee for administrative services provided to WHF in the management of
one of its subsidiaries (the "Management Agreement") which was recorded as a
reduction of general and administrative expense for the period. Subsequent to
the Recapitalization, the Management Agreement requires the Company, to the
extent applicable, to source WHF products, or products substantially the same
as those sold by WHF, from WHF prior to seeking sources of those products from
outside vendors. During the years ended May 31, 1994, 1995 and 1996, the
Company purchased approximately $7.4 million, $26.4 million and $50.7 million,
respectively, of products from WHF and had a trade payable of $1.3 million
and $.7 million at May 31, 1995 and 1996, respectively.
In conjunction with the Recapitalization, the Company executed an agreement
with a majority shareholder who provides management and advisory services.
Total annual fees due under this agreement are $800,000, and, for the years
ended May 31, 1995 and 1996, the Company recorded management fee expense of
$333,000 and $800,000, respectively. In addition, if the Company enters into
any acquisition transactions involving at least $10 million, the Company must
pay a fee to this majority shareholder of approximately 1% of the gross
purchase price, including liabilities assumed, of the transaction.
NON-COMPETE AGREEMENTS--In November 1994, the Company entered into non-
compete agreements with certain key executives of the Company in connection
with the Recapitalization (Note 2).
LICENSE FEES--Concurrent with the closing of the Recapitalization, the
Company obtained certain rights to use the WHF name pursuant to two separate
exclusive license agreements. Under the Weider Sports License, the Company
paid a $5 million license fee for a perpetual license with respect to Weider
Canadian Trademark Rights. Under the Weider Health and Fitness license, the
Company is required to pay a royalty with respect to Weider U.S. and other
trademark rights equal to 2% of sales of licensed products sold thereunder
until such time as the Company has paid an aggregate royalty equal to $12
million plus an interest factor accruing on the unpaid portion of the royalty
at a per annum rate of 10%. If the royalty has not been paid in full by the
tenth anniversary of the Recapitalization, or if the sales of WHF product fall
below a certain level and the royalty is not paid in full at that time, the
Company's rights under the license agreement will terminate. The Company
recorded license fees of approximately $500,000 and $549,000 during the years
ended May 31, 1995 and 1996, respectively, under this agreement. The Company
had accrued license fees payable to WHF of $503,000 and $81,000 at May 31,
1995 and 1996.
DISTRIBUTION AGREEMENT--The Company has appointed a Canadian WHF affiliate
to be the exclusive distributor of Health & Fitness products worldwide,
excluding the United States, Mexico and certain countries in Europe. Under the
terms of this agreement, the Company sells its products directly to WHF
affiliates for resale in the agreed-upon territory. In conjunction with this
agreement, the Company recorded revenue of $6.9 million for the year ended May
31, 1996 and had a trade receivable from WHF affiliates of $1.5 million at May
31, 1996. In addition, for the fiscal years ended
F-22
<PAGE>
IHF CAPITAL, INC.
(TO BE RENAMED ICON FITNESS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
May 31, 1995 and 1994, the Company recorded revenue from sales to WHF of $8.8
million and $4.9 million, respectively, and, at May 31, 1995, the Company had
a trade receivable from WHF affiliates of $2.6 million.
AIRCRAFT LEASE. In June 1996, the Company entered into an oral agreement
with FG Aviation, Inc. ("FG"), a company which is jointly owned by officers of
the Company, whereby the Company will lease an airplane from FG for a minimum
of 400 hours per year at a fair market rate (between $1,350 and $1,650 per
hour, as adjusted by the Company's costs associated with flight crews).
Scheduled maintenance and insurance will be paid for by FG and non-scheduled
maintenance will be paid for by the Company. Flight crews will be provided by
the Company. In connection with this lease the Company advanced $280,000 to
officers of the Company to be used as a security deposit on the aircraft
lease.
CANADIAN AND EUROPEAN OPTIONS--At any time prior to May 15, 1997, the
Company has an option to acquire the net fixed assets, inventory, and certain
other assets and to assume certain related leases and contracts of a Canadian
manufacturing business affiliated with WHF ("CanCo") and certain other parties
at a purchase price equal to one half of the historical net book value of its
inventory, fixed assets and equipment. In addition, the Company had an option
to acquire certain property and to assume certain related leases of several
European operations owned by WHF at any time prior to May 15, 1997.
In August 1995, the Company gave notice of its intention to exercise its
option to purchase the assets of CanCo. The Company may terminate this notice
at any time prior to executing a final purchase and sale agreement. The
purchase of the CanCo assets has not yet been completed due to complications
related to the WHF litigation (Note 12), However, based on its due diligence
and the estimated purchase price of $1.5 million, the Company does not believe
that CanCo's operations are 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.
14. SUBSEQUENT EVENTS
HEALTHRIDER ACQUISITION--In July 1996, the Company executed a definitive
agreement to acquire the net assets, excluding certain liabilities (including
liabilities associated with the lawsuit filed by certain stockholders of
HealthRider), of HealthRider, Inc. ("HealthRider"). Total consideration for
the purchase will consist of the payment of $16.8 million, the assumption of
amounts outstanding under HealthRider's revolving credit facility on the date
of acquisition and estimated fees and expenses of $1.0 million. The
acquisition will be accounted for under the purchase method of accounting.
In conjunction with and contingent upon the successful closing of the
acquisition of HealthRider, the Company entered into definitive agreements to
buy out HealthRider's manufacturing contract with Parkway Manufacturing, Inc.
("Parkway") and to buy out the minority interest of HealthRider's European
subsidiary held by La Forza, Limited ("La Forza"). The buyout agreement with
Parkway will require the Company to make a payment of $10.1 million, including
the repayment of $1.0 million of trade payables owed to Parkway by HealthRider
and the payment of $4.1 million for inventory and certain manufacturing
equipment of Parkway purchased for the manufacturing of HealthRider brand
products. The buyout agreement with La Forza will require the Company to make
a payment of $.6 million and to provide La Forza with $.1 million of
inventory.
The acquisition is contingent upon, among other things, obtaining
appropriate approvals from HealthRider's shareholders and bankers.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HealthRider, Inc.:
We have audited the accompanying consolidated balance sheets of HealthRider,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthRider, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As summarized in Note 1 to the
consolidated financial statements, subsequent to December 31, 1995 the Company
has entered into an asset purchase agreement to sell its operations to IHF
Capital, Inc., subject to certain conditions of closing. As further summarized
in Note 1, certain conditions exist, including subsequent losses from
operations, lack of adequate liquidity, violation of debt covenants and the
existence of various legal matters, which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Arthur Andersen LLP
Salt Lake City, Utah
July 22, 1996
F-24
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................... $ 1,156,000 $ 532,000 $ 867,000
Accounts receivable, less allowance
for doubtful accounts of $348,000,
$3,783,000 and $2,756,000 (unau-
dited)................................ 10,608,000 29,944,000 22,877,000
Inventories............................ 2,091,000 14,937,000 23,082,000
Prepaid expenses and other............. 1,913,000 6,301,000 3,280,000
Income tax receivable.................. -- -- 2,128,000
Deferred income tax asset, net......... 416,000 5,310,000 7,204,000
----------- ----------- -----------
Total current assets................. 16,184,000 57,024,000 59,438,000
Property and equipment, net............. 5,373,000 6,058,000 27,329,000
Other assets, net....................... 136,000 1,649,000 1,648,000
----------- ----------- -----------
$21,693,000 $64,731,000 $88,415,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 4,165,000 $22,149,000 21,072,000
Accrued expenses....................... 5,240,000 17,485,000 17,022,000
Line of credit......................... -- -- 11,567,000
Income taxes payable................... 2,199,000 1,206,000 --
Current portion of capital lease obli-
gations............................... 315,000 298,000 1,158,000
Current portion of long-term debt...... 59,000 45,000 43,000
Other liabilities...................... 333,000 411,000 --
----------- ----------- -----------
Total current liabilities............ 12,311,000 41,594,000 50,862,000
Capital lease obligations, net of cur-
rent portion........................... 480,000 247,000 18,149,000
Long-term debt, net of current portion.. 213,000 193,000 173,000
----------- ----------- -----------
Total liabilities.................... 13,004,000 42,034,000 69,184,000
----------- ----------- -----------
Commitments and contingencies (Notes 1,
6, 7 and 10)
Stockholders' equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized; none is-
sued.................................. -- -- --
Common stock, $.01 par value;
25,000,000 shares authorized;
9,272,335, 10,057,001 and 10,077,030
(unaudited) shares issued and out-
standing.............................. 93,000 101,000 101,000
Additional paid-in capital............. 291,000 699,000 729,000
Notes receivable from officers......... (110,000) (110,000) (35,000)
Retained earnings...................... 8,415,000 22,002,000 18,393,000
Cumulative translation adjustments..... -- 5,000 43,000
----------- ----------- -----------
Total stockholders' equity........... 8,689,000 22,697,000 19,231,000
----------- ----------- -----------
$21,693,000 $64,731,000 $88,415,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $21,181,000 $106,587,000 $241,415,000 $117,006,000 $113,156,000
Cost of goods sold...... 7,066,000 37,483,000 84,465,000 40,334,000 43,481,000
----------- ------------ ------------ ------------ ------------
Gross profit......... 14,115,000 69,104,000 156,950,000 76,672,000 69,675,000
----------- ------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing.. 12,049,000 48,403,000 119,310,000 53,320,000 65,811,000
General and adminis-
trative............... 1,074,000 4,976,000 15,877,000 6,812,000 8,497,000
----------- ------------ ------------ ------------ ------------
Total operating ex-
penses.............. 13,123,000 53,379,000 135,187,000 60,132,000 74,308,000
----------- ------------ ------------ ------------ ------------
Income (loss) from oper-
ations................. 992,000 15,725,000 21,763,000 16,540,000 (4,633,000)
----------- ------------ ------------ ------------ ------------
Other income (expense),
net:
Interest expense....... (645,000) (1,127,000) (119,000) (55,000) (1,341,000)
Minority interest in
loss of subsidiary.... -- -- 95,000 -- --
Other income (loss),
net................... 50,000 745,000 1,991,000 943,000 1,121,000
----------- ------------ ------------ ------------ ------------
Total other income
(expense), net...... (595,000) (382,000) 1,967,000 888,000 (220,000)
----------- ------------ ------------ ------------ ------------
Income (loss) before
provision for income
taxes.................. 397,000 15,343,000 23,730,000 17,428,000 (4,853,000)
(Provision) benefit for
income taxes........... (99,000) (6,405,000) (10,143,000) (7,494,000) 1,244,000
----------- ------------ ------------ ------------ ------------
Net income (loss)....... $ 298,000 $ 8,938,000 $ 13,587,000 $ 9,934,000 $ (3,609,000)
=========== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL
-------------------- PAID-IN FROM RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL OFFICERS EARNINGS ADJUSTMENTS EQUITY
---------- -------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 6,805,001 $ 68,000 $ -- $ -- $ (821,000) $ -- $ (753,000)
Purchase and
cancellation of common
shares................ (40,000) -- (20,000) -- -- -- (20,000)
Issuance of common
shares for services... 150,000 1,000 29,000 -- -- -- 30,000
Issuance of common
shares for cash....... 1,100,500 11,000 207,000 -- -- -- 218,000
Issuance of common
shares pursuant to
antidilutive right.... 1,004,334 10,000 (10,000) -- -- -- --
Net income............. -- -- -- -- 298,000 -- 298,000
---------- -------- -------- --------- ----------- ------- -----------
Balance at December 31,
1993................... 9,019,835 90,000 206,000 -- (523,000) -- (227,000)
Purchase and
cancellation of common
shares................ (100,000) (1,000) (74,000) -- -- -- (75,000)
Exercise of stock
options............... 352,500 4,000 159,000 (110,000) -- -- 53,000
Net income............. -- -- -- -- 8,938,000 -- 8,938,000
---------- -------- -------- --------- ----------- ------- -----------
Balance at December 31,
1994................... 9,272,335 93,000 291,000 (110,000) 8,415,000 -- 8,689,000
Exercise of stock
options............... 536,500 5,000 381,000 -- -- -- 386,000
Issuance of common
shares pursuant to
antidilutive right.... 245,666 3,000 (3,000) -- -- -- --
Issuance of common
shares for services... 2,500 -- 30,000 -- -- -- 30,000
Cumulative translation
adjustments........... -- -- -- -- -- 5,000 5,000
Net income............. -- -- -- -- 13,587,000 -- 13,587,000
---------- -------- -------- --------- ----------- ------- -----------
Balance at December 31,
1995................... 10,057,001 101,000 699,000 (110,000) 22,002,000 5,000 22,697,000
Issuance of common
shares for services
(unaudited)........... 25,000 -- 38,000 -- -- -- 38,000
Receipt of common
shares as payment of
note receivable from
officer (unaudited)... (4,971) -- (8,000) 75,000 -- -- 67,000
Cumulative translation
adjustments
(unaudited)........... -- -- -- -- -- 38,000 38,000
Net loss (unaudited)... -- -- -- -- (3,609,000) -- (3,609,000)
---------- -------- -------- --------- ----------- ------- -----------
Balance at June 30, 1996
(unaudited)............ 10,077,030 $101,000 $729,000 $ (35,000) $18,393,000 $43,000 $19,231,000
========== ======== ======== ========= =========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income (loss)....... $ 298,000 $ 8,938,000 $ 13,587,000 $ 9,934,000 $(3,609,000)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and amor-
tization.............. 142,000 570,000 2,167,000 735,000 1,824,000
Provision for losses on
accounts receivable... 256,000 649,000 4,882,000 3,053,000 3,690,000
Deferred income tax
provision (benefit)... 21,000 (437,000) (4,894,000) (2,341,000) (1,894,000)
Loss on disposition of
assets................ -- -- 417,000 -- 156,000
Issuance of common
shares for services... 30,000 -- 30,000 30,000 105,000
Changes in operating
assets and liabili-
ties--
Accounts receivable... (2,018,000) (9,455,000) (24,218,000) (6,199,000) 3,377,000
Inventories........... (576,000) (1,465,000) (12,846,000) (3,430,000) (8,145,000)
Prepaid expenses and
other................ (134,000) (1,297,000) (4,388,000) (2,775,000) 3,021,000
Other assets.......... -- -- (129,000) (70,000) 1,000
Accounts payable...... 2,025,000 2,085,000 17,984,000 1,786,000 (1,077,000)
Accrued expenses...... 837,000 4,131,000 12,245,000 5,392,000 (463,000)
Income taxes payable.. 78,000 2,121,000 (993,000) 923,000 (3,334,000)
Other liabilities..... 326,000 (42,000) 78,000 (283,000) (411,000)
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities.......... 1,285,000 5,798,000 3,922,000 6,755,000 (6,759,000)
----------- ----------- ------------ ----------- -----------
CASH FLOWS USED IN IN-
VESTING ACTIVITIES:
Purchase of property and
equipment.............. (645,000) (4,410,000) (4,636,000) (2,442,000) (4,009,000)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Net borrowings on line
of credit.............. -- -- -- -- 11,567,000
Proceeds from issuance
of long-term debt...... 397,000 461,000 35,000 35,000 --
Principal payments on
long-term debt......... (238,000) (822,000) (69,000) (37,000) (22,000)
Principal payments on
capital lease obliga-
tions.................. -- (62,000) (267,000) (129,000) (480,000)
Proceeds from notes pay-
able to stockholders... 97,000 84,000 -- -- --
Principal payments on
notes payable to stock-
holders................ (178,000) (820,000) -- -- --
Purchase of common
shares................. (20,000) (75,000) -- -- --
Net proceeds from issu-
ance of common stock... 218,000 53,000 386,000 353,000 --
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) financing
activities.......... 276,000 (1,181,000) 85,000 222,000 11,065,000
----------- ----------- ------------ ----------- -----------
Effect of changes in ex-
change rates on cash... -- -- 5,000 -- 38,000
----------- ----------- ------------ ----------- -----------
Net increase (decrease)
in cash................ 916,000 207,000 (624,000) 4,535,000 335,000
Cash at beginning of pe-
riod................... 33,000 949,000 1,156,000 1,156,000 532,000
----------- ----------- ------------ ----------- -----------
Cash at end of period... $ 949,000 $ 1,156,000 $ 532,000 $ 5,691,000 $ 867,000
=========== =========== ============ =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the pe-
riod for:
Interest............... $ 554,000 $ 1,234,000 $ 107,000 $ 80,000 $ 1,232,000
Income taxes........... -- 4,721,000 16,230,000 8,912,000 4,234,000
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996, capital lease obligations totaling $857,000, $17,000 and
$19,242,000 (unaudited), respectively, were entered into for the acquisition
of a new corporate office building, office furniture, and computer, telephone
and other equipment.
During the year ended December 31, 1995 and the six months ended June 30,
1995, the Company contributed $1,600,000 of land to a limited liability
company (LLC) in return for a 50 percent ownership interest in the LLC (see
Note 7).
During the year ended December 31, 1994, certain officers of the Company
exercised stock options with promissory notes to the Company in the amount of
$110,000.
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
NATURE OF OPERATIONS
The Company designs, markets and distributes innovative fitness equipment
designed primarily for use at home. The Company markets and distributes its
products through a variety of distribution channels, including direct-response
advertising (television infomercials and other forms of electronic and print
media) and a nationwide network of company-owned retail locations in regional
shopping malls, as well as large and small independent retailers, including
specialty retail stores.
DEPENDENCE ON THE HEALTHRIDER AND OTHER SIMILAR PRODUCTS
The Company's growth in sales and profitability through December 31, 1995
was attributable primarily to the demand for the Company's principal product,
the HealthRider, as well as other similar products based on the HealthRider
which are sold at other price points and through other distribution channels.
The HealthRider and the other similar products, consisting principally of the
aeROBICRider and SportRider, have accounted for 100%, 99% and 98% of the
Company's net sales during the years ended December 31, 1993, 1994 and 1995,
respectively, and accounted for 95% (unaudited) of the Company's net sales
during the six months ended June 30, 1996. Any significant decline in demand
for the HealthRider and other related products, would have a material adverse
effect on the Company's business and results of operations (see Recent
Developments below).
RECENT DEVELOPMENTS
Subsequent to December 31, 1995, the Company began to experience a liquidity
crisis caused by a build-up of inventory which was exacerbated by the terms of
a manufacturing agreement (see Note 7), by lower than expected revenues,
higher selling expenses related to infomercials and lower margins as well as
more lenient payment terms with certain wholesale customers and longer
deferred payment plans with retail customers.
During the six months ended June 30, 1996, the Company's sales levels
declined in all distribution channels and the Company experienced a loss from
operations of $4,633,000 (unaudited). As discussed in Note 6, as a result of
the operating losses and other covenant violations, the Company is currently
in default under its line of credit agreement. The liquidity crisis has
resulted in legal actions being taken by certain principal suppliers (see Note
7). As discussed in Note 13, the Company has entered into a definitive
agreement to sell the Company's assets in exchange for approximately $16.8
million of cash and the assumption of the majority of the Company's
liabilities by the buyer. However, the sale is subject to certain conditions
of closing. In the event the sale is not consummated, the Company's current
liquidity position, the defaults under the line of credit agreement, and the
outstanding legal matters raise substantial doubt about the Company's ability
to continue as a going concern. Management believes that the conditions of
closing will be satisfied and that the sale will be closed. In the event that
the sale does not close, management plans to restructure operations, to reduce
operating costs, to pursue alternative financing sources and to endeavor to
resolve current claims against the Company. However, there can be no assurance
that these efforts will be successful.
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The Company was originally organized and incorporated in the State of Utah
on March 13, 1991 as ExerHealth, Inc. HealthRider, Inc. was incorporated in
the state of Delaware on May 10, 1995 for
F-29
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the purpose of reincorporating ExerHealth, Inc. as a Delaware corporation.
Effective June 30, 1995, ExerHealth, Inc. was merged into HealthRider, Inc.
and each share of common stock of ExerHealth, Inc. was converted into one
share of common stock of HealthRider, Inc.
The accompanying consolidated financial statements include the accounts of
HealthRider, Inc. and its subsidiaries (collectively, the "Company")--
HealthRider International, Inc., HealthRider Canada, Inc., BodyHealth,
Incorporated, wholly owned U.S. Corporations, and HealthRider International
Limited (a UK corporation) which is 76 percent owned by HealthRider
International, Inc. HealthRider Inc. has entered into an agreement with
HealthRider International Limited whereby HealthRider International Limited
has the rights to market the Company's products outside of the U.S., except
for Canada and certain Pacific Rim countries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of HealthRider International Limited are translated
into U.S. dollars at the applicable rates of exchange at each period end.
Transactions with foreign entities that result in income and expense for the
Company are translated at the average rate of exchange during the periods.
Translation gains and losses are reflected as a separate component of
stockholders' equity. Transaction gains and losses are recorded in the
consolidated statements of income.
ACCOUNTS RECEIVABLE
The Company allows its retail customers to purchase its products under
various monthly installment payment plans ranging from four to ten months.
INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of
cost or market, using the first-in, first-out (FIFO) method.
ADVERTISING COSTS
The Company generally expenses advertising costs at the time the
advertisement takes place. Most direct response advertising using the
Company's infomercials requires advance payments which are recorded as prepaid
advertising costs until the infomercials are aired. The Company capitalizes
the production costs of its direct response advertising and amortizes them
over the expected airing periods which typically range from six months to one
year. The Company periodically reviews the carrying amounts for impairment and
during the six months ended June 30, 1996 the Company recognized a $1,600,000
(unaudited) charge related to the Company's 1996 infomercial.
F-30
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization,
which includes amortization of assets recorded under capital leases, are
computed using the straight-line method over the estimated useful lives of the
assets or the terms of the leases. The Company's corporate building is
amortized over the lease term of 15 years and furniture and equipment are
depreciated based on lives ranging from three to five years. Leasehold
improvements are amortized over the terms of the respective leases, ranging
from one to fifteen years. Expenditures for maintenance and repairs are
charged to expense as incurred. Gains and losses on sale or abandonment of
property and equipment are reflected in current operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheets for cash,
accounts receivable, and accounts payable approximate fair values because of
the immediate or short-term maturities of these financial instruments. The
fair value of the Company's long-term debt also approximates fair value based
on current rates for similar debt.
REVENUE RECOGNITION
Sales are recognized at the time products are shipped to the customer.
Allowances are recognized for estimated returns and discounts associated with
these sales. Payments received for products that have not been shipped by the
end of the period are recorded as unearned revenue.
WARRANTY COSTS
The Company provides for estimated warranty costs as products are sold and
periodically adjusts the estimates to reflect actual experience. The accrued
liability for warranty costs is included in accrued expenses in the
accompanying consolidated balance sheets.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred tax assets or liabilities are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to potential concentrations
of credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides unsecured credit terms to its customers.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121. "Accounting for the Impairment of
Long-Lived Assets and for Long-
F-31
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lived Assets to be Disposed Of" (SFAS No. 121). The Company adopted SFAS No.
121 during the three months ended March 31, 1996. The adoption did not have a
material impact on the Company's financial position or results of operations.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet at June 30, 1996, the
consolidated statements of income and cash flows for the six months ended June
30, 1995 and 1996 and the consolidated statement of stockholders' equity for
the six months ended June 30, 1996 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of the interim periods. The data disclosed in the
notes to consolidated financial statements for these periods are also
unaudited. Results for the unaudited six-month period ended June 30, 1996 are
not necessarily indicative of the results to be expected for the Company's
full fiscal year.
RECLASSIFICATIONS
Certain minor reclassifications have been made to the 1993 and 1994
consolidated financial statements to be consistent with the 1995 and 1996
presentations.
(3) PREPAID EXPENSES AND OTHER
Prepaid expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid advertising costs............... $1,137,000 $3,907,000 $ 602,000
Other prepaid expenses.................. 776,000 2,394,000 2,678,000
---------- ---------- ----------
$1,913,000 $6,301,000 $3,280,000
========== ========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land..................................... $2,512,000 $ 912,000 $ 912,000
Building................................. -- -- 18,228,000
Computer and telephone equipment......... 1,641,000 3,264,000 4,473,000
Furniture and fixtures................... 907,000 1,439,000 4,241,000
Leasehold improvements................... 520,000 1,950,000 2,259,000
Machinery and equipment.................. 319,000 210,000 359,000
Vehicles................................. 110,000 147,000 147,000
---------- ----------- -----------
6,009,000 7,922,000 30,619,000
Less accumulated depreciation and amorti-
zation.................................. (636,000) (1,864,000) (3,290,000)
---------- ----------- -----------
$5,373,000 $ 6,058,000 $27,329,000
========== =========== ===========
</TABLE>
F-32
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization of property and equipment totaled $107,000,
$526,000 and $1,797,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $1,222,000 for the six months ended June 30, 1996
(unaudited).
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related taxes................... $2,020,000 $ 5,040,000 $ 2,475,000
Royalties................................... 1,281,000 2,891,000 2,589,000
Sales taxes................................. 754,000 1,489,000 1,234,000
Returns allowance........................... 510,000 2,260,000 1,810,000
Warranty.................................... 200,000 1,486,000 1,596,000
Other....................................... 475,000 4,319,000 7,318,000
---------- ----------- -----------
$5,240,000 $17,485,000 $17,022,000
========== =========== ===========
</TABLE>
(6) DEBT
LINE OF CREDIT AGREEMENTS
As of December 31, 1995, the Company had a line of credit agreement with a
bank (the Bank) whereby a maximum of $10,000,000 was available for working
capital and letters of credit. Borrowings on the line of credit were limited
to 80 percent of eligible wholesale accounts receivable, 50 percent of
eligible consumer accounts receivable and eligible inventories, as defined,
and bore interest at the bank's variable base rate. At December 31, 1995, the
variable base rate was 8.50 percent. The line of credit agreement required the
maintenance of certain financial ratios, and was secured by accounts
receivable and inventory. There were no outstanding amounts drawn under this
agreement at December 31, 1994 and 1995; however, there were $3,608,000 of
letters of credit outstanding as of December 31, 1995.
On March 7, 1996, the maximum amount available under the agreement was
increased to $15,000,000. In conjunction with the negotiation of the new
credit facility described below, this line of credit was terminated in April
1996.
On April 16, 1996, the Company entered into a new credit agreement (the
Agreement) with General Electric Capital Corporation (the Lender). The
Agreement provides for a maximum commitment of up to $25,000,000 to be used
for working capital and letters of credit. Borrowings under the Agreement are
limited to 80 percent of eligible wholesale accounts receivable, 60 percent of
eligible inventories and 50 percent of eligible consumer accounts receivable,
as defined. Borrowings under the Agreement bear interest at either (1) the
prime or base rates of certain banks less an applicable margin ranging from .5
percent to 1 percent, as defined (7.75 percent at June 30, 1996); or (2) the
LIBOR rate plus an applicable margin ranging from 2 to 2.5 percent, as defined
(8.31 percent at June 30, 1996). Borrowings are secured by substantially all
assets of the Company. The Agreement expires on April 16, 1999, at which date
all outstanding balances related to the Agreement are due. As of June 30,
1996, the total outstanding amount under this Agreement included $11,567,000
in loans and $2,976,000 in letters of credit. The Company had no additional
borrowings available under the Agreement at June 30, 1996.
F-33
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company pays a monthly commitment fee based on an annual rate of .5
percent of the average unused portion of the borrowing limit under the
Agreement. Letter of credit fees equal 1.5 percent per annum of the amount of
all outstanding letter of credit obligations. In addition, in the event that
the Company terminates the Agreement prior to the first anniversary of the
Agreement, whether voluntarily or by reason of default, a prepayment fee of
$250,000 will be charged.
The Agreement requires, among other covenants, that the Company maintain a
certain tangible net worth, fixed charge coverage ratio, inventory turnover
ratio and that the Company shall not suffer any quarterly operating losses for
any fiscal quarter through the commitment maturity date. Upon the occurrence
of any event of default and so long as any event of default continues, the
Lender may increase the interest rate applicable to the Agreement by 2 percent
per annum above the rate otherwise applicable. In addition, the Lender may
accelerate the due date of all amounts outstanding under the Agreement.
As of June 30, 1996, the Company was not in compliance with the tangible net
worth, the fixed charge coverage ratio nor the quarterly operating loss
covenants. The Company has not obtained any waivers of the above covenants;
however, the Lender has agreed to forbear any action through August 16, 1996,
subject to certain conditions. Management believes that the Lender will
continue to forebear any action pending the consummation of the asset purchase
agreement discussed in Note 13. However, if the asset purchase agreement is
not consummated there can be no assurance that the Lender will grant waivers
for the current defaults. Accordingly, the balance outstanding under the
agreement as of June 30, 1996 of $11,567,000 has been classified as a current
liability in the accompanying consolidated financial statements.
LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to an individual, interest at 12
percent, due in monthly installments of
$3,000, unsecured, guaranteed by majority
stockholders (see Note 12).................... $190,000 $176,000 $168,000
Notes payable to banks and financing companies,
interest ranging from 7 to 11 percent, due in
monthly installments, secured by office
equipment and vehicles........................ 54,000 62,000 48,000
Other, paid in full during 1995................ 28,000 -- --
-------- -------- --------
272,000 238,000 216,000
Less current portion........................... (59,000) (45,000) (43,000)
-------- -------- --------
$213,000 $193,000 $173,000
======== ======== ========
</TABLE>
F-34
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future maturities of long-term debt as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996......................................................... $ 45,000
1997......................................................... 40,000
1998......................................................... 30,000
1999......................................................... 23,000
2000......................................................... 28,000
Thereafter..................................................... 72,000
--------
$238,000
========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
MARKETING AND PROMOTIONAL COMMITMENTS
As of December 31, 1995, the Company had a commitment of approximately $3.9
million for marketing and promotional efforts during 1996. Subsequent to
December 31, 1995, the Company reduced the commitment by approximately $2.8
million.
PURCHASE COMMITMENTS
As of December 31, 1995, the Company was obligated under a manufacturing
agreement with its principal supplier to purchase approximately $110,000,000
of HealthRider units (see discussion below) and was obligated under other
purchase commitments for inventory of approximately $3,920,000.
BUILDING LEASE
During March 1995, the Company entered into an agreement with a real estate
developer to form a limited liability company (the LLC). The Company
contributed $1,600,000 of land to the LLC in return for a 50 percent ownership
interest. The LLC was formed to construct a building for use by the Company.
Construction of the building was completed subsequent to December 31, 1995 and
the Company became a tenant in February 1996.
The Company leases the building from the LLC under an agreement which is
classified as a capital lease (see Note 10). The lease has a 15 year term with
a base annual rent commitment of approximately $2,405,000 payable in 12 equal
monthly installments. As discussed in Note 10, the Company has subleased a
portion of the building for a three year term. Annual rent will escalate at
the beginning of the sixth and eleventh years using a three percent annually
compounded rate or the change in the Consumer Price Index, whichever is less.
The lease also provides for the lessee to pay taxes, maintenance, insurance
and certain other operating costs of the leased property. In addition, the
Company has an option to purchase the building at cost, as defined, until
permanent financing has been secured. After permanent financing is in place
the Company may purchase the building at fair market value.
LEGAL MATTERS
In May 1995, certain stockholders of the Company filed a complaint in the
United States District Court for the District of Utah naming the Company and
two of the Company's principal officers as defendants. The complaint contains
five claims against both the Company and the two officers alleging breach of
various contracts for royalty payments (see Note 12) and for the issuance of
stock. Because
F-35
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of ongoing settlement discussions, the parties have stipulated a stay of the
litigation. An ongoing agreement has been reached which provides for the
Company to pay approximately $300,000, which has been accrued in the accompany
consolidated balance sheets, and the officers to transfer certain shares of
the Company's common stock held by the officers to the plaintiffs.
The Company is the subject of certain other legal matters related to its
operations for which settlements have been negotiated pending consummation of
the asset purchase agreement discussed in Note 13. Under the asset purchase
agreement, the Buyer of the Company's assets has agreed to assume all
obligations with respect to the following matters.
In June 1996, the Company's advertising agency filed a complaint in the
United States District Court for the Southern District of New York naming
the Company as a defendant. The complaint alleges that the Company has not
paid plaintiff for services rendered. The complaint seeks damages in the
amount of approximately $5,500,000, as well as punitive damages and
prejudgment interest. A verbal agreement has been reached which provides
for a payment of approximately $2,600,000, which has been accrued in the
accompanying financial statements.
Parkway Manufacturing, Inc. (Parkway), one of the Company's principal
suppliers, has informed the Company that they believe the Company is in
breach of a manufacturing agreement between the Company and Parkway which
was most recently amended on November 1, 1995. Under the manufacturing
agreement, in exchange for certain purchase price reductions, the Company
has agreed to purchase its domestic HealthRider unit requirements, as
defined, exclusively from Parkway subject to certain quantity limits. The
Company agreed to purchase a minimum of 10,000 units each week for a three
year period or until the Company has purchased 1,200,000 units. The weekly
purchase order quantities may vary a maximum of up 3 percent or down 2
percent from the preceding week.
Parkway has asserted that the Company has not complied with the terms of
the contract by not paying for units produced in accordance with payment
terms and not complying with the weekly purchase order quantities. Parkway
has alleged damages which may exceed $10,000,000 and has threatened to
pursue remedies provided under the Uniform Commercial Code relating to
repossessing certain items of inventory and proceed with the private sale
of HealthRider and aeROBICRider units; however, no formal lawsuit has been
filed. The Company has also asserted a breach of the agreement by Parkway
for not meeting production requirements.
In connection with the asset purchase agreement, the Buyer has agreed to
purchase certain of Parkway's assets, including Parkway's interest in the
manufacturing agreement with the Company.
In the event the asset purchase agreement is not consummated, the
ultimate outcome of these matters cannot presently be determined. No
provision for any liability that may result from the Parkway matter has
been made in the accompanying consolidated financial statements.
The Company is the subject of various other legal matters, which it
considers generally incidental to its business activities. It is the opinion
of management, after dicussions with legal counsel, that the ultimate
dispositions of these legal matters will not have a material impact on the
financial position, liquidity or results of operations of the Company.
However, no assurance can be given with respect to the ultimate resolution of
these matters.
SOURCES OF SUPPLY
The Company buys a large majority of its products from one domestic supplier
and one foreign supplier. A loss of any one of these suppliers could result in
a shortage of inventory and a loss of sales, which would affect operating
results adversely.
