Report of Independent Auditors and

Financial Statements with Additional Information for

American Council on Exercise

June 30, 2016 and 2015

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, whichcomprisethestatementsoffinancialpositionasofJune30,2016and2015,therelatedstatementsofactivitiesandcashflowsfortheyearsthenended,andtherelatednotestothefinancialstatements.Management’sResponsibilityfortheFinancialStatementsManagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsinaccordance with accounting principles generally accepted in the United States of America; thisincludesthedesign,implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.Auditor’sResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits.WeconductedourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationofthefinancialstatementsinordertodesignauditproceduresthatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectivenessoftheentity’s internalcontrol.Accordingly,weexpressnosuchopinion.Anauditalsoincludes evaluating the appropriateness of accounting policies used and the reasonableness ofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.Webelieve that theauditevidenceobtained issufficientandappropriate toprovideabasis forourauditopinion.

 

 

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OpinionInouropinion,thefinancialstatementsreferredtoabovepresentfairly, inallmaterialrespects,thefinancialpositionofAmericanCouncilonExerciseasofJune30,2016and2015,andthechangesinitsnet assets and its cash flows for the years then ended in accordance with accounting principlesgenerallyacceptedintheUnitedStatesofAmerica.

SanDiego,CaliforniaSeptember30,2016

Seeaccompanyingnotes. 3

AMERICANCOUNCILONEXERCISESTATEMENTSOFFINANCIALPOSITION

JUNE30,2016AND2015

2016 2015

CurrentAssetsCashandcashequivalents 9,305,957$ 6,010,463$Investments 2,865,574 3,053,278Deferredandprepaidexpenses,currentportion 770,350 713,924Accountsreceivable,net 1,135,469 625,601Inventory 412,949 411,778

Totalcurrentassets 14,490,299 10,815,044

FixedAssets,net 2,779,080 3,063,505

DeferredandPrepaidExpenses,long‐termportion 933,687 856,324

DeferredCompensationPlanAssets‐457b 332,428 191,511

Totalassets 18,535,494$ 14,926,384$

CurrentLiabilitiesDeferredrevenue 3,740,600$ 2,370,189$Accountspayableandaccruedexpenses 2,427,751 1,750,838

Totalcurrentliabilities 6,168,351 4,121,027

DeferredCompensationPayable‐457b 332,785 190,722

Totalliabilities 6,501,136 4,311,749

UnrestrictedNetAssets 12,034,358 10,614,635

Totalliabilitiesandnetassets 18,535,494$ 14,926,384$

ASSETS

LIABILITIESANDNETASSETS

June30,

4 Seeaccompanyingnotes.

AMERICANCOUNCILONEXERCISESTATEMENTSOFACTIVITIESYEARSENDEDJUNE30,2016AND2015

2016 2015REVENUEANDSUPPORT

Educationalmaterialsandtrainingmanuals 9,657,488$ 7,963,075$Certificationfees 6,108,536 5,358,628Continuingeducationfees 4,623,778 3,329,030Instructorrenewalfees 2,801,099 2,670,516Shippingandhandling 703,690 633,552Royalties 119,128 113,283Interestanddividends 106,391 71,848Mailinglistrentals 70,928 121,070Consumer‐outreach 17,156 128,501Contributionsandotherincome 7,371 15,293

Totalrevenueandsupport 24,215,565 20,404,796

EXPENSES Program 18,459,009 15,053,394Generalandadministrative 4,195,529 3,719,111

Totalexpenses 22,654,538 18,772,505

Excessofrevenueandsupportoverexpenses 1,561,027 1,632,291

NETREALIZED/UNREALIZED(LOSSES)GAINSONINVESTMENTS (141,304) 83,333

INCREASEINUNRESTRICTEDNETASSETS 1,419,723 1,715,624

UNRESTRICTEDNETASSETSBeginningofyear 10,614,635 8,899,011

Endofyear 12,034,358$ 10,614,635$

YearsEndedJune30,

Seeaccompanyingnotes. 5

AMERICANCOUNCILONEXERCISESTATEMENTSOFCASHFLOWS

YEARSENDEDJUNE30,2016AND2015

2016 2015OPERATINGACTIVITIES

Changeinnetassets 1,419,723$ 1,715,624$Adjustmentstoreconcilechangeinnetassetstonetcashprovidedbyoperatingactivities:

Depreciationandamortization 465,571 442,955Provisionforlossesonaccountsreceivable 511,724 165,307Netrealized/unrealizedlosses(gains)oninvestments 141,304 (83,333)(Increase)decreaseinoperatingassets:

Accountsreceivable (1,021,592) (264,401)Inventory (1,171) (7,391)Deferredandprepaidexpenses (133,789) 20,714

Increaseinoperatingliabilities:Accountspayableandaccruedexpenses 676,913 238,115Deferredrevenue 1,370,411 237,107Deferredcompensationpayable‐457b 142,063 22,191

Netcashprovidedbyoperatingactivities 3,571,157 2,486,888

INVESTINGACTIVITIESProceedsfromsalesofinvestments 941,000 625,852Purchasesofinvestments (893,843) (2,173,160)Purchasesofdeferredcompensationplanassets‐457b (141,675) (70,000)Purchasesoffixedassets (181,145) (344,309)

Netcashusedininvestingactivities (275,663) (1,961,617)

INCREASEINCASHANDCASHEQUIVALENTS 3,295,494 525,271

CASHANDCASHEQUIVALENTSBeginningofyear 6,010,463 5,485,192

Endofyear 9,305,957$ 6,010,463$

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 nounrecognizedtaxbenefitsorliabilitiesasofJune30,2016and2015.ACEfilesanexemptorganizationreturn in the United States federal jurisdiction and with the Franchise Tax Board in the state ofCalifornia.

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, 2016 and 2015, ACE did not have any temporarilyrestrictednetassets.

Permanently restrictednet assets are subject to irrevocabledonor restrictions, requiring that theassetsbemaintainedinperpetuity,usuallyforthepurposeofgeneratinginvestmentincometofundcurrent operations.At June30, 2016and2015,ACEdidnothave anypermanently restrictednetassets.

Revenuerecognition:

Revenue–ACEderivesrevenuefromthefollowing:

Publishingandsellingvariouseducationalandtrainingmanualsforexerciseprofessionals,andrelatedshippingandhandling(recognizedasmanualsaresold);

Feeschargedfortakingcertificationexaminations(recognizedasexamsareadministered); Processingfeesforcontinuingeducationquizzes(recognizedasquizzesareprocessed); Instructorrenewalfees(recognizedasrenewalformsareprocessed); Sellingvariouseducationalmaterialstoconsumers(recognizedasproductsaresold); Mailinglistrentals(recognizedwhenlistsarerented); Royalties(recognizedasearned); Investmentearnings(recognizedasearned);and Contributions(recognizedascontributionsarereceivedorunconditionallypledged).

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.

Investmentsanddeferredcompensationplanassets–457(b)–Marketablesecuritieswithreadilydeterminable fair values are reported at their fair value based on quoted prices in active markets.Unrealizedgainsandlossesareincludedinthechangeinnetassetsinthestatementsofactivities.

Deferredexpenses–Deferredexpensesarecostsassociatedwithcontentdevelopment,preproduction,typesetting, artwork, and design of products. Accumulated costs are expensed over the estimatedmarketablelifeofthemanualsrangingfromonetofiveyears.

Accountsreceivable–Credit terms forpaymentofproductsandservicespurchasedareextendedtocustomersinthenormalcourseofbusiness,andnocollateralisrequired.Theallowanceforestimateduncollectible accounts is based on past experience and on analysis of current accounts receivable.Accounts are considered delinquent after the payment due date. Accounts deemed uncollectible arewritten off against the allowance in the year deemed uncollectible. At June 30, 2016 and 2015,managementdeterminedthatanallowanceofapproximately$332,000and$49,000,respectively,wasrequired.

Inventory–Inventory,whichconsistsprincipallyoftrainingmanualsandmerchandise,isvaluedatthelowerofcostormarketvalueusingthefirst‐in‐first‐outmethod.

Fixed assets – ACE capitalizes fixed assets with a cost greater than $500. Furniture, equipment,computer software, website and database development, vehicles, land improvements, and leaseholdimprovements are recorded at cost and are depreciated on a straight‐line basis over the estimateduseful lives of the assets, generally three‐to‐five years. The building is recorded at cost and is beingdepreciatedover30years.

Impairmentoflong‐livedassets–ACEevaluateslong‐livedassetsforimpairmentwhenevereventsorchanges in circumstances indicate that the carrying value of an assetmay not be recoverable. If theestimatedfuturecashflow(undiscountedandwithoutinterestcharges)fromtheuseofanassetislessthanthecarryingvalue,awrite‐downwouldberecordedtoreducetherelatedassettoitsestimatedfairvalue.

