Reports of Independent Auditors

and Financial Statements with Additional Information for

American Council on Exercise

June30,2014and2013

CONTENTS

PageREPORTOFINDEPENDENTAUDITORS 1and2FINANCIALSTATEMENTS StatementsofFinancialPosition 3 StatementsofActivities 4 StatementsofCashFlows 5 NotestoFinancialStatements 6–11REPORTOFINDEPENDENTAUDITORSONTHEADDITIONALINFORMATION 12ADDITIONALINFORMATION StatementofFunctionalExpenses 13

 

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REPORTOFINDEPENDENTAUDITORSTheBoardofDirectorsAmericanCouncilonExerciseReportonFinancialStatementsWe have audited the accompanying financial statements of American Council on Exercise, whichcomprise thestatementsof financialpositionasof June30,2014and2013, therelatedstatementsofactivitiesandcashflowsfortheyearsthenended,andtherelatednotestothefinancialstatements.Management’sResponsibilityfortheFinancialStatementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludesthe design, implementation, andmaintenance of internal control relevant to the preparation and fairpresentationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.Auditors’ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. Weconductedouraudits inaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthe financial statements. The procedures selected depend on the auditor’s judgment, including theassessmentof therisksofmaterialmisstatementof the financialstatements,whetherdue to fraudorerror. Inmakingthoseriskassessments, theauditorconsidersinternalcontrolrelevant to theentity’spreparationand fairpresentationof the financial statements inorder todesignauditprocedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness ofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.Webelievethattheauditevidenceobtainedissufficientandappropriatetoprovideabasisforourauditopinion.

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OpinionIn our opinion, the financial statements referred to above present fairly, in allmaterial respects, thefinancialpositionofAmericanCouncilonExerciseasofJune30,2014and2013,andtheresultsof itsoperations and its cash flows for the years then ended in accordance with accounting principlesgenerallyacceptedintheUnitedStatesofAmerica.

SanDiego,CaliforniaSeptember16,2014

Seeaccompanyingnotes. 3

AMERICANCOUNCILONEXERCISESTATEMENTSOFFINANCIALPOSITION

JUNE30,2014AND2013

2014 2013

CurrentAssetsCashandcashequivalents 5,485,192$ 4,322,270$Investments 1,375,351 1,179,649Deferredandprepaidexpenses,currentportion 677,254 451,923Accountsreceivable 526,507 532,606Inventory 404,387 391,585

Totalcurrentassets 8,468,691 6,878,033

FixedAssets 3,162,151 3,403,150

DeferredandPrepaidExpenses,long‐termportion 913,708 759,226

DeferredCompensationPlanAssets‐457b 168,797 68,470

Totalassets 12,713,347$ 11,108,879$

CurrentLiabilitiesDeferredrevenue 2,132,633$ 1,969,202$Accountspayableandaccruedexpenses 1,513,172 1,485,763

Totalcurrentliabilities 3,645,805 3,454,965

DeferredCompensationPayable‐457b 168,531 71,590

Totalliabilities 3,814,336 3,526,555

UnrestrictedNetAssets 8,899,011 7,582,324

Totalliabilitiesandnetassets 12,713,347$ 11,108,879$

ASSETS

LIABILITIESANDNETASSETS

June30,

4 Seeaccompanyingnotes.

AMERICANCOUNCILONEXERCISESTATEMENTSOFACTIVITIESYEARSENDEDJUNE30,2014AND2013

2014 2013REVENUEANDSUPPORT

Educationalmaterialsandtrainingmanuals 6,880,467$ 5,553,653$Certificationfees 5,061,274 4,160,824Continuingeducationfees 2,912,552 2,348,984Instructorrenewalfees 2,659,417 2,488,256Shippingandhandling 547,651 459,656Royalties 123,630 98,743Mailinglistrentals 94,288 110,312Consumer‐outreach 67,624 149,375Interestanddividends 35,692 32,345Contributionsandotherincome 18,404 155Membershipfees ‐ 30,515

Totalrevenueandsupport 18,400,999 15,432,818

EXPENSES Program 13,958,968 12,184,983Generalandadministrative 3,320,988 3,173,334

