<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
August 16, 1996
---------------
ICON Health & Fitness, Inc.
IHF Holdings, Inc.
-----------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
33-87930 87-0531206
Delaware 33-87930-01 87-0531209
-------- ----------- ----------
(State or other jurisdic- (Commission File (I.R.S. Employer
tion of incorporation) Number) Identification No.)
</TABLE>
1500 South 1000 West
Logan, Utah, 84321
-----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrants' telephone number, including area code: (801) 750-5000
Not Applicable
---------------------------------------------------------
(Former name or former address, if changed since last report)
Page 1 of __ pages
Exhibit Index on Page 5
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets
On August 16, 1996, HealthRider Acquisition Corp. ("Acquisition Corp."), a
Delaware corporation, and a wholly owned subsidiary of ICON Health & Fitness,
Inc. ("ICON"): (i) purchased substantially all the assets of HealthRider, Inc.,
a Delaware corporation ("HealthRider") for approximately $16.8 million and
assumed (or refinanced) substantially all the liabilities of HealthRider which
designs, markets and distributes fitness equipment; (ii) purchased certain
other related manufacturing assets of Parkway Manufacturing, Inc., a Delaware
corporation, ("Parkway"), including Parkway's contract to manufacture and supply
upright rowers to HealthRider, for approximately $10.1 million; and (iii)
purchased the minority interest of HealthRider's European subsidiary for
approximately $.7 million (of which $.6 million was paid in cash and $.1 million
was paid in inventory) (together, the "HealthRider Acquisition"). The
Acquisition will be accounted for under the purchase method of accounting and
the purchase price will be allocated based on the estimated fair value of the
assets and liabilities acquired at the date of acquisition. The liabilities
assumed or refinanced included capital lease obligations of approximately $19.3
million and revolving credit borrowings and other long term debt of
approximately $9.5 million. The cash purchase price was funded and
HealthRider's revolving credit borrowings were refinanced through additional
borrowings under the Company's existing Credit Agreement with a syndicate of
banks.
The foregoing description of the HealthRider Acquisition is qualified in
its entirety by reference to the Asset Purchase Agreements with HealthRider,
Inc. and Parkway Manufacturing, Inc., each dated July 3, 1996, and the Buy-Out
Agreement with Parkway Manufacturing, Inc. dated August 26, 1996, which are
Exhibits to this report on Form 8-K and which are incorporated herein by
reference. The terms of the HealthRider Acquisition, including the
consideration paid, were determined by arm's length negotiations.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Audited and Unaudited Financial Statements of HealthRider, Inc.
1. Report of Independent Public Accountant
2. Consolidated Balance Sheets
3. Consolidated Statements of Income
4. Consolidated Statements of Stockholders' Equity
5. Consolidated Statements of Cash Flow
6. Notes to Consolidated Financial Statements
(b) Pro Forma Unaudited Financial Statements of IHF Holdings, Inc.
and ICON Health & Fitness, Inc.
1. Pro Forma Consolidated Statement of Operations -- IHF
Holdings, Inc.
2
<PAGE>
2. Pro Forma Consolidated Statement of Operations -- ICON Health &
Fitness, Inc.
3. Pro Forma Consolidated Balance Sheet -- IHF Holdings, Inc.
4. Pro Forma Consolidated Balance Sheet -- ICON Health & Fitness, Inc.
(c) Exhibits
2.1 Asset Purchase Agreement dated as of July 3, 1996 by and among IHF
Capital, Inc., HealthRider Acquisition Corp., and HealthRider,
Inc.
2.2 Asset Purchase Agreement for the purchase of certain assets of
Parkway Manufacturing, Inc. dated July 3, 1996.
2.3 Buy-Out Agreement between HealthRider Acquisition Corp. and
Parkway Manufacturing, Inc. dated August 26, 1996.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Companies have duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICON HEALTH & FITNESS, INC.
IHF HOLDINGS, INC.
By:
------------------------
S. Fred Beck,
Chief Financial Officer
Date: August 29, 1996
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
2.1(1) Asset Purchase Agreement dated as of July 3, 1996
by and among IHF Capital, Inc., HealthRider
Acquisition Corp. and HealthRider, Inc.
