As filed with the Securities and Exchange Commission on October 4, 2002
Registration No. 333-89440
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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ICON HEALTH & FITNESS, INC.
(Primary Registrant)
(Exact names of Registrant as specified in its charter)
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DELAWARE 3949 87-0531206
(State or other (Primary Standard (I.R.S.
jurisdiction Industrial Classification Employer Identification
of Incorporation or Code Number) No.)
Organization)
1500 South, 1000 West, Logan, Utah 84321, (435) 750-5000
(Address, including ZIP code, and telephone number, including area code, of
each Registrant's principal executive offices)
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Brad Bearnson, Esq.
1500 South, 1000 West
Logan, Utah 84321
(435) 750-5000
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
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Copies to:
Charles W. Robins, Esq.
Weil, Gotshal & Manges LLP
101 Federal Street
Boston, Massachusetts 02110
(617) 772-8300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
(Additional registrants on next page)
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CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Proposed
Maximum Maximum
Title of each Class of Amount to be Amount of Aggregate Amount of
Securities to be Registered Registered(1) Offering Price Offering Price(1) Registration Fee(1)
- ------------------------------------------------------------------------------------------------------
11.25% Notes due 2012.............. $155,000,000 100% $155,000,000 $14,260(2)
- ------------------------------------------------------------------------------------------------------
Guarantees of 11.25% Notes due 2012 $155,000,000 None(3) None(3) None(3)
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) This amount has previously been paid.
(3) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee
is payable with respect to the guarantees.
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Each Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until each Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
Primary
Standard
Industrial I.R.S. Employer
State of Classification Identification
Name of Additional Registrants* Incorporation Code Code
- ------------------------------- ------------- -------------- ---------------
Jumpking, Inc........................... Utah 3949 87-0481821
510152 N.B. Ltd......................... Canada 3949 N/A
Universal Technical Services, Inc....... Utah 3949 87-0468754
ICON International Holdings, Inc........ Delaware 3949 84-1425493
NordicTrack, Inc........................ Utah 3949 87-0674680
Free Motion Fitness..................... Utah 3949 87-0666332
ICON IP, Inc............................ Delaware 3949 87-0649577
- --------
* Address and telephone number of principal executive offices are the same as
ICON Health & Fitness, Inc.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, , 2002.
ICON HEALTH & FITNESS, INC.
EXCHANGE OFFER
$155,000,000
11.25% SENIOR SUBORDINATED NOTES DUE 2012
This exchange offer will expire at 5:00 p.m., New York City Time, on
, 2002, unless extended.
TERMS OF THE EXCHANGE OFFER:
. We are offering a total of $155,000,000 of exchange notes, which are
registered with the Securities and Exchange Commission, to all holders
of initial notes.
. We will exchange the exchange notes for all initial notes that are
validly tendered and not withdrawn prior to the expiration of the
exchange offer.
. You may withdraw tenders of initial notes at any time before the
exchange offer expires.
. We will not receive any proceeds from the exchange offer.
. The terms of the exchange notes are substantially identical to those of
the initial notes, except for transfer restrictions and registration
rights relating to the initial notes.
. We have the option until April 1, 2005, to redeem up to 35% of the
aggregate principal amount of notes originally issued, and any
additional notes issued under the same indenture governing the notes, at
a redemption price of 111.25% of the principal amount plus accrued and
unpaid interest using the net cash proceeds of certain types of
qualified equity offerings.
. The initial notes are, and the exchange notes will be, guaranteed by the
subsidiary guarantors set forth in this prospectus.
. There is no existing market for the exchange notes, and we do not intend
to apply for their listing on any securities exchange.
See the "Description of the Exchange Notes" section on page 73 for more
information about the exchange notes.
. Under certain circumstances specified in the registration rights
agreement, we may be required to file a "shelf" registration statement
for a continuous offer in connection with the initial notes pursuant to
Rule 415 under the Securities Act of 1933.
. Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may
be issued by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Initial Notes where such Notes were
acquired as a result of market-making activities or other trading
activities. The Issuer has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with
any such resale. In addition, until _____ __, 2002, all dealers
effecting transactions in the Exchange Notes may be required to deliver
a prospectus. See "Plan of Distribution."
THIS INVESTMENT INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK FACTORS" THAT
BEGINS ON PAGE 13 FOR A DISCUSSION OF THE RISKS THAT YOU SHOULD CONSIDER PRIOR
TO TENDERING YOUR INITIAL NOTES FOR EXCHANGE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is , 2002
TABLE OF CONTENTS
Page
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Forward-Looking Statements.......................................................... 1
Trademarks.......................................................................... 1
Prospectus Summary.................................................................. 2
Summary of Exchange Offer........................................................... 6
Summary of the Exchange Notes....................................................... 10
Risk Factors........................................................................ 13
The Exchange Offer.................................................................. 23
Use of Proceeds..................................................................... 31
Capitalization...................................................................... 32
Selected Historical Consolidated Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition and Results of Operation 36
Business............................................................................ 50
Management.......................................................................... 60
Executive Compensation.............................................................. 62
Security Ownership of Certain Beneficial Owners and Management...................... 65
Certain Relationships and Related Party Transactions................................ 68
Description of Senior Indebtedness.................................................. 70
Description of the Exchange Notes................................................... 73
Certain United States Federal Income Tax Considerations............................. 109
Plan of Distribution................................................................ 111
Legal Matters....................................................................... 111
Experts............................................................................. 111
Available Information............................................................... 111
Index to Consolidated Financial Statements.......................................... F-1
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Until _____ __, 2002 all dealers effecting transactions in these securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future results. When we use words in this document, such as "anticipates,"
"intends," "plans," "believes," "estimates," "expects," and similar
expressions, we do so to identify forward-looking statements. Our actual
results may differ materially from those anticipated in these forward-looking
statements. These forward-looking statements are affected by risks,
uncertainties, and assumptions that we make, including, among other things, the
factors that are described in "Risk Factors" and:
. price and product changes,
. promotional activity by competitors,
. the loss, or material change in the financial condition, of a
significant customer,
. capacity limitations,
. the difficulties of integrating acquisitions,
. adverse publicity and product liability claims,
. industry trends and conditions,
. technological advances, our level of debt,
. interest rate fluctuations,
. future cash flows,
. dependence on key employees,
. highly competitive nature of the fitness industry, and
. general economic conditions which impact the level of consumer spending.
You should keep in mind that any forward-looking statement made by us in
this prospectus or elsewhere speaks only as of the date on which we make it.
New risks and uncertainties arise from time to time, and it is impossible for
us to predict these events or how they may affect us. We do not intend to
update or revise the forward-looking statements in this prospectus unless the
securities laws require us to do so. In light of these risks and uncertainties,
you should not place undue reliance upon any forward-looking statement made in
this prospectus.
TRADEMARKS
We have proprietary rights to a number of trademarks important to our
businesses, such as: ProForm(R), NordicTrack(TM), HealthRider(R), Image(TM),
Weslo(R), JumpKing(R), Ground Zero(TM), Free Motion(TM), Workout Warehouse(TM),
iFIT.com(TM), iFIT(TM), SpaceSaver(TM), Cross Trainer(TM), Cross Walk(TM),
Cardioglide(R), Incline Trainer(TM), Hiker(TM), QuickSpeed(TM),
QuickIncline(TM), EKG Grip Pulse(TM), SoftDeck(TM), PowerIncline(TM),
PowerRamp(TM), and CustomCushioning(TM), all of which are owned by us, and
Reebok, Weider and Gold's Gym, which are used by us under license agreements
with the owners of such trademarks.
1
PROSPECTUS SUMMARY
This summary contains basic information about us and this exchange offer but
may not contain all the information that is important to you. We encourage you
to read the more detailed information and financial statements appearing
elsewhere in this prospectus. Unless the context requires otherwise:
. "We," "us" and "the Company" refer to ICON Health & Fitness, Inc. and
its subsidiaries on a consolidated basis;
. Our market share, measured by retail sales dollars, refers to our share
of the total United States home fitness equipment market according to
the Sports Market Research Group ("SMRG");
. Historical and projected retail sales of home fitness equipment,
including various product categories of home fitness equipment, and the
growth rates of such historical retail sales are according to the
National Sporting Goods Association ("NSGA");
. Historical and projected data regarding the size of the institutional
market for fitness equipment and the consumer usage levels are according
to The Sporting Goods Manufacturers' Association ("SGMA");
. "CAGR" refers to compound annual growth rate; and
. Our fiscal year refers to the twelve-month period ended May 31 of the
stated year.
. The terms "initial notes" or "old notes" refer to the 11.25% Senior
Subordinated Notes due 2012 which we issued in April 2002.
. The terms "notes," "new notes," or "exchange notes" refer to the 11.25%
Senior Subordinated Notes due 2012 offered in this prospectus.
Our Company
We manufacture and distribute a broad line of products in the fitness
equipment market. These fall into two product categories, namely:
cardiovascular and other equipment, and strength training equipment. We are one
of the largest manufacturers and marketers of home fitness equipment in the
United States. In addition, we manufacture and distribute an innovative line of
products for the institutional fitness equipment market in both our
cardiovascular and other equipment category and our strength training equipment
category. We are one of the few manufacturers with a broad product line in each
of our principal product categories. Our brand names include: ProForm,
NordicTrack, HealthRider, Weslo, Image, JumpKing, Free Motion Fitness and,
under license, Reebok, Weider and Gold's Gym. For the fiscal year ended May 31,
2002, we generated net sales of $896.1 million resulting in net income of $19.4
million and EBITDA (as defined herein) of $75.7 million. See "Selected
Historical Consolidated Financial Data."
Home fitness equipment is one of the fastest growing segments of the
sporting goods industry. Retail sales of home fitness equipment have increased
at a CAGR of 12.7% from $311 million in 1980 to an estimated $3.8 billion in
2001, according to NSGA. We believe that there are several leading reasons for
this growth. First, there has been a significant increase in the United States
population ages 45 to 64, which age group accounts for the majority of home
fitness equipment purchases in the United States. Second, the number of
Americans participating in fitness activities has increased from 42.3 million
in 1987 to 51.6 million in 2000, we believe, in part, because Americans have
become aware of the compelling medical evidence of the benefits of exercise.
Third, from 1990 to 2000, the percentage of Americans who use equipment during
their cardiovascular and strength training exercise routines has increased by
41% and 69%, respectively. Finally, we believe that consumers are dedicating
more of their disposable income to activities at home, including fitness.
2
Our Products
We manufacture and distribute a broad line of fitness equipment for the
fitness market in the following product categories:
. Cardiovascular and Other Fitness Equipment. This category consists of
products aimed at providing the user with a calorie burning endurance
workout. Primary products within this category include treadmills,
ellipticals, and exercise bikes. Sales of cardiovascular fitness
equipment has grown from $769.1 million in 1987 to $2.9 billion in 2000.
This category also includes other related products we manufacture,
including (i) fitness accessories (ii) trampolines and (iii) relaxation
products such as spas. We believe these products complement our primary
product offerings.
. Strength Training Equipment. Strength training equipment is designed to
develop muscle tone and strength. Primary products within this category
include multi-purpose gyms, free weights, weight benches and cages.
Retail sales of anaerobic strength training products industry-wide have
increased from $208.7 million in 1980 to $856.9 million in 2000, a CAGR
of 7.3%.
In addition, we recently introduced a full line of fitness equipment for the
institutional market that includes our innovative line of Free Motion strength
training equipment and treadmills, Incline Trainers and other cardiovascular
equipment sold to health clubs, elite athlete training centers and corporate
wellness centers under our NordicTrack and Free Motion Fitness brand.
Our Brands and Distribution Channels
We market a complete line of products under multiple brands through multiple
distribution channels to reach a wide range of consumers at various price
points. We have some of the strongest brands in the industry, including
NordicTrack which ranks among the top seven most widely recognized sporting
goods brands according to American Sports Data. Our ProForm brand was ranked
number one in terms of fitness market share by SMRG in 2000. We market our
products through each distribution channel in which home fitness equipment
products are sold, including: department stores, mass retailers and warehouse
clubs, sporting goods and specialty fitness retailers, and direct-to-consumer
sales through catalogs, infomercials, the Internet and our company-owned
NordicTrack stores.