Totalexpenses 17,279,956 15,358,317

Excessofrevenueandsupportoverexpenses 1,121,043 74,501

NETREALIZED/UNREALIZEDGAINSONINVESTMENTS 195,644 59,111

INCREASEINUNRESTRICTEDNETASSETS 1,316,687 133,612

UNRESTRICTEDNETASSETSBeginningofyear 7,582,324 7,448,712

Endofyear 8,899,011$ 7,582,324$

YearsEndedJune30,

Seeaccompanyingnotes. 5

AMERICANCOUNCILONEXERCISESTATEMENTSOFCASHFLOWS

YEARSENDEDJUNE30,2014AND2013

2014 2013OPERATINGACTIVITIES

Changeinnetassets 1,316,687$ 133,612$Adjustmentstoreconcilechangeinnetassetstonetcashprovidedbyoperatingactivities:

Depreciationandamortization 399,587 365,404Changeinallowanceforbaddebt 45,109 ‐Netrealized/unrealized(gains)oninvestments (195,644) (55,301)(Increase)decreaseinoperatingassets:

Accountsreceivable (39,010) (376,549)Inventory (12,802) 78,870Deferredandprepaidexpenses (379,813) (268,965)

Increaseinoperatingliabilities:Accountspayableandaccruedexpenses 27,409 540,697Deferredrevenue 163,431 278,691Deferredcompensationpayable‐457b 96,941 71,590

Netcashprovidedbyoperatingactivities 1,421,895 768,049

INVESTINGACTIVITIESProceedsfromsalesofinvestments 450,430 385,178Purchasesofdeferredcompensationplanassets‐457b (70,000) (68,470)Purchasesoffixedassets (158,588) (514,346)Purchasesofinvestments (480,815) (556,595)

Netcash(usedin)investingactivities (258,973) (754,233)

INCREASEINCASHANDCASHEQUIVALENTS 1,162,922 13,816

CASHANDCASHEQUIVALENTSBeginningofyear 4,322,270 4,308,454

Endofyear 5,485,192$ 4,322,270$

YearsEndedJune30,

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note1–NatureofOrganizationandSignificantAccountingPoliciesOrganization – American Council on Exercise (“ACE”), incorporated under the laws of the state ofCaliforniain1985,isanot‐for‐profitorganizationcommittedtoenrichingthequalityoflifethroughsafeandeffectivephysicalactivity.ACEprotectsallsegmentsofsocietyagainstineffectivefitnessproducts,programs,andtrendsthroughitsongoingpubliceducation,outreach,andresearch.ACEfurtherprotectsthepublicbysettingcertificationandcontinuingeducationstandardsforfitnessprofessionals.

Incometaxstatus–ACEisexemptfromincometaxesunderSection501(c)(3)oftheInternalRevenueCode(“IRC”)andSection23701(d)oftheCaliforniaRevenueandTaxationCode,excepttotheextentofunrelated business taxable income as defined under IRC Sections 511 through 515. ACE had nounrecognizedtaxbenefitsorliabilitiesasofJune30,2014and2013.ACEfilesanexemptorganizationreturn in the United States federal jurisdiction and with the Franchise Tax Board in the state ofCalifornia.ACE isno longer subject to income taxexaminationsby taxingauthorities foryearsbefore2011foritsfederalfilingsandforyearsbefore2010foritsstatefilings.

Method of accounting – The financial statements of ACE are prepared under the accrual basis ofaccounting.

Financial statementpresentation – Net assets, and changes therein, are classified as unrestricted,temporarilyrestricted,andpermanentlyrestrictedasfollows:

Unrestrictednetassetsrepresentexpendablefundsavailableforoperationsthatarenototherwiselimitedbydonorrestrictions.

Temporarily restricted net assets consist of contributed funds, subject to specific donor‐imposedrestrictions,contingentuponaspecificperformanceofafutureeventoraspecificpassageoftimebefore ACEmay spend the funds. At June 30, 2014 and 2013, ACE did not have any temporarilyrestrictednetassets.

Permanently restrictednet assets are subject to irrevocabledonor restrictions, requiring that theassetsbemaintainedinperpetuity,usuallyforthepurposeofgeneratinginvestmentincometofundcurrent operations.At June30, 2014and2013,ACEdidnothave anypermanently restrictednetassets.

Revenuerecognition

Revenue–ACEderivesrevenuefromthefollowing:

Publishingandsellingvariouseducationalandtrainingmanualsforexerciseprofessionals,andrelatedshippingandhandling(recognizedasmanualsaresold);

Feeschargedfortakingcertificationexaminations(recognizedasexamsareadministered);

Processingfeesforcontinuingeducationquizzes(recognizedasquizzesareprocessed);

Instructorrenewalfees(recognizedasrenewalformsareprocessed);

Royalties(recognizedasearned);

Mailinglistrentals(recognizedwhenlistsarerented);

Sellingvariouseducationalmaterialstoconsumers(recognizedasproductsaresold);and

Memberships(recognizedasmembershipsarerenewed).