2.2(2) Asset Purchase Agreement for the purchase of certain
assets of Parkway Manufacturing, Inc. dated July 3, 1996
2.3(3) Buy-Out Agreement between HealthRider Acquisition
Corp. and Parkway Manufacturing, Inc.
-------------------
(1) Filed as Exhibit 10.37 to the Registration Statement on Form S-1 of
IHF Capital, Inc., as amended (Registration Statement No. 333-04279)
(the "IHF Capital Registration Statement")
(2) Filed as Exhibit 10.38 to the IHF Capital Registration Statement
(3) Filed as Exhibit 10.39 to the IHF Capital Registration Statement
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HealthRider, Inc.:
We have audited the accompanying consolidated balance sheets of HealthRider,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthRider, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 1995 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Salt Lake City, Utah
July 22, 1996 (except with respect to the consummation of the asset purchase
agreement discussed in Notes 1, 7 and 13, as to which the date is August 16,
1996)
F-1
<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-2
<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-3
<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-4
<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-5
<PAGE>
HEALTHRIDER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
NATURE OF OPERATIONS
The Company designs, markets and distributes innovative fitness equipment
designed primarily for use at home. The Company markets and distributes its
products through a variety of distribution channels, including direct-response
advertising (television infomercials and other forms of electronic and print
media) and a nationwide network of company-owned retail locations in regional
shopping malls, as well as large and small independent retailers, including
specialty retail stores.
DEPENDENCE ON THE HEALTHRIDER AND OTHER SIMILAR PRODUCTS
The Company's growth in sales and profitability through December 31, 1995
was attributable primarily to the demand for the Company's principal product,
the HealthRider, as well as other similar products based on the HealthRider
which are sold at other price points and through other distribution channels.
The HealthRider and the other similar products, consisting principally of the
aeROBICRider and SportRider, have accounted for 100%, 99% and 98% of the
Company's net sales during the years ended December 31, 1993, 1994 and 1995,
respectively, and accounted for 95% (unaudited) of the Company's net sales
during the six months ended June 30, 1996. Any significant decline in demand
for the HealthRider and other related products, would have a material adverse
effect on the Company's business and results of operations (see Recent
Developments below).
RECENT DEVELOPMENTS
Subsequent to December 31, 1995, the Company began to experience a liquidity
crisis caused by a build-up of inventory which was exacerbated by the terms of
a manufacturing agreement (see Note 7), by lower than expected revenues,
higher selling expenses related to infomercials and lower margins as well as
more lenient payment terms with certain wholesale customers and longer
deferred payment plans with retail customers.
During the six months ended June 30, 1996, the Company's sales levels
declined in all distribution channels and the Company experienced a loss from
operations of $4,633,000 (unaudited). As discussed in Note 6, as a result of
the operating losses and other covenant violations, the Company was in default
under its line of credit agreement. The liquidity crisis resulted in legal
actions being taken by certain principal suppliers (see Note 7). As discussed
in Note 13, the Company entered into a definitive agreement to sell the
Company's assets in exchange for approximately $16.8 million of cash and the
assumption of the majority of the Company's liabilities by the buyer. The sale
was consummated on August 16, 1996 and the Company's operations have been
transferred to the Buyer.
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The Company was originally organized and incorporated in the State of Utah
on March 13, 1991 as ExerHealth, Inc. HealthRider, Inc. was incorporated in
the state of Delaware on May 10, 1995 for
F-6
<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-7
<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-8
<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-9
<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-10
<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 had not obtained any waivers of the above covenants;
however, the Lender agreed to forbear any action through August 16, 1996,
subject to certain conditions. Accordingly, the balance outstanding under the
agreement as of June 30, 1996 of $11,567,000 has been classified as a current
liability in the accompanying consolidated financial statements. In connection
with the consummation of the asset purchase agreement discussed in Note 13,
the balance outstanding under the agreement was assumed by the buyer.
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-11
<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-12
<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 agreement has been reached which provides for the Company to
pay approximately $300,000, which has been accrued in the accompany
consolidated balance sheets, and the officers to transfer certain shares of
the Company's common stock held by the officers to the plaintiffs.