Our History
Our predecessor company, Weslo, was founded in 1977 by Scott Watterson, our
Chairman and Chief Executive Officer, and Gary Stevenson, our President and
Chief Operating Officer. In 1987, we acquired ProForm, and in 1988 we were
acquired by Weider Health and Fitness ("Weider"). In 1994, affiliates of Bain
Capital, LLC formed ICON Health & Fitness, Inc. and obtained control of us in a
recapitalization transaction. As part of that transaction, we incurred
substantial indebtedness and issued common and preferred stock to Weider. In
1996, we acquired HealthRider and CanCo, a Weider affiliated Canadian
manufacturing firm, and we repurchased the common and preferred stock that had
been issued to Weider in that recapitalization. We funded these transactions
with additional indebtedness. In addition, in 1998 we acquired the assets of
NordicTrack, Inc. In 1999, we consummated a recapitalization that included a
$40.0 million cash contribution of capital, the exchange of our then-existing
debt securities for cash and new debt and equity securities and the refinancing
of our senior credit facility.
3
Our Competitive Strengths
We attribute our market leadership, opportunities for continued growth and
increased profitability to the following competitive strengths:
. Leading Market Position.
. Unique Multi-Brand, Multi-Channel Distribution Capability.
. Strong Customer Relationships.
. Strong Commitment to Research and Development.
. Flexible Manufacturing Capability.
. Experienced Management Team with Significant Equity Ownership.
4
Our Business Strategy
We plan to increase our net sales and EBITDA by continuing to pursue a
business strategy that has the following principal components:
. Participate in Industry Growth.
. Increase Direct-to-Consumer Sales.
. Increase Our Presence in the Institutional Fitness Equipment Market.
. Increase Our International Sales.
. Selectively Pursue Acquisitions.
5
SUMMARY OF THE EXCHANGE OFFER
As of the date of this prospectus, $155,000,000 aggregate principal amount
of unregistered notes are outstanding. Simultaneously with the issuance of the
initial notes, we entered into a registration rights agreement with the initial
holders of the notes in which we agreed to deliver this prospectus to you and
to consummate the exchange offer no later than 30 business days after the
effective date of the registration statement of which this prospectus is a
part, which effective date must occur on or prior to October 6, 2002. If we do
not consummate the exchange offer before this date, the annual interest rate on
the initial notes will increase in incremental amounts, up to a maximum
increase of 1.5% over the original interest rate of the notes until the
exchange offer is completed. You should read the description under "--Summary
of the Exchange Notes" and "Description of the Notes" for more information
about the registered notes.
We believe that the notes to be issued in the exchange offer may be resold
by you without compliance with the registration and prospectus delivery
provisions of the Securities Act, unless you are an affiliate of our company.
You should read the discussion under the heading "The Exchange Offer" for
further information regarding the exchange offer and resale of the notes.
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of our 11.25% notes due 2012 which have
been registered under the Securities Act for each
$1,000 principal amount of our outstanding 11.25%
notes due 2012 which were issued in April, 2002
in a private offering. In order to be exchanged,
an initial note must be properly tendered and
accepted. We will exchange all initial notes
validly tendered and not validly withdrawn.
Resales of Exchange Notes... Based on interpretations by the staff of the SEC,
as enunciated in
no-action letters issued to Exxon Capital
Holdings Corporation (avail. May 13, 1988),
Morgan Stanley & Co. (avail. June 5, 1991), and
Shearman & Sterling (avail. July 2, 1993), each
of which is unrelated to us, we believe that
exchange notes issued pursuant to the exchange
offer in exchange for initial notes may be
offered for resale, resold or otherwise
transferred by you without compliance with the
registration and prospectus delivery requirements
of the Securities Act, unless you:
. are an "affiliate" of ours within the meaning
of Rule 405 under the Securities Act;
. are a broker-dealer who purchased initial
notes directly from us for resale, under Rule
144A or Regulation S under the Securities Act
or any other available exemption under the
Securities Act;
. are a broker-dealer that receives exchange
notes for your own account in exchange for
initial notes which were acquired by you as a
result of market-making or other trading
activities;
. acquired the exchange notes other than in the
ordinary course of your business;
. are engaging or intend to engage in a
distribution of exchange notes; or
6
. have an arrangement or understanding with any
person to participate or engage in the
distribution of exchange notes.
By tendering your initial notes (as described
below) you will be making representations to this
effect.
However, the SEC has not considered our exchange
offer in the context of a no-action letter and we
cannot assure you that the staff of the SEC would
make a similar determination with respect to the
exchange offer. Furthermore, in order to
participate in the exchange offer, you must make
the representations set forth in the letter of
transmittal that we are sending you with this
prospectus.
If our belief is not accurate, or if you satisfy
one of the conditions listed above, and you
transfer an exchange note without delivering a
prospectus meeting the requirements of the
federal securities laws or without an exemption
from these laws, you may incur liability under
the federal securities laws. We do not and will
not assume, or indemnify you against, this
liability.
Each broker-dealer that receives exchange notes
for its own account in exchange for initial
notes, which were acquired by the broker-dealer
as a result of market-making or other trading
activities, must agree to deliver a prospectus
meeting the requirements of the federal
securities laws in connection with any resale of
the exchange notes. See "The Exchange Offer" and
"Plan of Distribution."
Expiration and Exchange Dates This offer will expire at 5:00 p.m., New York
City time, on _____ __, 2002, unless we, in our
sole discretion, extend the exchange offer, in
which case the expiration date shall be the
latest date and time to which the exchange offer
is extended.
Exchange and Registration
Rights Agreement.......... You have the right to exchange the initial notes
that you now hold for exchange notes with
substantially identical terms. This exchange
offer is intended to satisfy these rights. After
the exchange offer is complete, you will no
longer be entitled to any exchange or
registration rights with respect to your notes.
The registration rights agreement requires us to
file a registration statement for a continuous
offering in accordance with Rule 415 under the
Securities Act for your benefit if, under
applicable law, you would not receive freely
tradeable registered notes in the exchange offer,
you are ineligible to participate in the exchange
offer, or in other specified circumstances, and
you notify us that you wish to have your old
notes registered under the Securities Act. See
"The Exchange Offer--Shelf Registration
Statement."
Conditions.................. This offer is conditioned only upon compliance
with the securities laws. The offer applies to
any and all initial notes tendered by the
deadline.
7
Withdrawal Rights........... You may withdraw your tender of initial notes at
any time before the offer expires.
Federal Income Tax
Consequences.............. The exchange should not be a taxable event for
United States federal income tax purposes. You
should not recognize any taxable gain or loss or
any interest income as a result of the exchange.
Transfer Restrictions on
Exchange Notes............ You may incur liability under the Securities Act
if:
(1) any of the representations listed above are
not true; and
(2) you transfer any exchange note issued to you
in the exchange offer without:
. delivering a prospectus meeting the
requirements of the Securities Act; or
. an exemption from the Securities Act's
requirements to register your exchange
notes.
We do not assume or indemnify you against such
liability. Each broker-dealer that is issued
exchange notes for its own account in exchange
for initial notes that were acquired as a result
of market-making or other trading activities,
must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale of
the exchange notes. A broker-dealer may use this
prospectus for an offer to resell, a resale or
other retransfer of the exchange notes issued to
it in the exchange offer.
Procedures for Tendering Old
Notes..................... Each holder of initial notes who wishes to accept
the exchange offer must:
. complete, sign and date the accompanying
letter of transmittal, or a facsimile
thereof; or
. arrange for the Depository Trust Company to
transmit certain required information to the
exchange agent in connection with a
book-entry transfer. You must mail or
otherwise deliver such documentation and your
old notes to The Bank of New York, as
exchange agent, at the address set forth
under "The Exchange Offer--Exchange Agent."
Failure to Exchange will
affect you adversely...... If you are eligible to participate in the
exchange offer and you do not tender your initial
notes, you will not have any further registration
or exchange rights and your initial notes will
continue to be subject to some restrictions on
transfer. Accordingly, the liquidity of the
initial notes could be adversely affected.
Special Procedures for
Beneficial Owners......... If you beneficially own initial notes registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender your initial notes in the exchange offer,
you should
8
contact such registered holder promptly and
instruct it to tender on your behalf. If you wish
to tender on your own behalf, you must, before
completing and executing the letter of
transmittal for the exchange offer and delivering
your initial notes, either arrange to have your
initial notes registered in your name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time.
Guaranteed Delivery
Procedures................ You may comply with the procedures described in
this prospectus under the heading "The Exchange
Offer--Guaranteed Delivery Procedures" if you
wish to tender your initial notes and:
. time will not permit your required documents
to reach the exchange agent by the expiration
date of the exchange offer,
. you cannot complete the procedure for
book-entry transfer on time, or
. your initial notes are not immediately
available.
9
SUMMARY OF THE EXCHANGE NOTES
Interest.................... The notes will bear interest at an annual rate of
11.25%. Interest is payable semi-annually in
arrears on January 1 and July 1 of each year,
beginning July 1, 2002.
Maturity Date............... April 1, 2012
Ranking..................... The notes and subsidiary guarantees will rank:
. junior to all of our and the guarantors'
existing and future senior indebtedness,
including borrowings equal to $103.1 million
in the aggregate as of May 31, 2002 under the
new credit agreement;
. equally with any of our and the guarantors'
future senior subordinated indebtedness;
. senior to any of our and the guarantors'
future subordinated indebtedness; and
. effectively junior to all existing and future
liabilities, including trade payables, of our
non-guarantor subsidiaries $7.2 million in
the aggregate as of May 31, 2002.
Optional Redemption......... We may redeem the notes at any time on or after
April 1, 2007, in whole or in part, in cash at
the redemption prices described in this offering
circular, plus accrued and unpaid interest and
additional interest, if any, to the date of
redemption.
In addition, on or before April 1, 2005, we may
redeem up to 35% of the aggregate principal
amount of notes originally issued, and any
additional notes issued under the same indenture
governing the notes, at a redemption price of
111.25% plus accrued and unpaid interest with the
proceeds of specified equity offerings. This
redemption would be made by the trustee in
compliance with the requirements of the principal
national securities exchange on which the notes
are listed. If the notes are not listed on a
national securities exchange the redemption shall
be done pro rata by lot or other method the
trustee deems fair.
Change of Control........... Upon the occurrence of any of the following
events:
. the direct and indirect sale or disposition
of all or substantially all of our properties
and assets;
. the liquidation or dissolution of ICON;
. any transaction the result of which any
person other than our current shareholders,
becomes the owner of greater than 50% of our
voting stock;
10
. a change in a majority of our directors;
. if our Parent HF Holdings ceases to own 100%
of our outstanding voting stock
we will be required to make an offer to
repurchase the notes at a purchase price equal to
101% of the principal amount of the notes on the
date of repurchase, plus accrued and unpaid
interest and additional interest, if any, to the
date of repurchase. See "Description of the
Exchange Notes--Repurchase at Option of
Holders--Change of Control." Our ability to
complete the change of control repurchase may be
limited by the terms of our new credit agreement
and our other indebtedness.
Subsidiary Guarantees....... The notes will be jointly and severally
guaranteed on an unsecured, senior subordinated
basis by our existing and future Domestic
Subsidiaries (as defined herein).
Certain Covenants........... The indenture governing the notes will contain
covenants that will, among other things, limit
our ability and the ability of our restricted
subsidiaries to:
. incur additional indebtedness;
. create certain liens;
. pay dividends or make other equity
distributions;
. purchase or redeem capital stock;
. make certain investments;
. sell assets or consolidate or merge with or
into other companies;
. engage in transactions with affiliates; and
. enter into certain sale and leaseback
transactions
However, these limitations will be subject to a
number of important qualifications and
exceptions. See "Description of the Exchange
Notes."
11
Summary Historical Consolidated Financial Data
The following table shows our summary historical consolidated financial data
for the fiscal years ended May 31, 1999, 2000, 2001 and 2002. Our summary
historical consolidated financial data for the fiscal years ended May 31, 1999,
2000, 2001 and 2002 were derived from our audited consolidated financial
statements, included elsewhere in this prospectus. This summary financial data
should be read in conjunction with, and is qualified in its entirety by, "Use
of Proceeds," "Selected Historical Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and accompanying notes included elsewhere
in this prospectus.