F-36
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company's articles of incorporation authorize the Board of Directors to
fix the rights, preferences, privileges and restrictions of one or more series
out of the authorized shares of preferred stock.
COMMON STOCK ISSUED PURSUANT TO ANTIDILUTIVE RIGHT
During 1993 and 1995, the Company issued 1,004,334 and 245,666 shares of
common stock to a stockholder whose previous share purchase and debt
agreements with the Company provided for a 25 percent antidilutive right to
the Company's issued and outstanding common shares.
STOCK OPTIONS
Prior to the adoption of the 1995 Stock Option/Issuance Plan discussed
below, the Company had granted nonqualified stock options for common stock in
connection with the procurement of debt and equity, professional services
received and inducement for employment. In each case, the exercise price of
the nonqualified options equaled or exceeded the estimated fair maket value of
common stock on the date of grant. Most options have been immediately
exercisable upon issuance and have expiration periods ranging from 2.5 to 10
years from the date of grant.
On February 15, 1995, the Company's Board of Directors adopted, and on March
15, 1995, the Company's stockholders approved the 1995 Incentive Stock Option
Plan. In May 1995 the Company's Board of Directors adopted, and the Company's
stockholders approved in June 1995, the 1995 Stock Option/Issuance Plan (the
Plan). The Plan supersedes the Company's 1995 Incentive Stock Option Plan (the
Prior Plan) effective in May 1995, and assumes the options granted under the
Prior Plan. The Plan is divided into three components: the discretionary
option grant program, the automatic option grant program and the stock
issuance program. The discretionary option grant program provides for the
grant of options to purchase shares of the Company's common stock to key
employees (including officers and employee directors) and consultants of the
Company. The automatic option grant program provides for the grant of options
to purchase shares of the Company's common stock to non-employee Board
members. The stock issuance program allows key employees (including officers
and directors) and consultants of the Company to effect immediate purchases of
the Company's common stock.
Under the Plan, 1,500,000 shares of common stock have been reserved for
issuance. The Plan provides for the grant of incentive stock options which
qualify for favorable tax treatment under the Federal tax laws and non-
statutory options which do not so qualify. Only employees may be granted
incentive stock options. The exercise price of incentive stock options and of
automatic option grants may not be less than 100 percent of the fair market
value of the common stock on the date of grant while the exercise price of
nonstatutory options may not be less than 85 percent of the fair market value
on the date of grant. Stock issuances under the stock issuance program may be
made at fair market value or at discounts of up to 15 percent. The Board of
Directors presently intends to grant any options under the Plan at current
market value. As of December 31, 1995 and June 30, 1996 (unaudited), the
unoptioned shares available for granting under the Plan is 810,000 shares.
F-37
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of nonqualified and incentive stock option
activity:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1992................. 1,475,000 $ .10- 1.00
Granted.......................................... 314,000 .25- 1.00
Exercised........................................ (950,000) .21
---------
Outstanding at December 31, 1993................. 839,000 .10- 1.00
Granted.......................................... 230,000 .75
Exercised........................................ (352,500) .10- 1.00
---------
Outstanding at December 31, 1994................. 716,500 .10- 1.00
Granted.......................................... 690,000 10.00-12.50
Exercised........................................ (536,500) .50- 1.00
---------
Outstanding at December 31, 1995................. 870,000 .10-12.50
Forfeited (unaudited)............................ (440,000) 10.00
---------
Outstanding at June 30, 1996 (unaudited)......... 430,000 .10-12.50
=========
</TABLE>
The stock options exercised during 1993 were granted in 1992 at an exercise
price of $0.45 per share; however, the Company negotiated with the stockholder
to exercise the options early and reduced the exercise price to $0.21 per
share. The reduced exercise price represented the estimated fair market value
at that date. At December 31, 1995 and June 30, 1996, 81,500 and 112,500
(unaudited); respectively, of the stock options outstanding were exercisable.
(9) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
--------- ---------- -----------
<S> <C> <C> <C>
Current tax provision:
Federal............................. $ 68,000 $5,560,000 $12,178,000
State............................... 10,000 1,282,000 2,859,000
--------- ---------- -----------
78,000 6,842,000 15,037,000
--------- ---------- -----------
Deferred tax provision (benefit):
Federal............................. 125,000 (359,000) (4,037,000)
State............................... 17,000 (78,000) (857,000)
--------- ---------- -----------
142,000 (437,000) (4,894,000)
--------- ---------- -----------
220,000 6,405,000 10,143,000
Valuation allowance................. (121,000) -- --
--------- ---------- -----------
$ 99,000 $6,405,000 $10,143,000
========= ========== ===========
</TABLE>
In applying the provisions of SFAS 109, the Company recorded a valuation
allowance for the net deferred tax asset as of December 31, 1992. As of
December 31, 1993, no valuation allowance was necessary as a result of the
Company's profitable operations.
F-38
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax assets and liabilities as of December
31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts............................... $ 389,000 $ 1,568,000
Warranty and sales returns allowances................. 281,000 1,383,000
Other accrued expenses and reserves................... 451,000 4,412,000
---------- -----------
Total deferred tax assets.............................. 1,121,000 7,363,000
---------- -----------
Deferred tax liabilities:
Prepaid advertising costs............................. (450,000) (1,684,000)
Other................................................. (255,000) (369,000)
---------- -----------
Total deferred tax liabilities......................... (705,000) (2,053,000)
---------- -----------
Net deferred tax asset................................. $ 416,000 $ 5,310,000
========== ===========
</TABLE>
The differences between the statutory federal income tax rate and the
effective rate, which is derived by dividing the provision for income taxes by
income before provision for income taxes, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate............................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............. 4.6 4.9 4.9
Change in valuation allowance.......................... (30.5) -- --
Other.................................................. 15.9 1.8 2.8
----- ---- ----
25.0% 41.7% 42.7%
===== ==== ====
</TABLE>
(10) LEASE OBLIGATIONS
The Company leases certain office, warehouse, and retail store spaces under
noncancelable operating lease agreements. Total rent expense under all
operating leases for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996 (unaudited) was $46,000, $2,339,000,
$8,994,000, and $5,584,000, respectively.
F-39
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital and operating leases with
noncancelable lease terms greater than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES AS OF OPERATING
------------------------- LEASES AS OF
DECEMBER 31, JUNE 30, DECEMBER 31,
YEAR ENDING DECEMBER 31, 1995 1996 1995
- ------------------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
1996................................... $ 336,000 $ 1,659,000 $1,638,000
1997................................... 254,000 3,236,000 1,634,000
1998................................... 4,000 2,933,000 1,217,000
1999................................... -- 2,924,000 496,000
2000................................... -- 2,916,000 328,000
Thereafter............................. -- 24,296,000 --
--------- ------------ ----------
594,000 37,964,000 $5,313,000
==========
Less amounts representing interest..... (49,000) (18,657,000)
--------- ------------
Present value of future minimum lease
payments.............................. 545,000 19,307,000
Less current portion................... (298,000) (1,158,000)
--------- ------------
Capital lease obligations, net of cur-
rent portion.......................... $ 247,000 $ 18,149,000
========= ============
</TABLE>
With respect to the lease on the Company's corporate building (see Note 7),
the Company has subleased a portion of the building for $640,000 a year for a
period of three years ending in February 1999. The sublease payments will
effectively reduce the future minimum lease payments included in the above
table.
Assets recorded under capital leases consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment and furniture................. $857,000 $ 717,000 $ 2,856,000
Building................................ -- -- 17,103,000
-------- --------- -----------
857,000 717,000 19,959,000
Less accumulated depreciation........... (45,000) (236,000) (972,000)
-------- --------- -----------
$812,000 $ 481,000 $18,987,000
======== ========= ===========
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
In January 1995, the Company established a defined contribution savings plan
which qualifies under Section 401(k) of the Internal Revenue Code covering all
employees meeting minimum age and service requirements. Participants may
contribute up to 12 percent of their gross wages, subject to certain
limitations. The Company matches 50 percent of the first 3 percent of employee
contributions. During the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited), the Company made contributions of $54,000,
and $30,000, respectively, to the plan.
F-40
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) RELATED PARTY TRANSACTIONS
LOAN AGREEMENTS WITH RELATED COMPANY
In October 1992, the Company entered into a factoring loan agreement with a
son-in-law of the Chairman of the Company's Board of Directors and majority
stockholders, acting on behalf of U.S. Funding, whereby U.S. Funding loaned
$50,000 to the Company to finance the production of certain HealthRider units.
The loan was collateralized by the units produced. Under the agreement, the
Company paid a factoring charge of $1.11 for each of the units when sold. The
agreement also provided an option for U.S. Funding to extend the $50,000 loan
until a total of $203,000 of factoring charges were received. As of December
31, 1994, the Company had paid the $203,000 of factoring charges and
terminated the agreement by repaying the principal amount of the loan. In
connection with the agreement, the Company also granted U.S. Funding options
to purchase 50,000 shares of the Company's common stock at $1.00 per share.
The stock options were exercised in full during December 1994.
During 1994, the Company entered into another agreement with U.S. Funding
under which U.S. Funding agreed to provide debt financing for certain retail
locations to be opened by the Company at the rate of $7,000 per location. The
loans bear interest at 24 percent per annum with interest and principal due
monthly at $25 per HealthRider unit sold from the specific retail locations.
The agreement also provides for the Company to continue to pay $25 per
HealthRider unit sold from the specific retail locations after the principal
and interest has been repaid. During the years ended December 31, 1994 and
1995 and the six months ended June 30, 1996 (unaudited), loans of $77,000, $0,
and $0, respectively, were made to the Company and $100,000, $204,000, and
$57,225, respectively, were paid to U.S. Funding under the agreement.
NOTES PAYABLE TO MAJORITY STOCKHOLDERS
During 1991 and 1992, the Company entered into three promissory notes with
the Company's majority stockholders in an aggregate amount of $348,000 as
consideration for services provided to the Company and for the sale of shares
of common stock back to the Company. The promissory notes provided for monthly
payments and interest at an annual rate of 12 percent. In January 1992, the
majority stockholders assigned $222,000 of the proceeds due them under the
promissory notes to an unrelated third party and personally guaranteed the
payment. As of December 31, 1995 and June 30, 1996 (unaudited), the balance
owing the unrelated third party was $176,000 and $168,000, respectively, which
is included in long-term debt in the accompanying financial statements. The
remaining balance due to the majority stockholders was paid in full in
December 1993.
DISTRIBUTION AGREEMENT
During September 1994, the Company entered into an agreement with AxTan, of
which a former director of the Company and a son-in-law of the Company's
Chairman and majority stockholders own interests, pursuant to which the
Company granted exclusive rights to sell the HealthRider machine in retail
outlets within the states of Arizona, Oregon and Washington. The agreement
provides that AxTan must pay a fee of $5,000 to the Company for each retail
location opened in exchange for the Company providing one kiosk unit, carpet,
signs, fixtures, general start-up supplies and two HealthRider machines. Fees
paid to the Company pursuant to this agreement during the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1996 (unaudited)
were $90,000, $0, and $0, respectively, and sales of the HealthRider to AxTan
were $2,077,000, $3,243,000, and $1,308,000, respectively. On June 18, 1996,
the Company negotiated a termination of this agreement.
F-41
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
STOCKHOLDER ROYALTY AGREEMENT
On May 14, 1992, the Company entered into an agreement with the then current
stockholders of the Company whereby an ongoing quarterly royalty of $5 per
HealthRider unit sold would be made to these stockholders on a pro rata basis.
The majority stockholders' royalty was apportioned to the other stockholders
on a pro rata basis until the latter received $2 for each share of common
stock held on May 14, 1992; thereafter, the majority stockholders began to
receive their proportionate share of the royalty. During the years ended
December 31, 1993, 1994, and 1995 and the six months ended June 30, 1996
(unaudited), the Company recorded royalty expense of $179,000, $699,000,
$1,780,000, and $790,000, respectively, related to this agreement.
NOTES RECEIVABLE FROM OFFICERS
During 1994, the Company loaned $110,000 in total to three of its executive
officers in connection with the exercise of certain stock options. The notes
bear interest at 8 percent, are payable upon demand, and are collateralized by
the stock purchased. The notes are presented as an offset to common stock in
the accompanying consolidated balance sheets. During the six months ended June
30, 1996, the Company received 4,971 shares of common stock from one of the
officers in payment of his $75,000 note receivable and related interest of
$12,000.
AGREEMENTS WITH T6-G LIMITED PARTNERSHIP
T6-G Limited Partnership (T6-G), a significant stockholder of the Company,
loaned the Company $590,000 in the aggregate pursuant to various agreements
and promissory notes. The balances due under the agreements were paid in full
in July 1994. The agreements also provided for grants of options to purchase
950,000 shares of common stock at a price of $.45 per share. The Company
subsequently agreed to reduce the exercise price of the stock options to $.21
per share as an inducement for T6-G to exercise the options (see Note 8). The
agreements with T6-G provide for antidilution protection such that T6-G has
the ability to maintain a 25 percent equity interest in the Company (see Note
8).
(13) ASSET PURCHASE AGREEMENT
On July 3, 1996, the Company entered into a definitive agreement with IHF
Capital, Inc. and HealthRider Acquisition Corp., an indirect subsidiary of IHF
Capital, Inc. (the "Buyer") whereby the Buyer has agreed to purchase
substantially all the assets of the Company for approximately $16.8 million
and assume substantially all of the Company's liabilities, with certain
exclusions. The liabilities excluded from the sale principally include all
liabilities and obligations relating to ownership, or claims to ownership of
any equity interest in the Company including the lawsuit filed by certain
stockholders against the Company described in Note 7, the stockholder royalty
agreements described in Note 12, as well as any other ownership related
claims. The agreement also includes certain conditions to closing, which
include among other things, obtaining consent and approval from the Lender,
the Company maintaining a minimum working capital, as defined, and approval by
the Company's stockholders.
In conjunction with and contingent upon the successful closing of the asset
acquisition, the Company and the Buyer entered into a definitive agreement to
buy out the minority interest of HealthRider International Limited. The buyout
agreement requires the Company to make a payment of $.7 million and the Buyer
to make a payment of $.6 million and provide inventory of $.1 million to the
minority interest holder.
F-42
<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 that, as part of the distribution of
the shares offered as a part of the International Offering, and subject
U-1
<PAGE>
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.
Certain Selling Stockholders have 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. Certain Selling
Stockholders have 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 Selling
Stockholders include Bain Capital, senior management of the Company and
certain employees and affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation, one of the representatives of the Underwriters.
The Company and the Selling Stockholders have 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, including the Selling 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.
At the request of the Company, the Underwriters have reserved up to
approximately shares of Common Stock for sale at the initial public
offering price to certain selling equity owners of HealthRider and certain
employees of, and other persons associated with, the Company. The number of
shares of Common Stock available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares which are not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.
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.
U-2
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be 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, are 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.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-3
<PAGE>
[Photo of a woman [Photo of a man exercising
exercising on a on a weight machine.]
stationary bicycle
machine.]
[Photo of the Company's [Photo of a pair of the [Photo of an assembly line
executive offices Company's weight in one of the Company's
building located in lifting gloves.] manufacturing
Logan, Utah.] facilities.]
[Photo of a pair of the [Photo of a HealthRider
Company's ankle weights.] product display located
inside a mall.]
<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................................................. 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Background................................................................ 21
Unaudited Pro Forma Financial Data........................................ 22
Selected Consolidated Financial Data...................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Business.................................................................. 42
Management................................................................ 58
Certain Relationships and Related Transactions............................ 65
Principal and Selling Stockholders........................................ 70
Description of Capital Stock.............................................. 73
Stockholders Agreement.................................................... 75
Description of Certain Indebtedness....................................... 77
Shares Eligible for Future Sale........................................... 78
Legal Matters............................................................. 79
Experts................................................................... 79
Additional Information.................................................... 80
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
-----------
UNTIL , 1996 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), 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 ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
ICON FITNESS CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
[ART LOGO APPEARS HERE]
FITNESS CORPORATION
-----------
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................................................ $84,267.24
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 1,706,290 shares of 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 426,573 shares of 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 April 13, 1995, the Company commenced the exchange of its 13% Senior
Subordinated Notes due 2002, Series B, for all of its 13% Senior Subordinated
Notes due 2002, Series A, and the exchange of its 15% Senior Discount Notes
due 2004, Series B, for all of its 15% Senior Discount Notes due 2004, Series
A. The Company did not receive any proceeds from these exchanges.
On November 14, 1995, Mr. Beck and Mr. White exercised options to purchase
18,355 and 12,237 shares, respectively, of Common Stock at $.08226 per share.
Other employees exercised options to purchase in aggregate 23,556 shares of
Common Stock at $.08226 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, 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
on Form S-1 of Health & Fitness and IHF Holdings, as amended, (Registration
No. 33-87930-01).
<TABLE>
<CAPTION>
EXHIBIT
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(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.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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(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.
10.37 Asset Purchase Agreement dated as of July 3, 1996 by and among
IHF Capital, Inc. HealthRider Acquisition Corp. and
HealthRider, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.38 Asset Purchase Agreement for the purchase of certain
assets of Parkway Manufacturing, Inc. dated July 3, 1996.
10.39** The Company's 1996 Stock Option Plan.
11.1** Statement regarding computation of pro forma income per
share.
16 Letter of Deloitte & Touche LLP regarding change in
certifying accountant.
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 Arthur Andersen, LLP.
23.4** Consent of Ropes & Gray (included in Exhibit 5).
24(4) Powers of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- --------
* Filed as the correspondingly numbered exhibit to the Registration Statement
on Form S-1 of Health & Fitness and IHF Holdings, as amended (Registration
No. 33-87930-01).
** To be filed by amendment.
(1) Filed as Exhibit 10.4 to the Registration Statement on Form S-1 of Health
& Fitness and IHF Holdings, as amended (Registration No. 33-87930-01).
(2) Filed as Exhibit 4.3 to the Registration Statement on Form S-1 of Health &
Fitness and IHF Holdings, as amended (Registration No. 33-87930-01).
(3) Filed as part of Exhibit 4 to the Registration Statement on Form S-1 of
Health & Fitness and IHF Holdings, as amended (Registration No. 33-87930-
01).
(4) Previously filed as part of this Registration Statement.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES OF THE COMPANY FOR THE THREE
YEARS ENDED MAY 31, 1996 ARE INCLUDED IN THIS REGISTRATION STATEMENT:
Schedule VIII Valuation and qualifying accounts for the years ended May 31,
1994, 1995 and 1996.
ITEM 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) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
(2) 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.
(3) 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 Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Logan, State of Utah, on the 13th day of August, 1996.
IHF CAPITAL, INC.
*
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 13th day of August, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
Chairman of the Board of Directors and
* Chief Executive Officer (principal
- ------------------------------------- executive officer)
SCOTT R. WATTERSON
Vice President, Chief Financial and
* Accounting Officer and Treasurer
- ------------------------------------- (principal financial and accounting
S. FRED BECK officer)
Director
*
- -------------------------------------
GARY E. STEVENSON
- ------------------------------------- Vice Chairman of the Board of
ERIC WEIDER Directors
Vice Chairman of the Board of
* Directors
- -------------------------------------
ROBERT C. GAY
- ------------------------------------- Director
RICHARD RENAUD
Director
*
- -------------------------------------
RONALD P. MIKA
Director
*
- -------------------------------------
GEOFFREY S. REHNERT
/s/ S. Fred Beck
*By: ___________________________
S. FRED BECK, POWER OF ATTORNEY
</TABLE>
II-6
<PAGE>
IHF CAPITAL, INC.
CONSOLIDATED SUPPLEMENTAL SCHEDULE VIII
<TABLE>
<CAPTION>
RECAPITALIZED
COMPANIES COMPANY
------------- --------------------------
YEARS ENDED
MAY 31, YEAR ENDED MAY 31,
------------- --------------------------
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
ALLOWANCES FOR DOUBTFUL ACCOUNTS,
ADVERTISING AND CREDIT MEMOS:
Balance at Beginning of year......... $ 2,146,000 $ 3,279,000 $5,308,000
Additions
Charged to Costs and Expenses (Al-
lowance for Doubtful Accounts and
Credit Memos)..................... 1,864,000 3,792,000 3,662,000
Charged to Costs and Expenses (Ad-
vertising)........................ 12,907,000 14,114,000 34,585,000
Recoveries on Accounts Charged Off. -- -- 74,000
Deductions
Accounts Charged Off (Allowance for
Doubtful Accounts and Credit
Memos)............................ (1,163,000) (2,666,000) (3,569,000)
Accounts Charged Off (Advertising). (12,475,000) (13,211,000) (32,465,000)
------------ ------------ ------------
Balance at End of Year............... $ 3,279,000 $ 5,308,000 $ 7,595,000
============ ============ ============
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE 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.
10.37 Asset Purchase Agreement dated as of July 3, 1996
by and among IHF Capital, Inc., HealthRider
Acquisition Corp. and HealthRider, Inc.
10.38 Asset Purchase Agreement for the purchase of
certain assets of Parkway Manufacturing, Inc. dated
July 3, 1996.
10.39** The Company's 1996 Stock Option Plan.
11.1** Statement regarding computation of pro forma income
per share.
16 Letter of Deloitte & Touche LLP regarding change in
certifying accountant.
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 Arthur Andersen, LLP.
23.4** Consent of Ropes & Gray (included in Exhibit 5).
24(4) Powers of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- --------
* Filed as the correspondingly numbered exhibit to the Registration Statement
on Form S-1 of Health & Fitness and IHF Holdings, as amended (Registration
No. 33-87930-01).
** To be filed by amendment.
(1) Filed as Exhibit 10.4 to the Registration Statement on Form S-1 of Health
& Fitness and IHF Holdings, as amended (Registration No. 33-87930-01).
(2) Filed as Exhibit 4.3 to the Registration Statement on Form S-1 of Health &
Fitness and IHF Holdings, as amended (Registration No. 33-87930-01).
(3) Filed as part of Exhibit 4 to the Registration Statement on Form S-1 of
Health & Fitness and IHF Holdings, as amended (Registration No. 33-87930-
01).
(4) Previously filed as part of this Registration Statement.
SCHEDULES
Schedule VIII Valuation and qualifying accounts for the years ended May 31,
1994, 1995 and 1996.
<PAGE>
Exhibit 10.37
ASSET PURCHASE AGREEMENT
DATED AS OF JULY 3, 1996
BY AND AMONG
IHF CAPITAL, INC.
HEALTHRIDER ACQUISITION CORP.
AND
HEALTHRIDER, INC.
<PAGE>
================================================================================
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS................................................................ 1
2. PURCHASE AND SALE OF ASSETS................................................ 1
2.1. Purchase of Assets.................................................... 1
------------------
2.2. Retained Assets....................................................... 4
---------------
2.3. Assumed Liabilities................................................... 4
-------------------
2.4. Retained Liabilities.................................................. 4
--------------------
2.5. Purchase Price........................................................ 7
--------------
2.6. Allocation of Purchase Price.......................................... 7
----------------------------
2.7. Closing............................................................... 8
-------
2.8. Execution and Delivery of Documents of Title by the Company........... 8
-----------------------------------------------------------
2.9. Execution and Delivery of Documents by the Buyer...................... 9
------------------------------------------------
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................. 9
3.1. Corporate Matters, etc................................................ 9
----------------------
3.1.1. Organization, Power and Standing.................................. 9
--------------------------------
3.1.2. Capitalization.................................................... 9
--------------
3.1.3. Subsidiaries......................................................10
------------
3.1.4. Charter and By-laws...............................................10
-------------------
3.2 Financial Statements, etc..............................................10
-------------------------
3.2.1. Financial Information.............................................10
---------------------
3.2.2. Character of Financial Information................................11
----------------------------------
3.2.3. Inventory and Receivables.........................................12
-------------------------
3.2.4. Change in Condition...............................................12
-------------------
3.3. Liabilities...........................................................14
-----------
3.3.1. Debt..............................................................14
----
3.3.2. Absence of Undisclosed Liabilities................................14
----------------------------------
3.4. Assets................................................................14
------
3.4.1. Title to Assets...................................................14
---------------
3.4.2. Real Property and Equipment.......................................15
---------------------------
3.4.3. Intellectual Property Rights......................................16
----------------------------
3.5. Contracts, etc........................................................17
--------------
3.5.1. Certain Contractual Obligations...................................17
-------------------------------
3.5.2. Nature of Contracts, etc..........................................19
------------------------
3.5.3. Transactions with Affiliates......................................19
----------------------------
3.5.4. Non-Contravention, etc............................................20
----------------------
3.6. Insurance.............................................................20
---------
3.7. Compliance with Laws, etc.............................................21
-------------------------
3.7.1. Compliance Generally..............................................21
--------------------
3.7.2. Tax Matters.......................................................21
-----------
3.7.3. Employee Benefit Plans............................................23
----------------------
3.7.4. Non-Contravention, etc............................................25
----------------------
3.8. Environmental and Safety Matters, etc.................................26
-------------------------------------
3.9. Labor Relations.......................................................26
---------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.10. Customers, Suppliers and Distributors................................26
-------------------------------------
3.11. Litigation, etc......................................................27
---------------
3.11.1. General Litigation...............................................27
------------------
3.11.2. Products Liability Matters.......................................27
--------------------------
3.12. Disclosure...........................................................27
----------
3.13. Authorization and Enforceability.....................................28
--------------------------------
3.14. Brokers, etc.........................................................28
------------
3.15. Approval of Stockholders.............................................28
------------------------
3.16. Bank Accounts........................................................29
-------------
3.17 Disclaimer...........................................................29
----------
4. REPRESENTATIONS AND WARRANTIES OF IHF AND THE BUYER........................29
4.1. Corporate Matters.....................................................29
-----------------
4.2. Authorization and Enforceability......................................29
--------------------------------
4.3. Non-Contravention, etc................................................29
----------------------
4.4 Disclaimer............................................................30
----------
5. CERTAIN AGREEMENTS OF THE PARTIES..........................................30
5.1. Certain Pre-Closing Matters...........................................30
---------------------------
5.1.1. Exclusivity.......................................................30
-----------
5.1.2. Access to Premises and Information................................30
----------------------------------
5.1.3. Confidentiality Covenant of IHF and the Buyer.....................31
---------------------------------------------
5.1.4. Administrative and Regulatory Matters.............................31
-------------------------------------
5.1.5. Operation of Business in the Ordinary Course......................33
--------------------------------------------
5.1.6. Certain Notices...................................................34
---------------
5.1.7. Preparation for Closing...........................................35
-----------------------
5.1.8. Consents..........................................................35
--------
5.1.9. Additional Financial Statements...................................35
-------------------------------
5.1.10. Contracts........................................................35
---------
5.1.11. Nondisclosure and Noncompete Agreements..........................35
---------------------------------------
5.1.12. Employee Relations and Benefits..................................36
-------------------------------
5.2. Certain Closing and Other Matters.....................................37
---------------------------------
5.2.1. Expenses of Transaction...........................................37
-----------------------
5.2.2. Finder's or Broker's Fees.........................................37
-------------------------
5.2.3. Public Announcements, etc.........................................37
-------------------------
5.2.4. Certain Closing Agreements........................................37
--------------------------
5.2.5. Covenant Not to Compete...........................................38
-----------------------
5.2.6. Waiver of Bulk Transfer Requirements..............................39
------------------------------------
5.2.7. Tax Refund........................................................39
----------
6. CONDITIONS TO THE OBLIGATION TO CLOSE OF IHF AND THE BUYER.................42
6.1. Representations, Warranties and Covenants.............................42
-----------------------------------------
6.1.1. Continued Accuracy of Representations and Warranties..............42
----------------------------------------------------
6.1.2. Performance of Agreements.........................................42
-------------------------
6.1.3. Closing Certificate...............................................42
-------------------
6.2. Consents, etc.........................................................43
-------------
6.3. Certain Deliveries....................................................43
------------------
6.4. Closing Agreements....................................................43
------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
6.5. Legality; Governmental Authorization; General Litigation..............44
--------------------------------------------------------
6.6. No Pending Action.....................................................44
-----------------
6.7. Proceedings Satisfactory..............................................44
------------------------
6.8. Corporate Documents...................................................45
-------------------
6.9. Transfer of Necessary Permits.........................................45
-----------------------------
6.10. Transfer of Purchased Assets.........................................45
----------------------------
6.11. Assignments of Intangibles...........................................45
--------------------------
6.12. Opinion of Counsel...................................................46
------------------
6.13. Material Adverse Effect..............................................46
-----------------------
6.14. Minimum Working Capital..............................................46
-----------------------
6.15 Projections...........................................................46
-----------
7. CONDITIONS TO THE OBLIGATION TO CLOSE OF THE COMPANY.......................46
7.1. Representations, Warranties and Covenants.............................46
-----------------------------------------
7.1.1. Continued Accuracy of Representations and Warranties..............46
----------------------------------------------------
7.1.2. Performance of Agreements.........................................47
-------------------------
7.1.3. Officer's Certificate.............................................47
---------------------
7.2. Consents, etc.........................................................47
-------------
7.3. Closing Agreements....................................................47
------------------
7.4. Government Authorization; Litigation..................................47
------------------------------------
7.5. Opinion of Counsel....................................................48
------------------
7.6. Assumption of Liabilities.............................................48
-------------------------
7.7. Proceedings Satisfactory..............................................48
------------------------
8. INDEMNIFICATION............................................................48
8.1. Indemnification.......................................................48
---------------
8.1.1. Indemnification of IHF and the Buyer..............................48
------------------------------------
8.1.2. Indemnification by the Buyer......................................49
----------------------------
8.1.3. Third Person Claims...............................................49
-------------------
8.1.4. Limitation on Damages.............................................50
---------------------
8.1.5. Exclusive Remedy..................................................51
----------------
8.2. Certain Matters of Construction.......................................51
-------------------------------
8.3. No Circular Recovery..................................................51
--------------------
9. DEFINITIONS................................................................51
9.1. Certain Matters of Construction.......................................52
-------------------------------
9.2. Cross Reference Table.................................................53
---------------------
9.3. Certain Definitions...................................................54
-------------------
9.3.1. Action............................................................54
------
9.3.2. Affiliate.........................................................54
---------
9.3.3. Business..........................................................54
--------
9.3.4. Business Day......................................................55
------------
9.3.5. By-laws...........................................................55
-------
9.3.6. Charter...........................................................55
-------
9.3.7. Code..............................................................55
----
9.3.8. Compensation......................................................55
------------
9.3.9. Contractual Obligation............................................55
----------------------
9.3.10. Debt.............................................................55
----
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
9.3.11. Distribution.....................................................56
9.3.12. Enforceable......................................................56
-----------
9.3.13. Equity Security..................................................56
---------------
9.3.14. ERISA............................................................56
-----
9.3.15. Generally Accepted Accounting Principles.........................57
----------------------------------------
9.3.16. Guarantee........................................................57
---------
9.3.17. Governmental Authority...........................................57
----------------------
9.3.18. Governmental Order...............................................57
------------------
9.3.19. Legal Requirement................................................57
-----------------
9.3.20. Lien.............................................................57
----
9.3.21. Material Adverse Effect..........................................58
-----------------------
9.3.22. Members of the Immediate Family..................................58
-------------------------------
9.3.23. Ordinary Course of Business......................................58
---------------------------
9.3.24. Person...........................................................59
------
9.3.25. Registration Statement...........................................59
----------------------
9.3.26. Subsidiary.......................................................59
----------
9.3.27. Taxes............................................................59
-----
9.3.28. Tax Return.......................................................59
----------
10. GOVERNING LAW.............................................................60
10.1. Governing Law........................................................60
-------------
10.2. Reliance.............................................................60
--------
10.3. Disputes, etc........................................................60
-------------
11. TERMINATION...............................................................60
11.1. Termination of Agreement.............................................61
------------------------
11.2. Effect of Termination................................................62
---------------------
12. MISCELLANEOUS.............................................................62
12.1. Entire Agreement; Waivers............................................62
-------------------------
12.2. Amendment or Modification, etc.......................................62
------------------------------
12.3. Survival, etc........................................................63
-------------
12.4. Headings, etc........................................................63
-------------
12.5. Schedules; Listed Documents, etc.....................................63
--------------------------------
12.6. Severability.........................................................63
------------
12.7. Counterparts.........................................................64
------------
12.8. Knowledge............................................................64
---------
12.9. Successors and Assigns...............................................64
----------------------
12.10 No Third Party Beneficiaries.........................................65
----------------------------
13. NOTICES...................................................................65
</TABLE>
iv
<PAGE>
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made as of the 3 day of July, 1996, by
and among IHF Capital, Inc., a Delaware corporation ("IHF"), HealthRider
Acquisition Corp., a Delaware corporation and an indirect subsidiary of IHF (the
"Buyer"), and HealthRider, Inc., a Delaware corporation (the "Company").
RECITALS
--------
This Agreement sets forth the terms and conditions upon which IHF will
cause the Buyer to purchase from the Company, and the Company will sell to the
Buyer, substantially all the assets of the Company (other than the Retained
Assets, as hereinafter defined) and the business and goodwill of the Company as
a going concern, subject only to the Assumed Liabilities described in Section
2.3 below (and exclusive of the Retained Liabilities described in Section 2.4
below), for the consideration provided herein (the "Acquisition").
WITNESSETH:
-----------
In consideration of the mutual promises, representations and warranties,
covenants, payments and actions herein provided, the parties hereto, each
intending to be legally bound hereby, do agree as follows:
1. DEFINITIONS
Certain terms are used in this Agreement as specifically defined herein.
These definitions are set forth or referred to in Section 9 hereof.