The Company was the subject of certain other legal matters related to its
operations for which settlements were negotiated pending consummation of the
asset purchase agreement discussed in Note 13 which occured on August 16,
1996. Under the asset purchase agreement, the Buyer of the Company's assets
agreed to assume all obligations with respect to the following matters.
In June 1996, the Company's advertising agency filed a complaint in the
United States District Court for the Southern District of New York naming
the Company as a defendant. The complaint alleges that the Company had not
paid plaintiff for services rendered. The complaint seeks damages in the
amount of approximately $5,500,000, as well as punitive damages and
prejudgment interest. An agreement has been reached which provides for
payments of approximately $2,600,000, which have been accrued in the
accompanying financial statements.
Parkway Manufacturing, Inc. (Parkway), one of the Company's principal
suppliers, has informed the Company that they believe the Company is in
breach of a manufacturing agreement between the Company and Parkway which
was most recently amended on November 1, 1995. Under the manufacturing
agreement, in exchange for certain purchase price reductions, the Company
agreed to purchase its domestic HealthRider unit requirements, as defined,
exclusively from Parkway subject to certain quantity limits. The Company
agreed to purchase a minimum of 10,000 units each week for a three year
period or until the Company had purchased 1,200,000 units. The weekly
purchase order quantities could vary a maximum of up 3 percent or down 2
percent from the preceding week.
Parkway asserted that the Company had not complied with the terms of the
contract by not paying for units produced in accordance with payment terms
and not complying with the weekly purchase order quantities. Parkway
alleged damages which could have exceeded $10,000,000 and threatened to
pursue remedies provided under the Uniform Commercial Code relating to
repossessing certain items of inventory and proceeding with the private
sale of HealthRider and aeROBICRider units; however, no formal lawsuit was
filed. The Company also asserted a breach of the agreement by Parkway for
not meeting production requirements.
In connection with the asset purchase agreement, the Buyer purchased
certain of Parkway's assets, including Parkway's interest in the
manufacturing agreement with the Company.
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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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 agreed to purchase substantially
all the assets of the Company for approximately $16.8 million and assume
substantially all of the Company's liabilities, with certain exclusions. The
liabilities excluded from the sale principally include all liabilities and
obligations relating to ownership, or claims to ownership of any equity
interest in the Company including the lawsuit filed by certain stockholders
against the Company described in Note 7, the stockholder royalty agreements
described in Note 12, as well as any other ownership related claims. On August
16, 1996 the sale was consummated, and the Company's operations have been
transferred to the Buyer.
In conjunction with the asset acquisition, the Company and the Buyer entered
into a definitive agreement to buy out the minority interest of HealthRider
International Limited. The buyout agreement required the Company to make a
payment of $.7 million and the Buyer to make a payment of $.6 million and
provide inventory of $.1 million to the minority interest holder.
F-19
<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 HealthRider
Acquisition, including the refinancing of approximately $11.6 million of
revolving credit borrowings outstanding at June 30, 1996 (actual refinanced
revolving credit borrowings were $9.3 million at August 16, 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
incudes $16.8 million payable to HealthRider, $10.1 million payable to Parkway
and $.6 million payable to the minority shareholder of HealthRider's European
subsidiary.
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. The Company expects that HealthRider revenues in the
periods subsequent to the HealthRider Acquisition will decline substantially.
The Unaudited Pro Forma Consolidated Balance Sheet data includes the
following charges related to the HealthRider Acquisition which the Company
expects to incur in the second and third quarters of 1997: (i) approximately
$5.0 million of integration expenses in connection with the HealthRider
Acquisition; and (ii) a significant, non-recurring, non-cash increase in cost of
goods sold which is not expected to exceed approximately $26.2 million, based on
HealthRider's inventory at June 30, 1996 (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).
