-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGtzMqCMIw6ntorx8yeLvQeklp+P9qc1K/W/eiJpyrfzWI/ESkqCmdsIv7lPCpw+ 62smsj/xBR/7gEj97zfWOw== 0000950109-96-005734.txt : 19960904 0000950109-96-005734.hdr.sgml : 19960904 ACCESSION NUMBER: 0000950109-96-005734 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960816 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960903 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON HEALTH & FITNESS INC CENTRAL INDEX KEY: 0000934798 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 870531206 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-87930 FILM NUMBER: 96625285 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 8017505000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IHF HOLDINGS INC CENTRAL INDEX KEY: 0000934799 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 870531209 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-87930-01 FILM NUMBER: 96625286 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 8017505000 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 8-K 1 FORM 8-K ================================================================================ 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)
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.)
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 ================================================================================ 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 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 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 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 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 HEALTHRIDER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ JUNE 30, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) 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 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-2 HEALTHRIDER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) 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) =========== ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 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)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL -------------------- PAID-IN FROM RETAINED TRANSLATION STOCKHOLDERS' SHARES AMOUNT CAPITAL OFFICERS EARNINGS ADJUSTMENTS EQUITY ---------- -------- ---------- ---------- ----------- ----------- ------------- 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 ========== ======== ======== ========= =========== ======= ===========
See accompanying notes to consolidated financial statements. F-4 HEALTHRIDER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) 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
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 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 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 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 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:
DECEMBER 31, --------------------- JUNE 30, 1994 1995 1996 ---------- ---------- ----------- (UNAUDITED) 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 ========== ========== ==========
(4) PROPERTY AND EQUIPMENT Property and equipment are comprised of the following:
DECEMBER 31, ----------------------- JUNE 30, 1994 1995 1996 ---------- ----------- ----------- (UNAUDITED) 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 ========== =========== ===========
F-9 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:
DECEMBER 31, JUNE 30, ---------------------- ----------- 1994 1995 1996 ---------- ----------- ----------- (UNAUDITED) 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 ========== =========== ===========
(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 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:
DECEMBER 31, ------------------ JUNE 30, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) 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 ======== ======== ========
F-11 HEALTHRIDER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Future maturities of long-term debt as of December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1996......................................................... $ 45,000 1997......................................................... 40,000 1998......................................................... 30,000 1999......................................................... 23,000 2000......................................................... 28,000 Thereafter..................................................... 72,000 -------- $238,000 ========
(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 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 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 HEALTHRIDER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a summary of nonqualified and incentive stock option activity:
NUMBER OF OPTION PRICE OPTIONS PER SHARE --------- ------------ 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 =========
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:
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 --------- ---------- ----------- 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 ========= ========== ===========
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 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:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1995 ---------- ----------- 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 ========== ===========
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:
YEAR ENDED DECEMBER 31, ----------------- 1993 1994 1995 ----- ---- ---- 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% ===== ==== ====
(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 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:
CAPITAL LEASES AS OF OPERATING ------------------------- LEASES AS OF DECEMBER 31, JUNE 30, DECEMBER 31, YEAR ENDING DECEMBER 31, 1995 1996 1995 - ------------------------ ------------ ------------ ------------ (UNAUDITED) 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 ========= ============
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:
DECEMBER 31, ------------------- JUNE 30, 1994 1995 1996 -------- --------- ----------- (UNAUDITED) 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 ======== ========= ===========
(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 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 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 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 IHF Holdings, Inc. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (In thousands)
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 ---- ---------------- -------- ----------- ---- 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 ======== ======== ======== ========= ========
See Notes to Unaudited Pro Forma Consolidated Statement of Operations. F-21 ICON Health & Fitness, Inc. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (In thousands)
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 ---- ---------------- -------- ----------- ---- 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 ======== ======== ======== =========== ========
See Notes to Unaudited Pro Forma Consolidated Statement of Operations. F-22 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 IHF Holdings, Inc. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (In thousands)
IHF Holdings HealthRider ------------- -------------------- Historical Balance Pro Forma ------------- -------------------- ---------- May 31, 1996 Sheet at June 30, May 31, ------------- -------------------- ---------- 1996 Combined Adjustments 1996 -------------------- ---------- --------------- ---------- 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 ========= ======= ========= =========== =========
(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 ICON Health & Fitness UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (In thousands)
ICON HealthRider ---- ----------- Historical Balance Pro Forma ---------- ------- --------- May 31, 1996 Sheet at June 30, May 31, ------------ ----------------- ------- -- 1996 Combined Adjustments 1996 ---- -------- ----------- ---- 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 ========= ======= ========= =========== =========
(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 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):
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 ========
(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. -----END PRIVACY-ENHANCED MESSAGE-----