For the Years Ended May 31,
-----------------------------------
1999 2000 2001 2002
------ ------ ------ ------
(in millions)
Operating Data:
Net sales............................. $710.2 $733.0 $820.5 $896.1
Cost of sales......................... 514.0 531.6 580.5 635.1
Gross profit.......................... 196.2 201.4 240.0 261.0
Operating expenses.................... 168.7 166.0 184.1 205.2
Income from operations................ 27.5 35.4 55.9 55.8
Interest expense...................... 33.1 33.9 34.8 26.1
Amortization of deferred financing
fees................................ 7.0 2.7 3.2 3.1
Net income (loss)..................... (24.7) (6.6) 13.3 19.4
Other Financial Data:
Depreciation and amortization......... $ 17.4 $ 16.7 $ 17.4 $ 19.2
Purchases of property and
equipment(1)........................ 11.6 12.9 16.1 11.6
Net cash provided by operating
activities.......................... $ 38.0 $ 0.5 $ 12.4 $ 37.5
Net cash used in investing activities. (20.1) (19.9) (22.8) (17.1)
Net cash provided by (used in)
financing activities................ (17.1) 21.4 8.7 (19.3)
Ratio of earnings to fixed charges.... --(2) --(2) 1.4 x 1.8x
Balance Sheet Data (at the end of the
period):
Cash.................................. $ 4.3 $ 5.9 $ 3.3 $ 4.8
Working capital....................... 108.0 132.3 157.6 164.0
Total assets.......................... 331.9 368.1 405.5 423.2
Long-term obligations................. 253.4 242.2 253.3 255.8
Supplemental Data:
EBITDA(3)............................. 44.9 52.5 72.1 75.7
- --------
(1) Excludes purchases of intangibles, trademarks and acquisitions of $8.5
million for fiscal year 1999, $4.4 million for fiscal year 2000, $6.7
million for the fiscal year 2001 and $5.5 million for the fiscal year 2002.
(2) Our earnings were inadequate to cover our fixed charges by $12.6 million
and $1.0 million for fiscal years 1999 and 2000, respectively.
(3) EBITDA means earnings before net interest expense, income taxes,
depreciation, amortization and extraordinary loss on extinguishment of
debt. EBITDA is presented because we believe it is an indicator of our
ability to incur and service debt and is used by our lenders in determining
compliance with financial covenants. However, EBITDA should not be
considered an alternative to cash flow from operating activities as
measures of liquidity or as an alternative to net income as measures of
operating results in accordance with generally accepted accounting
principles. Our definition of EBITDA may differ from definitions of EBITDA
used by other companies. For a list of unusual items that have affected
EBITDA see "Selected Historical Consolidated Financial Data."
12
RISK FACTORS
You should carefully consider the risk factors set forth below, as well as
the other information contained in this prospectus, before purchasing the notes
offered pursuant to this prospectus. The risks described below are not the only
risks facing us. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial may also materially and adversely
affect our business operations. Any of the following risks could materially
adversely affect our business, financial condition, cash flows or results of
operations. In such case, you may lose all or part of your original investment.
Risks Relating to this Offering
Our substantial leverage could adversely affect our financial condition and
prevent us from fulfilling our obligations under the notes.
We are, and will continue after this offering to be, highly leveraged. After
giving pro forma effect to:
. the issuance in April 2002 of the initial notes,
. our initial borrowings of $117.3 million under the new credit facility,
. the repayment of $194.1 million due and under our old credit facility,
. the redemption of our 12% subordinated notes due 2005 in the aggregate
amount of $46.1 million, and
. the payment of the transaction fees and expenses related to the issuance
of the initial notes and to our new credit facility,
we had on May 31, 2002 total indebtedness of approximately $255.9 million
(of which $152.8 million consisted of the initial notes and $103.1 million
consisted of secured borrowings under our new credit facility), and
stockholders' equity of approximately $16.2 million. Also, after giving pro
forma effect to the same items, our ratio of earnings to fixed charges would
have been 1.9 to 1.0 for the fiscal year ended May 31, 2002. In addition, we
and our subsidiaries will be permitted to incur substantial additional
indebtedness in the future.
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult or render us unable to satisfy our obligations
with respect to the notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to obtain additional financing to fund future working
capital, capital expenditures and other general corporate requirements,
or to carry out other aspects of our business plan;
. require us to dedicate a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of such cash flow to
fund working capital, capital expenditures or other general corporate
purposes, or to carry out other aspects of our planning for our business
plan;
. limit our flexibility in executing our business strategy or in reacting
to changes in our business and the industry;
. place us at a competitive disadvantage compared to our competitors that
have less debt; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds. Also, failing to comply with those covenants could result in an
event of default which, if not cured or waived, could have a material
adverse effect on us.
13
In addition, the indenture and our new credit facility contain financial and
other restrictive covenants that limit our ability to engage in activities that
may be in our long-term best interests. Our failure to comply with those
covenants could result in an event of default which, if not cured or waived,
could result in the acceleration of all of our debts.
The notes and the guarantees are junior to our and the guarantors' senior debt,
respectively.
The notes and the guarantees are subordinated in right of payment to all of
our and the guarantors' current and future senior debt, respectively. Upon any
distribution to our or the guarantors' creditors in a liquidation or
dissolution of us or the guarantors or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to us, the guarantors
or our or their property, the holders of senior debt will be entitled to be
paid in full before any payment may be made with respect to the notes or the
guarantees, as applicable. In addition, the subordination provisions of the
indenture will provide that payments with respect to the notes will be blocked
in the event of a payment default on senior debt and may be blocked for up to
179 days each year in the event of certain non-payment defaults on senior debt.
In the event of our or the guarantors' bankruptcy, liquidation or
reorganization or similar proceeding, holders of the notes will participate
ratably with all holders of subordinated indebtedness that is deemed to be of
the same class as the notes and the guarantees, as applicable, and potentially
with all other general creditors, based upon the respective amounts owed to
each holder or creditor, in our or the guarantors remaining assets, as
applicable. In any of the foregoing events, there can be no assurance that
there would be sufficient assets to pay amounts due on the notes. As a result,
holders of notes may receive less, ratably, than the holders of senior debt. In
addition, under the subordination provisions of the indenture, payments that
would otherwise be made to holders of the notes will instead be paid to holders
of senior debt in the event of a default under our senior credit agreement. As
a result of these provisions, other creditors (including trade creditors) that
are not holders of senior debt may recover more, ratably, than the holders of
the notes. In addition, the notes are effectively subordinated to all
outstanding obligations of any of our subsidiaries that does not guarantee the
notes. The notes will not be guaranteed by any unrestricted subsidiary under
the indenture or by our foreign subsidiaries (other than our Canadian
subsidiaries).
Despite current indebtedness levels, we and our subsidiaries may still be able
to incur substantially more debt. This could further exacerbate the risks
associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture allow for additional
indebtedness under specified conditions and do not fully prohibit us or our
subsidiaries from doing so. As of May 31, 2002, subject to borrowing base
limitations and after giving pro forma effect to:
. the issuance in April 2002 of the initial notes,
. our initial borrowings under our credit facility,
. the repayment of our old credit facility,
. the redemption of our 12% subordinated notes due 2005, and
. the payment of fees and expenses related to the issuance of the initial
notes and to our credit facility,
our new credit facility would have permitted additional borrowings of up to
$82.9 million and all of such borrowings would have ranked senior to the
initial notes and the subsidiary guarantees. If new debt is added to our and
our subsidiaries' current debt levels, the related risks that we and they now
face could intensify.
To service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control.
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, our indebtedness, including the notes, or to fund
planned capital expenditures will depend on our ability to generate
14
cash in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. See "Market Risk" page 43.
Based on our current level of operations, management believes that cash flow
from operations and available cash, together with available borrowings under
our new credit facility, will be adequate to meet our future liquidity needs
for at least the next few years. We may, however, need to refinance all or a
portion of the principal amount of the notes on or prior to maturity.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that anticipated revenue growth and operating
improvements will be realized or that future borrowings will be available under
our new credit facility in an amount sufficient to enable us to service our
indebtedness, including the notes, or to fund our other liquidity needs. In
addition, we cannot assure you that we will be able to refinance any of our
indebtedness, including our new credit facility or the notes, on commercially
reasonable terms or at all.
The terms of the new credit facility and the indenture relating to the notes
restrict our current and future operations, particularly our ability to respond
to changes or to take some actions.
The new credit facility contains numerous operating and financial covenants,
and any future refinancing of the new credit facility likely would contain a
number of restrictive covenants, that impose significant operating and
financial restrictions on us. The new credit facility includes covenants
restricting, among other things, our ability to:
. incur additional indebtedness;
. pay dividends and make restricted payments;
. create liens;
. use the proceeds from sales of assets and subsidiary stock;
. enter into sale and leaseback transactions;
. enter into transactions with affiliates; and
. enter into certain mergers, consolidations and transfers of all or
potentially all of our assets.
The new credit facility also includes financial covenants, including
requirements that we maintain a minimum debt service coverage ratio.
The indenture relating to the notes also contains numerous operating and
financial covenants including, among other things, restrictions on our ability
to:
. incur additional indebtedness;
. create liens or other encumbrances;
. make certain payments and investments;
. enter into sale and leaseback transactions;
. sell or otherwise dispose of assets; and
. merge or consolidate with another entity.
A failure by us to comply with covenants contained in the new credit
facility or the indenture could result in an event of default which could
materially and adversely affect our operating results and our financial
condition.
We may not have the ability to raise the funds necessary to finance any change
of control offer required by the indenture governing the notes.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes at 101% of the
principal amount thereof plus accrued and unpaid interest and
15
additional interest, if any, to the date of repurchase. However, it is possible
that we will not have sufficient funds at the time of the change of control to
make any required repurchases of notes or that restrictions in our new credit
facility will not allow such repurchases. In addition, certain important
corporate events, such as leveraged recapitalizations that would increase the
level of our indebtedness, would not constitute a "Change of Control" under the
indenture.
Federal and state statutes allow courts, under specific circumstances, to void
guarantees and require noteholders to return payments received from guarantors.
Under federal bankruptcy law or comparable provisions of state fraudulent
transfer laws, a note or guarantee could be voided. Further, claims in respect
of a note or guarantee could be subordinated to all other debts of us or those
of the guarantor, as the case may be, if, among other things, we or the
guarantor, at the time of incurring the indebtedness evidenced by the note or
the guarantee:
. received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness; and
. was insolvent or rendered insolvent by reason of such incurrence; or
. was engaged in a business or transaction for which our or the
guarantor's remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment made by us pursuant to the notes or by a guarantor
pursuant to a subsidiary guarantee could be voided and required to be returned
to the person making such payment, or to a fund for the benefit of our
creditors or creditors of the guarantors, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, we or a guarantor would be considered insolvent
if:
. the sum of its debts, including contingent liabilities, were greater
than the saleable value of all of its assets; or
. if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
. it could not pay its debts as they become due.
If an active trading market for the notes does not develop, the liquidity and
value of the notes could be harmed.
Prior to this offering, there was no public market for these notes. We have
been informed by the initial purchasers that they intend to make a market in
these notes after this offering is completed. However, the initial purchasers
may cease their market-making at any time. The initial purchasers of the notes
were Credit Suisse First Boston Corporation, JP Morgan Securities and Fleet
Securities. In addition, the liquidity of the trading market in these notes,
and the market price quoted for these notes, may be adversely affected by
changes in the overall market for high yield securities and by changes in our
financial performance or prospects or in the prospects for companies in our
industry generally. As a result, you cannot be sure that an active trading
market will develop for these notes. If no active trading market develops, you
may not be able to resell your notes at their fair market value or at all.
16
The trading price of the notes may be volatile.
The trading price of the notes could be subject to significant fluctuation
in response to, among other factors, variations in operating results,
developments in industries in which we do business, general economic
conditions, changes in securities analysts' recommendations regarding our
securities and changes in the market for noninvestment grade securities
generally. This volatility may adversely affect the market price of the notes.
Consequences Of Failure To Exchange
Holders of initial notes who are eligible to participate in the exchange
offer but who do not tender their notes will not have any further registration
rights, and their initial notes will continue to be subject to restrictions on
transfer. Accordingly, such notes may be resold only:
. to us, upon redemption of these notes or otherwise,
. so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A,
. in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
. under an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state
of the United States.
Risks Relating to our Business
We rely on a limited number of major customers, the loss of any of which could
have a material adverse effect on our business.
Our largest customer, Sears, accounted for approximately 39.1%, 42.4% and
44.5% of our net sales in fiscal years 2000, 2001 and the fiscal year ended May
31, 2002, respectively. The level of our sales to this customer depends in
large part on consumers' continuing commitment to home fitness equipment
products and on the success of the customer's efforts to market and promote our
products, as well as our competitiveness in terms of price, quality, product
innovation, customer service and other factors. Consistent with industry
practice, we do not have long-term purchase agreements or other commitments as
to levels of future sales. There can be no assurance that we will be able to
maintain our current level of sales to this customer. The loss of, or a
substantial decrease in the amount of purchases by, or a write-off of any
significant receivables due from any of our major customers would have a
material adverse effect on our business and financial condition.