F-20
<PAGE>
IHF Holdings, Inc.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
HealthRider
-----------
Statement of
------------
IHF Holdings Operations Pro Forms
------------ ---------- ---------
Year Ended Twelve Months Year Ended
---------- ------------- ----------
May 31, Ended May 31,
------- ----- -------
1996 June 30, 1996(a) Combined Adjustments 1996
---- ---------------- -------- ----------- ----
<S> <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 development 6,759 -- 6,759 -- 6,759
General and administrative 48,055 17,562 65,617 -- 65,617
Compensation expense
attributable to options 2,769 -- 2,769 -- 2,769
-------- -------- -------- --------- --------
Total operating
expense..................... 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) 40,265
Amortization of deferred
financing fees........................ 3,483 -- 3,483 -- 3,483
Other income........................... -- (2,264) (2,264) -- (2,264)
-------- -------- -------- --------- --------
Income before taxes.................... 14,617 1,449 16,066 (2,333) 13,733
Provision (benefit) for
income taxes.......................... 7,896 1,405 9,301 (887)(e) 8,414
-------- -------- -------- --------- --------
Net income $ 6,721 $ 44 6,765 $ (1,446) $ 5,319
======== ======== ======== ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
F-21
<PAGE>
ICON Health & Fitness, Inc.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
HealthRider
-----------
Statement of
------------
ICON Operations Pro Forma
---- ---------- ---------
Year Ended Twelve Months Year Ended
---------- ------------- ----------
May 31, Ended May 31,
------- ----- -------
1996 June 30, 1996(a) Combined Adjustments 1996
---- ---------------- -------- ----------- ----
<S> <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 ex-
pense attributable to
options................. 2,769 -- 2,769 2,769
-------- -------- -------- ----------- --------
Total operating
expense................. 151,507 149,363 300,870 -- 300,870
-------- -------- -------- ----------- --------
Income from operations.... 54,627 590 55,217 -- 55,217
Interest expense.......... 27,727 1,405 29,132 2,333(d) 31,465
Amortization of deferred
financing fees........... 2,479 -- 2,479 -- 2,479
Other income -- (2,264) (2,264) -- (2,264)
-------- -------- -------- ----------- --------
Income before taxes....... 24,421 1,449 25,870 (2,333) 23,537
Provision (benefit) for
income taxes............. 10,832 1,405 12,237 (887)(e) 11,350
-------- -------- -------- ----------- --------
Net income $ 13,589 $ 44 $ 13,633 $(1,446) $ 12,187
======== ======== ======== =========== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
F-22
<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 period 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 increase in cost of goods sold which
is not expected to exceed approximately $26.2 million 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 (at a rate of 8.5%) on the $27.5
million additional borrowings under the Credit Agreement incurred in order
to effect the HealthRider Acquisition.
(e) Represents the additional income tax benefit resulting form the pro forma
adjustments to income at a 38% effective rate.
F-23
<PAGE>
IHF Holdings, Inc.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
IHF Holdings HealthRider
------------- --------------------
Historical Balance Pro Forma
------------- -------------------- ----------
May 31, 1996 Sheet at June 30, May 31,
------------- -------------------- ----------
1996 Combined Adjustments 1996
-------------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 19,313 $ 867 $ 20,180 $ -- $ 20,180
Accounts receivable, net................. 126,869 22,877 149,746 -- 149,746
Inventories 95,922 23,082 119,004 1,450(a)(b) 120,454
Deferred income taxes.................... 5,240 7,204 12,444 11,859(b) 24,303
Prepaid income taxes..................... 882 2,128 3,010 -- 3,010
Other assets............................. 4,770 3,280 8,050 -- 8,050
--------- ------- --------- ----------- ---------
Total current assets.................. 252,996 59,438 312,434 13,309 325,743
Property and equipment, net................ 32,312 27,329 59,641 (19,996)(a) 39,645
Deferred income taxes...................... 5,489 -- 5,489 -- 5,489
Other assets 25,930 1,648 27,578 (1,243)(a) 26,335
--------- ------- --------- ----------- ---------
Total $ 316,727 $88,415 $ 405,142 $ (7,930) $ 397,212
========= ======= ========= =========== =========
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)(a) 92,924
Accrued expenses......................... 11,424 17,022 28,446 5,000(b) 33,446
Interest payable......................... 5,815 -- 5,815 -- 5,815
--------- ------- --------- ----------- ---------
Total current liabilities............. 93,956 39,295 133,251 3,200 136,451
--------- ------- --------- ----------- ---------
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(a) 318,883
Series A cumulative redeemable preferred
stock 47,904 -- 47,904 -- 47,904
Stockholder's equity (deficit):
Common stock and APIC 77,730 830 78,560 (830)(c) 77,730
Receivable from officers for
purchase of equity (758) (35) (793) 35(c) (758)
Cumulative translation
adjustment 386 43 429 (43)(c) 386
Accumulated deficit (182,184) 18,393 (163,791) (37,742)(b)(c)(201,533)
--------- ------- --------- ----------- ---------
Total stockholder's equity (deficit) (104,826) 19,231 (85,595) (38,580) (124,175)
--------- ------- --------- ----------- ---------
Total $ 316,727 $88,415 $ 405,142 $ (7,930) $ 397,212
========= ======= ========= =========== =========
</TABLE>
(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 were assumed under the Company's Credit Agreement upon the
closing of the acquisition.