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note1–NatureofOrganizationandSignificantAccountingPolicies(continued)

Deferredrevenue–Deferredrevenuerepresentsfeesreceivedinadvanceforexamsandtraining.

Contributions – Contributions are recognized as support when received or unconditionallypledged. Contributions subject to donor‐imposed restrictions for use in a future period or for aspecific purpose are reported as either temporarily or permanently restricted, depending on thenatureofthedonor’srestriction.Whenadonorrestrictionexpires,temporarilyrestrictednetassetsarereclassifiedtounrestrictednetassetsandreportedinthestatementsofactivitiesasnetassetsreleased fromrestrictions.Donor‐restrictedcontributions,whoserestrictionsaremet in thesamereportingperiod,arereportedasunrestrictedcontributions.

Cash and cash equivalents – Cash and cash equivalents include highly liquid investments with anoriginalmaturityofthreemonthsorless.Investmentsanddeferred compensationplanassets –457b –Marketable securitieswith readilydeterminable fair values are reported at their fair value based on quoted prices in active markets.Unrealizedgainsandlossesareincludedinthechangeinnetassetsinthestatementsofactivities.Accountsreceivable–Credit terms forpaymentofproductsandservicespurchasedareextendedtocustomersinthenormalcourseofbusiness,andnocollateralisrequired.Theallowanceforestimateduncollectible accounts is based on past experience and on analysis of current accounts receivable.Accountsareconsidereddelinquentafter30days.Accountsdeemeduncollectiblearewrittenoffagainsttheallowanceintheyeardeemeduncollectible.AtJune30,2014,managementdeterminedanallowanceofapproximately$45,000 is required.At June30,2013,managementdeterminedanallowance isnotrequired.Inventory–Inventory,whichconsistsprincipallyoftrainingmanualsandmerchandise,isvaluedatthelowerofcostormarketvalueusingthefirst‐in‐first‐outmethod.Deferredexpenses–Deferredexpensesarecostsassociatedwithcontentdevelopment,preproduction,typesetting, artwork, and design of manuals. Accumulated costs are expensed over the estimatedmarketablelifeofthemanualsrangingfromonetofiveyears.Fixed assets – ACE capitalizes fixed assets with a cost greater than $500. Furniture, equipment,computer software,website anddatabasedevelopment, and leasehold improvements are recorded atcostandaredepreciatedonastraight‐linebasisovertheestimatedusefullivesoftheassets,generallythree‐to‐fiveyears.Thebuildingisrecordedatcostandisbeingdepreciatedover30years.Impairmentoflong‐livedassets–ACEevaluateslong‐livedassetsforimpairmentwhenevereventsorchanges in circumstances indicate that the carrying value of an assetmay not be recoverable. If theestimatedfuturecashflow(undiscountedandwithoutinterestcharges)fromtheuseofanassetislessthanthecarryingvalue,awrite‐downwouldberecordedtoreducetherelatedassettoitsestimatedfairvalue.Todate,nosuchwrite‐downshaveoccurred.

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note1–NatureofOrganizationandSignificantAccountingPolicies(continued)Advertising–Advertisingcostsareexpensedasincurred.Shipping and handling – Shipping and handling costs are expensed as incurred and are primarilyincludedinprogramexpenses.Functionalallocationofexpenses –ThecostsofprovidingACE’sprogramandotheractivitieshavebeensummarizedona functionalbasis in the statementsofactivities.Accordingly, certaincostshavebeenallocatedamongtheprogramandsupportingservicesbenefited.Useofestimates – Thepreparation of financial statements in conformitywith accountingprinciplesgenerally accepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assetsand liabilities at the date of the financial statements, and the reported amounts of revenues andexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.Reclassifications–CertainamountsintheJune30,2013statementofactivitieshavebeenreclassifiedtoconformtotheJune30,2014presentation,withnoeffectonnetassets.Subsequentevents – Subsequent events areeventsor transactions thatoccurafter the statementoffinancialpositiondate,butbefore the financial statementsare issued.ACE recognizes in the financialstatements theeffectsofall subsequentevents thatprovideadditionalevidenceaboutconditions thatexistedatthedateofthestatementoffinancialposition,includingtheestimatesinherentintheprocessof preparing the financial statements. ACE’s financial statements do not recognize subsequent eventsthat provide evidence about conditions that did not exist at the date of the statement of financialposition,butaroseafterthestatementoffinancialpositiondateandbeforethefinancialstatementsareavailabletobeissued.ACEhasevaluatedsubsequenteventsthroughSeptember16,2014,whichisthedatethefinancialstatementswereavailabletobeissued.Note2–ConcentrationofCreditRiskACEmaintainscashinbankdepositaccountswhichattimesexceedthefederally‐insureddepositlimits.ACEhasnotexperiencedanylossesinsuchaccounts.Investments are exposed to various risks such as interest rate,market, and credit risks. It is at leastreasonablypossible,giventhelevelofriskassociatedwithinvestments,thatchangesinthenear‐termcouldmateriallyaffecttheamountsreportedinthefinancialstatements.