We rely heavily on product innovation.
Product life cycles can be short in the home fitness industry and innovation
is an important component of the competitive nature of the industry. While we
emphasize new product innovation and product repositioning (i.e., design
changes or revised marketing strategies), we may be unable to continue to
develop competitive products in a timely manner or to respond adequately to
market trends. In addition, we may not be able to ensure that repositioned
products will gain initial market acceptance, that interest in our products
will be sustained, or that significant start-up costs with respect to new
products will be recouped. Moreover, although our management believes that
fitness and health activities have become important to consumers, we cannot
ensure that interest in any particular fitness activity will be sustained.
17
We are dependent on the sale of our treadmills.
The sale of motorized treadmills accounts for a significant portion of our
net sales. Motorized treadmills accounted for 63.9%, 60.5% and 58.6% of our net
sales for fiscal years ended May 31, 2000, 2001 and 2002, respectively. We
could be adversely affected if we experienced a significant decline in the
popularity of our motorized treadmills and were unable to develop and introduce
other successful products in a timely manner. Additionally, we could become
dependent upon other product categories in the future which may evolve due to
shifts in consumer trends.
We operate in a very competitive business environment.
Competition in the field of home fitness equipment is intense. The home
fitness equipment market is served by a variety of entities including (i)
manufacturers such as Life Fitness, Precor, Direct Focus, Fitness Quest, Keys
and Horizon Fitness; (ii) retailers such as Omnifitness and Exercise Equipment
Company and (iii) Asian direct exporters and international direct
importers--such as Direct Focus, Tunturi and Helmut Kettler. Our primary
competitors in the institutional fitness market include manufacturers such as
Life Fitness, Precor, StarTrac and Cybex. Because of their greater resources,
many of our competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, devote greater resources to
the promotion and sale of their products than we can, or consummate strategic
acquisitions. Many of these competitors may also have long-standing
relationships with key suppliers and may offer other products and/or services
which we do not provide. Providers of home fitness equipment have traditionally
competed on the basis of price, quality, brand name recognition, product
innovation and customer service. As we seek to maintain our position as one of
the principal members of the home fitness equipment industry, we compete on
price, product innovation and design, unique multi-channel distribution, our
principal brand names and our strong customer relationships. We believe that
developing and maintaining a competitive advantage will require our continued
investment in research and development and sales and marketing. We cannot
assure you that we will have sufficient resources to make the necessary
investments to do so, nor can we assure you that we will be able to compete
successfully in this market or against such competitors.
We plan to increase our use of direct response advertising.
We plan to increase our use of direct response advertising primarily through
infomercials. Direct response advertising consists of infomercials, direct mail
and other types of communications mailed or transmitted directly to consumers.
Our principal competitors include Direct Focus, Fitness Quest and Thane. This
form of advertising can have costs significantly higher than other types which
we may not be able to recover if these advertising initiatives fail to produce
sufficient sales. Our direct response advertising expenses were $7.1 million
and $10.1 million for fiscal 2001 and the fiscal year ended May 31, 2002,
respectively. We cannot be certain that these initiatives will produce
sufficient sales to cover these costs.
Our sales are highly price sensitive, which can prevent us from passing cost
increases on to our customers.
Sales to mass retailers, which are among our primary customers, are highly
price sensitive. We set many product prices on an annual basis but we typically
purchase raw materials and components under purchase orders with periods of
less than one year. Accordingly, we often must set prices for many products
before production costs have been firmly established, before we have complete
knowledge of the costs of raw materials and components and sometimes before
product development is complete. After we have established prices, we may be
unable to pass cost increases along to our customers or to compete as
effectively if we seek to pass such costs along.
We are dependent on key suppliers.
We rely on our key suppliers, namely: ATR Manufacturing, Ltd.; Chang Chen
Instrument; McMillan Electric Co.; Ametek Specialty Motors; and A.O. Smith; and
several other backup suppliers for electronic parts, which include controller
components and electric motors, and Belt Concepts of America, for walking belt
18
materials used in the manufacture of our products. Our agreements with these
suppliers are terminable at will by either party. In the event that any of our
key or backup suppliers terminated our relationship we may not be able to
identify suitable replacement suppliers on similar or favorable terms.
Our reliance on foreign suppliers exposes us to the general risks of doing
business abroad.
Since we purchase components and finished products from foreign suppliers,
we are subject to the general risks of doing business abroad, including delays
in shipment, work stoppages, adverse fluctuations in currency exchange rates,
increases in import duties and tariffs, changes in applicable customs rules and
regulations, disputes and litigation arising from applicable customs
regulations, changes in foreign regulations, changes in most-favored-nation
status and political instability. For example, we depend on manufacturers in
mainland China for approximately 20% of our products (by dollar value). The
Bush administration recently announced proposed increased tariffs on steel
imported from certain countries into the United States. Steel is a primary raw
material used in the manufacture of components used in our finished products.
Increased steel tariffs may increase our cost of sales. The ultimate impact
that this tariff proposal will have on our results of operations, if any,
remains uncertain. There can be no assurance that foreign governments will not
adopt regulations or take other actions that have a direct or indirect adverse
impact on our business or that market opportunities within such countries will
continue to be available to us. In addition, although we seek to maintain dual
sources for the material and components required for our products, we currently
rely on single sources for component parts, including electronic consoles and
controllers and finished products including bikes, ellipticals and benches. The
occurrence of any material negative events relating to our foreign suppliers or
the loss of certain of these suppliers could adversely affect our business
until alternative supply arrangements could be secured, particularly if such
loss occurred during our key production periods. We are unable to ensure that
we would be able to obtain products and supplies on substantially similar terms
should any of these risks materialize.
Fluctuations in foreign exchange rates could adversely affect our results of
operations.
Our functional currency is the U.S. dollar. A significant weakening of the
currencies in which we generate sales relative to the U.S. dollar may adversely
affect our ability to meet our U.S. dollar obligations. In addition, our
results of operations are reported in U.S. dollars. A weakening of the
currencies in which we generate sales relative to the U.S. dollar will cause
our reported results to decline.
In all jurisdictions in which we operate, we are also subject to laws and
regulations that govern foreign investment, foreign trade and currency exchange
transactions. These laws and regulations may limit our ability to repatriate
cash as dividends or otherwise to the United States and may limit our ability
to convert foreign currency cash flows into U.S. dollars. Outside the United
States, our sales and costs are denominated in a variety of currencies
including the euro and the British pound. A weakening of the currencies in
which we generate sales relative to the currencies in which our costs are
denominated may decrease our operating profits and cash flows.
Economic conditions for retail businesses in general can affect our business,
and we rely on continuing consumer interest in fitness activities.
Our customers are primarily retail businesses. Retail businesses may be
adversely affected by unfavorable local, regional or national economic
developments which result in reduced consumer spending. We cannot guarantee
that an economic downturn would not have a material adverse effect on our
customers and, therefore, on us.
On January 22, 2002, Kmart filed for bankruptcy protection from its
creditors. At the time of the bankruptcy filing we had unsecured receivables
outstanding with Kmart totaling $12.1 million. We have reserved $2.4 million
against these receivables as of May 31, 2002. There can be no assurance that we
will be able to collect any portion of our outstanding accounts receivable. In
the fiscal year ended May 31, 2001, we had net sales to Kmart of approximately
$38.9 million, representing approximately 4.7% of our total net sales for such
fiscal year, and for the fiscal year ended May 31, 2002 we had total net sales
to Kmart of approximately $30.6 million,
19
representing approximately 3.4% of our total net sales for such period. Also,
Kmart has secured debtor in possession financing and continues to operate in
bankruptcy. We resumed shipments to Kmart on February 5, 2002. There can be no
assurance that Kmart would continue to operate in bankruptcy. There can be no
assurance that we will be able to resume the same level of business we
maintained with Kmart prior to their bankruptcy filing. Lastly, there can be no
assurance that we would be able to identify or secure a customer or customers
to replace any loss of sales to Kmart.
The growth of the fitness industry may not continue.
While the home fitness industry has grown from $311 million in 1980 to an
estimated $3.8 billion in 2001, we cannot be certain consumers' interest in
fitness will be sufficient to sustain continued growth in the future. If
consumers' interest in fitness activity declines, we cannot assure you that
such a decline would not have a material adverse effect on our results of
operations, cash flow and financial condition.
Our sales fluctuate by season, which can have a material adverse effect on our
operating results and cash flow.
In fiscal years 2000, 2001 and 2002, we sold approximately 64.3%, 64.7% and
64.4%, respectively, of our products to our customers in our second and third
quarters (i.e., from September through February). Increased sales and
distribution typically have occurred in the Christmas retail season and the
beginning of a new calendar year because of increased customer promotions and
increased consumer purchases. We have frequently incurred operating losses in
the first and fourth quarters of our fiscal year. Such variations in demand
could have a material adverse effect on the timing of our cash flows and
therefore our ability to service our obligations with respect to the notes. The
timing of large orders from customers and the mix of products sold may also
contribute to quarterly or other periodic fluctuations. If actual sales in our
second and third fiscal quarters do not meet or exceed projected sales for that
period, expenditures and inventory levels could be disproportionately high for
such period and our cash flow for that period and future periods could be
adversely affected as we increase inventory levels during our busy season.
We may enter similar businesses outside our core business lines.
We may, through acquisitions or otherwise, decide to enter into businesses
outside the scope of our core business lines. We cannot be certain that these
businesses would be successful and will not adversely affect us due to the
diversion of management's attention from our core business lines. Also, there
can be no assurance that the costs incurred with entering these new businesses
will not have a material adverse affect on us.
We depend on key members of our management team.
Our success depends to a considerable extent on the performance of our
senior management team. While we believe that our senior management team has
significant depth, the loss of services of our senior executives, particularly
the loss of either Scott Watterson, our Chief Executive Officer, or Gary
Stevenson, our Chief Operating Officer, could have a material adverse effect on
us. Although Messrs. Watterson and Stevenson are parties to employment
agreements through May 31, 2003, Messrs. Watterson and Stevenson may terminate
such employment without cause upon six months' notice or, under certain
circumstances, upon three months' notice.
We are controlled by certain stockholders who may substantially influence our
business.
HF Investment Holdings, LLC ("HF Investment Holdings") owns approximately
79.7% (51.6% on a fully diluted basis) of the outstanding capital stock of HF
Holdings, our parent company. Bain Capital Fund IV, L.P., Bain Capital Fund
IV-B. L.P., BCIP Associates and BCIP Trust Associates, L.P., collectively own
59.8% of the membership interests of HF Investment Holdings (49.8% on a fully
diluted basis). Additionally, Credit Suisse First Boston Corporation owns both
membership interests in HF Investment Holdings and shares of our parent HF
Holdings. Through such ownership of HF Investment Holdings and the provisions
of the stockholders
20
agreement and operating agreement for HF Investment Holdings, these affiliates
of Bain Capital, LLC and Credit Suisse First Boston Corporation have the
ability to elect a majority of the Boards of Directors of HF Holdings and us
and to determine the outcome of significant corporate transactions or other
matters submitted to stockholders for approval. HF Holdings has no separate
operations and its only asset is our capital stock. Circumstances may occur in
which the interests of these stockholders could be in conflict with the holders
of notes. In addition, such concentration of ownership may have the effect of
preventing a change of control.
We are subject to product liability claims and other litigation.
Due to the nature of our products, we are subject to product liability
claims involving personal injuries allegedly related to our products. Our
involvement in the trampoline business through our JumpKing subsidiary has
especially exposed us to such claims. We currently carry an occurrence-based
product liability insurance policy. The current policy provides coverage for
the period from October 1, 2002 to October 1, 2003 of up to $5.0 million per
occurrence and $5.0 million in the aggregate. The policy has a deductible on
each claim of up to $1,000,000. We believe that our insurance is generally
adequate to cover product liability claims. Nevertheless, currently pending
claims and any future claims are subject to the uncertainties related to
litigation, and the ultimate outcome of any such proceedings or claims cannot
be predicted. Due to uncertainty with respect to the nature and extent of
manufacturers' and distributors' liability for personal injuries, we cannot
guarantee that our product liability insurance is or will be adequate to cover
such claims. In addition, we cannot guarantee that our insurers will be solvent
when required to make payments on claims. Furthermore, we cannot guarantee that
insurance will remain available, or if available, that it will not be
prohibitively expensive. The loss of insurance coverage could have a material
adverse effect on our results of operations, cash flows and financial condition.