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
F-24
<PAGE>
ICON Health & Fitness
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
ICON HealthRider
---- -----------
Historical Balance Pro Forma
---------- ------- ---------
May 31, 1996 Sheet at June 30, May 31,
------------ ----------------- -------
-- 1996 Combined Adjustments 1996
---- -------- ----------- ----
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 19,313 $ 867 $ 20,180 $ -- $ 20,180
Accounts receivable, net................ 126,869 22,877 149,746 -- 149,746
Inventories............................. 95,922 23,082 119,004 1,450(a)(b) 120,454
Deferred income taxes................... 5,240 7,204 12,444 11,859(b) 24,303
Prepaid income taxes.................... 589 2,128 2,717 -- 2,717
Other assets 4,770 3,280 8,050 -- 8,050
--------- ------- --------- ----------- ---------
Total current assets.................... 252,703 59,438 312,141 13,309 325,450
Property and equipment, net............... 32,312 27,329 59,641 (19,996)(a) 39,645
Deferred income taxes..................... 1,770 -- 1,770 -- 1,770
Other assets 19,703 1,648 21,331 (1,243)(a) 20,108
--------- ------- --------- ----------- ---------
Total................................... $ 306,488 $88,415 $ 394,903 $ (7,930) $ 386,973
========= ======= ========= =========== =========
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)(a) 92,924
Accrued expenses........................ 11,424 17,022 28,446 5,000 (b) 33,446
Income taxes payable.................... -- -- -- -- --
Interest payable........................ 5,815 -- 5,815 -- 5,815
--------- ------- --------- ----------- ---------
Total current liabilities............... 93,956 39,295 133,251 3,200 136,451
--------- ------- --------- ----------- ---------
Long-term portion of capital lease
obligations -- 18,149 18,149 -- 18,149
Long-term debt 210,546 11,740(1) 222,286 27,450 (a) 249,736
Stockholder's equity (deficit):
Common stock and APIC 166,176 830 167,006 (830)(c) 166,176
Receivable from officers for
purchase of equity (758) (35) (793) 35 (c) (758)
Cumulative translation
adjustment 386 43 429 (43)(c) 386
Accumulated deficit (163,818) 18,393 (145,425) (37,742)(b)(c) (183,167)
--------- ------- --------- ----------- ---------
Total stockholder's equity (deficit) (1,986) 19,231 (21,217) (38,580) (17,363)
--------- ------- --------- ----------- ---------
Total.................................. $ 306,488 $88,415 $ 394,903 $ (7,930) $ 386,973
========= ======= ========= =========== =========
</TABLE>
(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 were assumed under the Company's Credit Agreement upon the
closing of the acquisition.
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
F-25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) 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, which will be
determined within one year after such date. 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 paid to HealthRider, $10.1 million paid to Parkway and $.6 million paid
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>
<CAPTION>
<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>
(b) Represents the recognition of approximately $5.0 million of integration
expenses and $26.2 million in higher cost of goods sold (resulting from the fact
that the Company's purchase accounting will include writing-up the book value of
the acquired HealthRider inventory to fair market value less estimated sales
costs), net of the related tax benefit of $11.9 million, in the second and third
quarters of 1997 resulting from the HealthRider Acquisition.
(c) Represents elimination of the existing HealthRider equity structure upon
the closing of the HealthRider Acquisition.