2. PURCHASE AND SALE OF ASSETS
2.1. Purchase of Assets.
------------------
Upon the terms and subject to the conditions contained in this
Agreement, at the Closing (as defined in Section 2.7 below), the Company
shall sell, assign, transfer and convey to the Buyer, and the Buyer shall
purchase, acquire and accept from the Company, the business of the Company
as a going concern, including all of the Company's assets of every kind and
description in their current form and condition and as and where they are
currently located (the "Purchased Assets") (other than those assets
included in the Retained Assets as defined in Section 2.2 below), and
subject only to those certain liabilities and obligations of the Company
which are defined in Section 2.3 (the "Assumed Liabilities"). The sale,
transfer, conveyance, and assignment by the Company of the Purchased Assets
to the Buyer shall be effected on the Closing Date by the Company's
execution and delivery to the Buyer of a Bill of Sale in substantially the
form of Exhibit A hereto, and the
---------
1
<PAGE>
Assignment of Intangibles substantially in the form of Exhibit B hereto,
---------
together with such other instruments of conveyance or assignment as the
Buyer may reasonably request. At the Closing, all of the Purchased Assets
shall be transferred and conveyed to the Buyer free and clear of all Liens,
except as otherwise specifically disclosed on Schedule 3.4.1 hereto. The
--------------
Purchased Assets include, without limitation, the following assets and
properties (other than those assets included in the Retained Assets as
defined in Section 2.2):
(a) all assets owned by the Company on May 31, 1996, and
reflected on the most recent of the Balance Sheets of the Company,
with only such changes therein as have occurred in the ordinary course
of the Business since the date of most recent of the Balance Sheets.
Such assets include, without limitation, (i) all trade and other
accounts receivable and other Debt owing to the Company and including
the benefit of all collateral, security, guaranties, and similar
undertakings received or held in connection therewith; (ii) all
inventories wherever located, including raw materials, goods consigned
to vendors or subcontractors, work in process, finished goods and
goods in transit; (iii) all prepaid expenses, deposits and rights to
refunds from customers and suppliers, including prepaid premiums under
insurance policies; (iv) all machinery, equipment, fixtures and
furniture; (v) all motor vehicles; (vi) all real estate owned or
leased, including the buildings and improvements thereon and as more
particularly described on Schedule 3.4.2(a) attached hereto; and (vii)
-----------------
all cash and cash equivalents, including, without limitation, the
savings, checking and money market accounts, certificates of deposit
and the like which are set forth on Schedule 3.16 attached hereto (to
-------------
be transferred at the Closing to an account or accounts designated by
the Buyer);
(b) all rights and interests of the Company in and to any
contracts, including contracts for the purchase of materials, supplies
and services and the sale of products and services, equipment leases,
or other obligations relating to the borrowing of money by the
Company, and any other contract of the Company, including without
limitation, those listed on Schedule 3.5.1 attached hereto; provided,
-------------- --------
however, that with regard to the indemnification agreements listed on
-------
Schedule 3.5.1 between the Company and any of its officers and
--------------
directors, any Shareholder Claims made under such agreements shall not
be assumed by the Buyer and shall constitute Retained Liabilities to
be retained by the Company and, following the Closing, the Buyer will
not be required to continue to maintain any director and officer
indemnity insurance policies as otherwise required therein;
(c) all of the Company's books, records and other data, except
minute and stock record books, journals, ledgers and books of original
entry;
(d) all of the Company's goodwill, dealer and customer lists and
all other sales and marketing information, and all know-how,
technology, drawings, engineering specifications, bills of materials,
software and other intangible assets of the Company;
2
<PAGE>
(e) to the extent assignable, all of the Company's interest in
patents, patent applications, proprietary designs, copyrights,
tradenames, servicemarks, trademarks and trademark applications
(including, without limitation, the exclusive right to use the name
"HealthRider" and all variants thereof in connection with products
sold by the Company on or prior to the date of this Agreement), and
all patents, trademarks, servicemarks, proprietary designs, trade
names, assumed names and copyrights listed in Schedule 3.4.3 attached
--------------
hereto, in each case together with the goodwill appurtenant thereto,
all federal, state, local and foreign registrations thereof, if
applicable, all common law rights thereto, and all claims or causes of
action for infringement thereof;
(f) all permits, licenses, orders, ratings and approvals of all
federal, state, local or foreign governmental or regulatory
authorities or industrial bodies which are held by the Company, to the
extent the same are transferable;
(g) all rights of the Company (whether or not yet asserted) to
causes of action, lawsuits, judgments, claims and demands of any
nature except for any such causes of action, lawsuits, judgments,
claims and demands against the Company's officers, directors and
shareholders that do not constitute Retained Liabilities;
(h) all rights and interest of the Company in and to the
Employee Plans of the Company listed on Schedule 3.7.3 attached hereto
--------------
(excluding all Welfare Plans and Equity Plans) and the assets included
therein or held thereunder;
(i) all rights and interests of the Company under the insurance
policies and contracts listed on Schedule 3.6 hereto and all present
-------------
and future insurance proceeds which may be payable under the insurance
policies and contracts listed on Schedule 3.6 attached hereto;
------------
(j) all equity securities of any Subsidiaries and joint ventures
of the Company;
(k) all tax refunds owed or which may become owing to the
Company or any of its Subsidiaries except for refunds attributable
exclusively to (i) operations of the Company after the Closing
unrelated to the transactions contemplated hereby and (ii) payment of
Retained Liabilities to the extent not accrued in the Financial
Statements; and
(l) except for Retained Assets described in Section 2.2 below,
all other items of property, real or personal, tangible or intangible,
including without limitation all securities, corporate names,
restrictive and negative covenant agreements with employees and
others, computer programs, tapes, discs and time-sharing files, owned,
used by (under assumable contract rights) or accruing to the benefit
of the Company.
3
<PAGE>
2.2. Retained Assets.
----------------
The Company will retain ownership only of the following assets
(collectively, the "Retained Assets"):
(a) the Company's minute and stock record books, journals,
ledgers and books of original entry;
(b) the Company's rights under this Agreement; and
(c) the Company's Welfare Plans and Equity Plans.
2.3. Assumed Liabilities.
--------------------
The Buyer shall assume and agree to pay, perform and discharge the
Assumed Liabilities, and will pay, perform and discharge the Assumed
Liabilities as they become due. The Assumed Liabilities shall consist of
all liabilities and obligations of the Company and the Subsidiaries listed
on Schedule 3.1.3, whether absolute, accrued, due, to become due, known or
--------------
unknown, matured or unmatured, fixed, contingent or otherwise, other than
the Retained Liabilities. The Buyer's assumption of the Assumed
Liabilities shall be effected on the Closing Date by the Buyer's execution
and delivery to the Company of an Instrument of Assumption in substantially
the form of Exhibit C hereto. The Buyer's assumption of the Assumed
---------
Liabilities shall in no way expand the rights or remedies of third parties
against the Buyer as compared to the rights and remedies which such parties
would have had against the Company had this Agreement not been consummated.
IHF covenants and agrees that, upon and subject to the Closing, it will pay
or cause the Buyer to pay the Purchase Price to be paid to the Company in
accordance with Section 2.5 hereof and will further cause the Buyer to
perform and satisfy the funded Debt obligations of the Company to General
Electric Credit Corporation and to the equipment lessors as and to the
extent specifically set forth on Schedule 3.3.1 hereto.
--------------
2.4. Retained Liabilities.
---------------------
The liabilities and obligations which shall be retained by the Company
(the "Retained Liabilities") shall consist only of the following:
(a) all liabilities of the Company resulting from, constituting,
arising out of, or relating to a breach of any of the covenants or
agreements of the Company hereunder, including without limitation the
Company's indemnification obligations under Section 8 hereof;
(b) all liabilities of the Company or any of its Subsidiaries
for federal, state, local or foreign Taxes levied upon the Company,
its shareholders or any of the Company's Subsidiaries in connection
with the sale of the Purchased Assets and other transactions
contemplated herein or in connection with any liquidation or
4
<PAGE>
dissolution of the Company, including, but not limited to, any Taxes
resulting from the Subsidiaries ceasing to be members of the
affiliated group, as defined in Section 1504 of the Code, of which the
Company is the corporate parent;
(c) all liabilities of the Company or any of its Subsidiaries
arising in connection with operations unrelated to the Business;
(d) any liability of the Company or any of its Subsidiaries
either based on (i) criminal conduct or (ii) intentionally tortious or
illegal conduct as finally determined by a court or regulatory
authority of competent jurisdiction (except with respect to certain of
the pending matters as and only to the extent specifically set forth
on Schedule 2.4(d) which matters so specifically disclosed and
---------------
identified as such shall constitute Assumed Liabilities); it being
acknowledged that the Buyer shall at its expense defend and control
the defense of any proceeding involving conduct referenced in clause
(ii) hereof and liability in respect of such conduct (including the
Buyer's reasonable costs of investigation and defense) shall not
constitute a Retained Liability unless and until a final determination
is entered by a court or regulatory authority as aforesaid;
(e) any liability or obligation incurred by the Company or any
of its Subsidiaries for any and all legal, accounting, brokers',
finders', and other professional fees and expenses at any time
incurred, including without limitation fees and expenses to be paid by
the Company under Sections 5.2.1 and 5.2.2 as well as any other such
fees and expenses incurred in connection with the negotiation,
execution or performance of this Agreement, except for (i)
Compensation payable to employees of the Company in the Ordinary
Course of Business as specifically set forth on Schedule 3.5.1 (a) and
------------------
(ii) any such fees and expenses that are unrelated to transactions
with IHF or the Buyer as and then only to the extent specifically set
forth on Schedule 2.4 (e) and subject to independent review and
----------------
verification by the Buyer, which Compensation and fees and expenses so
specifically disclosed shall constitute Assumed Liabilities;
(f) all liabilities incurred by the Company resulting from
actions or events occurring after the Closing Date (other than
Retained Liabilities, which shall remain liabilities of the Company at
any time incurred);
(g) all liabilities or obligations associated with the Welfare
Plans and Equity Plans;
(h) all liabilities or obligations of the Company or any of its
Subsidiaries with regard to claims (whether or not yet asserted) that
any Person ("Shareholder Claims") has, had or may at any time have
against the Company or any of its Subsidiaries or its or their
directors or officers based upon, arising out of or relating to
ownership, or claims to ownership (including rights or claims to
issuance in the
5
<PAGE>
future), of any equity interest in the Company or its Subsidiaries,
including but not limited to:
(i) claims arising under or relating to any or all of: (1) the
Royalty Agreement between the Company and all of its
original investors, dated May 15, 1992; (2) the Letter
Agreement between Dale W. Brunken and the Company, dated
July 25, 1992; (3) the Royalty Agreement between the
Company and Craig K. Poulton, dated December 21, 1992; (4)
all claims arising out of or relating to the litigation
pending as Patricia C. Anderson, James T.F. Anderson, Dean
-----------------------------------------------
M. Sato and Donna Sato v. ExerHealth Inc., Gary M. Smith
--------------------------------------------------------
and Helen Smith, United States District Court for the
---------------
District of Utah, Case No. 2:95 CV 522W; (5) the
Confidential Settlement Agreement, Release and Hold
Harmless Agreement between the Company, Gary H. Smith,
Helen M. Smith, Patricia C. Anderson, James T.F. Anderson,
Dean M. Sato, Donna Sato, Kae Manning and Earl Manning;
(6) the Settlement and Release Agreement between the
Company and the parties to the original Royalty Agreement
described in (1) above, dated September 25, 1995; (7) the
Share Purchase and Option Agreement dated August 20, 1992,
between the Company, Gary H. Smith, T-6G Limited
Partnership, as amended by the First Amendment to Share
Purchase and Option Agreement dated October 19, 1992; (8)
all claims of G. Preston Parker to shares of stock of
Company pursuant to pending litigation in the Third
Judicial District Court, Salt Lake County, Utah, Civil No.
950905724; (9) rights to transfer of shares of stock of
Company to Johnny Miller Enterprises, Inc. pursuant to
that Agreement dated March 7, 1996; (10) Stock Option
Agreements dated January 10, 1994 between Company and
James R. Jeppson (most of which are assigned to third
parties), Bretton Lee Ammon, David Marsden Babcock and
Dallon G. Smith; (11) Stock Option Agreement dated
September 27, 1992 between Company and Stephen A. Pia;
and; (12) any other Contractual Obligation to issue any
capital stock or other equity interest in the Company to
any Person;
(ii) all claims regarding fiduciary duties or duties of
loyalty;
(iii) all derivative claims; and
(iv) all dissenter claims that any shareholder of the Company
may have under applicable state law.
(i) any liability or claim which may arise by reason of or
relate to the Company's post-Closing activities or liquidation or
dissolution;
(j) all topping-fees, break-up fees, or similar or related
fees or claims in
6
<PAGE>
connection with other offers, if any, to acquire the Purchased Assets
or any interest in the Company; and
(k) all liabilities to Affiliates of the Company not disclosed
on Schedule 3.5.1 or Schedule 3.5.3 hereof.
-------------- --------------
2.5. Purchase Price; Payment of Certain Shareholder Royalties.
---------------------------------------------------------
(a) Upon the terms and subject to the conditions contained in this
Agreement, in reliance upon the representations, warranties and agreements
of the Company contained herein, and in consideration of the sale,
assignment, transfer and delivery of the Purchased Assets and covenants not
to compete received from the Company, IHF will cause the Buyer to pay, by
wire transfer of immediately available funds or certified bank check, to
the Company, Sixteen Million Eight Hundred Thousand and 00/100 Dollars
($16,800,000) (the "Purchase Price"). Payment of the Purchase Price to the
Company shall be made to the Company's account as set forth on Exhibit D
---------
attached hereto.
(b) In addition to the payment of the Purchase Price as aforesaid and
subject to the Closing and the other terms and conditions set forth
herein, the Buyer shall pay at the Closing an amount equal to accrued and
unpaid royalty payments due and payable by the Company to certain
shareholders, including Gary Smith, but only to the extent and in the
amounts specifically set forth next to the name of each such shareholder on
Schedule 3.5.1(e) hereto. Payment of the shareholder royalties pursuant to
-----------------
this Section 2.5(b) shall be made to the Company's account as set forth on
Exhibit D attached hereto and the Company shall have exclusive
---------
responsibility and associated liability for disbursement of such royalty
payments to its shareholders.
2.6. Allocation of Purchase Price.
-----------------------------
The purchase price for the Purchased Assets, which shall be
determined as required for income Tax purposes, shall be allocated among
the Purchased Assets in accordance with the principles of Section 1060 of
the Code and the Regulations thereunder under the so-called residual method
in proportion to their relative fair market values as of May 31, 1996. For
purposes hereof: accounts receivable shall have a fair market value equal
to their face amount less an allowance for uncollectibility; inventory
shall have a fair market value equal to its net realizable value, which for
this purpose shall be its selling price less the cost of sale of the
inventory; the interest in the Company's real estate joint venture shall be
the fair market value agreed upon by the parties; and the fair market value
of all other assets shall be their net book value. The Buyer shall prepare
a schedule showing the purchase price for
7
<PAGE>
income Tax purposes and the allocation of such purchase price to the
Purchased Assets in accordance with the provisions of this Section 2.6
within thirty days after the Closing Date and shall deliver a copy of that
schedule to the Company for its review. The schedule prepared by Buyer
shall constitute the allocation of purchase price pursuant to this Section
2.6 unless, within ten (10) days of the delivery to the Company of such
schedule, the Company delivers notice to the Buyer of a written objection
to the purchase price allocation, which notice shall set forth each
objection and the basis therefor in reasonable detail. If the Company and
the Buyer are unable to agree as to the purchase price allocation based
upon the principles set forth in this Section 2.6, the purchase price
allocation shall be resolved in a manner similar to the resolution
procedure set forth in Section 5.2.7 hereof in a timely manner sufficient
to enable the Company to file a timely Tax Return for its 1996 Taxable
year-end. The Company, IHF, and the Buyer covenant and agree that each will
be bound by such allocation for all purposes and will account for and
report the purchase and sale contemplated hereby for all financial,
accounting and Tax purposes in accordance with such allocation to the
extent permissible under applicable accounting and tax laws and will not
take any position for any purpose inconsistent with such allocation for
income Tax purposes.
2.7. Closing.
-------
The closing (the "Closing") of the transactions contemplated by this
document will take place at the offices of Kruse, Landa & Maycock, Salt
Lake City, Utah on the fifth business day following the day on which the
last to be received of all authorizations, approvals, and consents that are
specified as conditions to the consummation of the transactions
contemplated hereby have been obtained, or such other date as IHF, the
Buyer and the Company shall agree in writing; provided, however, that
without the express written agreement of IHF, the Buyer and the Company,
the Closing Date shall not be extended beyond August 31, 1996. The date of
Closing is sometimes referred to herein as the "Closing Date."
2.8. Execution and Delivery of Documents of Title by the Company.
------------------------------------------------------------
At the Closing, the Company shall execute and deliver to the Buyer the
Bill of Sale attached hereto as Exhibit A and such deeds, conveyances,
---------
bills of sale, certificates of title, assignments, assurances and other
instruments and documents as IHF and/or the Buyer may reasonably request in
order to effect the sale, conveyance, and transfer of the Purchased Assets
from the Company to the Buyer . Such instruments and documents shall be
sufficient to convey to the Buyer good and merchantable title in all of the
Purchased Assets, free and clear of all Liens except as otherwise
specifically disclosed on Schedule 3.4.1. The Company will, from time to
--------------
time after the Closing Date, take such additional actions and execute and
deliver such further documents as IHF and/or the Buyer may reasonably
request in order more effectively to sell, transfer and convey the
Purchased Assets to the Buyer and to place the Buyer in position to
operate and control all of the Purchased Assets.
8
<PAGE>
2.9. Execution and Delivery of Documents by the Buyer.
------------------------------------------------
At the Closing, the Buyer shall execute and deliver to the Company an
Instrument of Assumption in the form attached hereto as Exhibit C, and such
---------
other documents as the Company may reasonably request in order to evidence
the Buyer's assumption of the Assumed Liabilities. The Buyer will, from
time to time after the Closing Date, take such additional action and
deliver such further documents as the Company may reasonably request in
order for the Buyer to effectively assume the Assumed Liabilities.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce IHF and the Buyer to enter into and perform this
Agreement and to consummate the transactions contemplated hereby, the Company
represents and warrants to IHF and the Buyer as follows:
3.1. Corporate Matters, etc.
-----------------------
3.1.1. Organization, Power and Standing.
---------------------------------
Each of the Company and its Subsidiaries is a corporation,
partnership or limited liability company duly organized, validly
existing and in good standing under the laws of the jurisdiction of
its incorporation or organization and has all requisite power and
authority, corporate and otherwise, to execute, deliver and perform
each of the Closing Agreements to which it is a party, to carry on the
Business as currently conducted, and to consummate the transactions
contemplated hereby. Each of the Company and its Subsidiaries is duly
qualified or licensed to do business as a foreign corporation, and is
in good standing as such, in each jurisdiction in which the failure to
be so qualified or licensed and in good standing would have a Material
Adverse Effect, and each of such jurisdictions is listed on Schedule
--------
3.1.1.
------
3.1.2. Capitalization.
--------------
The Company's authorized capital stock is as set forth on
Schedule 3.1.2 and the issued and outstanding capital stock of the
--------------
Company is owned beneficially and of record by the parties as set
forth on Schedule 3.1.2. Except as set forth on Schedule 3.1.2, all
-------------- --------------
of such outstanding shares are duly authorized, validly issued, fully
paid, non-assessable, free of all Liens of the Company and pre-emptive
rights. There are, to the Company's knowledge, no outstanding options,
warrants, rights or agreements of any kind for the issuance or sale
of, or outstanding securities convertible into or exchangeable for,
any additional shares of common stock or any other Equity Security of
the Company except as set forth on Schedule 3.1.2.
--------------
9
<PAGE>
3.1.3. Subsidiaries.
-------------
The Company has no Subsidiaries except as set forth on
Schedule 3.1.3. Such Schedule sets forth the name and jurisdiction of
--------------
incorporation or formation of each Subsidiary. Except as set forth on
Schedule 3.1.3, the Company is the beneficial and record holder of all
--------------
of the issued and outstanding shares of capital stock or interests of
each Subsidiary, such shares or interests have been duly authorized,
validly issued, are fully paid and nonassessable, and the Company owns
such shares free and clear of any Liens other than restrictions on
transfer imposed by applicable securities laws. There is no
Contractual Obligation or Charter or By-law provision which obligates
any Subsidiary to issue, purchase, or redeem, or make any payment in
respect of, any shares of its capital stock or other securities
convertible into or exchangeable for shares of capital stock or which
provides for any stock appreciation or similar rights. The Company has
no investment in any Person, other than investments in (a) its
Subsidiaries and (b) demand deposit or money market accounts.
3.1.4. Charter and By-laws.
-------------------
The Company has heretofore delivered to the Buyer a true and
complete copy of the Company's Charter and By-laws and the Charter and
By-laws of each Subsidiary.
3.2 Financial Statements, etc.
--------------------------
3.2.1. Financial Information.
----------------------
The Buyer has been furnished with true and complete copies of
each of the following:
(a) Projections. The projected financial information of the
-----------
Company and the Subsidiaries (the "Projections") prepared by the Company and
attached hereto as Exhibit E in accordance with the provisions of Section 6.15
---------
hereof.
(b) Audited Financials. The audited consolidated balance
------------------
sheets of the Company and its Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income and retained
earnings and cash flows for the years then ended, accompanied by the
notes thereto and the report thereon of Arthur Anderson LLP (the
"Audited Financials," and together with the First Quarter Financials
and the Monthly Financials, the "Financial Statements").
10
<PAGE>
(c) Quarterly Financials. The unaudited consolidated
--------------------
balance sheets of the Company and its Subsidiaries as of March 31,
1996, and the related consolidated statements of income and retained
earnings and cash flows for the three months then ended (the "First
Quarter Financials").
(d) Monthly Financials. The monthly unaudited financial
------------------
statements of the Company and its Subsidiaries in the form customarily
prepared by management for internal use for the calendar months of
April and May 1996 (the "Monthly Financials").
(e) Balance Sheets. As used herein, the term "Balance
--------------
Sheets Date" shall mean December 31, 1995/May 31, 1996 and the term
"Balance Sheets" shall mean the balance sheets as of December 31,
1995/May 31, 1996 contained in the December 31, 1995 Audited
Financials and the May 31, 1996 Monthly Financials.
3.2.2. Character of Financial Information.
----------------------------------
The Financial Statements (including the notes thereto) were
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods specified therein, have
been prepared from and are in complete accordance with the books and
records of the Company, are true, correct and complete in all material
respects, and present fairly, in all material respects, the financial
position and results of operations of the Company and its Subsidiaries
for the periods specified therein, subject (a) in the case of the
Monthly Financials and the First Quarter Financials to the absence of
footnotes, and (b) in the case of the Monthly Financials and the First
Quarter Financials to normal year-end audit adjustments which will not
be material either individually or in the aggregate. The books and
records of the Company are sufficient and accurate to the extent
necessary (A) to permit the Buyer's independent certified public
accountants to conduct an audit of the Company sufficient in scope to
permit the issuance of a qualified opinion on the financial statements
of the Company and (B) to permit the Buyer to comply with any and all
applicable reporting requirements under applicable federal or other
securities laws. The Projections were prepared in good faith based
upon diligent estimates of the anticipated assets and liabilities of
the Company as well as the anticipated operating results, financial
condition and prospects of the Company. As of the date of this
Agreement, except as set forth in Schedule 3.2.4, no event has
--------------
occurred and no circumstances has arisen since the date of such
Projections which would render such Projections or the assumptions
underlying the same misleading or no longer reasonable; it being
recognized, however, that such Projections do not constitute any
warranty as to the Company's future performance and that actual
results may vary from projected results.
11
<PAGE>
3.2.3. Inventory and Receivables.
-------------------------
(a) Inventories.
-----------
(i) Subject to amounts reserved on the Balance
Sheets, the values at which all inventories are
carried on such Balance Sheets have been
calculated in accordance with generally accepted
accounting principles and reflect the Company's
historical valuation policy of stating
inventories at the lower of cost (determined on
a first-in, first-out ("FIFO") basis) or market
value.
(ii) The inventories reflected on the Balance Sheets
are and will be (A) in good and merchantable
condition, (B) generally usable for the purposes
for which they are intended or salable in the
Ordinary Course of Business of the Company and
(C) verifiable by reference to perpetual records
which are maintained by each warehouse or other
storage location by individual stock keeping
unit.
(b) Accounts Receivable. Subject to the reserves for
-------------------
uncollectible accounts set forth in the Balance Sheets, all of the
accounts reflected on the Balance Sheets were accounts receivable that
(i) arose from valid sales in the ordinary course of the Company's
business, (ii) to the Company's knowledge, are not subject to any set-
off or counterclaim, and (iii) are collectible in the Ordinary Course
of Business.
3.2.4. Change in Condition.
-------------------
(a) Except for the matters set forth in Schedule 3.2.4,
--------------
since the May 31, 1996 Balance Sheets Date and as of the date of this
Agreement:
(i) The Business has been conducted only in the
Ordinary Course of Business;
(ii) Neither the Company nor any Subsidiary has made
any capital expenditures except in amounts
contemplated by the Projections;
(iii) Neither the Company nor any Subsidiary has
incurred or otherwise become liable in respect of
any Debt except for borrowings in the Ordinary
Course of Business or become liable in respect of
any Guaranty;
12
<PAGE>
(iv) Neither the Company nor any Subsidiary has
declared or made any Distribution for the benefit
of any of the Company's shareholders or any
Affiliate of any of the Company's shareholders
(other than transactions among the Company and
its Subsidiaries);
(v) Neither the Company nor any Subsidiary has (A)
sold, leased to others or otherwise disposed of
any of its assets (except for sales of inventory
in the Ordinary Course of Business) (B) entered
into any Contractual Obligation relating to (x)
the purchase of any capital stock or interest in
any Person, (y) the purchase of assets
constituting a business or (z) any merger,
consolidation or other business combination, (C)
canceled or compromised any Debt or claim (other
than accounts receivable and other Debts or
claims in the Ordinary Course of Business and
consistent with past practices), (D) waived or
released any right of substantial value, or (E)
instituted, settled or agreed to settle any
Action (other than in the Ordinary Course of
Business and consistent with past practices);
(vi) Except as set forth on Schedule 3.5.1(a), neither
-----------------
the Company nor any Subsidiary has (A) made any
changes in the rate of Compensation in effect
throughout the three-month period covered by the
First Quarter Financials of any director,
officer, employee, consultant or agent of the
Company or any Subsidiary or (B) paid or agreed
or orally promised to pay, conditionally or
otherwise any extra Compensation to any such
Person;
(vii) Neither the Company nor any Subsidiary has made
any change in its customary methods of accounting
or accounting practices, pricing policies or
payment or credit practices or failed to pay any
creditor any amount owed to such creditor when
due or granted any extensions of credit other
than in the Ordinary Course of Business;
(viii) Neither the Company nor any Subsidiary has
entered into any Contractual Obligation to do any
of the things referred to in clauses (i) through
(vii) above; and
(b) Except as set forth in Schedule 3.2.4, since the May 31,
--------------
1996 Balance Sheets Date and as of the date of this Agreement, no
Material Adverse Effect has occurred, nor have any event or events
occurred which, individually or in the aggregate, will have a Material
Adverse Effect.
13
<PAGE>
3.3. Liabilities.
-----------
3.3.1. Debt.
----
Schedule 3.3.1 hereto sets forth a listing by category and
--------------
obligee of all Debt of the Company and its Subsidiaries, including:
(a) the principal amount of each such Debt obligation and (b) the
maturity date and amortization schedule of each such Debt obligation.
True, accurate, and complete copies of the documents and instruments
evidencing all items of the Debt listed on Schedule 3.3.1 have been
--------------
provided to the Buyer.
3.3.2. Absence of Undisclosed Liabilities.
----------------------------------
Except as set forth in Schedule 3.3.2 or as reflected in the
--------------
May 31, 1996 Balance Sheet, as of the date of this Agreement: (a) the
Company has no liability of any nature (matured or unmatured, fixed or
contingent) that could, together with all such other liabilities,
result in a Material Adverse Effect nor does the Company have any
reasonable grounds to know of any such liability; (b) all reserves
established by the Company and set forth in the May 31, 1996 Balance
Sheet were and are adequate for the purposes indicated therein; and
(c) there are no loss contingencies (as such term is used in Statement
of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975) which are not adequately
disclosed in the May 31, 1996 Balance Sheet as required by such
Statement No. 5.
3.4. Assets.
------
3.4.1. Title to Assets.
---------------
The Company and each of its Subsidiaries has good and
marketable title to, or, in the case of property held under lease or
other Contractual Obligation, a valid and enforceable right to use,
all of its properties, rights and assets, whether real or personal and
whether tangible or intangible, included in the Purchased Assets,
including without limitation all properties, rights and assets
reflected in the Balance Sheets (except as sold or otherwise disposed
of since the Balance Sheets Date in the Ordinary Course of Business).
The Purchased Assets are not subject to any Lien except as described
in Schedule 3.4.1 hereto. The Purchased Assets (including without
--------------
limitation the Real Property, the Equipment, the Intangibles and the
Contracts and excluding the Retained Assets) constitute all
properties, rights and assets held for or used in or necessary for the
conduct of the Business of the Company and its Subsidiaries as
currently conducted.
14
<PAGE>
3.4.2. Real Property and Equipment.
---------------------------
(a) General. Schedule 3.4.2(a) lists all of the real
------- -----------------
property and fixtures and other improvements constituting real
property included in the Purchased Assets (the "Real Property") and
all of the tangible personal property other than inventory included in
the Purchased Assets (the "Equipment"), which are in all material
respects in good working order, operating condition and state of
repair, ordinary wear and tear excepted. Schedule 3.4.2(a) sets forth
-----------------
a list of each lease or other Contractual Obligation (including all
amendments) under which any Real Property or Equipment having a cost
or capital lease obligation in excess of $100,000 is held or used by
the Company or any Subsidiary (the "Listed Leases"). The aggregate
liability of the Company and its Subsidiaries under all leases and
other Contractual Obligations under which any Real Property or
Equipment is held or used (the "Leases") other than the Listed Leases
does not exceed $100,000. Except as set forth on Schedule 3.4.2(a),
-----------------
there is no lease or other Contractual Obligation under which the
Company or any Subsidiary is liable as lessor with respect to any Real
Property or Equipment. Schedule 3.4.2(a) also sets forth a list of all
-----------------
of the Real Property and of the addresses of each other location, if
any, at which is located any Equipment or inventory.
(b) Real Estate Joint Venture and Related Leases. The Buyer
--------------------------------------------
has been furnished with a true and complete copy, including all
amendments, side agreements and ancillary agreements, of the Articles
of Organization and of the Operating Agreement of Boyer-Old Mill L.C.,
a Utah limited liability company ("BOMLC"). BOMLC has good and
marketable title to the property described on Schedule 3.4.2(b), which
-----------------
includes the land with one building containing approximately 150,326
gross rentable square feet (the "Building"), located at 6322 South 300
East, Salt Lake City, Utah, including all appurtenant rights of way,
easements and access and all parking and other improvements related
thereto (the "Property"), free and clear of any Liens except those set
forth in Schedule 3.4.2(b). The sole members in BOMLC are Boyer O.M.
-----------------
Manager, L.C., holding a fifty (50) percent interest and the Company
holding a fifty (50) percent interest respectively. The Company has
not granted any rights or options to any other party or person,
including to Boyer O.M. Manager, L.C., with respect to the purchase of
its interest in BOMLC. BOMLC owns all property, inventory, equipment
and fixtures necessary or appropriate for the use and operation of the
Property and has no material obligations or material liabilities of
any kind or nature whatsoever, accrued, absolute, contingent or
otherwise, other than those expressly described in Schedule 3.4.2(b)
-----------------
and those incurred in the Ordinary Course of Business. To the
Company's knowledge, there are no defects or irregularities in the
construction or alteration of the Building and other improvements at
the Property nor, as of the date of this Agreement, any existing or
potential claim or liability relating to the construction or
alteration
15
<PAGE>
thereof, nor any pending or threatened liens, claims or demands with
respect to the Property. As of the date of this Agreement, there are
no pending or threatened condemnation, eminent domain or similar
proceedings relating to the Property or any portion thereof or any
interest (whether legal, beneficial or otherwise) or estate therein.
There are no tenants or occupants with respect to the Property other
than the Company and General Electric Credit Corporation . The Buyer
has been furnished with true and correct copies of those certain Lease
Agreements dated March 6, 1995, between BOMLC as Landlord and
ExerHealth Inc. as Tenant (the "BOMLC Leases"). All construction
required of the Landlord under the BOMLC Leases has been properly
completed. Except for the BOMLC Leases no person other than General
Electric Credit Corporation has any option or right to lease space at
the Property, and there are no rights of first refusal or rights or
options to the Leases (the "Options"). Said Options (which have been
duly exercised by the Company in accordance with their terms) are in
full force and effect and valid and enforceable against the Landlord
under the BOMLC Leases in accordance with their respective terms.
3.4.3. Intellectual Property Rights.
----------------------------
Schedule 3.4.3 lists all: significant trade and product
--------------
names; trademarks, service marks and logos; domestic and foreign
letters patents, and patent applications; domestic and foreign
trademark registrations, service mark registrations, trademark
applications and service mark applications; registered copyrights and
copyright applications; proprietary computer software that are
directly or indirectly owned, or licensed by the Company or any
Subsidiary (the "Intangibles"). Schedule 3.4.3 sets forth a list of
--------------
each license (other than "shrink wrap" licenses) or other Contractual
Obligation (including all amendments) under which any Intangible is
held or used by the Company or any Subsidiary (the "Licenses"). Except
as set forth in Schedule 3.4.3, there is no license or other
--------------
Contractual Obligation under which the Company or any Subsidiary is
liable as licensor with respect to any Intangibles. Schedule 3.4.3
--------------
includes a list of all jurisdictions in which Intangibles owned by the
Company or any Subsidiary have been duly registered and patented. The
Company has good and marketable title to all of the Intangibles. Any
and all assignments affecting the Company's ownership of, or title to,
any of the Intangibles has been properly and timely recorded with the
U.S. Patent and Trademark Office or the appropriate foreign patent or
trademark authority, as the case may be, and, to the Company's
knowledge, no other prior assignments exist that affect the Company's
ownership of, or title to, any of the Intangibles. Each and every such
Intangible is in full force and effect, the Company is in compliance
with all its obligations with respect thereto, and, to the Company's
knowledge as of the date of this Agreement, no event has occurred
which permits, or upon the giving of notice or the passage of time or
otherwise would permit, revocation, cancellation, or termination of
any of the Intangibles. There are as of the date of this Agreement no
claims or proceedings pending, threatened or, to the
16
<PAGE>
Company's knowledge, contemplated against the Company asserting that
the use by the Company or any Subsidiary of any such Intangibles
infringes the rights of any other person or seeking invalidity,
unenforceability, revocation, cancellation, termination, or concurrent
use of any of such Intangibles and there is, to the Company's
knowledge as of the date of this Agreement, no basis for any such
claim or proceeding. None of the Intangibles is as of the date of
this Agreement subject to any outstanding order, decree, judgment,
stipulation, or agreement limiting or otherwise restricting the scope
or use of any Intangible. To the knowledge of the Company, as of the
date of this Agreement no activity of any third party infringes upon
the rights of the Company or such Subsidiary with respect to any of
the Intangibles.