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note3–InvestmentsandDeferredCompensationPlanAssets–457bFairvalueisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Thefairvaluehierarchyrequiresanentity tomaximize the use of observable inputs andminimize the use of unobservable inputswhenmeasuringfairvalue.Therearethreelevelsofinputsthatmaybeusedtomeasurefairvalue:

Level1‐ Quoted prices in active markets for identical assets or liabilities which are not activelytraded;

Level2‐ Observable inputs other than Level 1 prices, such as quoted prices for similar assets orliabilities;quotedpricesinmarketsthatarenotactive;orotherinputsthatareobservableor can be corroborated by observable market data for substantially the full term of theassetsorliabilities;and

Level3‐ Unobservable inputs that are supported by little or no market activity and that aresignificanttothefairvalueoftheassetsorliabilities.

All investments and deferred compensation plan assets – 457b are considered Level 1 based on theexistenceofquotedpricesinanactivemarketfortheidenticalassets.

SeeNote1forthevaluationmethodologiesusedforassetsmeasuredatfairvalueonarecurringbasisandrecognizedintheaccompanyingstatementsoffinancialposition.Transfersofassetsandliabilitiesbetweenlevelsaredoneasofthebeginningoftheyear.

AtJune30,investmentsconsistof:

2014 2013

Mutualfunds:Domesticequity 757,677$ 543,109$Fixedincome 444,746 455,187Internationalequity 146,604 129,891Preciousmetals 26,324 51,462

Total 1,375,351$ 1,179,649$

AtJune30,deferredcompensationplanassets–457bconsistof:

Mutualfunds:Domesticequity 146,728$ 58,745$

Balanced/assetallocation 7,652 3,368 Internationalequity 7,248 3,032 Fixedincome 7,169 3,325

Total 168,797$ 68,470$

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note4–DeferredandPrepaidExpensesDeferredandprepaidexpensesaresummarizedasfollowsatJune30:

2014 2013

Deferredexpenses 1,279,613$ 1,069,154$Prepaidexpenses 311,349 141,995

1,590,962 1,211,149Lesscurrentportion (677,254) (451,923)

913,708$ 759,226$

Note5–FixedAssetsAtJune30,fixedassetsconsistof:

Building 3,113,744$ 3,113,744$Land 1,286,883 1,286,883Equipment 1,021,171 959,593Websiteanddatabasedevelopment 949,020 949,020Computersoftware 534,282 442,714Furniture 379,151 374,831Leaseholdimprovements 298,500 297,413Vehicle 8,475 8,475

7,591,226 7,432,673Lessaccumulateddepreciation (4,429,075) (4,029,523)

3,162,151$ 3,403,150$

Note6–CommitmentsandContingenciesOperatingleases–ACEleasescopiersundernon‐cancelableoperatingleaseagreementswhichextendthroughMay2016andrequiretotalmonthlyleasepaymentsof$1,233.RentexpenseforboththeyearsendedJune30,2014and2013wasapproximately$15,000.

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note6–CommitmentsandContingencies(continued)Futureminimumrentalpaymentsrequiredundernon‐cancelableoperatingleaseagreementsaredueasfollows:

YearsendingJune30,2015 14,796$2016 8,580

23,376$

Retirementplans –ACEhas a 401(k) plan (the “401(k)Plan”)which covers all full‐timeemployeesafter 90 days of employment. Employees also receive a 50 percent employer match for the first 6percentof salarydeferral,whichvests evenlyover fiveyears.For theyears ended June30,2014and2013,ACEcontributedapproximately$124,000and$105,000,respectively,tothe401(k)Plan.ACE has a 457(b) deferred compensation plan for qualified employees. During both the years endedJune30,2014and2013,ACEapprovedcontributionsofapproximately$70,000totheplan.Trademarkmatters–ACEoperatesunderatrademarkand,attimes,mustdefenditsrightsbyfilingforanadministrativeproceedingbeforetheTrademarkTrialandAppealsBoard,aunitoftheUnitedStatesPatentandTrademarkoffice.Legalmatters–ACEisapartytocertainlegalactionsarisingintheordinarycourseofbusiness.Intheopinion of management, additional liabilities, if any, under these actions will not result in materialchargesagainstnetassets.Note7–CertificationExaminationsACE charges fees for certification examinations that are recognized as revenue as examinations areadministered.ACEhasanagreementwithanorganizationthatadministersthepersonaltrainer,groupfitnessinstructor,clinicalexercisespecialist,andlifeweightmanagementconsultantcertificationtests.Theagreementexpires in July2015andmaybe terminatedbyeitherparty.Expenses for feespaidtothisorganizationunderthisagreementfortheyearsendedJune30,2014and2013wereapproximately$1,433,000and$1,001,000,respectively.

ADDITIONALINFORMATION

 

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REPORTOFINDEPENDENTAUDITORSONTHEADDITIONALINFORMATION

BoardofDirectorsAmericanCouncilonExerciseWehaveauditedthefinancialstatementsofAmericanCouncilonExercise(“ACE”)asofandfortheyearendedJune30,2014,andhaveissuedourreportthereondatedSeptember16,2014,whichcontainedanunmodifiedopiniononthosefinancialstatements.Ourauditwasperformedforthepurposeofforminganopiniononthefinancialstatementsasawhole.Thestatementoffunctionalexpensesispresentedforpurposesofadditionalanalysisandisnotarequiredpartofthefinancialstatements.Suchinformationisthe responsibility of management and was derived from and relates directly to the underlyingaccounting and other records used to prepare the financial statements. The information has beensubjected to the auditing procedures applied in the audit of the financial statements and certainadditionalprocedures,includingcomparingandreconcilingsuchinformationdirectlytotheunderlyingaccounting and other records used to prepare the financial statements or to the financial statementsthemselves,andotheradditionalproceduresinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Inouropinion,theinformationisfairlystatedinallmaterialrespectsinrelationtothefinancialstatementsasawhole.

SanDiego,CaliforniaSeptember16,2014

Seereportofindependentauditorsontheadditionalinformation. 13

AMERICANCOUNCILONEXERCISEADDITIONALINFORMATION

STATEMENTOFFUNCTIONALEXPENSESYEARENDEDJUNE30,2014

(WITHSUMMARIZEDFINANCIALINFORMATIONFORTHEYEARENDEDJUNE30,2013)

Generaland 2013

Program Administrative Total Total

Salariesandwages 4,833,036$ 2,015,189$ 6,848,225$ 6,012,585$Testingservices 1,433,495 ‐ 1,433,495 1,001,222Educationalmaterials 1,321,404 ‐ 1,321,404 1,243,488Marketing 974,503 12,229 986,732 1,147,576Printing,photography,andproduction 939,609 ‐ 939,609 1,084,949Advertisingandpromotion 788,684 25,460 814,144 651,185Insurance 408,101 194,653 602,754 509,372Payrolltaxes 417,265 75,035 492,300 423,807Postage,shipping,andhandling 443,518 11,864 455,382 376,865Professionaldevelopmentanddues 266,322 150,099 416,421 360,395Events/tradeshows 400,272 ‐ 400,272 334,743Depreciation 219,773 179,814 399,587 365,404Meetings 195,285 173,366 368,651 351,150Merchantfees 328,136 ‐ 328,136 275,442Travel 201,282 28,693 229,975 262,087Baddebt 224,034 ‐ 224,034 67,124Repairandmaintenanceandjanitorial 126,871 54,373 181,244 92,404401(k)plancontribution 87,097 37,327 124,424 104,906Legalandaccounting 52,472 97,072 149,544 182,957Miscellaneous 64,660 16,878 81,538 82,208Temporarywages 79,253 ‐ 79,253 24,474Telephone 50,672 21,717 72,389 62,310Entertainment 7,352 64,809 72,161 62,270457(b)plancontribution ‐ 70,000 70,000 70,000Utilities 44,841 19,218 64,059 56,623Officesuppliesandcomputersupplies 17,459 44,307 61,766 61,366Recruitment ‐ 24,626 24,626 43,354Fulfillment 23,637 ‐ 23,637 30,499Copyingandduplication 9,935 4,259 14,194 17,552

TotalexpensesfortheyearendedJune30,2014 13,958,968$ 3,320,988$ 17,279,956$ 15,358,317$

TotalexpensesfortheyearendedJune30,2013 12,184,983$ 3,173,334$ 15,358,317$

2014