We are subject to government oversight and regulation.
We are subject to general oversight by several governmental agencies. This
oversight requires us to make certain public disclosures and, from
time-to-time, to effect recalls and remediation of certain products.
Recently we, in conjunction with the Consumer Product Safety Commission,
initiated a recall of our Hiker product. To date, we have received fourteen
reports from consumers that under certain circumstances an electrical component
in the control system of our Hiker products which included approximately 7,500
units. These units could overheat causing a risk of fire. We effected a recall
of the units and remediation of the defective machines at our retail outlets
and those already purchased by consumers. While we have not received any
reports of injuries we cannot assure you that we will not receive such reports
in the future and that injuries, if incurred, will not have a material adverse
effect on our results of operation, cash flow and financial condition. In
addition, while we do not anticipate the costs to effect the recall and
remediation will be material, there can be no assurance that these costs will
not have a material adverse effect on our results of operations, cash flow and
financial condition.
We may be in competition with our retail customers.
We currently conduct business directly with consumers through seven Websites
over the Internet. We expect to continue to expand our sales efforts via the
Internet. Our expansion strategy over the Internet may not, however, be
successful, and our traditional retail customers may view this strategy and the
continued operation of our retail specialty stores as a competitive effort
against them, causing them to reduce or cease the purchase of our products.
Additionally, our retail customers may develop direct relationships with
suppliers and begin to market private label fitness equipment products under
their own brand names in competition with our products.
We operate retail stores.
We currently operate approximately 70 retail store locations under our
NordicTrack name. Retail businesses may be adversely affected by unfavorable
local, regional or national economic developments which result in
21
reduced consumer spending. In addition, our retail store strategy of selling
goods directly to consumers may be viewed negatively by our traditional retail
customers as a competitive effort against them. Lastly, retail stores have many
fixed costs including real property leases, personnel costs and other fixed
costs associated with operating a retail location. We cannot assure you that an
economic downturn would not have a material adverse effect on our retail stores
and, therefore on us in general.
Our business strategy includes acquisitions to supplement internal growth.
Our business strategy is based in part on our ability to supplement internal
growth by pursuing opportunistic acquisitions of complementary businesses. We
do not know whether in the future we will be able to complete acquisitions on
acceptable terms, identify suitable businesses to acquire or successfully
integrate acquired businesses. Our competition and, due to our position in
certain markets, regulatory considerations may result in fewer acquisition
opportunities. If we cannot complete acquisitions, our financial condition or
results of operations may be adversely affected.
We are subject to potentially costly environmental regulation.
Our operations are subject to federal, state and local environmental and
health and safety laws and regulations that impose workplace standards and
limitations on the discharge of pollutants into the environment and establish
standards for the handling, generation, emission, release, discharge,
treatment, storage and disposal of materials, substances and wastes. The nature
of our operations exposes us to the risk of claims with respect to
environmental matters, and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. We believe
that we are in material compliance with such laws and regulations and that the
cost of maintaining compliance with such laws and regulations will not have a
material adverse effect on our business or financial position. However, future
events, such as changes in existing laws and regulations or enforcement
policies or the discovery of contamination on sites presently or formerly owned
or operated by us, may give rise to additional compliance costs or operational
interruptions that could have a material adverse effect on our results of
operations or financial condition.
If our iFIT Internet service is not accepted by the market, we may not be able
to sustain or expand our interactive technology and service business.
We began selling interactive products and services through our iFIT
operations in 2001, and the market for iFIT is new and evolving. The
development of a mass market for our iFIT Internet service may be impacted by
many factors which are out of our control, including: the cost competitiveness
of our iFIT Internet service; consumer reluctance to try a new Internet
service; regulatory requirements; consumer perception of our iFIT Internet
service; and the emergence of newer and more competitive Internet services. We
cannot assure you that the interactive products and services available through
iFIT will prove to be commercially viable or that we will not experience
operational problems with such products or services.
22
THE EXCHANGE OFFER
We are offering to issue new 11.25% senior subordinated notes due 2012 in
exchange for a like principal amount of our initial 11.25% senior subordinated
notes due 2012 issued on April 9, 2002. We may extend, delay or terminate the
exchange offer. Holders of initial notes will need to complete the exchange
offer documentation related to the exchange.
Purpose And Effect Of The Exchange
We entered into a registration rights agreement with the initial purchasers
of the initial notes in which we agreed to use all commercially reasonable
efforts to file a registration statement relating to an offer to exchange the
initial notes for new notes within 90 days after issuing the initial notes and
to use all commercially reasonable efforts to have it declared effective within
180 days after issuing the initial notes. We are offering the new notes under
this prospectus to satisfy those obligations under the exchange and
registration rights agreement.
The exchange of initial notes for exchange notes should be treated as a
"non-event" for U.S. federal income tax purposes. The exchange notes should not
be considered to differ materially in kind or extent from the initial notes. As
a result, no U.S. federal income tax consequences would result to holders
exchanging initial notes for exchange notes.
Resale Of The Exchange Notes
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties, we believe that a holder of initial
notes, but not a holder who is an affiliate of our company within the meaning
of Rule 405 of the Securities Act, who exchanges initial notes for exchange
notes in the exchange offer, generally may offer the exchange notes for resale,
sell the exchange notes and otherwise transfer the exchange notes without
further registration under the Securities Act and without delivery of a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
This does not apply, however, to a holder who is an affiliate of our company
within the meaning of Rule 405 of the Securities Act. We also believe that a
holder may offer, sell or transfer the exchange notes only if the holder
acquires the exchange notes in the ordinary course of its business and is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in a distribution of the exchange
notes.
Any holder of initial notes using the exchange offer to participate in a
distribution of exchange notes cannot rely on the no-action letters referred to
above. This includes a broker-dealer that acquired initial notes directly from
us for resale under Rule 144A or Regulation S or any other available exemption
under the Securities Act, but not as a result of market-making activities or
other trading activities. Consequently, the holder must comply with the
registration and prospectus delivery requirements of the Securities Act in the
absence of an exemption from such requirements.
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes, where such old notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with the resale of exchange notes received in exchange for initial
notes. The letter of transmittal which accompanies this prospectus states that
by so acknowledging and by delivering a prospectus, a participating
broker-dealer will not be deemed to admit that it is an underwriter within the
meaning of the Securities Act. A participating broker-dealer may use this
prospectus, as it may be amended from time to time, in connection with resales
of exchange notes it receives in exchange for initial notes in the exchange
offer. We will make this prospectus available to any participating
broker-dealer in connection with any resale of this kind for a period of 180
days after the expiration date of the exchange offer. See "Plan of
Distribution".
23
Each holder of the initial notes who wishes to exchange notes for exchange
notes in the exchange offer will be required to represent and acknowledge, for
the holder and for each beneficial owner of such initial notes, whether or not
the beneficial owner is the holder, in the letter of transmittal that:
. the exchange notes to be acquired by the holder and each beneficial
owner, if any, are being acquired in the ordinary course of business,
. neither the holder nor any beneficial owner is an affiliate, as defined
in Rule 405 of the Securities Act, of our company or any of our
subsidiaries,
. any person participating in the exchange offer with the intention or
purpose of distributing exchange notes received in exchange for initial
notes, including a broker-dealer that acquired old notes directly from
us, but not as a result of market-making activities or other trading
activities cannot rely on the no-action letters referenced above and
must comply with the registration and prospectus delivery requirements
of the Securities Act, in connection with a secondary resale of the
exchange notes acquired by such person, if the holder is not a
broker-dealer, the holder and each beneficial owner, if any, are not
participating, do not intend to participate and have no arrangement or
understanding with any person to participate in any distribution of the
exchange notes received in exchange for initial notes, and
. if the holder is a broker-dealer that will receive exchange notes for
the holder's own account in exchange for initial notes, the old notes to
be so exchanged were acquired by the holder as a result of market-making
or other trading activities and the holder will deliver a prospectus
meeting the requirements of the Securities Act in connection with any
resale of such exchange notes received in the exchange offer. However,
by so representing and acknowledging and by delivering a prospectus, the
holder will not be deemed to admit that it is an underwriter within the
meaning of the Securities Act.
Shelf Registration Statement
If applicable law or interpretations of the staff of the SEC are changed so
that the exchange notes received by holders who make all of the above
representations in the letter of transmittal are not or would not be, upon
receipt, transferable by each such holder without restriction under the
Securities Act, our Company and the subsidiary guarantors will, at their cost:
. file a shelf registration statement covering resales of the initial
notes,
. use their respective best efforts to cause the shelf registration
statement to be declared effective under the Securities Act at the
earliest possible time, but no later than the later of 180 days after
the obligation to file a shelf registration arises, and
. use their respective best efforts to keep effective the shelf
registration statement until the earlier of 180 days after the effective
date or the time when all of the applicable initial notes are no longer
outstanding.
We will, if and when we file the shelf registration statement, provide to
each holder of the initial notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf
registration statement has become effective and take other actions as are
required to permit unrestricted resales of the initial notes. A holder that
sells initial notes pursuant to the shelf registration statement generally must
be named as a selling security-holder in the related prospectus and must
deliver a prospectus to purchasers, will be subject to civil liability
provisions under the Securities Act in connection with these sales and will be
bound by the provisions of the exchange and registration rights agreement which
are applicable to the holder, including certain indemnification obligations. In
addition, each holder of initial notes must deliver information to be used in
connection with the shelf registration statement and provide comments on the
shelf registration statement in order to have its initial notes included in the
shelf registration statement and benefit from the provisions regarding any
liquidated damages described under "Description of Exchange Notes--Registration
Rights; Liquidated Damages".
24
Terms of the Exchange Offer
Upon the exchange offer registration statement being declared effective, we
will offer the exchange notes in exchange for surrender of the initial notes.
We will keep the exchange offer open for at least 25 days, or longer if
required by applicable law, after the date notice of the exchange offer is
mailed to the holders of the initial notes. The exchange offer is not
conditioned upon any minimum aggregate principal amount of initial notes being
tendered for exchange.
Upon the terms and subject to the conditions contained in this prospectus
and in the letter of transmittal which accompanies this prospectus, we will
accept any and all initial notes validly tendered and not withdrawn before 5:00
p.m., New York City time, on the expiration date of the exchange offer. We will
issue an equal principal amount of exchange notes in exchange for the principal
amount of initial notes accepted in the exchange offer. Holders may tender some
or all of their initial notes under the exchange offer. Initial notes may be
tendered only in integral multiples of $1,000.
The form and terms of the exchange notes will be the same as the form and
terms of the initial notes except that:
(1) the exchange notes will have been registered under the Securities Act
and therefore will not bear legends restricting their transfer, and
(2) the exchange notes will not contain certain terms providing for an
increase in the interest rate on the initial notes under specific
circumstances which are described in the registration rights agreement.
The exchange notes will evidence the same debt as the initial notes and will be
entitled to the benefits of the indenture governing the initial notes.
In connection with the exchange offer, holders of initial notes do not have
any appraisal or dissenters' rights under law or the indenture governing the
initial notes. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission related to such offers.
We will be deemed to have accepted validly tendered initial notes when, as
and if we have given oral or written notice of acceptance to The Bank of New
York, exchange agent for the exchange offer. The exchange agent will act as
agent for the tendering holders for the purpose of receiving the exchange notes
from us.
If any tendered initial notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events specified in this
prospectus or if initial notes are submitted for a greater principal amount
than the holder desires to exchange, the certificates for the unaccepted
initial notes will be returned without expense to the tendering holder. If
initial notes were tendered by book-entry transfer in the exchange agent
account at The Depository Trust Company in accordance with the book-entry
transfer procedures described below, these non-exchanged initial notes will be
credited to an account maintained with The Depository Trust Company as promptly
as practicable after the expiration date of the exchange offer.
We will pay all charges and expenses, other than transfer taxes in certain
circumstances, in connection with the exchange offer. See "--Fees and
Expenses." Holders who tender initial notes in the exchange offer will
therefore not need to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with respect to the
exchange of initial notes in the exchange offer.