3.5. Contracts, etc.
---------------
3.5.1. Certain Contractual Obligations.
-------------------------------
Set forth on Schedule 3.5.1 hereto is a true and complete
--------------
list of all of the following Contractual Obligations of the Company
and its Subsidiaries as of the date hereof:
(a) All collective bargaining agreements and other
labor agreements; all employment or consulting agreements;
and all other plans, agreements, arrangements or practices
(other than any Employee Plan) which constitute Compensation
or benefits to any of the officers or employees of the
Company or any Subsidiary. Such schedule includes the names
and current salaries and bonuses of all directors and elected
and appointed officers of the Company and the wage rates for
all non-salaried and non-executive salaried employees of the
Company, by classification.
(b) All Contractual Obligations under which the Company
or any Subsidiary is or may become obligated to pay: (i) any
legal, accounting, brokerage, finder's or similar fees or
expenses at any time incurred and unpaid prior to the Closing
Date (which schedule shall include a specific statement as to
the amount of each such obligation, the party to whom each
such obligation is owed and the nature of each such
obligation) and (ii) any severance pay or special
Compensation obligations which would become payable by reason
of this Agreement or other consummation of the transactions
contemplated hereby (and such schedule shall include a
specific statement as to the amount of any such severance or
special Compensation, obligations and the party to whom such
severance or special Compensation obligation is to be paid).
17
<PAGE>
(c) All Contractual Obligations under which the Company
or any Subsidiary is or will after the Closing be restricted
from carrying on any business or other activities anywhere in
the world.
(d) All Contractual Obligations (including without
limitation options) to sell or otherwise dispose of any
Purchased Assets except in the Ordinary Course of Business.
(e) All Contractual Obligations under which the Company
or any Subsidiary has or will after the Closing have any
liability or obligation to or for the benefit of any of its
shareholders or any Affiliate of any of its shareholders.
Schedule 3.5.1(e) includes a statement as to accrued but
unpaid royalty payments that are due and payable by the
Company: (i) in respect of the second fiscal quarter of 1996
to the Company's shareholders in the specific amounts, and in
respect of the Contractual Obligations specifically set
forth, on said schedule next to the name of each such
shareholder and (ii) to Gary Smith, in respect of the fiscal
periods indicated, in the specific amounts and in respect of
the Contractual Obligations specifically set forth in said
schedule. The Financial Statements covering the periods as to
which the royalty payments referenced above are due and
payable include reserves in an amount at least equal to the
royalty payments specifically set forth in Schedule
--------
3.5.1(e).
--------
(f) All Contractual Obligations under which the Company
or any Subsidiary has any liability or obligation for Debt or
constituting or giving rise to a Guarantee of any liability
or obligation of any Person, or under which any Person has
any liability or obligation constituting or giving rise to a
Guarantee of any liability or obligation of the Company or
any Subsidiary (including without limitation partnership and
joint venture agreements).
(g) All Contractual Obligations under which the Company
or any Subsidiary is or may become obligated to pay any
amount in excess of $100,000 in respect of indemnification
obligations, purchase price adjustment or otherwise in
connection with any (i) acquisition or disposition of assets
or securities, (ii) merger, consolidation or other business
combination, or (iii) series or group of related transactions
or events of a type specified in subclauses (i) and (ii).
(h) All distributorship agreements, and all other
Contractual Obligations (other than purchase orders and sales
orders entered into in the Ordinary Course of Business) with
independent laboratories or testing facilities, distributors,
suppliers, vendors, or other suppliers of goods or services.
18
<PAGE>
(i) All advertising contracts which individually
involve liabilities of the Company or any Subsidiary in
excess of $100,000.
(j) All purchase orders or sales orders which
individually involve liabilities of the Company or any
Subsidiary in excess of $250,000 or which were not entered
into the Ordinary Course of Business.
(k) All Contractual Obligations (other than purchase
orders or sales orders) not required to be listed on Schedule
--------
3.5.1 pursuant to clauses (a) through (j) above which
-----
individually involve liabilities of the Company or any
Subsidiary in excess of $100,000.
The Company has heretofore delivered to the Buyer a true and
complete copy of each of the Contractual Obligations listed on
Schedule 3.5.1 hereto, each as in effect on the date hereof,
--------------
including without limitation all amendments thereto (the "Listed
Contracts"; together with the Leases, Licenses and Insurance
Policies, referred to herein collectively as the "Contracts").
3.5.2. Nature of Contracts, etc.
-------------------------
Except as set forth in Schedule 3.5.2, no material breach or
--------------
default by the Company or any Subsidiary under any of the Contracts
has occurred and is continuing, and no event has occurred which with
notice or lapse of time would constitute such a material breach or
default or permit termination, modification or acceleration by any
other Person under any of the Contracts. As of the date hereof, to
the knowledge of the Company, no material breach or default by any
other Person under any of the Contracts has occurred and is
continuing, and no event has occurred which with notice or lapse of
time would constitute such a material breach or default or permit
termination, modification or acceleration by the Company or any
Subsidiary under any of such Contracts.
3.5.3. Transactions with Affiliates.
-----------------------------
Except for the matters set forth on Schedule 3.5.3 or on
--------------
Schedule 3.5.1 hereto pursuant to clause (e) of Section 3.5.1 hereof
--------------
(the "Affiliate Relationships"), no shareholder of the Company or any
Affiliate of any shareholder of the Company (other than the Company
and their Subsidiaries) is an officer, director, employee, consultant,
competitor, customer, distributor, supplier or vendor of, or is party
to any Contractual Obligation with, the Company or any Subsidiary.
Except as set forth on Schedule 3.5.3, there are no trademarks, trade
--------------
names (or any component thereof), service marks, service names,
copyrights, patents, patent rights, franchises, know-how, or
proprietary or confidential knowledge of the Company that any
shareholder of the Company or such Affiliate owns or is licensed or
otherwise has the right to use
19
<PAGE>
which are used in, or necessary to the conduct of the
Business of, the Company and its Subsidiaries. All
transactions between the Company or any Subsidiary on the one
hand, and any shareholder of the Company or any such
Affiliate on the other hand, which occurred during the
periods covered by the Financial Statements are reflected in
the Financial Statements at amounts which do not overstate
the net worth or net income of the Company or such Subsidiary
as compared with fair market values and prices which would
have been charged and paid between parties at arms' length at
the time of the entering into of the transactions in
question.
3.5.4. Non-Contravention, etc.
-----------------------
Neither the execution and delivery of this Agreement
nor the consummation of any of the transactions contemplated
hereby does or will constitute, result in or give rise to (a)
a breach of or a default or violation under any Contractual
Obligation or Charter or bylaws provision of the Company or
any Subsidiary, (b) the acceleration of the time for
performance of any obligation under any such Contractual
Obligation, (c) the imposition of any Lien upon or the
forfeiture of any Asset (including without limitation any
Asset held under a Lease or License), (d) the requirement
that any consent under or waiver of any such Contractual
Obligation, Charter or bylaws be obtained, or (e) any
severance payments, right of termination, modification of
terms, or any other right or cause of action under any such
Contractual Obligation, Charter or By-laws provision, except
as set forth in Schedule 3.5.4. The other items, if any, set
--------------
forth in said Schedule do not and will not, individually or
in the aggregate, have a Material Adverse Effect.
3.6. Insurance.
---------
Set forth on Schedule 3.6. is a list of all liability
-------------
(including without limitation, public liability, products liability
and automobile liability) policies by which the Company or any
Subsidiary has been insured since June 30, 1990 (the "Liability
Policies"). The list includes the type of policy, form of coverage,
policy number and insurer, coverage dates, named insured, limit of
liability and deductible. All material properties of the Company and
its Subsidiaries are covered by valid and currently effective
insurance policies issued in favor of the Company or its
Subsidiaries in amounts which are customary in the place in which
such properties are located for companies operating similar
businesses and operations. All insurance coverages required under
the Leases are in force under valid and currently effective
insurance policies. In the event of any Loss or claim resulting in
any insurance recovery related to the Company, any of its
Subsidiaries or the Business, the amount of any such recovery
related to the Company, such Subsidiary or the Business will be paid
to the Company or such Subsidiary or to the holders of Liens set
forth on Schedule 3.4.1. Except for the matters set forth on the
--------------
loss runs attached hereto ("Loss Runs") and the matters set forth on
Schedule 3.6 hereto, since June 30, 1994, there have been no
------------
liability claims (except products liability and workers'
compensation claims) which have been made against the Company or its
Subsidiaries or any occurrence which may give rise to any such claim
against
20
<PAGE>
the Company or its Subsidiaries. The list includes the current legal
status of such claims or occurrences as of the date hereof. Statutory
workers' compensation insurance coverage has been maintained on all
employees of the Company and its Subsidiaries and all such policies were
written by insurers in existence as of the date hereof. The premiums for
all Liability Policies and workers' compensation policies have been fully
paid and no future payments on any of these policies shall be due as of the
Closing, except as set forth on Schedule 3.6. Set forth on Schedule 3.6 is
------------ ------------
a list of all insurance policies of the Company and each Subsidiary
currently in effect other than the Liability Policies and the workers'
compensation policies (together with the Liability Policies and the
workers' compensation policies, the "Insurance Policies"). After giving
effect to the Closing and the consummation of the transactions contemplated
hereby, except as set forth on Schedule 3.6, each Insurance Policy will be
------------
in full force and effect and be payable to the Company or one or more of
its Subsidiaries.
3.7. Compliance with Laws, etc.
--------------------------
3.7.1. Compliance Generally.
--------------------
Except as of and to the extent specifically set forth on
Schedule 3.9, 3.11.1 and 3.11.2, the operations of the Business as
-------------------------------
heretofore or currently conducted were not and are not in violation
of, nor is the Company or any Subsidiary in default or violation
under, any Legal Requirement where the failure so to comply would
have a Material Adverse Effect on the value of the Purchased Assets.
All future expenditures with respect to the operations of its
Business as currently conducted required to meet the provisions of
any Legal Requirement currently in effect (or, to the knowledge of
the Company, enacted but to take effect in future) will not,
individually or in the aggregate, have a Material Adverse Effect on
the value of the Purchased Assets. The Company and its Subsidiaries
have been duly granted all material licenses, permits, franchises
and other authorizations under any Legal Requirement necessary for
the conduct of the Business as currently conducted or currently
proposed to be conducted.
3.7.2. Tax Matters.
-----------
Since its tax year ending December 31, 1994, the Company and
its Subsidiaries have been included in the United States
consolidated federal income Tax Returns and required consolidated,
unitary or combined state tax returns filed by the Company. Except
as set forth on Schedule 3.7.2:
--------------
(a) all Tax Returns that are required to be filed by
or with respect to the Company or any Subsidiary have been
duly and timely filed in accordance with all applicable
Legal Requirements, and no claim has ever been made by any
taxing authority in a jurisdiction where the Company does
not file Tax Returns that it is or may be subject to
taxation by that jurisdiction,
21
<PAGE>
(b) all Tax obligations of the Company and its
Subsidiaries, whether or not shown as due and payable on
such returns, have been timely paid or otherwise
appropriately deferred, collected or reserved (excluding
reserve any for deferred Taxes established to reflect timing
differences between book and Tax income) for payment as
reflected on the Financial Statements,
(c) all other assessments that are due have been paid
in full,
(d) all Tax Returns referred to in clause (a) for
taxable periods ending on or before the date indicated in
Schedule 3.7.2 have been examined by the Internal Revenue
--------------
Service ("IRS") or the appropriate state, local or foreign
taxing authority, or the statute of limitations for
examining such Tax Returns has expired,
(e) no deficiencies have been asserted or assessments
made as a result of any examinations of the Tax Returns
referred to in clause (a) by the IRS or the appropriate
state, local or foreign taxing authority,
(f) there is no action, suit, proceeding, audit,
claim, deficiency or assessment pending (or, to the
knowledge of the Company, threatened) with respect to any
Taxes of the Company or any Subsidiary, and there are no
Liens or other security interests on any of the assets of
the Company or any Subsidiary that arose in connection with
any failure (or alleged failure) to pay any Tax other than
for current Taxes not yet due and payable,
(g) no waivers of statutes of limitations have been
given or requested by or with respect to any Taxes of the
Company or any Subsidiary,
(h) no powers of attorney with respect to Taxes of
the Company or any Subsidiary are currently in force,
(i) there is no Contractual Obligation (including
without limitation any of the Closing Agreements) covering
any employee or former employee of the Company or any
Subsidiary that will give rise to the payment of any amount
that will be not deductible by reason of Section 280G of the
Code or that will be subject to the excise tax under Section
4999 of the Code,
(j) neither the Company nor any Subsidiary has any
liability for the Taxes of any Person (other than the
Company and its Subsidiaries) under Treas. Reg. (S) 1.1502-6
(or any similar provision of state, local, or foreign law),
as a transferee or successor, by contract, or otherwise, or
is a party to or bound by any Contractual Obligation
relating to any allocation or sharing of Taxes,
22
<PAGE>
(k) the Company has provided to Buyer true, complete,
and correct copies of all Tax Returns filed by it with
Taxing authorities since the date indicated in Schedule
--------
3.7.2 and all requests for extensions or waivers and notices
-----
or claims given or received with respect thereto,
(l) the Company and each of its Subsidiaries has
withheld and paid to, or will cause to be paid to, the IRS
or the appropriate state, local or foreign taxing authority
all amounts required to be withheld from the wages of the
employees of the Company and such Subsidiaries under state
law and the applicable provisions of the Code, and any
payments made to any independent contractors, creditors,
stockholders or other third parties, and the Company and
such Subsidiaries will continue to do so with respect to all
wages and other payments paid by it through the Closing
Date,
(m) all contributions and other Taxes due from the
Company and its Subsidiaries pursuant to any unemployment
insurance or workers compensation laws and all sales or use
Taxes which are due or payable by such corporation prior to
the date hereof have been paid in full and will be so paid
through the Closing Date,
(n) neither the Company nor any Subsidiary has been a
United States real property holding corporation within the
meaning of Code Section 897(c)(2) during the applicable
period specified in Code Section 897(c)(1)(A)(ii), and each
of the Company and its Subsidiaries are U.S. Persons within
the meaning of Section 7701(a)(30) of the Code,
(o) no consent to the application of Section 341(f)
of the Code has been made by or on behalf of the Company or
any Subsidiary with regard to any assets or property held,
acquired or to be acquired by the Company or any Subsidiary.
3.7.3. Employee Benefit Plans.
----------------------
(a) Disclosure. Schedule 3.7.3. sets forth all
---------- ---------------
Employee Plans to which the Company or any Subsidiary
contributes or is obligated to contribute, or under which
the Company or any Subsidiary has or may have any liability
for premiums or benefits, or which benefits any employee or
former employee of the Company or any Subsidiary or the
beneficiaries of any such employee or former employee (an
"Existing Plan"), as well as all plans, agreements, policies
and arrangements that would be Existing Plans if the term
"Employee" were construed to include outside directors,
consultants or other independent contractors who provide
services to or for the benefit of the Company or any of its
Subsidiary. For purposes of this Agreement, the term
"Employee Plan" means any plan, program, agreement,
23
<PAGE>
policy or arrangement (a "Plan"), whether or not reduced to
writing, that is: (i) a welfare benefit plan within the
meaning of Section 3(1) of ERISA (a "Welfare Plan"); (ii) a
pension benefit plan within the meaning of Section 3(2) of
ERISA (a "Pension Plan"); (iii) a stock bonus, stock
purchase, stock option, restricted stock, stock appreciation
right or similar equity-based plan (an "Equity Plan"); or
(iv) any other deferred-compensation, severance, retirement,
welfare-benefit, bonus, incentive or fringe-benefit plan.
With respect to each Existing Plan, the Company has provided
to the Buyer accurate, current and complete copies of each
of the following: (A) where the plan has been reduced to
writing, the plan document together with all amendments; (B)
where the plan has not been reduced to writing, a written
summary of all material plan terms; (C) where applicable,
copies of any trust agreements, custodial agreements,
insurance policies, administration agreements and similar
agreements, and investment management or investment advisory
agreements; (D) copies of any summary plan descriptions,
employee handbooks or similar employee communications; (E)
in the case of any plan that is intended to be qualified
under Section 401(a) of the Code, a copy of the most recent
determination letter from the IRS and any related
correspondence, including a copy of the request for such
determination; (F) in the case of any funding arrangement
intended to qualify as a voluntary employees' beneficiary
association (VEBA) under Section 501(c)(9) of the Code, a
copy of the IRS letter determining that it so qualifies; (G)
in the case of any plan for which Forms 5500 are required to
be filed, a copy of the three most recently filed Forms
5500, with schedules attached; and (H) copies of any
notices, letters or other correspondence from the IRS or the
Department of Labor relating to the plan. Also set forth in
Schedule 3.7.3 is a list of each Existing Plan in which
--------------
employees of the Company and its Subsidiaries will continue
to participate (subject to Section 3.7.3(g) of this
Agreement) after giving effect to the Closing (the "Company
Plans").
(b) No Defined Benefit Pension Plans. Neither the
--------------------------------
Company nor any Subsidiary, nor any corporation, trust,
partnership or other entity that would be considered as a
single employer with the Company or any Subsidiary under
Section 4001(b)(1) of ERISA or Sections 414(b), (c), (m) or
(o) of the Code has ever maintained or been required to
contribute to any Employee Plan subject to Title IV of
ERISA.
(c) Plan Qualification; Plan Administration;
----------------------------------------
Certain Taxes and Penalties. Each Existing Plan that is
---------------------------
intended to be qualified under Section 401(a) of the Code is
so qualified. Each Existing Plan, including any associated
trust or fund, has been administered in accordance with its
terms and with all applicable Legal Requirements, and, as of
the date of this Agreement, nothing has occurred with
respect to any Existing Plan that has subjected or could
subject the Company, any Subsidiary, or any current or
24
<PAGE>
former employee, officer, or director thereof to any penalty
or liability under Section 502 of ERISA or Chapter 43 of
Subtitle D or section 6652 of the Code, or that has
subjected or could subject any participant in or beneficiary
of an Existing Plan to a tax under Section 4973 of the Code.
(d) All Contributions and Premiums Paid. As of the
-----------------------------------
date hereof, all required contributions, assessments and
premium payments on account of each Existing Plan have been
made.
(e) Claims. As of the date hereof, there are no
------
existing (or, to the knowledge of the Company, threatened)
lawsuits, claims or other controversies relating to an
Existing Plan, other than claims for information or benefits
in the Ordinary Course of Business.
(f) Retiree Benefits; Certain Welfare Plans. Other
---------------------------------------
than as required under Section 601 et seq. of ERISA, no
Existing Plan that is a Welfare Plan provides benefits or
coverage following retirement or other termination of
employment. Each welfare benefit trust or fund that
constitutes or is associated with an Existing Plan and that
is intended to be exempt from federal income tax under
Section 501(c)(9) of the Code is so exempt. As of the date
hereof, no event has occurred that could result in a loss of
any deduction to the Company or any Subsidiary under Section
162(n) of the Code.
(g) No Restrictions On Termination. No provision of
------------------------------
any Existing Plan would result in any limitation on the
ability of the Company or any Subsidiary to amend, suspend,
or terminate the plan.
(h) Effect of Transactions. The execution and
----------------------
delivery of this Agreement and the consummation of the
transactions contemplated hereby will not (i) involve any
prohibited transaction within the meaning of ERISA, (ii)
entitle any current or former employee, officer, or director
of the Company or any Subsidiary to any severance or
termination pay except as provided in Schedule 3.7.3, or
--------------
(iii) increase the amount of or accelerate the time of
payment of any Compensation otherwise due any such employee,
officer or director.
3.7.4. Non-Contravention, etc.
-----------------------
Neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby does or
will constitute, result in or give rise to a material breach or
violation or default under any Legal Requirement applicable to the
Company or any Subsidiary. No approval, consent, waiver,
authorization or other order of, and no declaration, filing,
registration, qualification or recording with, any Governmental
Authority is required to be obtained or made
25
<PAGE>
by or on behalf of the Company or any Subsidiary in connection with
the execution, delivery or performance of this Agreement or the
consummation of any of the transactions contemplated hereby, except
for items listed on Schedule 3.7.4 which shall have been obtained or
--------------
made and shall be in full force and effect at the Closing.
3.8. Environmental and Safety Matters, etc.
-------------------------------------
Except as provided in Schedule 3.8, the Company and each of its
------------
Subsidiaries is and has at all times been in compliance in all respects
with all applicable Legal Requirements relating to environmental, natural
resource, health or safety matters. Except as set forth on Schedule 3.11.2
---------------
there is no suit, claim, action or proceeding, pending or threatened
against the Company or any Subsidiary, or, to the Company's knowledge any
basis therefor, in respect of (a) noncompliance with any such Legal
Requirement, (b) personal injury, wrongful death, other tortious conduct,
or the existence of any nuisance relating to materials, commodities or
products held, used, sold, transferred, manufactured or disposed of by or
on behalf of the Company or any Subsidiary or any predecessor entity made
of, containing or incorporating any hazardous, noxious or toxic materials,
commodities or substances, or (c) the presence or release or threatened
release into the environment of any pollutant, contaminant or toxic,
hazardous or noxious material, substance or waste, whether solid, liquid or
gas and whether generated by the Company or any Subsidiary or any
predecessor entity or located at or about a site included in the Real
Property or heretofore owned, leased or otherwise used by the Company or
any Subsidiary or any predecessor entity.
3.9. Labor Relations.
---------------
As of the date hereof, none of the employees of the Company or any
Subsidiary is represented by a labor union, and no petition has been filed
or proceedings instituted by any employee or group of employees with any
labor relations board seeking recognition of a bargaining representative.
As of the date hereof, to the knowledge of the Company, there is no
organizational effort currently being made or threatened by or on behalf of
any labor union to organize any employees of the Company or any Subsidiary.
Except as provided in Schedule 3.9, there are no controversies or disputes
------------
pending between the Company or any Subsidiary on the one hand and any of
their respective employees on the other hand, except for controversies and
disputes with individual employees arising in the Ordinary Course of
Business.
3.10. Customers, Suppliers and Distributors.
-------------------------------------
Except as set forth in Schedule 3,10, since the May 31, 1996
--------------
Balance Sheets Date, (a) no significant customer (or group of customers
which in the aggregate is significant) or any distributor of the Business
has given the Company or any Subsidiary notice or has taken any other
action which has given the Company any reason to believe that such customer
(or group of customers) or distributor will cease to purchase products or
services or reduce significantly the amount of products and services
purchased from the Company or such Subsidiary, and (b) no significant
supplier or vendor (or group of suppliers or vendors which
26
<PAGE>
in the aggregate is significant) of the Business has given the Company or
any Subsidiary notice or has taken any other action which has given the
Company any reason to believe that such supplier or vendor (or group of
suppliers or vendors) will cease to supply or restrict the amount supplied
or adversely change its price or terms to the Company or any Subsidiary of
any products or services.
3.11. Litigation, etc.
----------------
3.11.1. General Litigation.
------------------
There is no litigation, at law or in equity, or any
proceeding before or investigation by any foreign, federal, state or
municipal board or other governmental or administrative agency or
any arbitrator pending or threatened against the Company or any
Subsidiary, or any basis therefor, except for (a) such of the
foregoing as are described in Schedule 3.11.1, and (b) product
---------------
liability claims. As of the date of this Agreement, there is no
litigation at law or in equity, or any proceeding before or
investigation by any foreign, federal, state or municipal board or
other governmental or administrative agency or any arbitrator,
pending or threatened against the Company or any Subsidiary, or any
basis therefor, which seeks rescission of, seeks to enjoin the
consummation of, or otherwise relates to, this Agreement or any of
the transactions contemplated hereby. Except as set forth on
Schedule 3.11.1, no judgment, decree or order of any foreign,
---------------
federal, state or municipal court, board or other governmental or
administrative agency or any arbitrator has been issued against the
Company or any Subsidiary.
3.11.2. Products Liability Matters.
--------------------------
Set forth on Schedule 3.11.2 is (a) a listing of
---------------
all product liability claims (other than the Existing Products
Claims referred to below) which have been made against the Company
or any Subsidiary since June 30, 1994, including the disposition
thereof, and (b) a listing and description (including without
limitation summary of procedural status, status of settlement
discussions, and other significant matters) of all pending product
liability claims and, to the knowledge of the Company, all
threatened product liability claims and other occurrences which have
occurred but have not yet resulted in a products liability claim
(collectively, the "Existing Products Claims").
3.12. Disclosure.
----------
As of the date of this Agreement, neither this Agreement (including
without limitation the Schedules hereto as of the date of this Agreement),
nor any certificate furnished or to be furnished by or on behalf of the
Company, contains or will contain any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading. As of the date of this
Agreement, there is no fact or circumstance known to the Company which has
not been
27
<PAGE>
disclosed to IHF and to the Buyer and which could reasonably be anticipated
to materially and adversely affect the business, financial condition,
operating results, assets or prospects of the Company or any Subsidiary, or
the relationships of the Company or any Subsidiary with its suppliers or
employees. As of the date of this Agreement, this Agreement (including
without limitation the Schedules hereto as of the date of this Agreement)
and the Financial Statements do not, considered as a whole, omit to state a
material fact necessary in order to make the statements contained herein
and therein not misleading.
3.13. Authorization and Enforceability.
--------------------------------
The Company has full corporate or other requisite power and
authority to execute and deliver this Agreement, subject only to obtaining
the approval of stockholders of the Company in accordance with Section
251(c) of the Delaware General Corporation Law, to consummate the
transactions contemplated hereby and to perform each of its obligations
hereunder. The Board of Directors of the Company has approved the
consummation of each of the transactions contemplated hereby and
recommended that the stockholders of the Company adopt and approve this
Agreement and approve the transactions contemplated hereby. The Board of
Directors of the Company has taken all action required by law, the
Company's Charter and Bylaws or otherwise to be taken by it to authorize
the execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby, and, subject only to obtaining the
necessary approval of stockholders of the Company, no other corporate
action is or was required for such execution, delivery and consummation.
This Agreement has been duly executed and delivered by the Company and is
enforceable against it in accordance with its terms.
3.14. Brokers, etc.
------------
Except as specified in Schedule 3.14, no broker, finder, investment
-------------
bank or similar agent is entitled to any brokerage, finder's or other fee,
Compensation based upon agreements or arrangements made by or on behalf of
(or the conduct of) the Company.
3.15. Approval of Stockholders.
------------------------
The affirmative vote of a majority of the votes that the holders of
the outstanding shares of Company's common stock are entitled to cast, in
each case with respect to the adoption and approval of this Agreement, are
the only votes of the holders of any class or series of the capital stock
necessary to approve this Agreement, the Acquisition and the other
transactions contemplated hereby, and Shareholder Consents and Lock-Up
Agreements representing such quantum of vote have been executed and
delivered in favor of this Agreement, the Acquisition and the other
transactions contemplated hereby. The Persons listed on Schedule 3.15 have
-------------
duly executed and delivered to IHF and the Buyer the Shareholder Consent
and Lock-Up Agreement, dated as of the date hereof, substantially in the
form of Exhibit I hereto.
---------
28
<PAGE>
3.16. Bank Accounts.
-------------
Schedule 3.16 contains a complete and accurate list of all bank
-------------
accounts (including savings, checking, money market accounts, certificates
of deposit, and the like), safe deposit boxes, and lock boxes maintained by
the Company and each Subsidiary of the Company, together with a list of all
authorized signatories thereto.
3.17 Disclaimer.
----------
The representations and warranties set forth in this Section 3
constitute the only representations and warranties given by the Company in
connection with this Agreement and the transactions contemplated hereby and
the Company hereby disclaims all other representations and warranties,
express or implied of whatever kind or nature including, without
limitation, warranties of merchantability or warranties of fitness for a
particular purpose and the Buyer hereby acknowledges that it has relied
solely on the representations and warranties made by the Company in this
Agreement in connection with the transactions contemplated herein.
4. REPRESENTATIONS AND WARRANTIES OF IHF AND THE BUYER
In order to induce the Company to enter into and perform this Agreement and
to consummate the transactions contemplated hereby, each of IHF and the Buyer
represents and warrants to the Company as follows:
4.1. Corporate Matters.
-----------------
Each of IHF and the Buyer is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation
and has all requisite power and authority to execute, deliver and perform
this Agreement and to consummate the transactions contemplated hereby.
4.2. Authorization and Enforceability.
--------------------------------
This Agreement has been duly authorized, executed and delivered by
each of IHF and the Buyer and is Enforceable against each of them in
accordance with its terms.
4.3. Non-Contravention, etc.
-----------------------
Neither the execution, delivery nor performance of this Agreement
nor the consummation of the transactions contemplated hereby does or will
constitute, result in or give rise to any breach or violation of, or any
default or right or cause of action under, any Contractual Obligation of or
the Charter or bylaws of either IHF or the Buyer or any Legal Requirement
applicable to either of them. No approval, consent, waiver, authorization
or other order of, and no declaration, filing, registration, qualification
or recording with, any
29
<PAGE>
Governmental Authority or any other Person, including without limitation
any party to any Contractual Obligation of either IHF or the Buyer, is
required to be obtained or made by or on behalf of either of them in
connection with the execution, delivery or performance of this Agreement
and the transactions contemplated hereby by either IHF or the Buyer, except
for (a) filings under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended and (b) consent and approval of IHF's senior lender,
General Electric Credit Corporation.
4.4 Disclaimer
----------
The representations and warranties set forth in this Section 4
constitute the only representations and warranties given by IHF and the
Buyer in connection with this Agreement and the transactions contemplated
hereby and each of IHF and the Buyer hereby disclaims all other
representations and warranties, express or implied of whatever kind or
nature including, without limitation, warranties of merchantability or
warranties of fitness for a particular purpose and the Company hereby
acknowledges that it has relied solely on the representations and
warranties made by IHF and the Buyer in this Agreement in connection with
the transactions contemplated herein.
5. CERTAIN AGREEMENTS OF THE PARTIES
5.1. Certain Pre-Closing Matters.
---------------------------
5.1.1. Exclusivity.
-----------
None of the Company, any Subsidiary or any employee,
representative and agent of the Company or any Subsidiary will,
directly or indirectly, solicit or initiate or enter into
discussions or transactions or Contractual Obligations with or
encourage or provide any information to any Person (other than IHF
and the Buyer and their respective designees) concerning any sale of
stock by (or by the stockholders of), or any merger or share
exchange or sale or other disposition of securities or substantial
assets or recapitalization or any similar transaction involving, the
Company or any Subsidiary. The Company will notify IHF and the Buyer
immediately upon becoming aware that any Person has made any
proposal, offer, inquiry, or contact with respect to any such
transaction and will keep IHF and the Buyer fully informed of the
status and details of such events; it being acknowledged that,
subject to the Company's compliance with the provisions hereof, the
Company may receive unsolicited third-party bids but may not solicit
such bids or otherwise enter into discussions or transactions with
such third-parties.
5.1.2. Access to Premises and Information.
----------------------------------
Prior to the Closing, the Company and its Subsidiaries will
permit IHF and the Buyer and their prospective investors and
lenders, and their respective authorized representatives (other than
a competitor of the Company), to have full access to their
30
<PAGE>
premises and documents, books and records and to make copies during
normal business hours of such financial and operating data and other
information with respect to the Company and its Subsidiaries as IHF
and/or the Buyer, such investors or lenders, or any of their
representatives shall reasonably request. The Company will cause to
be delivered such additional information and copies of documents,
books and records relating to the Company and its Subsidiaries as
may be reasonably requested by IHF and/or the Buyer, such investors
or lenders, or any of their representatives.
5.1.3. Confidentiality Covenant of IHF and the Buyer.
---------------------------------------------
No investigation by, or furnishing of information to, IHF or
the Buyer shall affect the right of IHF and the Buyer to rely on the
representations, warranties, covenants and agreements of the Company
set forth herein. IHF and the Buyer will not, and will not permit
any of its or their prospective investors or lenders or its or their
respective representatives to, directly or indirectly, without the
prior written consent of the Company, disclose any information
relating to the Company or any Subsidiary furnished to IHF or the
Buyer or such investors or lenders by or on behalf of the Company or
use any such information for any purpose otherwise than in
evaluating the Company and its Subsidiaries in connection with the
transactions contemplated hereby; provided, however, that (a) such
-------- -------
information may be disclosed to any of the representatives of IHF or
the Buyer or to its or their prospective investors or lenders and
their respective representatives (other than a competitor of the
Company) who have a need to know such information in connection with
the transactions contemplated hereby, and (b) the information
subject to the foregoing provisions of this sentence shall be deemed
not to include any information known generally in the industry
(other than as a result of disclosure in violation hereof) or any
information received by IHF or the Buyer, such investor or lender or
any of their representatives from a third party not bound by a duty
of confidentiality to the Company or independently developed by IHF
or the Buyer, such investor or lender or any of their
representatives without violating any of its obligations under this
Section 5. In the event of the termination of this Agreement, upon
request of the Company, IHF and the Buyer, such investors and
lenders, and their respective representatives will return all copies
of any written materials in their possession furnished by or on
behalf of the Company. The foregoing provisions of this Section 5,
(a) shall supersede all prior confidentiality obligations of IHF and
the Buyer, (b) shall terminate upon the consummation of the Closing,
and (c) shall not prohibit any retention of records or disclosure
required by law or made in connection with the enforcement of any
right or remedy relating to this Agreement or the transactions
contemplated hereby or as otherwise required by law.