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.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.ACE has evaluated subsequent events through September 30, 2016, which is the date the financialstatementswereavailabletobeissued.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–FairValueMeasurementsFairvalueisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.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 actively

traded;Level2‐ Observable inputs other than Level 1 prices, such as quoted prices for similar assets or

liabilities;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 are

significanttothefairvalueoftheassetsorliabilities.All investmentsanddeferredcompensationplanassets–457(b)areconsideredLevel1basedon theexistenceofquotedpricesinanactivemarketfortheidenticalassets.SeeNote1forthevaluationmethodologiesusedforassetsmeasuredatfairvalueonarecurringbasisandrecognizedintheaccompanyingstatementsoffinancialposition.Transfersofassetsandliabilitiesbetweenlevelsaredoneasofthebeginningoftheyear.AtJune30,investmentsconsistof:

2016 2015

Cash 537$ 2,555$Domesticequities 365,967 380,923Mutualfunds:

Fixedincome 820,301 799,276Domesticequity 684,175 890,645Balancedassetallocation 539,950 581,558Internationalequity 431,419 378,783Preciousmetals 23,225 19,538

Total 2,865,574$ 3,053,278$

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note3–FairValueMeasurements(continued)AtJune30,deferredcompensationplanassets–457(b)consistof:

2016 2015Mutualfunds:

Domesticequity 230,442$ 159,181$ Balancedassetallocation 55,235 11,306 Fixedincome 31,511 10,769 Internationalequity 15,240 10,255

Total 332,428$ 191,511$

Note4–DeferredandPrepaidExpensesDeferredandprepaidexpensesaresummarizedasfollowsatJune30:Deferredexpenses 1,337,502$ 1,183,813$Prepaidexpenses 366,535 386,435

1,704,037 1,570,248Lesscurrentportion (770,350) (713,924)

Total 933,687$ 856,324$

Note5–FixedAssetsAtJune30,fixedassetsconsistof:Building 3,113,744$ 3,113,744$Land 1,286,883 1,286,883Websiteanddatabasedevelopment 897,478 947,718Equipment 649,314 781,536Leaseholdimprovements 440,822 419,241Computersoftware 230,728 548,115Furniture 225,396 221,841Landimprovement 15,700 15,700Constructioninprogress ‐ 9,444Vehicle ‐ 8,475

6,860,065 7,352,697Lessaccumulateddepreciation (4,080,985) (4,289,192)

Total 2,779,080$ 3,063,505$

AMERICANCOUNCILONEXERCISENOTESTOFINANCIALSTATEMENTS

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Note6–CommitmentsandContingenciesOperatingleases–ACEleasescopiersandavehicleundernon‐cancelableoperatingleaseagreementswhich extend through December 2019 and require total monthly lease payments of $1,099. RentexpensefortheyearsendedJune30,2016and2015wasapproximately$13,000.

Futureminimumrentalpaymentsrequiredundernon‐cancelableoperatingleaseagreementsaredueasfollows:

YearsendingJune30,2017 13,186$2018 11,8802019 11,8802020 5,940

Total 42,886$

Retirement plans – ACE has a 401(k) plan which covers all full‐time employees after 90 days ofemployment. Employees also receive a 100 percent employermatch for the first 3 percent of salarydeferralplus50percentofcontributions from3percent to5percentofpay,whichvestsevenlyoverfouryears.FortheyearsendedJune30,2016and2015,ACEcontributedapproximately$239,000and$127,000,respectively,tothe401(k)Plan.

ACEhasa457(b)deferredcompensationplanforqualifiedemployees.DuringtheyearsendedJune30,2016and2015,ACEapprovedcontributionsofapproximately$151,000and$134,000,respectively,tothe457(b)deferredcompensationplan.

Trademarkmatters–ACEoperatesunderatrademarkand,attimes,mustdefenditsrightsbyfilingforanadministrativeproceedingbeforetheTrademarkTrialandAppealsBoard,aunitoftheUnitedStatesPatentandTrademarkoffice.