Expiration Date; Extensions; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on
, 2002, unless we, in our sole discretion, extend the exchange offer,
in which case the expiration date shall be the latest date and time to which
the exchange offer is extended. We reserve the right, in our sole discretion:
. to delay acceptance of any initial notes tendered, to extend the
exchange offer or to terminate the
25
exchange offer if, in our reasonable judgment, any of the conditions
described below under "--Conditions" shall not have been satisfied, by
giving oral or written notice of the delay, extension or termination to
the exchange agent, or
. to amend the terms of the exchange offer in any manner.
We will give oral or written notice of any extension, delay, non-acceptance,
termination or amendment as promptly as practicable by a public announcement,
and in the case of an extension, no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
If the exchange offer is amended in any manner determined by us to
constitute a material change, including the waiver of a material condition, we
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of the initial notes of such amendment and, if the exchange
offer would otherwise expire during the 5 or 10 business day period immediately
following such amendment, we will extend the exchange offer for the minimum
period of time required by applicable law (which, depending on the substance
and nature of the change, could be 5 or 10 business days from the date of such
amendment).
During an extension, all notes previously tendered will remain subject to
the exchange offer and may be accepted for exchange by us. Any initial notes
not accepted for exchange for any reason will be returned without cost to the
holder that tendered them as promptly as practicable after the expiration or
termination of the exchange offer.
Conditions To The Exchange Offer
Despite any other term of the exchange offer, if in our reasonable judgment
the exchange offer, or the making of any exchange by a holder of initial notes,
would violate applicable law or any applicable interpretation of the staff of
the Commission:
. we will not be required to accept for exchange, or exchange any new
notes for, any initial notes; and
. we may terminate the exchange offer as provided in this prospectus
before accepting any initial notes for exchange.
In addition, we will not be obligated to accept for exchange the initial
notes of any holder that has not made the following:
. the representations described under "--Resale of The Exchange Notes,",
and
. other representations as may be reasonably necessary under applicable
Commission rules, regulations or interpretations to make available to us
an appropriate form for registration of the new notes under the
Securities Act.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any initial notes not previously accepted for exchange,
upon the occurrence of any of the conditions to the exchange offer specified
above. We will give oral or written notice of any extension, amendment, non
acceptance or termination to the holders of the initial notes as promptly as
practicable. These conditions are for our sole benefit, and we may assert them
or waive them in our sole discretion, in whole or in part, at any time or at
various times prior to the expiration date. If we fail at any time to exercise
any of these rights, this failure will not mean that we have waived our rights.
Each right will be deemed an ongoing right that we may assert at any time or at
various times prior to the expiration date. In addition, we will not accept for
exchange any initial notes tendered and will not issue new notes in exchange
for any initial notes, if at that time any stop order has been threatened or is
in effect with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the indenture relating to the notes
under the Trust Indenture Act of 1939.
Procedures for Tendering
To tender in the exchange offer, you must do the following:
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal,
. have the signatures thereon guaranteed if required by the letter of
transmittal, and
. except as discussed in "--Guaranteed Delivery Procedures," mail or
otherwise deliver the letter of transmittal, or facsimile, together with
the old notes and any other required documents, to the exchange agent
prior to midnight, New York City time, on the expiration date of the
exchange offer.
26
The exchange agent must receive the initial notes, a completed letter of
transmittal and all other required documents at the address listed below under
"--Exchange Agent" before 5:00 p.m., New York City time, on the expiration date
for the tender to be effective. You may deliver your initial notes by using the
book-entry transfer procedures described below, as long as the exchange agent
receives confirmation of the book-entry transfer before the expiration date.
The Depository Trust Company has authorized its participants that hold
initial notes on behalf of beneficial owners of initial notes through The
Depository Trust Company to tender their initial notes as if they were holders.
To effect a tender of initial notes, The Depository Trust Company participants
should either:
(1) complete and sign the letter of transmittal (or a manually signed
facsimile of the letter), have the signature thereon guaranteed if required
by the instructions to the letter of transmittal, and mail or deliver the
letter of transmittal (or the manually signed facsimile) to the exchange
agent according to the procedure described in "Procedures for Tendering" or
(2) transmit their acceptance to The Depository Trust Company through its
automated tender offer program for which the transaction will be eligible
and follow the procedure for book-entry transfer its described in
"--Book-Entry Transfer."
By tendering, each holder will make the representations contained in the
fourth paragraph above under the heading "--Resale of the Exchange Notes."
Each participating broker-dealer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. See "Plan
of Distribution."
The tender by a holder and the acceptance of the tender by us will
constitute the agreement between the holder and our company set forth in this
prospectus and in the letter of transmittal.
The method of delivery of initial notes and the letter of transmittal and
all other required documents to the exchange agent is at the election and sole
risk of the holder. As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. No letter of transmittal or initial notes or book-entry confirmation
should be sent to us. Holders may request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
on their behalf. Any beneficial owner whose initial notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
it to tender on the beneficial owner's behalf. See "Instructions to Registered
Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner"
included with the letter of transmittal. If the beneficial owner wishes to
tender on his own behalf, such owner must, prior to completing and executing
the letter of transmittal and delivering such beneficial owner's initial notes,
either make appropriate arrangements to register ownership of the initial notes
in such owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution (within the meaning of Rule
17Ad-15 under the Exchange Act of 1934) unless the initial notes are tendered:
. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal, or
. for the account of an eligible guarantor institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, the guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an eligible guarantor institution.
27
If a letter of transmittal is signed by a person other than the registered
holder of any old notes listed in the letter of transmittal, the initial notes
must be endorsed or accompanied by a properly completed bond power and signed
by the registered holder as the registered holder's name appears on the initial
notes.
If a letter of transmittal or any initial notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
Promptly after the date of this prospectus, the exchange agent will
establish a new account or utilize an existing account with respect to the
initial notes at the book-entry transfer facility, The Depository Trust
Company, for the purpose of facilitating the exchange offer. Subject to the
establishment of the accounts, any financial institution that is a participant
in the book-entry transfer facility's system may make book-entry delivery of
initial notes by causing the book-entry transfer facility to transfer the old
notes into the exchange agent's account with respect to the initial notes in
accordance with that facility's procedures. Although delivery of the initial
notes may be effected through book-entry transfer into the exchange agent's
account at the book-entry transfer facility, an appropriate letter of
transmittal properly completed and duly executed or an agent's message with any
required signature guarantee and all other required documents may be delivered
to the exchange agent at its address listed below on or before the expiration
date of the exchange offer, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such procedures.
Delivery of documents to the book-entry transfer facility does not constitute
delivery to the exchange agent.
The term "agent's message" means a message transmitted by The Depository
Trust Company to, and received by, the exchange agent, which states that The
Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the initial notes stating:
. the aggregate principal amount of old notes which have been tendered by
such participant,
. that such participant has received and agrees to be bound by the term of
the letter of transmittal and
. that ICON may enforce such agreement against the participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered initial notes and withdrawal of tendered
initial notes will be determined by us in our sole discretion, which
determination will be final and binding. We reserve the absolute right to
reject any and all initial notes not properly tendered or any initial notes our
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any defects, irregularities or conditions of tender
as to particular initial notes. Our interpretation of the terms and conditions
of the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of initial notes must be cured within
a period of time that we shall determine. Neither our company, the exchange
agent nor any other person shall incur any liability for failure to give notice
of any defect or irregularity with respect to any tender of initial notes.
Tenders of initial notes will not be deemed to have been made until such
defects or irregularities mentioned above have been cured or waived. Any
initial notes received by the exchange agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date of the exchange offer.
Guaranteed Delivery Procedures
A holder who wishes to tender its initial notes and:
. whose old notes are not immediately available,
. who cannot deliver the holder's initial notes, the letter of transmittal
or any other required documents to the exchange agent prior to the
expiration date, or
28
. who cannot complete the procedures for book-entry transfer, before the
expiration date, may effect a tender if:
. the tender is made through an eligible guarantor institution,
. before the expiration date, the exchange agent receives from the
eligible guarantor institution a properly completed and duly executed
notice of guaranteed delivery by facsimile transmission, mail or hand
delivery, the name and address of the holder, the certificate number(s)
of the old notes and the principal amount of initial notes tendered,
stating that the tender is being made thereby and guaranteeing that,
within three New York Stock Exchange trading days after the expiration
date, the letter of transmittal (or facsimiles thereof) together with
the certificate(s) representing the initial notes (or a confirmation of
book-entry transfer of the old notes into the exchange agent's account
at the book-entry transfer facility), and any other documents required
by the letter of transmittal will be deposited by the eligible guarantor
institution with the exchange agent, and
. the exchange agent receives, within three New York Stock Exchange
trading days after the expiration date, a properly completed and
executed letter of transmittal or facsimile, as well as the
certificate(s) representing all tendered initial notes in proper form
for transfer or a confirmation of book-entry transfer of such initial
notes into the exchange agent's account at the book-entry transfer
facility, and all other documents required by the letter of transmittal.
Withdrawal Of Tenders
Except as otherwise provided in this prospectus, tenders of initial notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer.
To withdraw a tender of initial notes in the exchange offer, a letter or
facsimile transmission notice of withdrawal must be received by the trustee at
its address set forth below prior to the expiration date. Any notice of
withdrawal must:
. specify the name of the person having deposited the initial notes to be
withdrawn,
. identify the old notes to be withdrawn including the certificate
number(s) and principal amount of such initial notes or, in the case of
initial notes transferred by book-entry transfer, the name and number of
the account at the book-entry transfer facility to be credited and
otherwise comply with the procedures of the transfer agent,
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the initial notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee under the indenture
governing the initial notes register the transfer of the initial notes
into the name of the person withdrawing the tender, and
. specify the name in which any such initial notes are to be registered,
if different from that of the person who deposited the notes.
If certificates for initial notes have been delivered or otherwise identified
to the exchange agent, then, before the release of the certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an eligible guarantor institution unless the holder is an
eligible guarantor institution.
All questions as to the validity, form and eligibility, including time of
receipt, of such notices will be determined by us, and our determination shall
be final and binding on all parties. Any initial notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer,
and no exchange notes will be issued, unless the initial notes so withdrawn are
validly retendered. Any initial notes which have been tendered but which are
not accepted for exchange will be returned to the holder of the notes without
cost to the holder as soon as practicable after withdrawal, rejection of tender
or termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time before the expiration date.
29
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance and requests for additional copies
of this prospectus or of the letter of transmittal should be directed to The
Bank of New York addressed as follows:
For Information by Telephone: (212) 815-2742
By Overnight Delivery Service or Registered/Certified Mail:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn.: Enrique Lopez
By Hand:
The Bank of New York
101 Barclay Street
Ground Level Corporate Trust Services Window
New York, New York 10286
Attn.: Enrique Lopez
By Facsimile Transmission: (212) 815-6339
Telephone Confirmation to: (212) 815-2742
-------------
Fees And Expenses
We will bear the expenses of soliciting tenders. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. However, we will pay the exchange agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of The Bank of New York
as exchange agent and as trustee under the indenture governing the notes,
accounting and legal fees and printing costs, among others.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
initial notes as reflected in our accounting records on the date of exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the initial notes will be amortized over the term of the notes.
Consequences Of Failure To Exchange
Holders of initial notes who are eligible to participate in the exchange
offer but who do not tender their initial notes will not have any further
registration rights, and their initial notes will continue to be subject to
restrictions on transfer. Accordingly, such initial notes may be resold only:
. to us, upon redemption of these notes or otherwise,
. so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A,
30
. in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
. under an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state
of the United States.
Other
Participation in the exchange offer is voluntary and holders of initial
notes should carefully consider whether to accept the terms and condition of
this offer. Holders of the old notes are urged to consult their financial and
tax advisors in making their own decisions on what action to take with respect
to the exchange offer.
Prior Exchange Offer
In September 1999 we issued 12% Subordinated Notes in connection with a
recapitalization. These notes were subject to a registration rights agreement
which required that we file a registration statement on Form S-4 with the
Commission and commence an exchange offer covering these notes within a
specified time period. The registration rights agreement provided that in the
event we failed to file, and have declared effective, a registration statement,
we would be required to pay additional interest with respect to the notes. The
registration statement was never declared effective and we paid additional
interest on the notes until their repayment on April 9, 2002. The registration
statement was withdrawn on June 12, 2002.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes as described in this prospectus. We will receive in exchange the initial
notes in like principal amount. The old notes surrendered in exchange for the
exchange notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the exchange notes will not result in any change in
our total indebtedness.