5.1.4. Administrative and Regulatory Matters.
-------------------------------------
(a) The Company shall (at its expense and as a
Retained Liability to the extent not paid prior to Closing)
furnish to IHF and the Buyer such necessary information and
reasonable assistance as IHF or the Buyer may
31
<PAGE>
request in connection with the preparation of necessary
filings or submissions to any Governmental Authority. The
Company (at its expense and as a Retained Liability to the
extent not paid prior to the Closing), and IHF and the Buyer
(at their expense) will comply with all requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended ("HSR Act") and shall use reasonable efforts to
respond as promptly as practicable to all inquiries received
from the Federal Trade Commission or the Antitrust Division
of the Department of Justice for additional information or
documentation.
(b) The Company shall (at the Buyer's expense)
cooperate with and assist IHF in the preparation and
processing of the Registration Statement in all reasonable
respects requested by IHF and will furnish to IHF
information relating to the Company and its Affiliates to
the extent such information is required to be set forth
therein under the Securities Act of 1933, as amended, or the
rules and regulations thereunder. If at any time prior to
the Closing any event should occur relating to the Company
or its Affiliates which should be set forth in an amendment
of, or a supplement to, the Registration Statement or the
related prospectus, the Company shall (at the Buyer's
expense) promptly inform IHF and shall promptly furnish all
necessary information with respect thereto. Consistent with
the foregoing, the Company shall (at the Buyer's expense)
cause the Company's independent accountants to furnish
audited financial statements for the Company for the years
ended December 31, 1995, 1994 and 1993 in a form meeting the
requirements of Regulation S-X of the Securities Act of 1933
on or prior to July 5, 1996 and the consent of the Company's
independent accountants to the inclusion of their reports on
such financial statements in any registration statements and
amendments thereto of the Buyer filed during the three year
period subsequent to the Closing. Notwithstanding this
commitment, the Company shall use reasonable best efforts to
promptly cause the delivery of such audited financial
statements as soon as practicable after the execution of
this Agreement. For purposes of assisting the Buyer with its
planned registration statement and subsequent reporting
requirements, the Company will deliver to the Buyer (i)
unaudited balance sheets and statements of operations and of
cash flows for the quarters ended March 31, 1996 and June
30, 1996, and (ii) unaudited balance sheets and statements
of operations and of cash flows for each corresponding 1995
calendar quarter. The financial statements described in
clauses (i) and (ii) above for the first quarter of 1996 and
1995, respectively, shall be delivered to Buyer as of the
Closing. In addition, the Company shall cause the Company's
independent accountant to perform a review of the unaudited
financial statements described in clauses (i) and (ii) above
in accordance with the provisions of Statement on Auditing
Standards No. 71, "Interim Financial Information" on or
prior to the Closing with respect to the quarter ended June
32
<PAGE>
30, 1996. The parties acknowledge and agree that time is of
the essence in the performance of the provision of this
Section 5.1.4.
5.1.5. Operation of Business in the Ordinary Course.
--------------------------------------------
On and prior to the Closing Date, the Company will use its
best efforts to cause the Company and its Subsidiaries to conduct
its Business only in the Ordinary Course of Business and use its
best efforts to maintain the value of its Business as a going
concern and the relationships of the Company and its Subsidiaries
with customers, distributors, suppliers, vendors, employees, agents
and others. Without limiting the generality of the foregoing, except
as set forth on Schedule 5.1.5, on and prior to the Closing Date the
--------------
Company and its Subsidiaries will not, without the prior written
consent of the Buyer, which shall not be unreasonably withheld or
delayed:
(a) Enter into any transactions (otherwise than on an
arms' length basis) or any transaction with any shareholder
of the Company or any Affiliate of any shareholder of the
Company (other than transactions by and between the Company
and any or all of its Subsidiaries).
(b) Pay any Compensation other than in the Ordinary
Course of Business at the rates in effect throughout the
three-month period covered by the First Quarter Financials
or increase any Compensation of any director, officer,
employee, consultant or agent, other than Compensation
payable to David Allen and Chris Robinson as set forth on
Schedule 3.5.1(a).
-----------------
(c) Make or declare any Distribution (other than
Distributions to the Company by its Subsidiaries).
(d) Incur any Debt except in the Ordinary Course of
Business or become liable in respect of any Guaranty.
(e) Make any capital expenditure, except in amounts
contemplated by the Projections.
(f) Sell, lease to others or otherwise dispose of any
of its assets (except for sales of inventory in the Ordinary
Course of Business).
(g) Change or amend the Company's Certificate of
Incorporation or By-laws except to authorize the use of
shareholder consents under Delaware law.
(h) Issue or sell any shares of its capital stock
(except upon exercise of outstanding options) or other
securities, acquire directly or indirectly, by redemption or
otherwise, any such capital stock, reclassify or
33
<PAGE>
split-up any such capital stock or grant or enter into any
options, warrants, calls or commitments of any kind with
respect thereto.
(i) Organize any new subsidiary, acquire any capital
stock or other equity securities of any corporation or
acquire any equity or ownership interest in any business.
(j) Change its corporate existence and business
organization or its relationships with licensors, suppliers,
distributors, customers and others having business
relationships with it, except in the Ordinary Course of
Business.
(k) Pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, contingent or otherwise),
other than payments, discharges or satisfactions in the
Ordinary Course of Business and consistent with past
practice, since the date of the Balance Sheets.
(l) Prepay any obligation having a fixed maturity of
more than 90 days from the date such obligation was issued
or incurred.
(m) Cancel any debts or waive any claims or rights of
substantial value, except in the Ordinary Course of Business
and consistent with past practice.
(n) Dispose of or permit to lapse any rights to the
use of any patents, trademark, trade name or copyright, or
dispose of or disclose to any person any trade secret,
formula, process or know-how not theretofore a matter of
public knowledge.
(o) Change any of the banking or safe deposit
arrangements the Company has in place prior to the date
hereof, except to the extent required by the Company's
senior secured lenders; provided that the Company shall
provide prior written notice of any such change to IHF and
the Buyer.
(p) Agree, whether in writing or otherwise, to do any
of the foregoing.
5.1.6. Certain Notices.
---------------
Prior to the Closing, the Company will promptly upon
becoming aware thereof give the Buyer written notice of any material
development affecting the Business, or the financial condition or
prospects of the Company and its Subsidiaries; provided, however,
-------- -------
that no such disclosure shall be deemed to amend any Schedule
34
<PAGE>
hereto, or prevent or cure any breach of or inaccuracy in, or
disclose any exception to, any of the representations and warranties
set forth herein. Prior to the Closing, each party will give the
other prompt written notice upon becoming aware of any breach of or
inaccuracy in any representation or warranty of such notifying
party; provided, however, that no such disclosure shall be deemed to
-------- -------
amend any Schedule hereto, or prevent or cure any breach of or
inaccuracy in, or disclose any exception to, any of the
representations and warranties set forth herein.
5.1.7. Preparation for Closing.
-----------------------
Each party will use its best efforts to bring about the
fulfillment of each of the conditions precedent to the obligations
of the other parties hereto set forth in this Agreement.
5.1.8. Consents.
--------
The Company will use all reasonable efforts to obtain, in
writing, prior to the Closing, all consents necessary to the
consummation of the transactions contemplated hereby, including,
without limitation, the required consent of (a) each person holding
a mortgage or lien on real property or personal property owned or
leased by the Company, (b) each lessor of real or personal property
leased by the Company and (c) each counterparty to contracts listed
in Schedule 3.5.4 hereto. The Company will deliver all such consents
--------------
obtained by it prior to the Closing to the Buyer at the Closing.
5.1.9. Additional Financial Statements.
-------------------------------
The Company shall furnish the Buyer with its regularly
prepared monthly unaudited management financial statements for
fiscal months ending after May 31, 1996, each of which shall be
prepared on a basis consistent to that used in the preparation of
financial statements delivered to the Buyer pursuant to Section 3.2
of this Agreement.
5.1.10. Contracts.
---------
No contract or commitment will be entered into, and no
purchase of supplies will be made, by or on behalf of the Company
except contracts or commitments made in the Ordinary Course of
Business.
5.1.11. Nondisclosure and Noncompete Agreements.
---------------------------------------
The Company shall use all reasonable efforts to obtain from
each of its key employees, officers, and significant stockholders
identified on Schedule 5.1.11 hereto executed nondisclosure and
---------------
noncompete agreements in form and substance satisfactory to the
Buyer.
35
<PAGE>
5.1.12. Employee Relations and Benefits.
-------------------------------
(a) The Buyer shall offer employment (i) on or before
the Closing Date to such salaried and hourly employees
employed exclusively in the Business who are actively
employed on the Closing Date as the Buyer elects and (ii) at
the termination of their leaves of absence to such salaried
and hourly employees on disability, pregnancy, military or
other approved leaves of absence on the Closing Date as the
Buyer elects. Employees of the Company who are offered
employment by the Buyer shall not be entitled to any
severance payments or other payments due to termination of
employment, and the Buyer's offer of employment shall be
deemed continued employment with the Company for the purpose
of severance plans and payments of the Company.
(b) As to any such employee who is employed by the
Buyer, the Company agrees to cause the release of such
employee from any contractual provision with the Company or
any affiliate of the Company which would impair the utility
of such employee's services to the Buyer, or which would
impose upon such employee any monetary or other obligation
to the Company which otherwise would be occasioned by the
termination of such employee's employment or any agreement
of noncompetition or confidentiality.
(c) The Company shall be responsible for any notice
required under or liability associated with the Worker
Adjustment and Retraining Notification Act (29 U.S.C.
(S)(S)2101-2109) and any applicable State or local plant
closing, mass layoff, relocation, or severance laws
associated with any current or former officer or employee of
the Business which takes place or arises on or before the
Closing Date, and the Buyer shall be responsible for any
such notice or liability associated with the persons hired
by the Buyer on or after the Closing Date which takes place
or arises after the Closing Date.
(d) Effective as of the Closing Date, the Buyer shall
adopt and become the successor employer of the HealthRider
Employee's 401(k) Plan ("401(k) Plan"). The Company agrees
to provide all information and documentation under its
control that is reasonably necessary for the Buyer to
maintain the 401(k) Plan, including information regarding
employment history.
36
<PAGE>
5.2. Certain Closing and Other Matters.
---------------------------------
5.2.1. Expenses of Transaction.
-----------------------
Subject to Section 8 hereof, whether or not the transactions
contemplated hereby are consummated, IHF and the Buyer and the
Company and each of its Subsidiaries will pay all financial
advisory, legal, accounting and other expenses incurred by it or for
its benefit in connection with the preparation and execution of this
Agreement, the compliance herewith and the transactions contemplated
hereby. If and to the extent not paid in full by the Company or its
Subsidiaries at or prior to the Closing, any such expenses shall
constitute Retained Liabilities of the Company; provided, however,
that Compensation payable in the Ordinary Course of Business to
employees of the Company and specifically set forth on Schedule
--------
3.5.1 shall be assumed and paid by the Buyer and included among
-----
the Assumed Liabilities.
5.2.2. Finder's or Broker's Fees.
-------------------------
Each party represents and warrants to, and agrees with, each
other party hereto that its conduct has not given and will not give
rise to any liability for any fee, Compensation or reimbursement of
expenses to any agent, finder or broker, either in the nature of a
finder's fee or otherwise, in connection with the subject matter of
this Agreement, except for fees, Compensation and reimbursement of
expenses which shall be paid in full by such representing and
warranting party.
5.2.3. Public Announcements, etc.
-------------------------
No public announcement shall be made by any party with
respect to the consummation of the transactions contemplated hereby
or the terms thereof without the prior consent of IHF and the
Company; provided, however, that this Section 5.2.3 shall not
-------- -------
prohibit (a) any private disclosure by any financier of IHF or the
Buyer in the ordinary course to any of its investors, (b) any
disclosure required by law (in which case prior written notice of
such announcement shall be given to the Company), (c) any disclosure
made in connection with the enforcement of any right or remedy
relating to this Agreement or the transactions contemplated hereby,
or (d) any disclosure made in the Registration Statement.
5.2.4. Certain Closing Agreements.
--------------------------
Attached hereto as Exhibits F, G, H, and I, respectively,
-----------------------
are copies of each of the following agreements (the "Closing
Agreements"). On or prior to the Closing, each of the parties hereto
shall have executed and delivered such of the Closing Agreements to
which they are respectively stated to be party:
(a) Employee Arrangements with the key employees of
the Company listed on Schedule 5.2.4 hereto.
--------------
37
<PAGE>
(b) Non-Competition Agreements with the key employees,
officers and significant stockholders of the Company listed
on Schedule 5.1.11 hereto.
---------------
(c) Confidentiality Agreements.
(d) Shareholder Consent and Lock-Up Agreements with
each of the Persons listed on Schedule 3.15 hereto.
-------------
5.2.5. Covenant Not to Compete.
-----------------------
(a) Duration and Extent of Restriction. For a
----------------------------------
period of five years following the Closing hereunder, the
Company will not, directly or indirectly, whether alone or
in association with any person or entity, (i) manage,
operate, be employed by, provide consulting services to,
participate in, engage in, or own any interest in, any
business operating anywhere in the world which is the same
as, similar to, or in competition with the business
activities carried on or being planned by the Company
through the date hereof, (ii) induce or attempt to influence
any customer or supplier of the Company to terminate or
otherwise decrease the level of business to be conducted by
such customer or supplier with the Buyer after the Closing
Date, or (iii) induce or attempt to influence any employee
of the Buyer to terminate his or her employment with the
Buyer.
(b) Remedies for Breach. The Company acknowledges
-------------------
that the restrictions contained in subparagraph (a) above
are reasonable and necessary to protect the Buyer's
legitimate interests and that any violation thereof would
result in irreparable injury to the Buyer. The Company
therefore acknowledges and agrees that, in the event of any
violation thereof, the Buyer shall be authorized and
entitled to obtain, from any court of competent
jurisdiction, preliminary and permanent injunctive relief,
as well as an equitable accounting of all profits or
benefits arising out of such violation, which rights and
remedies shall be cumulative and in addition to any other
rights or remedies to which the Buyer may be entitled. In
the event that subparagraph a) above is adjudged to be in
any respect an unreasonable restriction upon the Company,
then the scope of such restrictions shall be reduced by the
elimination of such portion thereof so that such
restrictions may be enforced as it is adjudged to be
reasonable.
(c) Extension of Restriction. In the event of any
------------------------
breach or violation of the restriction contained in
subparagraph (a) above, the period therein specified shall
abate during the time of any violation thereof, and that
portion remaining at the time of commencement of any
violation shall not
38
<PAGE>
begin to run until such violation has been fully and finally
cured.
5.2.6. Waiver of Bulk Transfer Requirements.
-------------------------------------
The Buyer and the Company each agree to waive compliance
with the bulk transfer provisions under Section 6-103 of the Uniform
Commercial Code as in effect in any states where Purchased Assets
are located at the Closing Date.
5.2.7. Tax Refunds
-----------
(a) After consummation of the transactions
contemplated herein, the Company shall promptly file all Tax
Returns for its fiscal year and other taxable periods ending
on or before December 31, 1996, or if earlier, ending upon
complete liquidation of the Company (the "1996 Fiscal Year")
and all Tax Returns of the Subsidiaries of the Company for
the tax periods of the Subsidiaries ending on or before the
Closing Date, which to the maximum extent permitted by
applicable law will be filed on a consolidated, unitary or
combined basis with the Company (the "1996 Returns"). The
Buyer shall have the exclusive right to file all Tax Returns
for the Subsidiaries for all taxable periods ending after
the Closing Date.
(b) The Company agrees to timely file without regard
for extensions the 1996 Returns. The 1996 Returns and any
Tax Returns of the Company or any of its Subsidiaries not
yet filed for the periods ended on or before December 31,
1995 (the "1995 Returns") shall be prepared by the Company
in a manner consistent with its past practice and custom.
The 1996 Returns and 1995 Returns shall be subject to the
approval of the Buyer and shall be submitted to the Buyer
prior to their filing for the Buyer's review and comment
within ninety (90) days (30 days with respect to the 1995
Returns) of their due date. The Buyer shall deliver comments
to the Company within thirty (30) days (15 days with respect
to the 1995 Returns) of such receipt. If the Company and the
Buyer cannot agree on the 1996 Returns or the 1995 Returns,
such disagreement shall be referred for resolution to such
nationally recognized independent certified public
accounting firm as is mutually agreed upon by the Company
and the Buyer (a "Tax Referee"). If the parties cannot agree
on such a Tax Referee, the Tax Referee shall be picked by
two nationally recognized accounting firms, one picked by
the Buyer and one picked by the Company; provided, however,
-------- -------
that the Tax Referee so picked may not then be the
independent accountant regularly employed by the Buyer or
the Company. The decision of the Tax Referee shall be final
and binding on the parties. The fees of the Tax Referee
shall be shared equally by the Company and the Buyer. The
Buyer shall have reasonable opportunity to review all
underlying work papers. Any extension of time to file the
1996 Returns or the 1995 Returns shall be approved by the
Buyer. The Buyer may
39
<PAGE>
consult with and work with its tax advisors regarding any
approvals or actions hereunder. The Buyer shall have the
same approval rights over all other Tax Returns of the
Company or any of its Subsidiaries filed by the Company,
whether for past, present or future years, in accordance
with the procedures of this Section 5.2.7(b).
(c) The Company will not make any election to forego
and shall carryback any net operating loss or other
carrybacks from its 1996 Returns, the 1995 Returns or any
other Tax Returns of the Company or its Subsidiaries,
whether for a past, present or future year. The Company
agrees to file as soon as reasonably practicable after its
1996 Fiscal Year-end a timely Application for Tentative
Refund under Section 6411 of the Internal Revenue Code of
1986, as amended, in order to carry back any net operating
loss and any other loss (such as a capital loss) properly
reflected on the federal income tax 1996 Return (the "1996
Losses"). The Company shall also file on a timely basis all
refund claims under applicable state law arising from the
1996 Losses on any state 1996 Return. (The federal and state
refund claims are hereinafter referred to as the "Refund
Claims".) The Refund Claims shall be subject to the approval
of the Buyer and shall be submitted to the Buyer prior to
its filing for Buyer's review and comment within twenty (20)
days of their due date. The Buyer shall deliver comments to
the Company within ten (10) days of such receipt. If the
Company and the Buyer cannot agree on the Refund Claims,
such disagreement shall be resolved in accordance with the
procedures set forth in Section 5.2.7(b).
(d) The Buyer shall have the right to control the
contest and settlement of any examination, audit, contest,
appeal or other proceeding relating to any of the Company's
or any of its Subsidiaries' federal, state, foreign or local
Taxes or Tax Returns for any and all periods, including, but
not limited to, the 1996 Returns and the 1995 Returns, the
Refund Claims and Tax Returns for any carryback years and
future years. The Company agrees to provide the Buyer with
reasonable access to all information, documents,
substantiation, prior returns, and work papers necessary or
helpful in resolving any such dispute. The Company agrees to
appoint as Power of Attorney for these periods the Buyer's
designee. Any refunds generated as a result of the Refund
Claims and any other Tax refunds of the Company or its
Subsidiaries shall be directed to the Power of Attorney, and
shall be properly and promptly endorsed over to the Buyer by
an authorized officer of the Company and delivered to the
Buyer.
(e) The Company agrees to indemnify the Buyer and its
affiliates for any Taxes described in Section 2.4(a) hereof.
In addition, if the 1996 Losses or any other Losses of the
Company or any of its Subsidiaries is reduced or income of
the Company or any of its Subsidiaries is increased on
account of any adjustments of any items of income, gain,
loss, deduction,
40
<PAGE>
credit, basis, Tax attribute or the like of the Company or
any of its Subsidiaries arising from resulting from or
attributable to the sale of the Purchased Assets or other
transactions contemplated herein or in connection with any
liquidation or dissolution of the Company, the Company shall
indemnify the Buyer and its affiliates for any Taxes and any
reduction in Tax refunds attributable to such adjustments,
including any interest, penalties and costs related thereto.
(f) The Company agrees to take, and to cause its
shareholders, officers, directors and affiliates to take,
any and all actions necessary in order to authorize an
individual to endorse over to the Buyer any Tax refund
checks made payable to the Company and any other documents
necessary to implement the terms of this section.
(g) The Company represents that all Tax Returns filed
for the carryback years are true and complete in all
material respects and were duly and timely filed. The
Company agrees further that all Taxes due on said returns
were duly and timely paid.
(h) The Company represents that there are no audits
opened or threatened, nor assessments proposed, for any
carryback years, or any years which impact on the tax due
with respect to any carryback years.
(i) Neither the Company nor its directors, officers,
shareholders or affiliates will take any action that will
negatively impact on the rights of the Buyer under this
Section 5, including, without limitation, reducing the 1996
Losses as contemplated by the Buyer based upon the Financial
Statements and the purchase price allocation called for in
Section 2.6 hereof.
(j) All Tax sharing agreements between the Company and
its Subsidiaries shall be terminated on the Closing Date and
shall have no further effect for any Tax year.
(k) The Company shall be liable for all Taxes accrued
by the Company after the Closing Date. For purposes of this
Section 5.2.7(k), Section 2.3, 2.4(a) and Section 2.4(e),
there shall be a closing of the books of the Company on the
Closing Date for tax accounting purposes. Furthermore, to
the extent that the Company's 1996 Losses, as computed
through the Closing Date on said closing of the books
methods of tax accounting, is reduced on account of income
or the like made after the Closing Date, the Company shall
pay Buyer an amount equal to the reduced Tax Refund the
Company would receive on account of such reduced 1996
Losses, as so computed. Nothing in this Section 5.2.7(k)
shall limit the Company's liability under Section 2.4(a) or
other provisions of this Section 5. Nor shall anything in
this Section 5.2.7(k) be construed to affect the Buyer's
right to
41
<PAGE>
tax refunds generated by NOLs or other losses generated by
the Company after the Closing Date.
(l) The Company will immediately pay to the Buyer any
Tax refund (or reduction in Tax liability) resulting from a
carryback of a post-acquisition Tax attribute of its
Subsidiaries into the Company consolidated, combined or
unitary Tax Returns, when such refund or reduction is
realized by the Company. The Company will cooperate with the
Buyer in obtaining such refunds (or reduction in Tax
liability), including through the filing of amended Tax
Returns or refund claims. The Company will not elect to
retain any net operating loss carryovers or capital loss
carryovers of the Company or its Subsidiaries under Reg.
(S)1.1502-20(g) of the Code.
6. CONDITIONS TO THE OBLIGATION TO CLOSE OF IHF AND THE BUYER
The obligations of IHF and the Buyer at the Closing are subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
compliance with which, or the occurrence of which, may be waived prior to the
Closing in writing by IHF and the Buyer in their sole discretion:
6.1. Representations, Warranties and Covenants.
-----------------------------------------
6.1.1. Continued Accuracy of Representations and Warranties.
----------------------------------------------------
All representations and warranties of the Company contained
in this Agreement (as each such representation or warranty would
read if all qualifications as to materiality (including without
limitation in the definition of Material Adverse Effect) were
deleted therefrom) shall be true and correct in all material
respects as of the Closing with the same force and effect as if made
at and as of the Closing; provided, however, that to the extent that
any such representations and warranties refer to schedules or
expressly relate to an earlier date, such representations and
warranties shall at the Closing be true and correct in all material
respects only as of such earlier date.
6.1.2. Performance of Agreements.
-------------------------
The Company and its Subsidiaries shall have performed and
satisfied in all material respects all covenants and agreements
required by this Agreement to be performed or satisfied by it at or
prior to the Closing.
6.1.3. Closing Certificate.
-------------------
At the Closing, the Company shall furnish to IHF and the
Buyer an unqualified certificate, signed by the Company, dated the
Closing Date, to the effect
42
<PAGE>
that the conditions specified in Sections 6.1.1 and 6.1.2 hereof
have been satisfied.
6.2. Consents, etc.
-------------
(a) The Company shall have secured written consents or waivers
under all Contractual Obligations of the Company and its Subsidiaries
listed on Schedule 6.2 in a manner reasonably satisfactory in form and
------------
substance to IHF and the Buyer, without affecting any rights of the Company
or any Subsidiary under any such Contractual Obligations.
(b) General Electric Credit Corporation shall have granted its
consent and approval with respect to the transactions contemplated hereby
in a manner in form and substance satisfactory to IHF and the Buyer.
(c) All conditions precedent to the Buyer's closing obligations
under that certain Asset Purchase Agreement of even date and entered into
between Parkway Manufacturing, Inc., Kerry Wilkinson, Larry Duval, ICON
Health & Fitness, Inc. and the Buyer shall have been satisfied or waived by
the Buyer and the Buyer shall use its reasonable efforts to satisfy such
conditions to the extent under the Buyer's control.
(d) IHF and the Buyer shall have secured, on or before 2:00 P.M.
Salt Lake City time on Monday, July 15, 1996, a written consent, waiver or
acknowledgement from La Forza Limited, a U.K. corporation, ("LaForza") in a
manner reasonably satisfactory in form and substance to IHF and the Buyer,
to the effect that products that are developed, manufactured, sold or
distributed by IHF or its subsidiaries or its affiliates, other than the
Buyer, do not constitute "Joint Venture Products" for purposes of the
September 7, 1995 Joint Venture Agreement entered into between the Company,
its subsidiary HealthRider International, Inc., LaForza and HealthRider
International Limited.
6.3. Certain Deliveries.
------------------
The Company shall have caused to be prepared and delivered (i) such
resignation letters as IHF or the Buyer may request not later than five
Business Days prior to the Closing Date from directors and officers of the
Company's subsidiaries; and (ii) such other instruments and documents as
IHF or the Buyer may reasonably request from the Company necessary to
consummate the transactions contemplated hereby not later than two Business
Days prior to the Closing Date.
6.4. Closing Agreements.
------------------
The parties to each of the following agreements other than IHF and
the Buyer shall have executed and delivered the following agreements:
(a) Employee Arrangements with the key employees of the Company
listed on Schedule 5.2.4 hereto.
--------------
43
<PAGE>
(b) Non-Competition Agreements with the key employees, officers
and significant stockholders listed on Schedule 5.1.11
---------------
hereto.
(c) Confidentiality Agreements from the Persons listed on
Schedule 5.1.11 hereto.
---------------
(d) Shareholder Consent and Lock-Up Agreements from the Persons
listed in Schedule 3.15.
-------------
6.5. Legality; Governmental Authorization; General Litigation.
--------------------------------------------------------
The consummation of the Acquisition and the consummation of the
other transactions contemplated hereby, shall not be prohibited by any
Legal Requirement, and shall not subject any Subsidiary, or IHF or the
Buyer to any penalty or Tax or other liability other than liabilities
created by IHF or the Buyer, if any. The Company shall have caused to have
been obtained or made and be in full force and effect all approvals,
consents, waivers, authorizations and other orders of, and declarations,
filings, registrations, qualifications and recordings with, any
Governmental Authority necessary to be obtained or made by the Company or
any Subsidiary in order to permit the consummation of the transactions
contemplated hereby or otherwise reasonably requested by IHF or the Buyer,
and, without limiting the generality of the foregoing, all requirements and
conditions under all applicable state and federal laws rules and
regulations regarding bulk transfers shall have been satisfied and all
necessary filings, if any, pursuant to the HSR Act, shall have been made
and all applicable waiting periods thereunder shall have expired or been
terminated. No action or proceeding shall have been instituted at or prior
to the Closing before any court, arbitrator or other governmental body by
any Person other than IHF or the Buyer or any of their Affiliates, or
instituted or threatened by any Governmental Authority, relating to this
Agreement or any of the transactions contemplated hereby or against the
Company, any Subsidiary, IHF or the Buyer, the result of which could
prevent or make illegal the consummation of any such transaction or could
otherwise have a material adverse effect on IHF or the Buyer or have a
Material Adverse Effect.
6.6. No Pending Action.
-----------------
No legislation, order, rule, ruling or regulation shall have been
proposed, enacted or made by or on behalf of any governmental body,
department or agency, and no legislation shall have been introduced in
either House of Congress or in the legislature of any state, and no
investigation by any governmental authority shall have been commenced or
threatened, which, could adversely affect, restrain, prevent or rescind the
transactions contemplated by this Agreement (including, without limitation,
the purchase and sale of the Purchased Assets) or result in a Material
Adverse Effect.
6.7. Proceedings Satisfactory.
------------------------
Any Closing Agreement, any Schedule or Exhibit to this Agreement and
any other document, agreement or certificate contemplated by this
Agreement, not approved by IHF
44
<PAGE>
and the Buyer in writing as to form and substance on the date this
Agreement is executed, shall be reasonably satisfactory in form and
substance to IHF and the Buyer.
6.8. Corporate Documents.
-------------------
The Company shall have delivered to IHF and the Buyer:
(i) an Officer's Certificate of the Secretary of the Company
certifying (x) the incumbency and genuineness of signatures of all
officers of the Company executing this Agreement, any document
delivered by the Company at the Closing and any other document,
instrument or agreement executed in connection herewith, (y) the
truth and correctness of resolutions of the Company authorizing the
entry by the Company into this Agreement and the transactions
contemplated hereby and (z) the truth, correctness and completeness
of the bylaws of the Company;
(ii) the Charter of the Company and each of its Subsidiaries
certified as of a recent date by the Secretary of State of the
appropriate jurisdiction of incorporation; and
(iii) certificates of corporate and tax good standing and legal
existence of each of the Stockholder and the Company and each of its
Subsidiaries as of a recent date from the Secretary of State of the
appropriate jurisdiction and any jurisdictions in which they are
qualified to do business.
6.9. Transfer of Necessary Permits.
-----------------------------
All of the assignable permits necessary to the operation of the
Business shall have been transferred to or obtained by the Buyer on or
before the Closing Date.
6.10. Transfer of Purchased Assets.
----------------------------
All of the Purchased Assets shall have been effectively sold,
transferred, conveyed and assigned to the Buyer and all of the deeds,
conveyances, bills of sale, certificates of title, assignments, assurances
and other instruments and documents referenced in Section 2 shall have been
executed, delivered and, if appropriate, filed or recorded.
6.11. Assignments of Intangibles.
--------------------------
The Company shall have assigned to the Buyer all of its right,
title, and interest in and to the Intangibles listed on Schedule 3.4.3,
--------------
pursuant to an Assignment in substantially the form of Exhibit B hereto.
---------
45
<PAGE>
6.12. Opinion of Counsel.
------------------
The Company shall have furnished IHF and the Buyer with favorable
opinions of LeBoeuf, Lamb, Greene & MacRae, L.L.P. and C. Reed Brown,
general counsel to the Company, dated the Closing Date in substantially the
form of Exhibits J and K hereto.
-----------------
6.13. Material Adverse Effect.
------------------------
From the date of this Agreement to the Closing Date, the Company
shall not have suffered any Material Adverse Effect.
6.14 Minimum Working Capital.
-----------------------
The Company will have a minimum Working Capital in an amount to be
presented in writing to, and agreed and accepted by, IHF and to Buyer not
later than 2:00 PM Salt Lake City time on Thursday, July 11, 1996, which
minimum Working Capital amount shall then be certified by the Company to
IHF and the Buyer and verified by the independent certified public
accountant of the Buyer three (3) days prior to the Closing Date. For
purposes of this Agreement, "Working Capital" as of any date means the
amount of which the Company's total current assets exceed the Company's
total current liabilities as of such date, calculated in accordance with
generally accepted accounting principles on a basis consistent with the
most recent Audited Financials.
6.15 Projections.
-----------
The Company shall have delivered written Projections in form and
substance reasonably acceptable to IHF and the Buyer not later than 2:00
P.M. Salt Lake City time on Thursday, July 11, 1996.
7. CONDITIONS TO THE OBLIGATION TO CLOSE OF THE COMPANY
The obligations of the Company at the Closing are subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
compliance with which, or the occurrence of which, may be waived prior to the
Closing in writing by the Company in its sole discretion:
7.1. Representations, Warranties and Covenants.
-----------------------------------------
7.1.1. Continued Accuracy of Representations and Warranties.
----------------------------------------------------
All representations and warranties of IHF and the Buyer
contained in this Agreement (as each such representation or warranty
would read if all qualifications as to materiality (including
without limitation in the definition of Material Adverse Effect)
were deleted therefrom) shall be true and correct in all material
respects as of the Closing with the same force and effect as if made
at and as of the Closing;
46
<PAGE>
provided, however, that to the extent that any such representations
and warranties expressly relate to an earlier date, such
representations and warranties shall at the Closing be true and
correct in all material respects as of the Closing only as of such
earlier date.
7.1.2. Performance of Agreements.
-------------------------
Each of IHF and the Buyer shall have performed and satisfied
in all material respects all covenants and agreements required by
this Agreement to be performed or satisfied by each of them at or
prior to the Closing, including without limitation, delivery of the
Purchase Price and the Buyer's assumption of the Assumed Liabilities
as provided herein.
7.1.3. Officer's Certificate.
---------------------
At the Closing, IHF and the Buyer shall furnish to the
Company an unqualified certificate signed by the President or any
Vice President of each of them, dated the Closing Date, to the
effect that the conditions specified in Sections 7.1.1 and 7.1.2
hereof have been satisfied.
7.2. Consents, etc.
-------------
IHF and the Buyer shall have secured written consents or waivers
under all Contractual Obligations of IHF and the Buyer, in a manner
reasonably satisfactory in form and substance to the Company, necessary to
permit the consummation of the transactions contemplated hereby or
otherwise reasonably requested by the Company.
7.3. Closing Agreements.
------------------
The Buyer shall have entered into the Employment Arrangements with
the key employees of the Company listed on Schedule 5.2.4 hereto.
--------------
7.4. Government Authorization; Litigation.
------------------------------------
IHF and the Buyer shall have caused to be obtained or made and be in
full force and effect all approvals, consents, waivers, authorizations and
other orders of, and declarations, filings, registrations, qualifications
and recordings with, any Governmental Authority necessary to be obtained or
made by IHF or the Buyer in order to permit the consummation of the
transactions contemplated hereby or otherwise reasonably required by the
Company, and, without limiting the generality of the foregoing, all
necessary filings, if any, pursuant to the HSR Act, shall have been made
and all applicable waiting periods thereunder shall have expired or been
terminated and all requirements and conditions under all applicable state
and federal laws, rules and regulations regarding bulk transfers shall have
been satisfied. No action or proceeding shall have been instituted at or
prior to the Closing before
47
<PAGE>
any court, arbitrator or other governmental body by any Person or any
Affiliate thereof, the Company or any Subsidiary, or instituted or
threatened by any Governmental Authority, relating to this Agreement or any
of the transactions contemplated hereby or against the Buyer or the
Acquisition Company, the result of which could prevent or make illegal the
consummation any such transaction or could otherwise have a material
adverse effect on the Company.