Legalmatters–ACEisapartytocertainlegalactionsarisingintheordinarycourseofbusiness.Intheopinion of management, additional liabilities, if any, under these actions will not result in materialchargesagainstnetassets.Note7–CertificationExaminations

ACE charges fees for certification examinations that are recognized as revenue as examinations areadministered.ACEhasanagreementwithanorganizationthatadministersthepersonaltrainer,groupfitness instructor, clinical exercise specialist, and health coach certification tests. The agreementwasrenewedonJune30,2015,withatermthroughJune30,2020,andmaybeterminatedbyeitherparty.ExpensesforfeespaidtothisorganizationunderthisagreementfortheyearsendedJune30,2016and2015wereapproximately$1,750,000and$1,584,000,respectively.

ADDITIONALINFORMATION

 

 

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REPORTOFINDEPENDENTAUDITORSONTHEADDITIONALINFORMATION

BoardofDirectorsAmericanCouncilonExerciseWehaveauditedthefinancialstatementsofAmericanCouncilonExercise(“ACE”)asofandfortheyear ended June 30, 2016, and have issued our report thereon dated September 30, 2016, whichcontained an unmodified opinion on those financial statements. Our audit was performed for thepurposeof forming anopinionon the financial statements as awhole.The statementof functionalexpenses ispresentedforpurposesofadditionalanalysisand isnotarequiredpartof the financialstatements.Suchinformationistheresponsibilityofmanagementandwasderivedfromandrelatesdirectlytotheunderlyingaccountingandotherrecordsusedtopreparethefinancialstatements.Theinformation has been subjected to the auditing procedures applied in the audit of the financialstatementsandcertainadditionalprocedures,includingcomparingandreconcilingsuchinformationdirectlytotheunderlyingaccountingandotherrecordsusedtopreparethefinancialstatementsortothe financial statements themselves, and other additional procedures in accordance with auditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Inouropinion,theinformationisfairlystatedinallmaterialrespectsinrelationtothefinancialstatementsasawhole.

SanDiego,CaliforniaSeptember30,2016

Seereportofindependentauditorsontheadditionalinformation. 13

AMERICANCOUNCILONEXERCISEADDITIONALINFORMATION

STATEMENTOFFUNCTIONALEXPENSESYEARENDEDJUNE30,2016

(WITHSUMMARIZEDFINANCIALINFORMATIONFORTHEYEARENDEDJUNE30,2015)

Generaland 2015

Program Administrative Total Total

Salariesandwages 5,261,908$ 2,618,861$ 7,880,769$ 6,938,147$Marketing 2,049,651 10,462 2,060,113 1,218,396Testingservices 1,749,604 ‐ 1,749,604 1,584,024Advertisingandpromotion 1,579,873 8,667 1,588,540 1,035,176Educationalmaterials 1,515,638 ‐ 1,515,638 1,451,771Printing,photography,andproduction 1,191,083 ‐ 1,191,083 1,230,211Insurance 486,630 239,885 726,515 651,564Legalandaccounting 598,640 45,958 644,598 250,606Postage,shipping,andhandling 617,435 13,396 630,831 503,473Payrolltaxes 429,997 119,736 549,733 503,694Baddebt 511,725 ‐ 511,725 165,307Meetings 286,762 195,107 481,869 412,305Depreciation 256,064 209,507 465,571 442,955Professionaldevelopmentanddues 272,488 188,240 460,728 414,920Merchantfees 452,627 ‐ 452,627 370,091Travel 249,585 32,246 281,831 206,313Repair,maintenance,andjanitorial 173,864 74,513 248,377 360,863401(k)plancontribution 167,566 71,814 239,380 127,319Sponsorship 153,278 ‐ 153,278 42,950457(b)plancontribution 72,288 78,312 150,600 133,875Entertainment 15,973 119,853 135,826 97,629Telephone 80,332 34,428 114,760 92,756Miscellaneous 60,311 54,376 114,687 199,300Utilities 50,530 21,656 72,186 72,081Temporarywages 65,860 ‐ 65,860 104,033Events/tradeshows 62,085 ‐ 62,085 52,707Officesuppliesandcomputersupplies 17,526 34,412 51,938 45,138Fulfillment 20,356 ‐ 20,356 19,034Recruitment ‐ 20,100 20,100 32,991Copierfees 9,330 4,000 13,330 12,876

TotalexpensesfortheyearendedJune30,2016 18,459,009$ 4,195,529$ 22,654,538$ 18,772,505$

TotalexpensesfortheyearendedJune30,2015 15,053,394$ 3,719,111$ 18,772,505$

2016