31
CAPITALIZATION
The following table sets forth our consolidated capitalization as of May 31,
2002, on an actual basis:
The information in the following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements, and the related notes to
those statements included in this prospectus.
May 31, 2002
-------------
Actual
-------------
(In millions)
Long-term debt (including current portion):
2002 Revolving.............................. $ 79.3
2002 Term Loan.............................. 23.8
11.25% Senior Subordinated notes............ 152.8
-------
Total long-term debt.................... 255.9
-------
Stockholder's equity:
Common stock and additional paid-in capital. 204.1
Receivable from Parent...................... (2.2)
Accumulated other comprehensive loss........ (1.8)
Accumulated deficit......................... (183.9)
-------
Total stockholder's equity.............. 16.2
-------
Total capitalization.................... $ 272.1
=======
32
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data for the year ended May 31,
2002 has been derived by the application of pro forma adjustments to the
historical financial data.
The following pro forma financial data show the effect of the following
transactions (dollar amounts in thousands): (1) the issuance of the 11.25%
Senior Subordinated Notes, (2) the initial borrowings under the new 2002 credit
facility, (3) the repayment of the existing credit facility and the existing
12% Subordinated Notes due 2005, (4) the payment of fees and expenses related
to the transactions. These unaudited pro forma financial statements should be
read in conjunction with the historical financial statements and notes thereto
included elsewhere in this registration statement.
The pro forma financial data do not purport to represent what our financial
position or results of operations would have actually been had the transactions
in fact occurred on such dates, or to project results of operations for any
future period. The unaudited pro forma financial data is based on assumptions
that we believe are reasonable and should be read in conjunction with the
interim financial statements and the consolidated financial statements and
notes accompanying them that are included elsewhere in, or annexed to, this
prospectus.
Unaudited Pro Forma Condensed Statement of Operations
(in millions)
Historical Pro Forma
Year Ended Year Ended
May 31, 2002 Adjustments May 31, 2002
- - ------------ ----------- ------------
Net Sales................................................... $896.1 $ -- $896.1
Cost of goods sold.......................................... 635.1 -- 635.1
Operating expenses.......................................... 205.2 -- 205.2
------ ----- ------
Income from operations................................... 55.8 -- 55.8
Interest expense and amortization of deferred financing fees (29.2) 2.5 A (26.7)
Other income (expense), net................................. .6 -- .6
------ ----- ------
Income before income taxes and extraordinary item........... 27.2 2.5 29.7
Provision for income taxes.................................. 3.2 1.0 B 4.2
------ ----- ------
Income before extraordinary item............................ $ 24.0 $ 1.5 $ 25.5
====== ===== ======
Notes to the Unaudited Pro Forma Condensed Statements of Operations
(in millions)
A. Net adjustment for the elimination of historical interest expense and
amortization of deferred financing fees of $29.2 and recognition of interest
expense and amortization of deferred financing fees of $26.7 on the new debt.
B. Reflects the estimated income tax provision resulting from the pro forma
adjustments.
33
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to our statements
of operations for the three years ended May 31, 2002 and the balance sheet data
for May 31, 2001 and May 31, 2002 have been derived from our financial
statements included elsewhere in this prospectus that have been audited by
PricewaterhouseCoopers LLP, independent accountants, as indicated in their
report included elsewhere in this prospectus. Our statement of operations data
for the years ended May 31, 1998 and 1999, and our balance sheet data as of
May 31, 1998, 1999 and 2000, have been derived from the financial statements
audited by PricewaterhouseCoopers LLP but not included in this prospectus.
The data set forth should be read together with, and is qualified in its
entirety by, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements, and the related
notes thereto appearing elsewhere in this offering circular.
For the Years Ended May 31,
--------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
(in millions)
Operating Data:
Net sales.......................................... $749.3 $710.2 $733.0 $820.5 $896.1
Cost of sales(1)................................... 536.0 514.0 531.6 580.5 635.1
------ ------ ------ ------ ------
Gross profit....................................... 213.3 196.2 201.4 240.0 261.0
Operating expenses:
Selling.......................................... 120.7 107.6 96.0 109.8 126.0
Research and development......................... 7.8 7.7 8.3 10.9 10.4
General and administrative....................... 60.9 53.4 61.7 63.4 68.8
------ ------ ------ ------ ------
Total operating expenses....................... 189.4 168.7 166.0 184.1 205.2
------ ------ ------ ------ ------
Income from operations............................. 23.9 27.5 35.4 55.9 55.8
Interest expense................................... 35.0 33.1 33.9 34.8 26.1
Amortization of deferred financing fees............ 4.8 7.0 2.7 3.2 3.1
Net income (loss).................................. (9.5) (24.7) (6.6) 13.3 19.4
Other Financial Data:
Depreciation and amortization...................... $ 16.7 $ 17.4 $ 16.7 $ 17.4 $ 19.2
Purchases of property and equipment(2)............. 11.8 11.6 12.9 16.1 11.6
Net cash provided by operating activities.......... 47.6 38.0 0.5 12.4 37.5
Net cash provided by (used in) investing activities 6.4 (20.1) (19.9) (22.8) (17.1)
Net cash provided by (used in) financing activities (55.7) (17.1) 21.4 8.7 (19.3)
Ratio of earnings to fixed charges(3)(4)........... -- (5) -- (5) -- (5) 1.4x 1.8x
Supplemental Data:
EBITDA(6).......................................... $ 41.1 $ 44.9 $ 52.5 $ 72.1 $ 75.7
Balance Sheet Data (at the end of the period):
Cash............................................... $ 3.9 $ 4.3 $ 5.9 $ 3.3 $ 4.8
Working capital.................................... 152.9 108.0 132.3 157.6 164.0
Total assets....................................... 363.1 331.9 368.1 405.5 423.2
Long-term obligations.............................. 268.5 253.4 242.2 253.3 255.8
- --------
(1) We incurred a one-time charge of $0.3 million related to the inventory
step-up in value associated with the HealthRider and ICON of Canada
acquisitions in fiscal 1998.
(2) Excludes purchases of intangibles, trademarks and acquisitions of $0 for
fiscal year 1998, $8.5 for fiscal year 1999, $4.4 million for fiscal year
2000, $6.7 million for fiscal year 2001 and $5.5 million for fiscal year
2002.
34
(3) The ratio of earnings to fixed charges is derived by dividing earnings by
fixed charges. For this purpose, earnings represent income (loss) before
income taxes plus fixed charges. "Fixed Charges" consist of interest
expense whether expensed or capitalized, the portion of the operating
rental expense which management believes is representative of the interest
component of rental expense and the amortization of deferred financing fees.
(4) After giving effect to the issuance of the initial notes, our initial
borrowings under our new credit facility, the repayment of our old credit
facility, the redemption of our 12% senior subordinated notes due 2005 and
the payment of fees and expenses in connection with the foregoing, our pro
forma ratio of earnings to fixed charges was 1.9 for the fiscal year ended
May 31, 2002.
(5) For the fiscal years 1998, 1999 and 2000, our earnings were inadequate to
cover our fixed charges by $15.4 million, $12.6 million and $1.0 million,
respectively.
(6) EBITDA means earnings before net interest expense, income taxes,
depreciation, and amortization and extraordinary loss on extinguishment of
debt. EBITDA is presented because we believe it is an indicator of our
ability to incur and service debt and is used by our lenders in determining
compliance with financial covenants. However, EBITDA should not be
considered as an alternative to cash flow from operating activities as
measures of liquidity or as an alternative to net income as measures of
operating results in accordance with generally accepted accounting
principles. Our definition of EBITDA may differ from definitions of EBITDA
used by other companies. The following table includes a list of unusual
items that have affected EBITDA.
For the Year Ended May 31,
-------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In millions)
Step-up of Healthrider and ICON of Canada inventories............ 0.3(a) -- -- -- --
Non-recurring costs in selling expense........................... -- 10.5(b) -- -- --
Equity grant to senior management................................ -- -- 3.1(c) -- --
Non-recurring recapitalization cost.............................. -- -- 1.8(d) -- --
Excess air freight charges....................................... -- -- 6.0(e) -- --
-----
(a) We recorded a one-time charge of $0.3 million related to the inventory
step-up in value associated with the HealthRider and ICON of Canada
acquisitions in fiscal 1998.
(b) We recorded $10.5 million of non-recurring costs (in selling expenses)
related to the write-off of accounts receivable due to the bankruptcy of
Service Merchandise.
(c) We recorded $3.1 million of non-recurring non-cash costs (in general and
administrative expense) related to an equity grant made to certain
members of senior management due to our recapitalization in September
1999.
(d) We recorded $1.5 million of non-recurring costs (in general and
administrative expense) related to management retention bonuses, paid to
certain executive officers, and $0.3 million of one-time non-recurring
costs associated with the redemption of our 13% senior subordinated
notes due 2002, both in connection with our recapitalization in
September 1999.
(e) We incurred $6.0 million of in-bound air freight charges (in cost of
sales) in excess of normal freight costs. Due to our significant
indebtedness, certain of our vendors shortened our payment terms prior
to our recapitalization in September 1999. Due to liquidity constraints
we had to delay the purchase of certain component parts and finished
goods, and we therefore incurred additional in-bound air freight
expenses related to these items that we needed to receive rapidly in
order to meet our customers' delivery schedules.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following should be read in conjunction with the financial statements
and the related notes thereto appearing elsewhere in this prospectus. Our
fiscal year ends on May 31 of the corresponding calendar year. For example,
fiscal 2002 ended on May 31, 2002.
Overview
We manufacture and market a broad line of products in the fitness equipment
industry. These fall into two major product categories, namely: cardiovascular
and other equipment, and strength training equipment. We are one of the largest
manufacturers and marketers of home fitness equipment in the United States. In
addition, we manufacture and distribute an innovative line of products for the
institutional fitness equipment market in both our cardiovascular equipment
category and our strength training equipment category.
We sell our products under a wide variety of brand names and we use our
portfolio of brands to tailor our product offerings to specific distribution
channels. We sell our products to department stores, mass retailers and
warehouse clubs, sporting goods and specialty fitness retailers, and directly
to consumers.
The following paragraphs provide a brief description of certain items that
appear in our Consolidated Statements of Operations.
Net sales. Net sales primarily represents our gross sales adjusted for
returns and allowances. We limit our customers' ability to return merchandise
to us to products sold to their customers in which defects were discovered
within the warranty coverage period (usually 90 days from the time of retail
sale). We do not permit our customers to return unsold merchandise.
Cost of sales. Cost of sales primarily includes the cost of components that
we purchase, direct manufacturing labor and overhead, inbound shipping and
freight and depreciation expense related to our property, plant, equipment and
tooling.
Selling expense. Selling expense primarily includes our direct advertising
expense, advertising allowances provided to certain customers and the costs
related to our sales and marketing staff for our home fitness and institutional
fitness business.
Research and development expense. Research and development expense relates
primarily to the activities of our product development group and external
sources related to the decision of new products and product enhancements.
General and administrative expense. General and administrative expense
primarily includes expenses related to our senior management team, all
accounting and finance functions, management information systems, legal and
human resources expenses and unallocated overhead expenses.
1999 recapitalization.
In order to provide additional liquidity for our operations, we consummated
a recapitalization in September 1999 that included a $40.0 million cash
contribution of capital from our parent HF Holdings, Inc. in connection with an
investment of new equity from certain of our existing shareholders and new
investors. Holders of certain of our and our parent's then existing debt
securities exchanged their securities for a combination of cash, new debt
securities offered by us and equity offered by HF Holdings, Inc. and we also
refinanced our then existing senior debt. As a result of our recapitalization
in September 1999 and our improved operating performance, we
36
reduced our indebtedness from a seasonal peak of $547.3 million at January 30,
1998 to $255.9 million at May 31, 2002, and significantly reduced our interest
expense.