7.5. Opinion of Counsel.
------------------
The Buyer shall have furnished the Company with favorable opinions
of Hutchins, Wheeler & Dittmar, a professional corporation and Brad H.
Bearnson, general counsel to IHF and the Buyer, dated the Closing Date in
substantially the form of Exhibits L and M hereto, respectively.
----------------
7.6. Assumption of Liabilities.
-------------------------
The Buyer shall have assumed all of the contractual and Debt
obligations of the Company included within the Assumed Liabilities and
shall have delivered to the Company an instrument substantially in the form
attached hereto as Exhibit C, dated the Closing Date and signed by the
---------
President or a Vice President of the Buyer.
7.7. Proceedings Satisfactory.
------------------------
Any Closing Agreement, any Schedule or Exhibit to this Agreement and
any other document, agreement or certificate contemplated by this
Agreement, not approved by the Company in writing as to form and substance
on the date this Agreement is executed, shall be reasonably satisfactory in
form and substance to the Company.
8. INDEMNIFICATION
8.1. Indemnification.
----------------
8.1.1. Indemnification of IHF and the Buyer.
------------------------------------
The Company (in its capacity as an indemnifying party, the
"Indemnifying Party") covenants and agrees, subject to the
provisions of this Section 8, to indemnify, defend, protect, and
hold harmless each of IHF and the Buyer and each of their respective
subsidiaries and each of the respective shareholders, directors,
officers, and affiliates of IHF, the Buyer and such subsidiaries and
affiliates (each in its capacity as an indemnified party, an
"Indemnitee") at all times from and after the date of this Agreement
from and against all claims, damages, losses (including without
limitation any diminution in value), actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including
specifically, but without limitation, reasonable attorneys' fees and
expenses of investigation) (collectively
48
<PAGE>
"Damages") incurred by any such Indemnified Party and arising from
or relating to: (a) any breach or nonfulfillment by the Company of,
or any noncompliance by the Company with, any covenant, agreement,
or obligation contained herein or in any officer's or other
certificate or related agreement delivered in connection with this
Agreement or the transactions contemplated hereby or thereby and (b)
the Retained Liabilities.
8.1.2. Indemnification by the Buyer.
----------------------------
The Buyer, (in its capacity as an indemnifying party, the
"Indemnifying Party"), hereby covenants and agrees, subject to the
provisions of this Section 8, to indemnify, defend, protect, and
hold harmless the Company and each of its respective shareholders,
directors, officers and affiliates (each in its capacity as an
indemnified party, an "Indemnitee") at all times from and after the
date of this Agreement from and against all claims, damages, losses
(including without limitation any diminution in value), actions,
suits, proceedings, demands, assessments, adjustments, costs and
expenses (including specifically, but without limitation, reasonable
attorney's fees and expenses of investigation) (collectively
"Damages") incurred by the Company and arising from or relating to:
(a) any breach or nonfulfillment by IHF or the Buyer, or any
noncompliance by IHF or the Buyer with, any covenant, agreement, or
obligation contained herein or in any officer's or other certificate
or related agreement delivered in connection with this Agreement or
the transactions contemplated hereby or thereby; and (b) the Assumed
Liabilities.
8.1.3. Third Person Claims.
-------------------
Promptly after IHF or the Buyer has received notice of or
has knowledge of any claim by a person not a party to this Agreement
("Third Person") of the commencement of any action or proceeding by
a Third Person for which IHF or the Buyer would be entitled to
indemnification under Section 8.1.1, IHF or the Buyer shall, as a
condition precedent to a claim with respect thereto being made
against the Company, give the Company written notice of such claim
or the commencement of such action or proceeding specifying in
reasonable detail in light of the facts then known the nature of
such claim or action; provided, however, that failure to give such
-------- -------
notification shall not affect the indemnification provided hereunder
except to the extent the Company shall have been actually prejudiced
as a result of such failure. If the Company notifies IHF and the
Buyer within 30 days from the receipt of the foregoing notice that
it wishes to defend against the claim by the Third Person and if the
estimated amount of the claim, together with all other claims made
against the Company that have not been settled, is less than the
Purchase Price, then the Company shall have the right to assume and
control the defense of the claim by appropriate proceedings with
counsel reasonably acceptable to IHF and the Buyer, and the Company
shall be entitled to reimbursement by IHF or the Buyer for such
defense. IHF and the Buyer may participate in the defense, at sole
expense, provided
49
<PAGE>
that counsel for the Company shall act as lead counsel in all
matters pertaining to the defense or settlement of such claims, suit
or proceedings; provided, however, that IHF and/or the Buyer shall
-------- -------
control the defense of (a) any Tax audit or proceeding that could
reasonably be expected to have a material effect on IHF or the Buyer
or any of their subsidiaries and (b) any claim or proceeding that in
the reasonable judgment of IHF or the Buyer could have a material
and adverse effect on their business apart from the financial
impact. IHF and the Buyer shall be entitled to indemnification for
the reasonable fees and expenses of their counsel for any period
during which the Company has not assumed the defense of any claim.
Whether or not the Company shall have assumed the defense of any
claim, neither IHF, the Buyer, nor the Company shall make any
settlement with respect to any such claim, suit or proceeding
without the prior consent of the other, which consent shall not be
unreasonably withheld or delayed. It is understood and agreed that
in situations where failure to settle a claim expeditiously could
have an adverse effect on the party wishing to settle, the failure
of the party controlling the defense to act upon a request for
consent to such settlement within five Business Days of receipt of
notice thereof shall be deemed to constitute consent to such
settlement for purposes of this Section 8.1.3.
8.1.4. Limitation on Damages.
---------------------
(a) Except with respect to claims by IHF or the Buyer
for Damages in respect of: (i) any of the covenants set
forth in Sections 5.2.1 or 5.2.2; (ii) the Retained
Liabilities; or (iii) claims based upon (x) criminal
misconduct or (y) a final determination or judgment by a
court or regulatory authority of competent jurisdiction that
the Company (or any of its subsidiaries or its or their
respective shareholders, directors, officers, or affiliates)
has engaged in fraud or intentional or willful misconduct
(it being acknowledged that the Buyer shall defend and
control the defense of any such claim pending any such final
determination or judgment), the Company as an Indemnifying
Party shall have no liability to indemnify IHF and the Buyer
and their respective subsidiaries and affiliates as an
Indemnitee for a cumulative amount greater than the Purchase
Price; provided that the foregoing maximum dollar limitation
shall not apply with respect to claims referenced in clause
(iii) of this sentence.
(b) The amount of any liability for Damages as to
which indemnification exists under this Agreement shall be
measured taking into account (i) any income tax savings (and
income tax cost attributable to the indemnity payment)
actually realized (or incurred) that affect the overall
economic impact of the Damages to the Indemnitee, and (ii)
any insurance proceeds actually realized and adverse
insurance consequences incurred (such as premium adjustments
and other detriments) that affect the overall economic
impact of the Damages to the Indemnitee.
50
<PAGE>
(c) In the event of any claim by any third party based
on facts which, if true as alleged, would give rise to any
liability for Damages as to which indemnification exists
under this Agreement, the amount of the Damages shall be
deemed to include without limitation the costs of the
defense thereof, whether or not successful, subject to the
rights of the Indemnifying Party to assume such defense
pursuant to Section 8.1.3 hereof.
8.1.5. Exclusive Remedy.
----------------
From and after the Closing, the indemnification provisions
of this Section 8 shall be the sole and exclusive remedy for any
breach or nonfulfillment of, or noncompliance with, any covenant,
agreement, obligation or other provision contained in this Agreement
or any related agreement or certificate delivered at the Closing.
Notwithstanding the foregoing, it is acknowledged and agreed that
all equitable remedies, including without limitation the remedy of
specific performance, shall at all times be available.
8.2. Certain Matters of Construction.
-------------------------------
References in this Section 8 to claims with respect to or based upon
a representation or warranty set forth in a particular Section or Schedule
shall be deemed to include without limitation claims relating to such
representations or warranties based upon the certificates to be furnished
pursuant to Sections 6.1.3 and 7.1.3 hereof.
8.3. No Circular Recovery.
--------------------
The Company hereby agrees that it will not make any claim for
indemnification against the Buyer, or any Subsidiary by reason of the fact
that the Company or any of its officers, directors, agents or other
representatives was a controlling person, director, officer, employee,
agent or other representative of IHF, the Buyer, the Company or any
Subsidiary or was serving as such for another Person at the request of IHF,
the Buyer, the Company, or any Subsidiary (whether such claim is for
Damages of any kind or otherwise and whether such claim is pursuant to any
statute, Charter, By-law, Contractual Obligation or otherwise) with respect
to any claim brought by IHF or the Buyer against the Company relating to
this Agreement or any of the transactions contemplated hereby.
9. DEFINITIONS
For purposes of this Agreement:
9.1. Certain Matters of Construction.
-------------------------------
In addition to the definitions referred to as set forth below in
this Section 9:
51
<PAGE>
9.1.1. The words "hereof," "herein," "hereunder" and words of
similar import shall refer to this Agreement as a whole and not to any
particular Section or provision of this Agreement, and reference to a
particular Section of this Agreement shall include all subsections thereof.
9.1.2. The words "party" and "parties" shall refer to the Company,
IHF and the Buyer, collectively.
9.1.3. Definitions shall be equally applicable to both the singular
and plural forms of the terms defined, and references to the masculine,
feminine or neuter gender shall include each other gender.
9.1.4. Accounting terms used herein and not otherwise defined
herein are used herein as defined by generally accepted accounting
principles in effect as of the date hereof.
9.1.5. All references in this Agreement to any Section shall,
unless the context otherwise requires, be deemed to be a reference to a
Section of this Agreement.
9.1.6. All references in this Agreement to any Exhibit or Schedule
shall, unless the context otherwise requires, be deemed to be a reference
to an Exhibit or Schedule, as the case may be, to this Agreement, all of
which are made a part of this Agreement.
9.1.7. Unless otherwise specified, all references to "dollars" or
"$" shall be deemed to be a reference to currency of the United States of
America.
9.2. Cross Reference Table.
---------------------
The following terms defined elsewhere in this Agreement in the
Sections set forth below shall have the respective meanings therein
defined:
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
"Acquisition" Recitals
"Affiliate Relationships" Section 3.5.3
"Agreement" Preamble
"Assumed Liabilities" Section 2.1
"Audited Financials" Section 3.2.1(b)
"Balance Sheets" Section 3.2.1(e)
"Balance Sheets Date" Section 3.2.1(e)
"BOMLC" Section 3.4.2(b)
"BOMLC Leases" Section 3.4.2(b)
"Buildings" Section 3.4.2(b)
"Buyer" Preamble
"Closing" Section 2.7
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
"Closing Agreements" Section 5.2.4
"Closing Date" Section 2.7
"Company" Preamble
"Company Plans" Section 3.7.3(a)
"Contracts" Section 3.5.1
"Damages" Section 8.1.1 and Section
8.1.2
"Employee Plan" Section 3.7.3(a)
"Equipment" Section 3.4.2(a)
"Equity Plan" Section 3.7.3(a)
"Existing Plan" Section 3.7.3(a)
"Existing Products Claims" Section 3.11.2
"FIFO" Section 3.2.3(a)(i)
"Final Termination Date" Section 11.1.4
"Financial Statements" Section 3.2.1(b)
"First Quarter Financials" Section 3.2.1(c)
"401(k) Plan" Section 5.1.12
"HSR Act" Section 5.1.4(a)
</TABLE>
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
"IHF" Preamble
"Indemnifying Party" Sections 8.1.1 and 8.1.2
"Indemnitee" Sections 8.1.1 and 8.1.2
"Insurance Policies" Section 3.6
"Intangibles" Section 3.4.3
"IRS" Section 3.7.2(d)
"Leases" Section 3.4.2(a)
"Liability Policies" Section 3.6
"Licenses" Section 3.4.3
"Listed Contracts" Section 3.5.1
"Listed Leases" Section 3.4.2(a)
"Loss Runs" Section 3.6
"Monthly Financials" Section 3.2.1(d)
"Options" Section 3.4.2(b)
"Pension Plan" Section 3.7.3(a)
"Plan" Section 3.7.3(a)
"Projections" Section 3.2.1(a)
"Property" Section 3.4.2(b)
"Purchased Assets" Section 2.1
"Purchase Price" Section 2.5
"Real Property" Section 3.4.2(a)
"Retained Assets" Section 2.2
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
"Retained Liabilities" Section 2.4
"Shareholder Claims" Section 2.4(g)
"Third Person" Section 8.1.3
"Welfare Plan" Section 3.7.3(a)
</TABLE>
9.3. Certain Definitions.
-------------------
The following terms shall have the following meanings:
9.3.1. Action.
------
The term "Action" shall mean any claim, action, cause of
action or suit (in contract or tort or otherwise), arbitration or
proceeding by or before any Governmental Authority.
9.3.2. Affiliate.
---------
The term "Affiliate" shall mean, as to any specified Person
at any time, (a) each Person directly or indirectly controlling,
controlled by or under direct or indirect common control with such
specified Person at such time, (b) each Person who is or has been
within two years prior to the time in question an officer, director
or direct or indirect beneficial holder of at least 5% of any class
of the outstanding capital stock of such specified Person and the
Members of the Immediate Family of each such officer, director or
holder (and, if such specified Person is a natural person, of such
specified Person), and (c) each Person of which such specified
Person or an Affiliate (as defined in clauses (a) or (b) above)
thereof shall, directly or indirectly, beneficially own at least 5%
of any class of outstanding capital stock or other evidence of
beneficial interest at such time.
9.3.3. Business.
--------
The term "Business" shall mean the business of the Company
and its Subsidiaries as such business is reflected in the Financial
Statements and the Projections.
9.3.4. Business Day.
------------
The term "Business Day" shall mean any day on which banking
institutions in Salt Lake City, Utah are customarily open for the
purpose of transacting business.
54
<PAGE>
9.3.5. By-laws.
-------
The term "By-laws" shall mean all written rules, regulations
and by-laws, and all other documents (other than the Charter),
relating to the management, governance or internal regulation of a
Person (other than an individual) or interpretation of the Charter
of such Person, each as from time to time in effect.
9.3.6. Charter.
-------
The term "Charter" shall mean the certificate or articles of
incorporation or organization, statute, constitution, joint venture
or partnership agreement or articles or other charter documents of
any Person (other than an individual), each as from time to time in
effect.
9.3.7. Code.
----
The term "Code" shall mean the federal Internal Revenue Code
of 1986 or any successor statute, and the rules and regulations
thereunder, and in the case of any referenced section of any such
statute, rule or regulation, any successor section thereto,
collectively and as from time to time amended and in effect.
9.3.8. Compensation.
------------
The term "Compensation," as applied to any Person, shall
mean all salaries, compensation, remuneration or bonuses of any
character, and medical, surgical, dental, hospital, disability,
unemployment, severance, retirement, pension, vacation, insurance or
fringe benefits of any kind, or other payments of any kind
whatsoever made directly or indirectly by the Company or any
Subsidiary to such Person or Members of the Immediate Family of such
Person.
9.3.9. Contractual Obligation.
----------------------
The term "Contractual Obligation" shall mean, with respect
to any Person, any contract, agreement, deed, mortgage, lease,
license, commitment, undertaking, arrangement or understanding,
written or oral, or other document or instrument including without
limitation any document or instrument evidencing or otherwise
relating to any indebtedness but excluding the Charter and By-laws
of such Person, to which or by which such Person is a party or
otherwise subject or bound or to which or by which any property or
right of such Person is subject or bound.
9.3.10. Debt.
----
"Debt" of any Person shall mean all obligations of such
Person (i) for borrowed money, (ii) evidenced by notes, bonds,
debentures or similar instruments, (iii) for the deferred purchase
price of goods or services (other than trade payables
55
<PAGE>
or accruals incurred and paid in the Ordinary Course of Business,
but only to the extent that such payables or accruals are not
interest-bearing and all applicable discounts for prompt payment are
taken), (iv) under capital leases, (v) with respect to check
overdrafts or otherwise reflected as negative cash in financial
statements of such Person and (vi) in the nature of Guarantees of
the obligations described in clauses (i) through (v) above of any
other Person.
9.3.11. Distribution.
------------
The term "Distribution" shall mean, with respect to the
capital stock of or other evidence of beneficial interest in any
Person, (a) the declaration or payment of any dividend on or in
respect of any shares of any class of such capital stock or
beneficial interest; (b) the purchase, redemption or other
retirement of any shares of any class of such capital stock or
beneficial interest, directly, or indirectly through a Subsidiary or
otherwise; (c) any other distribution on or in respect of any shares
of any class of such capital stock or beneficial interest, or on or
in respect of any stock appreciation or similar right, and (d) any
payment or other transfer of all or any part of any interest in any
asset to any Affiliate, other than the Company or any Subsidiary.
9.3.12. Enforceable.
-----------
The term "Enforceable" shall mean, with respect to any
Contractual Obligation stated to be Enforceable by or against any
Person, that such Contractual Obligation is a legal, valid and
binding obligation enforceable by or against such Person in
accordance with its terms, except to the extent that enforcement of
the rights and remedies created thereby is subject to bankruptcy,
insolvency, reorganization, moratorium and other similar laws of
general application affecting the rights and remedies of creditors
and to general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
9.3.13. Equity Security
---------------
The term "Equity Security" shall have the meaning given to
such term in Section 3(a)(ii) of the Exchange Act.
9.3.14. ERISA.
-----
The term "ERISA" shall mean the federal Employee Retirement
Income Security Act of 1974 or any successor statute, and the rules
and regulations thereunder, and in the case of any referenced
section of any such statute, rule or regulation, any successor
section thereto, collectively and as from time to time amended and
in effect.
56
<PAGE>
9.3.15. Generally Accepted Accounting Principles.
----------------------------------------
The term "generally accepted accounting principles" shall
mean generally accepted accounting principles, as defined by the
Financial Accounting Standards Board as of the date hereof.
9.3.16. Guarantee.
---------
The term "Guarantee" shall mean (a) any guarantee of the
payment or performance of, or any contingent obligation in respect
of, any indebtedness or other obligation of any other Person, (b)
any other arrangement whereby credit is extended to one obligor on
the basis of any promise or undertaking of another Person (i) to pay
the indebtedness of such obligor, (ii) to purchase any obligation
owed by such obligor, (iii) to purchase or lease assets (other than
inventory in the ordinary course of business) under circumstances
that would enable such obligor to discharge one or more of its
obligations, or (iv) to maintain the capital, working capital,
solvency or general financial condition of such obligor, and (c) any
liability as a general partner of a partnership or as a venturer in
a joint venture in respect of indebtedness or other obligations of
such partnership or venture.
9.3.17. Governmental Authority.
----------------------
The term "Governmental Authority" shall mean any U.S.
Federal, state or local or any foreign government, governmental
authority, regulatory or administrative agency, governmental
commission, court or tribunal (or any department, bureau or division
thereof) or any arbitral body.
9.3.18. Governmental Order.
------------------
The term "Governmental Order" shall mean any order, writ,
judgment, injunction, decree, stipulation, determination or award
entered by or with any Governmental Authority.
9.3.19. Legal Requirement.
-----------------
The term "Legal Requirement" shall mean any federal, state,
local or foreign law, statute, standard, ordinance, code, order,
rule, regulation, resolution or promulgation, or any order, judgment
or decree of any Governmental Authority, or any license, franchise,
permit or similar right granted under any of the foregoing, or any
similar provision having the force and effect of law.
9.3.20. Lien.
----
The term "Lien" shall mean any mortgage, pledge, lien,
security interest, charge, claim, equity, encumbrance, restriction
on transfer, conditional sale or other
57
<PAGE>
title retention device or arrangement (including without limitation
a capital lease), transfer for the purpose of subjection to the
payment of any indebtedness, or restriction on the creation of any
of the foregoing, whether relating to any property or right or the
income or profits therefrom; provided, however, that the term
-------- -------
"Lien" shall not include (a) statutory liens for Taxes to the extent
that the payment thereof is not in arrears or otherwise due, (b)
encumbrances in the nature of zoning restrictions, easements, rights
or restrictions of record on the use of real property if the same do
not detract from the value of such property or impair its use in the
Business as currently conducted, (c) statutory or common law liens
to secure landlords, lessors or renters under leases or rental
agreements confined to the premises rented to the extent that no
payment or performance under any such lease or rental agreement is
in arrears or is otherwise due, (d) deposits or pledges made in
connection with, or to secure payment of, worker's compensation,
unemployment insurance, old age pension programs mandated under
applicable Legal Requirements or other social security and (e)
statutory or common law liens in favor of carriers, warehousemen,
mechanics and materialmen, statutory or common law liens to secure
claims for labor, materials or supplies and other like liens, which
secure obligations to the extent that payment thereof is not in
arrears or otherwise due.
9.3.21. Material Adverse Effect.
-----------------------
The term "Material Adverse Effect" shall mean any change in
or effect on the business, operations, assets, prospects or
condition, financial or otherwise, of the Company or any Subsidiary
which is materially adverse to the Company and its Subsidiaries
considered as one enterprise, provided that any such change or
effect shall not be deemed a Material Adverse Effect to the extent
it is substantially in accordance with the Projections.
9.3.22. Members of the Immediate Family.
-------------------------------
The term "Members of the Immediate Family," with respect to
any individual, shall mean each spouse, parent, brother, sister or
child of such individual, each spouse of any such Person, each child
of any of the aforementioned Persons, each trust created in whole or
in part for the benefit of one or more of the aforementioned Persons
and each custodian or guardian of any property of one or more of the
aforementioned Persons.
9.3.23. Ordinary Course of Business.
---------------------------
The term "Ordinary Course of Business" shall mean the
ordinary course of business consistent with either the Projections
or past custom and practice (including, without limitation, with
respect to quantity, pricing, discounts and customer concessions,
payment terms, collection practices and frequency).
58
<PAGE>
9.3.24. Person.
------
The term "Person" shall mean any individual, partnership,
corporation, association, trust, joint venture, unincorporated
organization or other entity, and any government, governmental
department or agency or political subdivision thereof.
9.3.25. Registration Statement.
----------------------
The term "Registration Statement" shall mean a registration
statement on Form S-1 pursuant to which IHF registers shares of its
common stock under the Securities Act of 1933, as amended.
9.3.26. Subsidiary.
----------
The term "Subsidiary" shall mean any Person of which the
Company (or other specified Person) shall own directly or indirectly
through a Subsidiary, a nominee arrangement or otherwise at least a
majority of the outstanding capital stock (or other shares of
beneficial interest) entitled to vote generally or at least a
majority of the partnership, joint venture or similar interests, or
in which the Company (or other specified Person) is a general
partner or joint venturer without limited liability. For the
purposes of this Agreement, the joint venture pursuant to the Joint
Venture Agreement dated September 7, 1985 among Health Rider
International, Inc., the Company, La Forza Limited and Health Rider
International, Limited and the joint venture involving BOMLC shall
be considered Subsidiaries of the Company
9.3.27. Taxes.
-----
The term "Taxes" shall mean any (and in the plural "Taxes"
shall mean all) federal, state, local or foreign income, gross
receipts, franchise, estimated, alternative minimum, add-on minimum,
sales, use, transfer, registration, value added, excise, natural
resources, severance, stamp, occupation, premium, profit, windfall
profit, environmental (including Code Section 59A), customs, duties,
real property, personal property, capital stock, intangibles, social
security, employment, unemployment, disability, payroll, license,
employee, and other tax, withholding taxes, back-up withholding
Taxes, assessments, imposts, levies, and other charges of every kind
and nature arising under or imposed by any Legal Requirement,
including, without limitation, all interest, penalties and additions
with respect to any of the foregoing.
9.3.28. Tax Return.
----------
The term "Tax Return" shall mean all federal, state, local
and foreign Tax returns, Tax reports, claims for refund of Tax and
declarations of estimated Tax, or other statement relating to Taxes
and any schedule or attachments to any of the foregoing or
amendments thereto, including (where permitted or required)
59
<PAGE>
consolidated, combined or unitary returns for any group of entities.
10. GOVERNING LAW
10.1. Governing Law.
-------------
Except to the extent that the Delaware General Corporation Law is
mandatorily applicable to the Acquisition and the rights of the respective
stockholders of the Company, IHF and the Buyer, this Agreement shall be
governed by and construed in accordance with the domestic substantive laws
of the State of Utah, without giving effect to any choice or conflict of
law provision or rule that would cause the application of the laws of any
other jurisdiction.
10.2. Reliance.
--------
Each of the parties hereto acknowledges that he or it has been
informed by each other party that the provisions of this Section 10
constitute a material inducement upon which such party is relying and will
rely in entering into this Agreement and the transactions contemplated
hereby.
10.3. Disputes, etc.
-------------
To the extent not prohibited by applicable law which cannot be
waived, each Party hereto hereby waives and covenants that it will not
assert any right to trial by jury in any forum in respect of any issue,
claim, demand, action, or cause of action arising out of or based upon this
Agreement, in each case whether now existing or hereafter arising and
whether in contract or tort or otherwise. Each Party hereby absolutely and
irrevocably consents and submits to the jurisdiction of the courts of the
State of Utah and of any Federal court located in said state in connection
with any actions or proceedings. In any such action or proceeding, each
Party hereby absolutely and irrevocably waives personal service of any
summons, complaint, declaration or other process and hereby absolutely and
irrevocably agrees that the service thereof may be made by certified or
registered first-class mail directed to the applicable Party, as the case
may be, at their respective addresses in accordance with Section 13 hereof.
11. TERMINATION
11.1. Termination of Agreement.
------------------------
This Agreement may be terminated by the parties only as provided below:
60
<PAGE>
11.1.1. IHF, the Buyer, and the Company may terminate this
Agreement by mutual written consent at any time prior to the
Closing.
11.1.2. IHF and the Buyer may terminate this Agreement by giving
written notice to the Company at any time prior to the Closing in
the event there has been a material inaccuracy in or a material
breach of any representation or warranty as of the date made by the
Company in this Agreement (including without limitation the
Schedules hereto) (as each such representation or warranty would
read if all qualifications as to materiality (including without
limitation in the definition of Material Adverse Effect or knowledge
were deleted therefrom) or a material breach or material violation
by the Company of any covenant or agreement made in or any duty with
respect to this Agreement (including without limitation the
Schedules hereto). Notwithstanding the foregoing, if notice is given
under Section 5.1.6, IHF and the Buyer shall have the right to
terminate this Agreement pursuant to this Section 11.1.2 only if
notice of such termination is given to the Company within ten (10)
business days after receipt by IHF and the Buyer of a notice
delivered under Section 5.1.6. If a notice of such termination is
given within such period, IHF and the Buyer may exercise their
rights under Section 11.2 hereof. If a notice of such termination is
not given within such period following receipt of a notice delivered
under Section 5.1.6 as aforesaid, IHF and the Buyer shall be deemed
to have waived their right to terminate this Agreement based on the
matters expressly specified in the notice delivered under Section
5.1.6 as aforesaid. Furthermore, if following receipt of a notice
under Section 5.1.6, IHF and the Buyer do not elect to terminate
this Agreement and instead elect to proceed to the Closing, IHF and
the Buyer shall be deemed to have waived their rights under Section
8 hereof with respect to the matters expressly specified in the
notice delivered under Section 5.1.6 as aforesaid, except to the
extent that such matters constitute either Retained Liabilities or
matters referenced in Section 8.1.4.(a)(iii).
11.1.3. The Company may terminate this Agreement by giving
written notice to IHF and the Buyer at any time prior to the Closing
in the event there has been a material inaccuracy in or a material
breach of any representation or warranty as of the date made by IHF
or the Buyer in this Agreement (including without limitation the
Schedules hereto) (as each such representation or warranty would
read if all qualifications as to materiality (including without
limitation in the definition of Material Adverse Effect or knowledge
were deleted therefrom) or a material breach or material violation
by IHF or the Buyer of any covenant or agreement made in or any duty
with respect to this Agreement (including without limitation the
Schedules hereto).
11.1.4. IHF or the Buyer may terminate this Agreement by giving
written notice to the Company at any time on or after August 31,
1996 (the "Final Termination Date") but prior to the Closing if the
Closing shall not have occurred on or before the Final Termination
Date by reason of the failure of any condition set
61
<PAGE>
forth in Section 6 hereof to be satisfied (unless the failure
results primarily from one or more breaches or violations of this
Agreement by IHF or the Buyer or inaccuracies in representations of
IHF or the Buyer hereunder).
11.1.5. The Company may terminate this Agreement by giving
written notice to IHF and the Buyer at any time on or after the
Final Termination Date but prior to the Closing if the Closing shall
not have occurred on or before the Final Termination Date by reason
of the failure of any condition set forth in Section 7 hereof to be
satisfied (unless the failure results primarily from one or more
breaches or violations of this Agreement by the Company or
inaccuracies in representations of the Company hereunder).
11.2. Effect of Termination.
---------------------
In the event of the termination of this Agreement pursuant to
Section 11.1, all obligations of the parties hereunder shall terminate
without any liability of any party to any other party; provided, however,
-------- -------
that no termination of this Agreement shall relieve any party of
liabilities in respect of any breaches or violations of this Agreement or
any duty with respect hereto by such party or any inaccuracies in any
representations by such party hereunder prior to termination.
12. MISCELLANEOUS
12.1. Entire Agreement; Waivers.
-------------------------
This Agreement constitutes the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties with respect to such subject
matter. No waiver of any provision of this Agreement shall be deemed to or
shall constitute a waiver of any other provision hereof (whether or not
similar), shall constitute a continuing waiver unless otherwise expressly
provided nor shall be effective unless in writing and executed (a) in the
case of a waiver by IHF or the Buyer, by IHF or the Buyer, as the case may
be, and (b) in the case of a waiver by the Company, by the Company.
12.2. Amendment or Modification, etc.
-------------------------------
The parties hereto may not amend or modify this Agreement except in
such manner as may be agreed upon by a written instrument executed by IHF,
the Buyer, and the Company. Any written amendment, modification or waiver
executed by the Buyer and the Company shall be binding upon IHF, the Buyer,
and the Company.
62
<PAGE>
12.3. Survival, etc.
-------------
All representations, warranties, covenants and agreements made by or
on behalf of any party hereto in this Agreement (including without
limitation the Schedules hereto), or pursuant to any document, certificate,
financial statement or other instrument referred to herein or delivered in
connection with the transactions contemplated hereby, shall be deemed to
have been material, of independent significance and relied upon by the
parties hereto, notwithstanding any investigation made by or on behalf of
any of the parties hereto or any opportunity therefor or any actual or
constructive knowledge thereby obtained. Notwithstanding the foregoing, the
representations, and warranties of the Company set forth in Section 3
hereof and of IHF and the Buyer set forth in Section 4 hereof shall survive
the execution and delivery of this Agreement but shall not survive the
Closing.
12.4. Headings, etc.
--------------
Section and subsection headings are not to be considered part of
this Agreement, are included solely for convenience, are not intended to be
full or accurate descriptions of the content thereof and shall not affect
the construction hereof. This Agreement shall be deemed to express the
mutual intent of the parties, and no rule of strict construction shall be
applied against any party.
12.5. Schedules; Listed Documents, etc.
--------------------------------
Neither the listing nor description of any item, matter or document
in any Schedule hereto nor the furnishing or availability for review of any
document shall be construed to modify, qualify or disclose an exception to
any representation or warranty of any party made herein or in connection
herewith, except to the extent that such representation or warranty
specifically refers to such Schedule and such modification, qualification
or exception is clearly described in such Schedule. The parties hereto
intend that each representation, warranty, covenant and agreement contained
herein shall have independent significance. If any party has breached any
representation, warranty, covenant or agreement contained herein in any
respect, the fact that there exists other representation, warranty,
covenant or agreement relating to the same subject matter (regardless of
the relative levels of specificity) which the party has not breached shall
not detract from or mitigate the fact that such party is in breach of the
first representation, warranty, covenant or agreement.
12.6. Severability.
------------
In the event that any provision hereof would, under applicable law,
be invalid or unenforceable in any respect, such provision shall (to the
extent permitted by applicable law) be construed by modifying or limiting
it so as to be valid and enforceable to the maximum extent compatible with,
and possible under, applicable law. The provisions hereof are severable,
and in the event any provision hereof should be held invalid or
unenforceable in any respect, it shall not invalidate, render unenforceable
or otherwise affect any other
63
<PAGE>
provision hereof.
12.7. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall
constitute but one and the same instrument.
12.8. Knowledge.
---------
Whenever reference is made herein to the knowledge of the Company,
such knowledge shall be deemed to include, without limitation, the actual
knowledge of any of the executive officers of the Company and each
Subsidiary.
12.9. Successors and Assigns.
----------------------
This Agreement shall be for the benefit of and binding upon the
parties hereto, their respective successors and , where applicable,
assigns. No party may assign this Agreement or any of its rights, interests
or obligations hereunder without the prior approval of the other party;
provided, however, that IHF and/or the Buyer may (a) assign its
-------- -------
indemnification rights under Section 8 hereof to General Electric Credit
Corporation or any successor senior lender; (b) assign any or all of its
rights and interests hereunder to one or more of its Affiliates; and (c)
designate one or more of its affiliates to perform its obligations
hereunder (but in any or all of such cases the IHF and/or Buyer, as the
case may be, shall nonetheless remain responsible for the performance of
all of its respective obligations hereunder).
12.10 No Third Party Beneficiaries.
----------------------------
It is hereby agreed that the named parties hereto and their
permitted successors and assigns shall have the sole right to enforce the
performance of the provisions of this Agreement and the sole right to
receive any and all amounts payable by the parties hereto pursuant to this
Agreement, and that no other person or entity shall be entitled to, or
shall have any claim, right, title or interest to or in any such amounts by
virtue of this Agreement. This Agreement is personal to the named parties
hereto, and is not intended for the benefit of, and is not intended to be
relied upon by, any other person or entity (including, without limitation,
any obligee under the Assumed Liabilities or Retained Liabilities) and no
such person or entity (or any other person or entity acting on its behalf)
shall be entitled to the benefit of or to enforce this Agreement.
64
<PAGE>
13. NOTICES
Any notices or other communications required or permitted hereunder shall
be effective if in writing and delivered personally or sent by telecopier,
Federal Express, or registered or certified mail, postage prepaid, addressed as
follows:
If to IHF or the Buyer, to it at:
c/o Icon Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Telecopier: 801-750-5238
Attention: Brad H. Bearnson - General Counsel
With copies to:
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway (300 South)
Salt Lake City, Utah 84101
Telecopier: 801-359-3954
Attention: Lyndon L. Ricks, Esq.
and:
Olson & Hoggan, P.C.
88 West Center
Logan, Utah 84321
Telecopier: 801-753-2699
Attention: Miles P. Jensen, Esq.
and:
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
Attention: R. Newcomb Stillwell, Esq.
and:
65
<PAGE>
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: Charles W. Robins, Esq.
If to the Company, to it at:
6322 South 3000 East
Salt Lake City, Utah 84121
Attention: Reed Brown - General Counsel
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
136 South Main, Suite 1000
Salt Lake City, Utah 84101
Attention: Nolan S. Taylor, Esq.
Unless otherwise specified herein, such notices or other communications
shall be deemed effective (a) on the date delivered, if delivered personally,
(b) two Business Days after being sent by Federal Express, if sent by Federal
Express, (c) one Business Day after being delivered, if delivered by telecopier
with confirmation of good transmission, and (d) three Business Days after being
sent, if sent by registered or certified mail. Each of the parties hereto shall
be entitled to specify a different address by giving notice as aforesaid to each
of the other parties hereto.
66
<PAGE>
HEALTHRIDER ASSET PURCHASE AGREEMENT
COUNTERPART SIGNATURE PAGE
--------------------------
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have hereunto set their hands under seal, as of the date first above
written.
IHF: IHF CAPITAL, INC.
By:/s/ Lynn Brenchley
------------------------------
Name: LYNN BRENCHLEY
Title: V. Pres.
THE BUYER: HEALTHRIDER ACQUISITION CORP.
By:/s/ Lynn Brenchley
------------------------------
Name: LYNN BRENCHLEY
Title: V. Pres
THE COMPANY: HEALTHRIDER, INC.
By:/s/ Christopher F. Robinson
------------------------------
Name: CHRISTOPHER F. ROBINSON
Title: CEO & PRES
67
<PAGE>
EXHIBIT INDEX
Exhibit A - Bill of Sale
Exhibit B - Form of Assignment of Intangibles
Exhibit C - Instrument of Assumption
Exhibit D - Payment Instructions
Exhibit E - Projections
Exhibit F - Employment Arrangements
Exhibit G - Non-Competition Agreement
Exhibit H - Confidentiality Agreement
Exhibit I - Form of Shareholder Consent and Lock-Up
Agreement
Exhibit J - Form of Legal Opinion of LeBoef, Lamb,
Green & MacRae, L.L.P.
Exhibit K - Form of Legal Opinion of Company's
General Counsel
Exhibit L - Form of Opinion of Hutchins, Wheeler &
Dittmar
Exhibit M - Form of Opinion of Brad H. Bearnson,
general counsel to IHF and Buyer
<PAGE>
SCHEDULE INDEX
<TABLE>
<CAPTION>
SCHEDULE
---------
<S> <C>
Schedule 2.4(d) Assumed Litigation
Schedule 2.4(e) Assumed Expenses
Schedule 3.1.1 Organization, Power and Standing
Schedule 3.1.2 Capitalization
Schedule 3.1.3 Subsidiaries
Schedule 3.2.4 Change in Condition
Schedule 3.3.1 Debt
Schedule 3.3.2 Absence of Undisclosed Liabilities
Schedule 3.4.1 Title to Assets
Schedule 3.4.2.(a) Real Property and Equipment
Schedule 3.4.2.(b) Real Estate Joint Venture and Related Leases
Schedule 3.4.3 Intellectual Property Rights
Schedule 3.5.1 Contractual Obligations
Schedule 3.5.2 Nature of Contracts, etc.
Schedule 3.5.3 Transactions with Affiliates
Schedule 3.5.4 Contract Consents
Schedule 3.6 Insurance
Schedule 3.7.2 Tax Matters
Schedule 3.7.3 Employee Benefit Plans
Schedule 3.7.4 Regulatory Consents
Schedule 3.8 Environmental and Safety Matters, etc.
Schedule 3.9 Labor Relations
Schedule 3.10 Customers, Suppliers and Distributors
Schedule 3.11.1 General Litigation
Schedule 3.11.2 Product Liability Matters
Schedule 3.14 Brokers, Etc.
Schedule 3.15 Approval of Stockholders
Schedule 3.16 Bank Accounts
Schedule 5.1.5 Operation of Business in the Ordinary Course
Schedule 5.1.11 Nondisclosure and Noncompete Agreements
Schedule 5.2.4 Certain Closing Agreements
Schedule 6.2 Required Consents
</TABLE>
<PAGE>
Exhibit 10.38
EXECUTION COPY
ASSET PURCHASE AGREEMENT
FOR THE PURCHASE OF
CERTAIN ASSETS OF
PARKWAY MANUFACTURING, INC.
BY AND AMONG
PARKWAY MANUFACTURING, INC.,
KERRY WILKINSON,
LARRY DUVALL, TINA DUVALL,
ICON HEALTH & FITNESS, INC.
AND
HEALTHRIDER ACQUISITION CORP.
JULY 3, 1996
<PAGE>
ASSET PURCHASE AGREEMENT
<TABLE>
<CAPTION>
Table of Contents
-----------------
Page
----
<S> <C> <C>
RECITALS ..................................................................1
SECTION 1: PURCHASE AND SALE OF ASSETS.......................................1
1.1 Purchased Assets.................................................1
1.2 Retained Assets..................................................2
1.3 Assumed Liabilities..............................................2
1.4 Retained Liabilities.............................................2
1.5 Buy Out of Manufacturing Agreement...............................3
SECTION 2: PAYMENT...........................................................3
2.1 Purchase Price...................................................3
2.2 Audit; Payments..................................................4
2.3 Payments of Transfer Taxes.......................................4
SECTION 3: THE CLOSING.......................................................4
3.1 Time and Place...................................................4
3.2 Execution and Delivery of Documents of Title.....................4
SECTION 4: REPRESENTATIONS AND WARRANTIES OF THE SELLER......................5
4.1 Organization.....................................................5
4.2 Authority........................................................5
4.3 No Violation.....................................................5
4.4 Title............................................................5
4.5 Properties; Condition............................................6
4.5.1 Real Property....................................................6
4.5.2 Tangible Property................................................6
4.6 Inventories and Receivables......................................6
4.6.1 Inventories......................................................6
4.6.2 Accounts Receivable..............................................6
4.7 Taxes............................................................6
4.8. Absence of Undisclosed Liabilities...............................7
4.9 Absence of Certain Changes.......................................7
4.10 Intellectual Property............................................7
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4.11 Contracts........................................................7
4.12 Litigation.......................................................8
4.13 Insurance........................................................8
4.14 Compliance with Laws.............................................8
4.15 Employee Benefit Plans...........................................9
4.16 Employees........................................................9
4.17 Environmental and Safety Matters.................................9
4.18 Disclosure of Material Information..............................10
4.19 Brokers.........................................................10
4.20 Continuing Representations......................................10
4.21 Sole Representations and Warranties.............................10
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER..........................11
5.1 Organization....................................................11
5.2 Authority.......................................................11
5.3 No Violation....................................................11
5.4 Continuing Representations......................................11
5.5 Sole Representations and Warranties.............................11
SECTION 6. CONDITIONS.......................................................12
6.1 Conditions to Obligations of the Buyer..........................12
6.1.1 Representations; Performance of Obligations.....................12
6.1.2 Transfer of Purchased Assets....................................12
6.1.3 Consents to Assignment of Manufacturing Agreement...............12
6.1.4 Opinion of Seller's Counsel.....................................12
6.1.5 Corporate Documents.............................................12
6.1.6 Physical Properties.............................................12
6.1.7 No Pending Actions; Legality; Governmental Authorization........13
6.1.8 Closing of HealthRider..........................................13
6.1.9 Consent of GECC.................................................13
6.1.10 Mutual General Release................................. ........13
6.2 Conditions to Obligations of the Seller.........................13
6.2.1 Representations; Performance of Obligations.....................14
6.2.2 Consent to Assignment of Manufacturing Agreement................14
6.2.3 Opinions of Buyer's Counsel.....................................14
SECTION 7. COVENANTS........................................................14
7.1 Access..........................................................14
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
7.2 Satisfaction of Conditions......................................14
7.3 No Solicitation; Confidentiality................................14
7.4 Accuracy of Representations and Warranties......................14
7.5 Compliance with Bulk Transfer Requirements......................15
7.6 Tax Matters.....................................................15
7.7 Further Assurances..............................................15
7.8 Limitations on Certain Corporate Actions........................15
7.9 Covenant Not to Compete.........................................15
7.10 WARN Act Liability..............................................16
7.11 Vendor Commitments..............................................17
SECTION 8: TERMINATION......................................................17
8.1 Termination of Agreement........................................17
8.2 Effect of Termination and Right to Proceed......................17
SECTION 9: INDEMNIFICATION..................................................18
9.1 Indemnification, General........................................18
9.2 Environmental Indemnification...................................18
9.4 Deductible......................................................19
9.3 Survival of Representations and Warranties......................19
9.5 Claims..........................................................19
SECTION 10. MISCELLANEOUS..................................................20
10.1 Fees and Expenses...............................................20
10.2 Law Governing; Juridiction......................................20
10.3 Notices.........................................................20
10.4 Entire Agreement................................................22
10.5 Amendment.......................................................22
10.6 Assignability...................................................22
10.7 Waivers; Severability...........................................22
10.8 Section Headings................................................22
10.9 Counterparts....................................................22
10.10 Attorneys' Fees.................................................22
10.11 Third Party Beneficiaries.......................................23
</TABLE>
-iii-
<PAGE>
Table of Exhibits
- -----------------
Exhibit A Bill of Sale, Assignment and Assumption Agreement
Exhibit B Consent and Release
Exhibit C Opinion of Seller's Counsel
Exhibits D(1) Opinions of Buyer's Counsel
and D(2)
Disclosure Schedules
- --------------------
1.1(a) Furniture, Fixtures and Equipment
1.1(b) Raw Materials and Work-in-Process Inventory
1.1(c) Finished Goods Inventory
1.1(d) Receivables Owed from HealthRider
1.3(a) Liabilities for Vendor Commitments
1.3(b) Employees Causing Liability Under WARN
4.4 Title
4.5.1(b) List of All Lessor/Lessee Agreements
4.5.2 Property Not Located at 2501 E. Magnolia
4.7 Taxes
4.9 Absence of Certain Changes
4.11 Leases, Contracts, Plans, Agreements, Licenses
4.12 Pending Litigation
4.13 Insurance Policies on Purchased Assets
4.14 Compliance With Laws
4.15 Pension, Profit-Sharing, and All Benefits Plans
4.16 Employees
4.17 Releases of Hazardous Materials
6.1.7 Pending Actions
-iv-
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
AGREEMENT made as of this 3rd day of July, 1996, by and among Icon Health &
Fitness, Inc., a Delaware corporation ("IHF"); HealthRider Acquisition Corp., a
Delaware corporation, and an indirect subsidiary of IHF ("Buyer"); Parkway
Manufacturing, Inc., an Arizona corporation ("Seller"); Kerry Wilkinson; Larry
DuVall; and Tina DuVall (Wilkinson and Larry and Tina DuVall, collectively, the
"Individuals")
The Buyer desires to buy out all right, title and interest of the Seller in
and to the Manufacturing Agreement, dated March 10, 1995 between the Seller and
ExerHealth, Inc. (succeeded by HealthRider, Inc.), as amended by Manufacturing
Agreement Addendum dated November 1, 1995 (the "Manufacturing Agreement"); and
The Seller desires to sell, and the Buyer desires to acquire all rights and
interest of the Seller in certain assets of the Seller relating to the
Manufacturing Agreement.
Accordingly, in consideration of the respective representations, warranties
and covenants set forth herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS
---------------------------
1.1 Purchased Assets. Subject to the terms, provisions and conditions
----------------
set forth herein, the Seller agrees to sell, assign, transfer and convey to the
Buyer, and the Buyer agrees to purchase, acquire and accept from the Seller, the
following assets and properties (the "Purchased Assets"):
(a) all furniture, fixtures, leasehold improvements, equipment,
machinery, parts, and tools specified in Schedule 1.1(a) ("F,F&E");
(b) all raw materials and work-in-process attributable or related
to Seller's production of HealthRider or AerobicRider units for
HealthRider, Inc. specified in Schedule 1.1(b) ("Inventory");
---------------
(c) all finished goods rider inventory specified in Schedule 1.1(c)
---------------
("Finished Goods");
(d) the total outstanding accounts receivable owed to Seller from
HealthRider, Inc. specified in Schedule 1.1(d) (the "HealthRider
--------------
Receivables");
(e) all licenses, permits and operating rights relating to the
assets specified in subsections (a)-(d) above (the "Principal Assets") and
to the Manufacturing Agreement, to the extent they are legally transferable
by Seller;
<PAGE>
(f) all intellectual property rights and other general intangibles
relating to the Manufacturing Agreement and to the Principal Assets as
utilized in connection with the Manufacturing Agreement, including, without
limitation, any and all patents (and applications therefor), know-how,
unpatented inventions, trade secrets, secret formulas, business and
marketing plans, and copyrights, trademarks and tradenames (and
applications therefor);
(g) all of Seller's customer and supplier lists, records and
information, and instructional material and literature relating to the
Principal Assets and the Manufacturing Agreement; and
(h) all books and records relating to the Principal Assets and the
Manufacturing Agreement, including, without limitation, blueprints,
drawings and other technical papers, maintenance, and asset history
records, and all historical source data and other information
electronically stored or otherwise recorded relating to the foregoing.
1.2 Retained Assets. The Seller will retain ownership of all assets of
---------------
the Seller not specifically included in the Purchased Assets as defined in
Section 1.1 or in the buy out of the Manufacturing Agreement pursuant to Section
1.5 (the "Retained Assets").
1.3 Assumed Liabilities. The Buyer shall assume and agree to pay,
-------------------
perform and discharge only the liabilities and obligations of the Seller set
forth below (the "Assumed Liabilities"), and will pay, perform and discharge the
Assumed Liabilities as they become due. The Assumed Liabilities shall consist
only of:
(a) The liabilities and obligations of the Seller for the vendor
commitments listed in Schedule 1.3(a) up to a maximum amount of
---------------
$1,000,000.00 (including any attorneys' fees related to any such claims);
and
(b) Any liability under the Worker Adjustment and Retraining
Notification Act (29 U.S.C. (S)(S)2101-2109) ("WARN Act") attributable to
the layoff or termination of those employees of the Seller listed in
Schedule 1.3(b) up to a maximum amount of $750,000.00.
---------------
1.4 Retained Liabilities. The Buyer will not assume, pay or discharge
--------------------
any debts, liabilities, obligations, contracts, loans, commitments, or
undertakings of the Seller, whether fixed, unliquidated, contingent or otherwise
and whether or not related to the Purchased Assets or the Manufacturing
Agreement, unless expressly assumed by the Buyer pursuant to Section 1.3 above,
including without limitation all liabilities and obligations of the Seller (i)
related to products sold under the Manufacturing Agreement prior to the Closing,
including, but not limited to, any claims for breach of warranty and products
liability related thereto and/or set forth on Schedule 4.12 hereto, (ii) for the
-------------
liabilities and obligations to the vendors listed in Schedule 1.3(a) in respect
---------------
of goods shipped prior to the date hereof, and (iii) related to the continuation
of group health plan coverage under Section 4980B of the Internal Revenue Code
of 1986, as amended ("Code"), Sections 601
-2-
<PAGE>
through 609 of the Employee Retirement Income Security Act of 1974, as amended,
("ERISA"), and any applicable state law with respect to the Seller and its
affiliates, including any such liabilities and obligations for those employees
listed on Schedule 1.3(b) and their dependents.
---------------
All such liabilities retained by the Seller (the "Retained Liabilities") shall
be paid or otherwise satisfied by the Seller when due.
1.5 Buy Out of Manufacturing Agreement. The parties agree that as of
----------------------------------
the Closing Date the Buyer shall buy out all of the right, title and interest of
the Seller in and to the Manufacturing Agreement. In consideration of said buy
out, the Buyer shall pay to the Seller Five Million Dollars ($5,000,000) (the
"Buy Out Payment") .
SECTION 2. PAYMENT
-------
2.1 Purchase Price. The computation and allocation of the purchase
--------------
price for the sale by Seller to Buyer of the Purchased Assets shall be as set
forth below. The Seller and the Buyer shall be bound by such allocation for all
purposes and to account for and report the purchase and sale contemplated hereby
for tax purposes in accordance with such allocation.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A. F, F&E $2,500,000.00
B. Inventory (Seller's actual
delivered in cost as set
forth on Schedule 1.1(b) $1,413,395.00
---------------
C. Finished Goods (Seller's
historical invoice price
as charged to HealthRider, Inc.
as set forth on Schedule 1.1(c) $ 175,794.00
---------------
D. HealthRider Receivables as set
forth on Schedule 1.1(d) $1,050,000.00
---------------
Total (the "Purchase Price") $5,139,189.00
</TABLE>
Any Purchase Price for the Purchased Assets not previously specifically
allocated hereunder shall be allocated among the Purchased Assets in a manner
consistent with the principles of Section 1060 of the Internal Revenue Code and
the regulations thereunder applying the so-called residual method in proportion
to their relative fair market values as of the Closing Date. If the Seller and
the Buyer cannot agree on the Purchase Price allocation, such disagreement shall
be referred for resolution to such a nationally recognized independent public
accountant firm as is mutually agreed upon by the Seller and the Buyer (a "Tax
Referee"). If the parties cannot agree on such a Tax Referee, the Tax Referee
shall be picked by two nationally recognized accounting firms, one picked by the
Buyer and one picked by the Seller; provided,
-3-
<PAGE>
however, that the Tax Referee so picked may not then be the independent
accountant regularly employed by the Buyer or the Seller. The decision of the
Tax Referee shall be final and binding on the parties. The fees of the Tax
Referee shall be shared equally by the Seller and the Buyer.
2.2 Audit: Payments. The Buyer and its attorneys, accountants and
---------------
agents shall have the right at such times prior to the Closing as deemed
necessary or desirable to audit and inspect Inventory and Finished Goods, and
the books and records related thereto to verify and confirm the amount to be
paid for such assets. The Buyer will pay to the Seller the amount of $100,000
contemporaneously with the execution hereof and an additional $100,000 on the
Monday of each succeeding week until the Closing. Such payments shall be
credited towards the Purchase Price and nonrefundable, except that such payments
shall be immediately refunded to Buyer by Seller upon any termination of this
Agreement by Buyer pursuant to Section 8.1(e) hereof (except for any termination
due to the nonfulfillment of a condition to Closing set forth in Section 6.1.8
or 6.1.9) and one-half of such payments shall be immediately refunded to Buyer
by Seller upon any termination of this Agreement by Buyer pursuant to Section
8.1(e) hereof due to the nonfulfillment of the condition to Closing set forth in
Section 6.1.8 due to the failure of the Buyer to receive HSR approval for the
acquisition of HealthRider, Inc. At the Closing, the Buyer will deliver to the
Seller the balance of the Purchase Price and the Buy Out Payment by wire
transfer of immediately available funds.
2.3 Payments of Transfer Taxes. All taxes levied or imposed in
--------------------------
connection with the sale and transfer of the Purchased Assets to the Buyer,
including without limitation, any and all sales, use, transfer and excise taxes
imposed by federal, state or local taxing authorities shall be borne by the
Seller.
SECTION 3. THE CLOSING
-----------
3.1 Time and Place. The closing ("Closing") shall take place at 10:00
--------------
a.m. at the offices of Kruse, Landa & Maycock, L.L.C., 50 West Broadway, Eighth
Floor, Salt Lake City, Utah 84101, on the second business day following the
closing of the Buyer's purchase of the assets of HealthRider, Inc., or at such
other time and place as the parties hereto may mutually agree. The date on which
the Closing takes place is referred to herein as the "Closing Date."
3.2 Execution and Delivery of Documents of Title. At the Closing, the
--------------------------------------------
Seller and Buyer shall execute and deliver the Bill of Sale, Assignment and
Assumption Agreement attached hereto as Exhibit A and the Seller shall execute
---------
and deliver such deeds, conveyances, bills of sale, certificates of title,
assignments, assurances and other instruments and documents as the Buyer may
reasonably request in order to effect the sale, conveyance, and transfer of the
Purchased Assets from the Seller to the Buyer and the buy out of the
Manufacturing Agreement. Such instruments and documents shall be sufficient to
convey to the Buyer good and merchantable title in the Purchased Assets, free
and clear of all liabilities, liens or encumbrances whatsoever. The Seller
agrees that it will, from time to time after the Closing Date, take such
-4-
<PAGE>
additional action and execute and deliver such further documents as the Buyer
may reasonably request in order to effectively sell, transfer and convey the
Purchased Assets to the Buyer and to place the Buyer in a position to operate
and control all of the Purchased Assets.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SELLER
--------------------------------------------
As a material inducement to the Buyer to enter into and perform this
Agreement, the Seller represents, warrants, covenants and agrees as follows:
4.1 Organization. The Seller is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Arizona, with full
power and authority (corporate or otherwise) to own or lease its property and
carry on its business, as and how such business is now conducted, and to
consummate the transactions contemplated by this Agreement.
4.2 Authority. The execution, delivery and performance of this
---------
Agreement and such other documents contemplated by this Agreement (the "Related
Documents") by or on behalf of the Seller have each been duly and validly
authorized by the Seller and this Agreement and such Related Documents will be
valid and binding obligations of the Seller enforceable against the Seller in
accordance with their respective terms.
4.3 No Violation. The entering into of this Agreement and the Related
------------
Documents by the Seller does not, and the consummation of the transactions
contemplated hereby will not, (i) violate the provisions of any applicable laws
of the United States or the State of Arizona or the Articles of Incorporation or
By-Laws of the Seller, or (ii) violate any provision of, or result in a default
or acceleration of any obligation under, or result in any change in the rights
or obligations of the Seller under, any mortgage, lien, lease, agreement,
contract, instrument, order, arbitration award, judgment, or decree to which the
Seller is a party or by which the Seller is bound, or to which any property of
the Seller is subject. No default or breach will occur in any material respect
by virtue of the consummation of the transactions contemplated herein under any
material contract, agreement, indenture or other instrument applicable to the
Seller.
4.4 Title. Except as set forth on Schedule 4.4, the Seller has good and
----- ------------
marketable title to all of the Purchased Assets and the Manufacturing Agreement,
free and clear of any and all liens, encumbrances, security agreements,
equities, options, claims, charges and restrictions whatsoever. The sale and
delivery of the Purchased Assets and the Manufacturing Agreement to the Buyer
pursuant hereto shall vest in the Buyer good and marketable title thereto, free
and clear of any and all liens, encumbrances, security agreements, equities,
options, claims, charges and restrictions whatsoever, including the liens set
forth on Schedule 4.4, all of which shall be released and discharged prior to
------------
the Closing.
-5-
<PAGE>
4.5 Properties; Condition.
---------------------
4.5.1 Real Property. The Seller does not own any interest in real
-------------
property nor does it hold nor is it subject to any options or contractual
obligations to purchase or acquire or sell or dispose of any interest in real
property. Schedule 4.5.1(b) attached hereto sets forth a list and summary
-----------------
description of all leases, subleases or other agreements under which Seller is
lessor or lessee of any real property. To the knowledge of the Seller, all of
such leases are in full force and effect and, except as set forth on Schedule
--------
4.5.1(b), there is no material and continuing default, and the Seller has not
- --------
received any notice of an event of default or notice of an event which with
notice or lapse of time or both would constitute a default.
4.5.2 Tangible Property. Except as set forth on Schedule 4.5.2,
----------------- --------------
all of the equipment, furniture, leasehold improvements, fixtures, vehicles, any
related capitalized items and other tangible property now owned by the Seller
are located at the Seller's facility at 2501 E. Magnolia, Phoenix, Arizona.
4.6 Inventory and Receivables.
-------------------------
4.6.1 Inventories.
-----------
(a) The values at which the inventories are carried on Schedules
---------
1.1(b) and 1.1(c), are solely based on (i) the Seller's historical invoice
------ ------
price as charged to HealthRider, Inc. in the case of Finished Goods, and
(ii) the Seller's actual cost in the case or all other Inventory.
(b) The inventories reflected on Schedules 1.1(b) and 1.1(c)
---------------- ------
are, (i) in all material respects in good and merchantable condition, (ii)
usable in all material respects for the purposes for which they are intended or
salable in the ordinary course of business of the Seller, and (iii) verifiable
in all material respects by reference to records which are maintained by the
Seller.
4.6.2 Accounts Receivable. The HealthRider Receivables are valid and
-------------------
enforceable claims, subject to no set-off or counterclaim, and are fully
collectible in the ordinary course of business.
4.7 Taxes. The Seller has timely filed all federal, state and local
-----
income, excise, payroll, withholding franchise, real estate and sales and use
tax returns required to be filed by it. All such tax returns are correct and
complete in all respects. Except as set forth on Schedule 4.7, the Seller has
------------
paid all taxes owing by it except taxes which have not yet accrued or otherwise
become due and which do not, in the aggregate, exceed $10,000. There are no
liens for federal or state taxes, assessments or government charges or levies
upon any property or assets of the Seller. No extensions of time for the
assessment of deficiencies for any year are in effect. Neither the Internal
Revenue Service nor any other taxing authority has asserted or, to the knowledge
of the Seller, threatened to assert against the Seller any deficiency or claim
for additional taxes or interest thereon or penalties in connection therewith.
The Seller has no liability for the taxes of any person, as a
-6-
<PAGE>
transferee or successor, by contract, or otherwise, or is a party to or bound by
any contractual obligation relating to any allocation or sharing of taxes.
4.8 Absence of Undisclosed Liabilities. Except as set forth in the list
----------------------------------
of the Seller's
creditors provided by the Seller to the Buyer pursuant to Section 7.5, there are
no material liabilities of the Seller, whether accrued, absolute, contingent or
otherwise (including, without limitation, liabilities as guarantor or otherwise
with respect to obligations of others, or liabilities for taxes due or then
accrued or to become due).
4.9 Absence of Certain Changes. Except as set forth on Schedule 4.9,
-------------------------- ------------
since June 1, 1996, there has not been:
(a) any sale or other disposition, or any agreement or other
arrangement for the sale or other disposition, of any part of the
properties or assets of the Seller, except for sales of inventory in the
ordinary course of business;
(b) any physical damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the Seller's
properties, assets or business; or
(c) any termination or failure to renew, or receipt of any threat
to terminate or failure to renew, any contract or other agreement affecting
the Purchased Assets, the Assumed Liabilities or the Manufacturing
Agreement pursuant to which the Seller paid or received annual payments in
excess of $5,000.
4.10 Intellectual Property. The Seller either owns or has a valid,
---------------------
enforceable right to use all intellectual property necessary to conduct its
business as presently conducted. To the knowledge of the Seller, the Seller has
not infringed or violated in any way any patent, trademark, trade name or
copyright of others, and has not received during the past three years any
notice, claim or protest regarding any such violations or infringement. No
current or former stockholder, employee, officer or director of the Seller has
(directly or indirectly) any right, title or interest in any of the intellectual
property being conveyed to Seller pursuant to Section 1.1(g) hereof.
4.11 Contracts. Except for leases, contracts, commitments, plans,
---------
agreements, instruments and licenses described in Schedule 4. 11 (the "Material
--------------
Contracts"), the Seller is not a party to or subject to:
(a) any plan or contract providing for bonuses, options, stock
purchases, collective bargaining or the like, or any contract or agreement
with any labor union;
(b) any employment contract or contract for services not terminable
at will by and without penalty or further liability to the Seller;
-7-
<PAGE>
(c) any contract, option, lease or other agreement of any nature
involving or relating in any manner to any of the Purchased Assets, Assumed
Liabilities or the Manufacturing Agreement; or
(d) any loan agreement, note, bond, debenture or any other
indebtedness to any person, firm or corporation.
Copies of all Material Contracts have been provided to the Buyer or its
counsel prior to the execution of this Agreement, and all such copies are true,
correct and complete and have been subject to no amendment, extension or other
modification as of the date hereof, except such as are described in Schedule
--------
4.11. All of the Material Contracts are valid, subsisting, in full force and
- ----
effect and binding upon the Seller and, except as described in Schedule 4.11,
-------------
the Seller has paid in full or accrued all amounts now due thereunder and has
satisfied in full or provided for all of its liabilities and obligations
thereunder.
Except as listed and described in Schedule 4.11, (i) neither the Seller
-------------
nor, to its knowledge, any other party, is in default, nor has received a
written notice of an event of default under, any Material Contract (a "default"
being defined for purposes hereof as an actual default or the existence of any
set of facts which would, upon receipt of notice or passage of time, constitute
a material default); and (ii) no approval or consent of any person is needed in
order that the Material Contracts will continue in full force and effect
following the consummation of the transactions contemplated by this Agreement.
The information regarding the vendor commitments set forth on Schedule
--------
1.3(a) is true, correct and complete, there are no other vendor commitments for
- ------
which the Seller has any obligation or liability other than those set forth on
Schedule 1.3(a), and all such vendor commitments relate solely to the
- ---------------
Manufacturing Agreement.
4.12 Litigation. Except as disclosed in Schedule 4.12, there is no
---------- -------------
proceeding or litigation pending or, to the knowledge of the Seller, threatened
against or affecting the Seller (or any facts which could lead to such
proceeding or litigation) regarding the Seller or its business, properties or
assets, at law or in equity, before any federal, state or local court or any
other governmental or administrative agency, and there are no judgments, orders,
consent decrees, injunctions, administrative orders, notices of violation or
other mandates outstanding which adversely affect or may adversely affect the
business, operations, property, financial condition or prospects of the Seller.
4.13 Insurance. There is listed on Schedule 4.11 each insurance policy
--------- -------------
maintained by the Seller with respect to the Purchased Assets and the
Manufacturing Agreement, including a designation of which such policies, if any,
are assignable to the Buyer, and a brief description of the extent to which the
Seller has self-insured the Purchased Assets and the Manufacturing Agreement.
4.14 Compliance with Laws. The Seller to its knowledge has conducted and
--------------------
is conducting its business in material compliance with applicable federal,
state, local or foreign laws, statutes,
-8-
<PAGE>
ordinances, regulations, rules or orders or other requirements of any
governmental, regulatory or administrative agency or authority or court or other
tribunal relating to it, except for notices of noncompliance which have been
remedied to the satisfaction of the appropriate agency or authority. Except as
disclosed in Schedule 4.14, the Seller is not now
-------------
charged with, and to its knowledge, is not now under investigation with respect
to, any possible material violation of any applicable law, statute, ordinance,
regulation, rule, order or requirement relating to any of the foregoing. Except
as disclosed in Schedule 4.14, the Seller to its knowledge has all necessary
-------------
permits, licenses, orders, ratings and approvals of all federal, state, local or
foreign governmental or regulatory bodies for it to operate its business
facilities as presently operated and to conduct its business as presently
conducted ("Necessary Permits") and, to the knowledge of the Seller, all other
such permits, licenses, orders, ratings and approvals required by applicable law
or regulation and all such permits are in full force and effect.
4.15 Employee Benefit Plans. Schedule 4.15 lists each pension plan,
---------------------- -------------
profit-sharing plan, deferred compensation plan, severance pay plan, and
hospitalization, disability, health or other employee insurance or benefit plan
established and maintained by the Seller or to which the Seller is or may be
obligated to contribute or for which Seller may have any liability, including,
but not limited to, each such plan subject to the provisions of ERISA
(individually a "Plan" and collectively, the "Plans"). Each Plan is in
compliance with applicable law and has been and currently is administered and
operated in accordance with its terms. Each Plan which is intended to be
"qualified" within the meaning of section 401(a) of the Internal Revenue Code of
1986, as amended, has received a favorable determination letter from the
Internal Revenue Service and no event has occurred and no condition exits which
could reasonably be expected to result in the revocation of any such
determination. None of the Plans is or has been subject to Title IV of ERISA.
All required contributions to, and all payments with respect to, the Plans have
been timely made.
4.16 Employees. Schedule 4.16 sets forth a true and complete list of all
--------- -------------
employees of the Seller including each such employee's job title, remuneration
and duration of employment period. Except as disclosed in Schedules 4.11 and
------------------
4.15, the Seller is not a party to any written or oral employment, service or
- ----
pension agreement. The Seller is not a party to, and none of its employees are
subject to, any collective bargaining agreement or other union contract. Except
as set out on Schedule 4.16, to the knowledge of the Seller, no employee or
intended employee of the Seller is a party to any non-competition or
confidentiality agreement with any other party. The Seller has conducted its
business in compliance in all material respects with federal, state and local
laws affecting employment and employment practices, including terms and
conditions of employment and wages and hours. Schedule 1.3(b) sets forth a true
---------------
and complete description of all layoffs, furloughs, and terminations of
employment of employees by the Seller and its affiliates located within a single
site as defined by the WARN Act since January 1, 1996, except for terminations
for cause or voluntary terminations by employees. The written notice included in
Schedule 1.3(b) was duly given to each employee of the Seller temporarily laid
off on or about May 22, 1996.
4.17 Environmental and Safety Matters. The Seller has received no notice
--------------------------------
of any asserted violation by the Seller of any applicable federal, state, or
local pollution, ecological control, health
-9-
<PAGE>
or safety requirement or regulation, including without limitation, any
requirement or regulation as to hazardous materials storage or disposal,
effluent disposal, ambient air quality and sewage, and any applicable
requirement of the Occupational Health and Safety Administration ("OSHA"),
except for such notices which have been remedied to the satisfaction of the
appropriate agency or authority. Further, the Seller has no knowledge of any
facts or circumstances which it reasonably believes would constitute any such
violation by the Seller or any other person which would have a material adverse
effect upon its business, the Purchased Assets or the Manufacturing Agreement,
including without limitation any lien or encumbrance which might arise under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. (S)(S)9601-9657 ("CERCLA") or under any comparable provisions of Arizona
state law. The Seller to its knowledge has never sent or arranged for the
transportation of hazardous materials to a site, or owned or operated a site,
which, pursuant to CERCLA or any similar state law, has been placed or is
proposed (by the United States Environmental Protection Agency ("EPA") or
similar state authority) to be placed, on the "National Priorities List," as in
effect as of the Closing Date, of hazardous waste sites or any similar state
list. There are no underground fuel or other storage tanks located at any of the
facilities of the Seller. Except as disclosed in Schedule 4.17, to the knowledge
-------------
of Seller, there have been no unpermitted releases or threatened releases that
are or at any time were reasonably likely to occur of hazardous materials on,
upon, into, or from any real estate owned or leased by or other assets of the
Seller; and, to the knowledge of the Seller, there have been no releases on,
upon, from, or into any real property in the vicinity of such real estate or
other assets of the Seller or which, through the soil, groundwater, or surface
water, may have come to be located on, upon, or under such real estate or other
assets.
4.18 Disclosure of Material Information. To the knowledge of the Seller,
----------------------------------
neither this Agreement (including the Schedules hereto) nor any document,
certificate or instrument furnished in connection herewith contains, with
respect to the Seller, any untrue statement of a material fact or omits to state
a material fact necessary to make the statements herein or therein not
misleading.
4.19 Brokers. Neither the Seller nor anyone acting on its behalf, has
-------
engaged, retained, or incurred any liability to any broker, investment banker,
finder or agent or has agreed to pay any brokerage fees, commissions, finder's
fees or other fees with respect to the sale of the Purchased Assets or the buy
out of the Manufacturing Agreement, this Agreement or the transactions
contemplated hereby.
4.20 Continuing Representations. The representations and warranties of
--------------------------
the Seller herein contained and the contents of all Schedules annexed hereto
shall be true and correct on and as of the Closing Date with the same force and
effect as if made on and as of that date.
4.21 Sole Representations and Warranties. The representations and
-----------------------------------
warranties contained in this Section 4 are the only express representations and
warranties made by Seller in connection with the transactions contemplated by
this Agreement and supersede any and all previous written or oral statements
made by Seller to the Buyer, and all other warranties, express or implied,
-10-
<PAGE>
including any implied warranties of merchantability or fitness for a particular
purpose, are expressly disclaimed.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
The Buyer hereby represents and warrants to the Seller as follows:
5.1 Organization. The Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware, with full
power and authority (corporate or otherwise) to own or lease its property and
carry on its business as and how such business is now conducted, and to
consummate the transactions contemplated by this Agreement.
5.2 Authority. The execution, delivery and performance of this
---------
Agreement and the Related Documents by or on behalf of the Buyer have been duly
and validly authorized by the Buyer and this Agreement and such Related
Documents will be valid and binding obligations of the Buyer enforceable against
the Buyer in accordance with their respective terms.
5.3 No Violation. The entering into of this Agreement and the Related
------------
Documents by the Buyer does not, and the consummation of the transactions
contemplated hereby will not, (i) violate the provisions of any applicable laws
of the United States or the State of Delaware or the Certificate of
Incorporation or By-Laws of the Buyer, or (ii) violate any provision of, or
result in a default or acceleration of any obligation under, or result in any
change in the rights or obligations of the Buyer under, any mortgage, lien,
lease, agreement, contract, instrument, order, arbitration award, judgment, or
decree to which the Buyer is a party or by which the Buyer is bound, or to which
any property of the Buyer is subject. No default or breach will occur in any
material respect by virtue of the consummation of the transactions contemplated
herein under any material contract, agreement, indenture or other instrument
applicable to the Buyer.
5.4 Continuing Representations. The representations and warranties of
--------------------------
the Buyer herein contained shall be true and correct on and as of the Closing
Date with the same force and effect as if made on and as of that date.
5.5 Sole Representations and Warranties. The representations and
-----------------------------------
warranties contained in this Section 5 are the only express representations and
warranties made by Buyer in connection with the transactions contemplated by
this Agreement and supersede any and all previous written or oral statements
made by Buyer to the Seller, and all other warranties, express or implied,
including any implied warranties of merchantability or fitness for a particular
purpose, are expressly disclaimed.
-11-
<PAGE>
SECTION 6. CONDITIONS
----------
6.1 Conditions to Obligations of the Buyer. The obligations of the
--------------------------------------
Buyer to consummate this Agreement and the transactions contemplated hereby are
subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
6.1.1 Representations; Performance of Obligations. All of the
-------------------------------------------
representations and warranties of the Seller contained in Section 4 hereof shall
remain true and correct as of the Closing Date and the Seller shall have
performed, on or before the Closing Date, all of its obligations hereunder which
by the terms hereof are to be performed on or before the Closing Date.
6.1.2 Transfer of Purchased Assets and Buy Out of the
-----------------------------------------------
Manufacturing Agreement. All of the Purchased Assets shall be effectively sold,
- -----------------------
transferred, conveyed and assigned to the Buyer. The Manufacturing Agreement
shall have been effectively bought out by the Buyer. All of the deeds,
conveyances, bills of sale, certificates of title, assignments, assurances and
other instruments and documents referenced in Section 3.2 shall be executed,
delivered and filed or recorded.
6.1.3 Consent to Buy Out of Manufacturing Agreement. The consent
---------------------------------------------
of HealthRider, Inc. to the buy out of the Manufacturing Agreement shall have
been obtained, substantially in the form attached hereto as Exhibit B and the
Seller shall have delivered written notice to HealthRider, Inc. of the
effectiveness of such buy out.
6.1.4 Opinion of Seller's Counsel. The Buyer shall have received
---------------------------
the opinion of Plattner, Schneidman & Schneider, P.C., counsel to the Seller, in
substantially the form attached hereto as Exhibit C.
6.1.5 Corporate Documents. The Buyer shall have received:
-------------------
(a) Certificate of the Secretary of the Seller certifying the
incumbency of officers and the resolutions adopted by the Company's
directors and shareholders authorizing the transaction and Seller's By-
laws;
(b) Articles of Incorporation of the Seller certified as of a
recent date from the Secretary of State of the State of Arizona; and
(c) Certificates of corporate good standing and legal existence
from the Secretary of State of the State of Arizona.
6.1.6 Physical Properties. As of the Closing Date, there shall
-------------------
have occurred no material physical damage to or destruction or loss of (whether
or not covered by insurance) any of the Purchased Assets.
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<PAGE>
6.1.7 No Pending Action; Legality; Governmental Authorization.
-------------------------------------------------------
Except as disclosed in Schedule 6.17, no investigation by any governmental
-------------
authority shall have been commenced or threatened, and no action, suit,
investigation or proceeding shall have been commenced before, and no decision
shall have been rendered by, any court or other governmental authority or
arbitrator, which, in any such case, in the reasonable judgment of Buyer could
adversely affect, restrain, prevent or rescind the transactions contemplated by
this Agreement (including, without limitation, the purchase and sale of the
Purchased Assets and/or the buy out of the Manufacturing Agreement). Buyer's
purchase of and payment for the Purchased Assets and/or the buy out of the
Manufacturing Agreement (a) shall not be prohibited by any applicable law or
governmental order, rule, ruling, regulation, release or interpretation, (b)
shall not subject Buyer to any penalty, tax, liability or, in Buyer's reasonable
judgment, any other onerous condition under or pursuant to any applicable law,
statute, ordinance, regulation or rule, (c) shall not constitute a fraudulent or
voidable conveyance under any applicable law and (d) shall be permitted by all
applicable laws, statutes, ordinances, regulations and rules of the
jurisdictions to which Buyer is subject. The Seller shall have caused to have
been obtained or made and be in full force and effect all approvals, consents,
approvals, waivers, authorizations and other orders of, and declarations,
filings, registrations, qualifications and recordings with, any governmental
authority necessary to be obtained or made by the Seller in order to permit the
consummation of the transactions contemplated hereby, and, without limiting the
generality of the foregoing, all requirements and conditions under all
applicable state laws, rules and regulations regarding bulk transfers shall have
been satisfied and all necessary filings, if any, pursuant to the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended ("HSR"), shall have been
made and all applicable waiting periods thereunder shall have expired or been
terminated.
6.1.8. Closing of HealthRider. The closing of the Buyer's
----------------------
acquisition of the assets of HealthRider, Inc. shall have been consummated.
6.1.9. Consent of GECC. General Electric Credit Corporation shall
---------------
have approved and consented to the Buyer's execution, delivery and performance
of this Agreement and the transactions contemplated hereby.
6.1.10 Mutual General Release. The Parties shall deliver a duly
----------------------
executed mutual general release dated as of the Closing of all obligations and
liabilities, whether arising in contract, tort or otherwise, other than those
obligations and liabilities of each party under this Agreement, of Buyer, IHF,
HealthRider, Inc. and their respective affiliates to Seller and of such
obligations and liabilities of Seller to such parties in a form acceptable to
Buyer.
6.2 Conditions to Obligations of the Seller. The obligation of the
---------------------------------------
Seller to consummate this Agreement and the transactions contemplated hereby are
subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
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<PAGE>
6.2.1 Representations; Performance of Obligations. All
-------------------------------------------
representations and warranties of the Buyer contained in Section 5 of this
Agreement shall remain true and correct as of the Closing Date and the Buyer
shall, on or before the Closing Date, have performed all of its obligations
hereunder which by the terms hereof are to be performed by it on or before the
Closing Date.
6.2.2 Consent to Buy Out of Manufacturing Agreement. The
---------------------------------------------
consent of HealthRider, Inc. to the buy out of the Manufacturing Agreement shall
have been obtained, substantially in the form attached hereto as Exhibit B.
6.2.3 Opinions of Counsel. The Seller shall have received the
-------------------
opinions of Hutchins, Wheeler & Dittmar, special counsel to the Buyer, and Brad
H. Bearnson, general counsel to the Buyer, substantially in the forms attached
hereto as Exhibits D(l) and D(2).
SECTION 7. COVENANTS
---------
7.1 Access. The Seller shall, upon reasonable notice, give Buyer and
------
its representatives full and free access to all the Purchased Assets and all
books, contracts, commitments and records of the Seller relating thereto and to
the Manufacturing Agreement during reasonable business hours, including, without
limitation, to permit the audit provided for in Section 2.2. In addition,
Seller, upon reasonable notice and only in order to comply with federal or state
regulatory requirements, shall give Buyer and its representatives full and free
access to the books, contracts and accounting records of Seller so as to permit
Buyer's accounting representatives to issue an unqualified opinion on the
financial position and results of operations of the Seller for any period so
required.
7.2 Satisfaction of Conditions. The Seller shall use its best efforts
--------------------------
to accomplish the satisfaction of the conditions precedent to Closing contained
in Section 6.1 herein or prior to the Closing Date.
7.3 No Solicitation; Confidentiality. Prior to the termination of this
--------------------------------
Agreement pursuant to Section 8 hereof, neither the Seller nor any Individual
will (i) enter into any letter of intent or agreement relating to the possible
direct or indirect acquisition of all or a portion of the Purchased Assets or
(ii) discuss or disclose the terms of this Agreement with any person (except as
may be required by law or except as may be required in connection with the
transactions contemplated by this Agreement to affiliates, officers, directors,
employees and agents of the Seller) without the prior written approval of Buyer.
7.4 Accuracy of Representations and Warranties. Without the prior
------------------------------------------
written consent of Buyer, neither the Seller nor any Individual will take any
action from the date hereof to the Closing Date, whether as an officer, director
or stockholder of the Seller or otherwise, that would cause any representation
or warranty of the Seller contained in this Agreement to become untrue or cause
the breach of any agreement hereof or covenant contained herein. The Seller will
promptly bring to the
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<PAGE>
attention of the Buyer any facts which come to its attention that would cause
any of the representations and warranties of the Seller to be untrue or
materially misleading in any respect.
7.5 Compliance with Bulk Transfer Requirements. The Seller shall comply
------------------------------------------
with all of the requirements imposed on a transferor in a bulk transfer under
Article 6 of the Uniform Commercial Code as in effect in the State of Arizona
(the "UCC") such that the transfer of the Purchased Assets to the Buyer and the
buy out of the Manufacturing Agreement by the Buyer will be effective against
all creditors of the Seller free and clear of any lien, charge or encumbrance
arising under said Article 6. The Buyer shall comply with all of the
requirements imposed on a transferee in a bulk transfer under Article 6 of the
UCC such that the transfer of the Purchased Assets to the Buyer and the buy out
of the Manufacturing Agreement by the Buyer will be effective against all
creditors of the Seller free and clear of any lien, charge or encumbrance
arising under said Article 6. The Buyer and the Seller will each continue to
comply with their respective requirements as a transferee and transferor in a
bulk transfer under Article 6 of the UCC after the Closing.
7.6 Tax Matters. As soon as practicable after the Closing, but in no
-----------
event later than sixty (60) days from the Closing, the Seller agrees to deliver
to Buyer a tax good standing certificate from the Department of Revenue (or
similar agency) of the State of Arizona. The Seller agrees to pay any and all
taxes due and owing to the State of Arizona necessary to obtain such tax good
standing certificate. The Seller shall remain responsible for and pay when due
any excise or similar taxes based solely on the value of the Purchased Assets
for all periods prior to the Closing, and the Buyer shall be responsible for and
pay when due any such taxes for all periods after the Closing. The Seller and
the Buyer each agree to promptly reimburse the other for any such taxes paid by
one of them that is the obligation of the other pursuant to this section.
7.7 Further Assurances. At any time or times after the Closing Date
------------------
that the Buyer shall request, the Seller shall execute any and all consents,
acknowledgments, agreements, assignments and other documents necessary or
appropriate to vest or evidence in the Buyer any and all Purchased Assets, to
buy out the Manufacturing Agreements and all other rights or actions to which
the Buyer is entitled under this Agreement.
7.8 Limitations on Certain Corporate Actions. The Seller shall not,
----------------------------------------
from and after the Closing Date for a period of three (3) years from the Closing
Date, dissolve or otherwise terminate its legal existence or merge with, or
consolidate into, any other corporation in any merger or consolidation in which
it is not the surviving or resulting corporation.
7.9 Covenant Not to Compete.
-----------------------
(a) Duration and Extent of Restriction. For a period of three (3)
----------------------------------
years following the Closing hereunder, neither the Seller nor any
Individual (each, a "Noncompetition Party") will directly or indirectly,
whether alone or in association with any person or entity, (i) manage,
operate, be employed by, provide consulting services to, participate in,
engage in,
-15-
<PAGE>
or own any interest in, any business operating in the United States of
America or Canada which is engaged in the design, manufacture, marketing,
sale or service of fitness and/or exercise equipment, (ii) induce or
attempt to influence any customer or supplier of the Buyer or Seller to
terminate or otherwise decrease the level of business to be conducted by
such customer or supplier with the Buyer after the Closing Date, or (iii)
induce or attempt to influence any employee of the Buyer to terminate his
or her employment with the Buyer. Notwithstanding the foregoing, each
Noncompetition Party may manufacture or sell golf-related products and
continue to manufacture and sell the foam abdominal headrest solely to the
current customer therefor.
(b) Remedies for Breach. Each Noncompetition Party acknowledges
-------------------
that the restrictions contained in subparagraph (a) above are reasonable
and necessary to protect the Buyer's legitimate interests and that any
violations thereof would result in irreparable injury to the Buyer. Each
Noncompetition Party therefore acknowledges and agrees that, in the event
of any violation thereof, the Buyer shall be authorized and entitled to
obtain, from any court of competent jurisdiction, preliminary and permanent
injunctive relief, as well as an equitable accounting of all profits or
benefits arising out of such violation, which rights and remedies shall be
cumulative and in addition to any other rights or remedies to which the
Buyer may be entitled. In the event that subparagraph (a) above is adjudged
to be in any respect an unreasonable restriction upon a Noncompetition
Party, then the scope of such restrictions shall be reduced by the
elimination of such portion thereof so that such restrictions may be
enforced as it is adjudged to be reasonable.
(c) Extension of Restriction. In the event of any breach or
------------------------
violation of the restriction contained in subparagraph (a) above, the
period therein specified shall abate during the time of any violation
thereof, and that portion remaining at the time of commencement of any
violation shall not begin to run until such violation has been fully and
finally cured.
(d) Consideration; Authority and Enforceability. Each
-------------------------------------------
Noncompetition Party hereby acknowledges the receipt and sufficiency of ten
dollars ($10) and other good and valuable consideration in respect of this
noncompetition covenant. Each Individual represents and warrants that, with
respect to this noncompetition covenant: (i) he or she has the legal
capacity, power and authority to enter into it; and (ii) it constitutes his
or her legal, valid and binding obligation enforceable against him or her
in accordance with its terms.
7.10 WARN Act Liability. The Seller agrees to cooperate with the Buyer
------------------
and take all reasonable measures to assist the Buyer in reducing to the maximum
extent possible the WARN Act liability being assumed by the Buyer pursuant to
Section 1.3(b) both before and after the Closing, provided such cooperation and
measures shall not require Seller to incur any expense, cost or liability.
-16-
<PAGE>
7.11 Vendor Commitments. Both parties agree to cooperate and jointly
------------------
seek to reduce to the maximum extent possible any liability in respect of the
vendor commitments listed in Schedule 1.3(a) both before and after the Closing,
---------------
and neither party shall settle or compromise any obligation or pay any amount to
any such vendor from and after the date hereof without the consent of the other,
which consent shall not be unreasonably withheld or delayed.
SECTION 8. TERMINATION
-----------
8.1 Termination of Agreement. This Agreement and the transactions
------------------------
contemplated hereby may (at the option of the party having the right to do so)
be terminated at any time on or prior to the Closing Date:
(a) Mutual Consent. By mutual written consent of the Buyer and the
--------------
Seller;
(b) Court Order. By the Buyer or the Seller if any court of
-----------
competent jurisdiction shall have issued an order pursuant to the request
of a third party restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement;
(c) Failure to Close by August 31, 1996. By the Buyer or the Seller
-----------------------------------
if the transactions contemplated hereby shall not have been consummated on
or before August 31, 1996; provided, however, that such right to terminate
this Agreement shall not be available to any party whose failure to fulfill
any obligation of this Agreement has been the cause of, or resulted in, the
failure of the transactions contemplated hereby to be consummated on or
before such date;
(d) Termination by Seller. By the Seller upon notice to Buyer at
---------------------
any time on or prior to August 31, 1996 if (i) a condition to the
performance of the Seller set forth in Section 6.2 hereof shall not be
fulfilled at the time specified for the fulfillment thereof, (ii) a
material default under or a material breach of this Agreement shall be made
by the Buyer or (iii) any representation or warranty set forth in this
Agreement or in any instrument delivered by the Buyer pursuant hereto shall
be materially false or misleading; or
(e) Termination by Buyer. By the Buyer by notice to the Seller at
---------------------
any time on or prior to August 31, 1996, if (i) a condition to the
performance of the Buyer set forth in Section 6.1 hereof shall not be
fulfilled at the time specified for the fulfillment thereof, (ii) a
material default under or a material breach of this Agreement shall be made
by the Seller or (iii) any representation or warranty set forth in this
Agreement or in any instrument delivered by the Seller pursuant hereto
shall be materially false or misleading.
8.2 Effect of Termination and Right to Proceed. If this Agreement is
------------------------------------------
terminated pursuant to this Section 8, then except as provided below, all
further obligations of the Buyer and the Seller under this Agreement shall
terminate without further liability of the Buyer or any affiliate thereof to the
Seller or of the Seller to the Buyer or any affiliate thereof, except, in the
case of
-17-
<PAGE>
termination pursuant to Section 8.1(d) or Section 8.1(e), as to liability for
misrepresentation, breach or default in connection with any warranty,
representation, covenant or obligation given, occurring or arising to the date
of termination. In addition, anything in this Agreement to the contrary
notwithstanding, if any of the conditions to obligations specified in Section
6.1 hereof have not been satisfied, the Buyer, in addition to any other rights
which it may have, shall have the right to waive its rights to have such
conditions satisfied and elect to proceed with the transactions contemplated
hereby and if any of the conditions to the obligations of the Seller specified
in Section 6.2 hereof have not been satisfied, the Seller in addition to any
other rights which may be available to it, shall have the right to waive its
rights to have such conditions satisfied and elect to proceed with the
transactions contemplated hereby.
SECTION 9. INDEMNIFICATION
---------------
9.1 Indemnification, General. The Buyer agrees to indemnify, defend,
------------------------
save and hold harmless the Seller from and against any Loss incurred or
sustained by it, which shall arise out of, result from or constitute any breach
of any representation, warranty, agreement or covenant by the Buyer, or
restriction imposed upon the Buyer, or non-fulfillment of any obligation of the
Buyer (including the Buyer's obligation to discharge the Assumed Liabilities),
under this Agreement or the Related Documents or any exhibit, schedule,
certificate or other document furnished in connection herewith, and IHF agrees
to so indemnify the Seller solely for any failure by Buyer to pay the Purchase
Price and/or the Buy Out Payment when otherwise due hereunder. The Seller agrees
to indemnify, defend, save and hold harmless the Buyer from and against any Loss
incurred or sustained by it, which shall arise out of, result from or constitute
any breach of any representation, warranty, agreement or covenant by the Seller
or any Individual or restriction imposed upon the Seller or any Individual or
non-fulfillment of any obligation of the Seller or any Individual (including the
Seller's obligation to discharge the Retained Liabilities), under this Agreement
or the Related Documents, or any exhibit, schedule, certificate or other
document furnished in connection herewith. The Seller agrees to indemnify the
Buyer for any and all taxes assessed against it as a transferee of the Seller.
Said indemnification shall include interest, penalties and the cost of defending
any such transferee assessments. As used herein, the term "Loss" refers to any
damage, liability, loss, expense, assessment, judgment or deficiency of any
nature whatsoever (including, without limitation, reasonable attorneys' fees and
other costs and expenses incident to any suit, action or proceeding), the term
"Indemnified Party" refers to the party or parties entitled to indemnification
pursuant to this Section 9, and the term "Indemnifying Party" refers to the
party or parties obligated to indemnify the Indemnified Party pursuant to this
Section 9.
9.2 Environmental Indemnification. The Seller agrees to indemnify,
-----------------------------
defend, save and hold harmless the Buyer from and against any and all costs,
fees, fines, claims or penalties of any kind related to Hazardous Materials at,
in, under or near the land and the buildings thereon known as and numbered 2401
and 2501 East Magnolia Street, Phoenix, Arizona (the "Premises"), unless caused
by the Buyer or its agents in the removal of any of the F,F&E from the Premises,
including, but not limited to, costs of investigation, damages, defenses,
judgments, suits, proceedings, disbursements, negotiation, remediation and
reasonable attorney's fees and costs. For the purposes
-18-
<PAGE>
of this Section 9, "Hazardous Materials" shall mean and include any and all
substances which are defined, determined or identified as such by any and all
applicable federal, state or local statutes, regulations or rules.
9.3 Survival of Representations and Warranties. For the purposes of
------------------------------------------
this Section 9, the representations and warranties of the parties hereto shall
survive the Closing for three (3) years from the Closing Date, except that the
Seller's representations and warranties with respect to tax and environmental
matters shall survive for the applicable statute of limitations for the
underlying claim. Any claim for indemnification hereunder for any breach of any
representation or warranty must be made by notice to the Indemnifying Party
within such period and shall be deemed to have arisen, for the purposes of this
Section 9, as of the date of such notice.
9.4 Deductible. Except as provided in the following sentence, no
----------
indemnification pursuant to Section 9.1 hereof shall be required of the
Indemnifying Party hereunder unless and until the aggregate amount due the
Indemnified Party for all claims under this Section 9 shall exceed $15,000 (the
"Deductible"). Notwithstanding the foregoing, no claim that regardless of
amount, arises out of (i) the Buyer's failure to pay any Assumed Liability, (ii)
the Seller's failure to pay any Retained Liability or (iii) the Seller's failure
to pay any of its tax obligations, shall at any time be subject to the
Deductible.
9.5 Claims.
------
(a) Defense of Claims. Should any claim be made, or suit or
-----------------
proceeding be instituted against an Indemnified Party which, if valid or
prosecuted successfully, would be a matter for which such Indemnified Party
is entitled to indemnification under this Agreement (a "Claim"), the
Indemnified Party shall notify the Indemnifying Party in writing concerning
the same promptly after the assertion or commencement thereof. The
Indemnified Party shall in the first instance file in a timely manner any
answer or pleading with respect to a suit or proceeding if such action is
necessary to avoid default or other material adverse results.
The party having the greater risk of financial loss with respect to
such Claim (the "Lead Party") shall control the defense thereof and shall
use its best efforts to defeat or minimize any loss resulting from such
Claim; provided, however, that if the Buyer is the Indemnified Party and it
reasonably believes that such claim is of such a nature that it may
jeopardize the Buyer's ability to continue to use the Purchased Assets
and/or the Manufacturing Agreement or any material portion thereof and so
advises the Seller in advance and in writing of the facts supporting such
conclusion, then the Buyer shall control the defense thereof without regard
to whether or not the Buyer has the greater risk of financial loss. Except
in the case of Claims with respect to which the Buyer is the Indemnified
Party and regarding which the Buyer reasonably believes may jeopardize the
Buyer's ability to continue to use the Purchased Assets and/or the
Manufacturing Agreement, any determination of the Lead Party hereunder
shall give due regard to all of the provisions
-19-
<PAGE>
of this Section 9 and the amount of the reasonable and likely value of the
Claim, if valid or prosecuted successfully. The Lead Party shall provide
the other party (the "Non-Lead Party") with such information and
opportunity for consultation (including estimations regarding costs and
fees) as may reasonably be requested and the Non-Lead Party shall be
entitled, at its own expense, to participate in the defense of a claim and
to engage counsel for such purpose.
(b) Settlement of Claims. No settlement of a Claim involving
--------------------
liability of the Indemnified Party under this Section 9 shall be made
without the prior written consent by or on behalf of the Indemnifying
Party, which consent shall not be unreasonably withheld or delayed. No
settlement involving liability of the Indemnified Party shall be made
without its prior written consent thereto, which consent shall not be
unreasonably withheld or delayed. In the event of any dispute regarding the
reasonableness of a proposed settlement, the party which will bear the
larger financial loss resulting from such settlement and the application of
the indemnification provisions set forth in this Section 9 will make the
final determination in respect thereto, which determination will be final
and binding on all involved parties, provided that any such settlement
shall include an unconditional release by the claimant of the Indemnified
Party and shall not impose any obligation or restriction on the Indemnified
Party.
SECTION 10. MISCELLANEOUS
-------------
10.1 Fees and Expenses. Each of the parties will bear its own expenses
-----------------
in connection with the negotiation and consummation of the transactions
contemplated by this Agreement.
10.2 Law Governing; Jurisdiction. This Agreement shall be governed by
---------------------------
and construed in accordance with the domestic substantive laws of the State of
Utah. The parties agree that any legal proceeding arising out of or relating to
this Agreement or the alleged breach thereof be brought in any state court
within Maricopa County or any federal district court within the State of
Arizona, and the parties hereto expressly consent to the personal jurisdiction
and venue of such federal and state courts and to service of process being
effected upon them by registered mail sent to the addresses set forth in Section
10.3.
10.3 Notices. Any notices or other communications required or permitted
-------
hereunder shall be effective if in writing and delivered personally or sent by
telecopier, Federal Express, or registered or certified mail, postage prepaid,
addressed as follows:
If to the Buyer or IHF:
c/o Icon Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Telecopier: 801-750-5238
-20-
<PAGE>
Attention: Brad H. Bearnson - General Co
With copies to:
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway (300 South)
Salt Lake City, Utah 841 01
Telecopier: 801-359-3954
Attention: Lyndon L. Ricks, Esq.
and:
Olson & Hoggan, P.C.
88 West Center
Logan, Utah 84321
Telecopier: 801-753-2699
Attention: Miles P. Jensen, Esq.
If to the Seller, Wilkinson or DuVall:
c/o Parkway Manufacturing, Inc.
2401 E. Magnolia
Phoenix, Arizona 85016
Telecopier: 602-267-1928
Attention: Kerry Wilkinson, President
With copies to:
Plattner, Schneidman & Schneider, P.C.
1707 East Highland, Suite # 190
Phoenix, Arizona 85016
Telecopier: 602-285-5589
Attention: Jeff Schneidman, Esq.
Unless otherwise specified herein, such notices or other communications
shall be deemed effective (a) on the date delivered, if delivered personally,
(b) two days after being sent by Federal Express, if sent by Federal Express,
(c) one day after being delivered, if delivered by telecopier with confirmation
of good transmission, and (d) three days after being sent, if sent by registered
or certified mail. Each of the parties hereto shall be entitled to specify a
different address by giving notice as aforesaid to each of the other parties
hereto.
-21-
<PAGE>
10.4 Entire Agreement. This Agreement, including the Schedules and
----------------
Exhibits referred to herein, is complete, and all promises, representations,
understandings, warranties and agreements with reference to the subject matter
hereof, and all inducements to the making of this Agreement relied upon by all
the parties, have been expressed herein or in said Schedules or Exhibits.
10.5 Amendment. This Agreement may not be amended, and any waiver,
---------
change, modification, consent or discharge may not be effected, except by an
instrument in writing signed by the parties hereto.
10.6 Assignability. This Agreement shall be binding upon, and shall be
-------------
enforceable by, and inure to the benefit of, the parties and their respective
heirs, personal representatives, successors and assigns but it shall not be
assignable by any party without the prior written consent of the other party
provided, however, that the Buyer may (a) assign its indemnification rights
- -------- -------
under Section 9 hereof to General Electric Credit Corporation or any successor
senior lender; (b) assign any or all of its rights and interests hereunder to
one or more of its affiliates; and (c) designate one or more of its affiliates
to perform its obligations hereunder (but in any or all of such cases the Buyer
shall nonetheless remain responsible for the performance of all of its
obligations hereunder).
10.7 Waivers; Severability. The failure of the parties to require the
---------------------
performance of a term or obligation under this Agreement or the waiver by a
party of any breach hereunder shall not prevent subsequent enforcement of such
term or obligation or be deemed a waiver of any subsequent breach hereunder. In
case any one or more of the provisions of this Agreement shall for any reason be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part of a
provision of this Agreement but this Agreement shall be construed as if such
invalid or illegal or unenforceable provision or part of a provision had never
been contained herein.
10.8 Section Headings. The Section and other headings contained in this
----------------
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
10.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.
10.10 Attorneys' Fees. In the event that any action is brought to
---------------
enforce any of the provisions of this Agreement, or to obtain money damages for
the breach hereof, and such action results in the award of a judgment for money
damages or in the granting of any injunction in favor of one of the parties to
this Agreement, all expenses, including reasonable attorneys' fees, shall be
paid by the nonprevailing party.
-22-
<PAGE>
10.11 Third Party Beneficiaries. No person not a party hereto shall be
-------------------------
a third party beneficiary of any provision of this Agreement.
[remainder of page intentionally left blank]
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
an instrument under seal as of the date first above written.
Attest: ICON HEALTH & FITNESS, INC.
______________________________ By:
-------------------------------
Name:_________________________ Name:
--------------------------
Title:________________________ Title:
-------------------------
Attest: HEALTHRIDER ACQUISITION CORP.
_____________________________ By:
------------------------------
Name:________________________ Name:
--------------------------
Title:_______________________ Title:
-------------------------
Attest: PARKWAY MANUFACTURING, INC.
/s/ Larry Duvall By: /s/ Kerry Wilkinson
- ----------------------------- ------------------------------
Name: /s/ Larry Duvall Name: Kerry Wilkinson
------------------------ --------------------------
Title: /s/ SEC. Title: President
-----------------------
Witness:
/s/ Kerry Willkinson
_____________________________ _________________________________
Name:________________________ Kerry Wilkinson
Witness:
/s/ Larry Duvall
_____________________________ _________________________________
Name:________________________ Larry DuVall
Witness:
/s/ Tina Duvall
_____________________________ _________________________________
Name:________________________ Tina DuVall
82550-5
<PAGE>
EXHIBIT 16
July 11, 1996
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments in the second paragraph of the
"Experts" section of the Registration Statement No. 333-04279 on Form S-1 of
IHF Capital, Inc. (to be renamed ICON Fitness Corporation), and have the
following comment: we do not have full knowledge of all consultations and
discussions between Price Waterhouse LLP and the Company.
Yours truly,
Deloitte & Touche LLP
<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
HealthRider Acquisition Corp. Delaware
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 Amendment No. 1 to the Registration Statement
No. 333-04279 of IHF Capital, Inc. (to be renamed ICON Fitness Corporation) 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 audit 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 the year ended May 31, 1994. This
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
August 13, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-04279) of
our report dated August 13, 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 on page
F-2 of such Prospectus. We also consent to the application of such report to
the Financial Statement Schedules for the two years ended May 31, 1996 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 heading "Experts" in such
Prospectus.
Price Waterhouse LLP
Boston, Massachusetts
August 13, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 22, 1996, relating to the consolidated financial statements
of HealthRider, Inc. and subsidiaries as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995, (and to all
references to our Firm) included in or made a part of this registration
statement on Form S-1 File No. 333-04279.
Arthur Andersen LLP
Salt Lake City, Utah
August 12, 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>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> MAY-31-1996
<CASH> 19,313,000
<SECURITIES> 0
<RECEIVABLES> 134,464,000
<ALLOWANCES> 7,595,000
<INVENTORY> 95,922,000
<CURRENT-ASSETS> 252,996,000
<PP&E> 52,053,000
<DEPRECIATION> 19,741,000
<TOTAL-ASSETS> 316,727,000
<CURRENT-LIABILITIES> 93,956,000
<BONDS> 279,693,000
0
0
<COMMON> 9,000
<OTHER-SE> (104,835,000)
<TOTAL-LIABILITY-AND-EQUITY> 316,727,000
<SALES> 747,577,000
<TOTAL-REVENUES> 747,577,000
<CGS> 541,443,000
<TOTAL-COSTS> 151,507,000
<OTHER-EXPENSES> 45,110,000
<LOSS-PROVISION> 3,662,000
<INTEREST-EXPENSE> 40,010,000
<INCOME-PRETAX> 9,517,000
<INCOME-TAX> 7,896,000
<INCOME-CONTINUING> 1,621,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