Results of Operations
The following table sets forth certain of our financial data, expressed as a
percentage of net sales, for fiscal years ended May 31, 2000, 2001 and 2002:
For the Years Ended May 31,
--------------------------
2000 2001 2002
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 72.5% 70.7% 70.9%
----- ----- -----
Gross profit................................................ 27.5% 29.3% 29.1%
Operating expenses:
Selling.................................................. 13.1% 13.4% 14.1%
Research and development................................. 1.1% 1.3% 1.2%
General and administrative............................... 8.4% 7.7% 7.7%
----- ----- -----
Total operating expenses............................. 22.6% 22.4% 23.0%
----- ----- -----
Income from operations...................................... 4.8% 6.8% 6.2%
Interest expense............................................ 4.6% 4.2% 2.9%
Amortization of deferred financing fees and other expense
(income).................................................. 0.3% 0.5% 0.3%
Income (loss) before income taxes and extraordinary item.... (0.1)% 2.0% 3.0%
Provision for income taxes.................................. 0.5% 0.4% 0.4%
Extraordinary loss, net..................................... 0.3% -- 0.5%
----- ----- -----
Net income (loss)........................................... (0.9)% 1.6% 2.2%
===== ===== =====
EBITDA...................................................... 7.2% 8.8% 8.4%
===== ===== =====
Year Ended May 31, 2002 Compared to Year Ended May 31, 2001
Net sales for fiscal 2002 increased $75.6 million, or 9.2%, to $896.1
million from $820.5 million in the comparable period in 2001. Sales increased
primarily due to increased customer demand and the introduction of our new line
of institutional fitness equipment which represented $11.0 million, or 14.6%,
of the sales increase. Sales of our cardiovascular and other equipment in
fiscal 2002 increased $58.3 million, or 8.2%, to $766.6 million. Sales of our
strength training equipment in fiscal 2002 increased $17.3 million, or 15.4%,
to $129.5 million.
Gross profit for fiscal 2002 was $261.0 million, or 29.1% of net sales,
compared to $240.0 million, or 29.3% of net sales, in fiscal 2001.
Selling expenses increased $16.2 million, or 14.8%, to $126.0 million in
fiscal 2002. This increase was the result of higher selling costs associated
with the increase in sales combined with the impact of the introduction of our
new line of institutional fitness equipment as well as increased advertising
expenses. "See Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources." Expressed as a
percentage of net sales, selling expenses were 14.1% in fiscal 2002 compared to
13.4% in fiscal 2001.
Research and development expenses decreased $0.5 million, or 4.6%, to $10.4
million in fiscal 2002. Expressed as a percentage of net sales, research and
development expenses were 1.2% in fiscal 2002 and 1.3% in fiscal 2001.
37
General and administrative expenses increased $5.4 million, or 8.5%, to
$68.8 million in fiscal 2002. This increase was the result of higher costs
associated with our increase in sales combined with the impact of our
introduction of our new line of institutional fitness equipment. Expressed as a
percentage of net sales, general and administrative expenses were 7.7% in
fiscal 2002 and 7.7% in fiscal 2001.
As a result of the foregoing factors, operating income decreased $0.1
million, or 0.2%, to $55.8 million in fiscal 2002. Expressed as a percentage of
net sales, operating income was 6.2% in fiscal 2002 compared with 6.8% in
fiscal 2001.
As a result of the foregoing factors, EBITDA increased $3.6 million, or
5.0%, to $75.7 million in fiscal 2002. Expressed as a percentage of net sales,
EBITDA was 8.4% in fiscal 2002 compared with 8.8% in fiscal 2001.
Interest expense including amortization of deferred financing fees decreased
$8.8 million, or 23.2%, to $29.2 million for fiscal 2002. This decrease
reflects our lower borrowing levels during the period combined with lower
interest rates on our borrowings during the period.
Income tax provision decreased $0.3 million, or 8.6%, to $3.2 million in
fiscal 2002. Our effective tax rate was 2% in fiscal 2002 compared to 21% in
fiscal 2001. The lower effective tax rate was the result of adjustments
pursuant to an Internal Revenue Service audit. These adjustments created a
deferred tax benefit of approximately $11.5 million. No valuation allowance was
recorded against this asset because we believe that we will generate sufficient
future taxable income through operations to realize the net deferred asset.
However, there can be no assurance that we will generate any specific level of
taxable earnings or that we will be able to realize any of the deferred tax
asset in future periods. If we are unable to generate sufficient taxable income
in the future, an additional valuation allowance against this deferred tax
asset would result in a charge to earnings.
An extraordinary loss of $7.4 million ($4.6 million net of income tax
benefit) was recorded on the extinguishment of the existing credit facility and
the 12% Notes.
As a result of the foregoing factors, our net income was $19.4 million in
fiscal 2002 compared to net income in fiscal 2001 of $13.3 million.
Year Ended May 31, 2001 Compared to the Year Ended May 31, 2000
Net sales for fiscal 2001 increased $87.5 million, or 11.9%, to $820.5
million from $733.0 million in fiscal 2000. Sales increased primarily due to
increased customer demand across our product categories and the introduction of
our new line of institutional fitness equipment in December of 2000, which
represented $3.3 million, or 3.8%, of the sales increase. Sales of our
cardiovascular and other fitness equipment in fiscal 2001 increased $76.1
million, or 12.0%, to $708.3 million. Sales of our strength training equipment
in fiscal 2001 increased $11.4 million, or 11.3%, to $112.2 million.
Gross profit for fiscal 2001 was $240.0 million, or 29.3% of net sales,
compared to $201.4 million, or 27.5% of net sales, for fiscal 2000. The
increase of 1.8% in profit margin was attributable to lower manufacturing costs
due to higher operating efficiency, including lower air freight, labor,
overhead and material costs.
Selling expenses increased $13.8 million, or 14.4%, to $109.8 million in
fiscal 2001. This increase was the result of higher selling costs associated
with the increase in sales combined with higher advertising expenses. Expressed
as a percentage of net sales, selling expenses were 13.4% in fiscal 2001
compared to 13.1% in fiscal 2000.
Research and development increased $2.6 million, or 31.3%, to $10.9 million
in fiscal 2001. Expressed as a percentage of net sales, research and
development expenses were 1.3% in fiscal 2001 and 1.1% in fiscal 2000. This
increase reflects our continued efforts to develop both current and future
products.
38
General and administrative expenses increased $1.7 million, or 2.8%, to
$63.4 million in fiscal 2001. This increase was the result of costs associated
with increased customer demand for our products. General and administrative
expenses in fiscal year 2000 included $4.9 million of costs related to our
September 1999 recapitalization. Expressed as a percentage of net sales,
general and administrative expenses were 7.7% in fiscal 2001 and 8.4% in fiscal
2000.
As a result of the foregoing factors, operating income increased $20.5
million, or 57.9%, to $55.9 million in fiscal 2001. Expressed as a percentage
of net sales, operating income was 6.8% in fiscal 2001 compared with 4.8% in
fiscal 2000.
As a result of the foregoing factors, EBITDA increased $19.6 million, or
37.3%, to $72.1 million in fiscal 2001. Expressed as a percentage of net sales,
EBITDA was 8.8% in fiscal 2001 compared with 7.2% in fiscal 2000.
Interest expense including amortization of deferred fees increased $1.4
million, or 3.8%,to $38.0 million in fiscal 2001. This increase reflects our
higher borrowing levels during the period combined with higher interest rates
on our borrowing during the period. Amortization on deferred financing fees was
also higher as a result of the September 1999 recapitalization.
Income taxes decreased $0.4 million, or 10.3%, to $3.5 million in fiscal
2001. The lower expense for fiscal 2001 reflects our use of approximately $9.5
million of net operating losses carried forward from our September 1999
recapitalization for the period from September 29, 1999 through May 31, 2000.
The provision in fiscal 2000 reflected our write-off of a portion of our
deferred tax assets that were not realized due to our September 1999
recapitalization. At the end of fiscal 2001, we had a net deferred tax asset of
$6.9 million. No valuation allowance was recorded against this asset because we
believed that we would generate sufficient future taxable income through
operations to realize the net deferred asset. However, there can be no
assurance that we will generate any specific level of taxable earnings or that
we will be able to realize any of the deferred tax assets in future periods. If
we were unable to generate sufficient taxable income in the future, an
additional valuation allowance against this deferred tax asset would result in
a charge to earnings.
As a result of the foregoing factors, our net income was $13.3 million for
fiscal 2001 compared to a net loss of $6.6 million in fiscal 2000.
39
Seasonality
The following are the net sales, net income and EBITDA by quarter for fiscal
years 2000, 2001 and 2002:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- ---------- ----------
(dollars in millions)
Net Sales
2000.................. 99.5 234.8 236.5 162.2
2001.................. 129.5 276.0 254.6 160.5
2002.................. 138.1 272.1 304.9 181.0
Net Income
2000.................. (11.7) 1.6 7.3 (3.5)
2001.................. (8.2) 11.7 10.8 (1.0)
2002.................. (7.5) 11.1 25.5 (9.7)
EBITDA
2000.................. (2.2) 22.4 24.9 7.4
2001.................. 1.6 34.2 32.2 4.1
2002.................. (0.1) 31.3 38.7 5.8
- --------
(1) Our first quarter ended August 28, September 2, and September 1 for fiscal
years 2000, 2001 and 2002, respectively.
(2) Our second quarter ended November 27, December 2 and December 1 for fiscal
years 2000, 2001 and 2002, respectively.
(3) Our third quarter ended February 26, March 3 and March 2 for fiscal years
2000, 2001 and 2002, respectively.
(4) Our fourth quarter ended May 31 for the fiscal years 2000, 2001 and 2002,
respectively.
We sell a majority of our products to customers in our second and third
fiscal quarters (i.e., from September through February). Increased sales and
distribution typically occur in the Christmas retail season and the beginning
of a new calendar year because of increased promotions by our retail customers,
increased consumer purchases and seasonal changes that prompt people to
exercise inside. If actual sales for a quarter do not meet or exceed projected
sales for that quarter, expenditures and inventory levels could be
disproportionately high for such quarter and our cash flow for that quarter and
future quarters could be adversely effected. The timing of large orders from
customers and the mix of products sold may also contribute to periodic
fluctuations.
Liquidity and Capital Resources
Net cash provided by operating activities was $37.5 million in fiscal 2002,
as compared to $12.4 million of cash provided by operations in fiscal 2001. In
fiscal 2002, major sources of funds were net income of $19.4 million, non-cash
provisions of $19.2 million for depreciation and amortization, and a decrease
in inventory of $12.2 million. These changes were offset by increases in
accounts receivable of $20.0 million. These changes are due to our increasing
sales during the course of the first several months of the fiscal year leading
up to our peak selling season, which occurs between the months of October and
December. We sell the majority of our products to customers in the second and
third fiscal quarters (i.e., from September through February). In fiscal 2001,
major sources of funds were net income of $13.3 million, non-cash provisions of
$17.4 million for depreciation and amortization, and increases in accrued
expenses and payables of $10.0 million. These increases were offset by
increases in accounts receivable of $14.1 million and inventory of
$14.8 million. Such increases were due to the aforementioned factors relating
to sales increases.
Net cash used in investing activities was $17.1 million in fiscal 2002,
compared to $22.8 million in fiscal 2001. Investing activities in fiscal 2002
consisted primarily of capital expenditures of $11.6 million related to
40
upgrades in plant and tooling and purchases of additional manufacturing
equipment and purchases of intangibles of $5.2 million. Cash used in investing
activities in fiscal 2001, was primarily for capital expenditures of
$16.1 million, acquisitions of $4.0 million and purchases of intangibles of
$2.7 million.
Net cash used in financing activities was $19.3 million in fiscal 2002,
compared to $8.7 million of cash provided by financing activities in fiscal
2001. Cash used by financing activities resulted from the issuance in April
2002 of the 11.25% Senior Subordinated Notes, our borrowings on our new credit
facility, the repayment of our old credit facility and the redemption of our
12% subordinated notes.
Net cash provided by operating activities was $12.4 million in fiscal 2001,
as compared to $0.5 million in fiscal 2000. In fiscal 2001, major sources of
funds were net income of $13.3 million, non-cash provisions of $17.4 million
for depreciation and amortization, and increases in accrued expenses and
payables of $10.0 million. These increases were partially offset by increases
in inventories of $14.8 million and accounts receivable of $14.1 million. These
increases are due, in part, to the incremental materials purchases associated
with the build up of inventories in anticipation of the upcoming busy season.
Our production is near or at full capacity from August to March and we also
build inventory from April to July to be able to meet future customer demand.
In addition, because we sell the majority of our products to customers in the
second and third fiscal quarters (i.e., from September through February),
fourth quarter results can create fluctuations or timing differences in
quarterly and or year-end results. Operating cash flows were $0.5 million in
fiscal 2000. Major sources of funds were non-cash provisions of $16.7 million
for depreciation and amortization and increases in accrued expenses and
payables of $13.3 million. These increases were offset by a net loss of
$6.6 million as well as increases in inventories of $23.9 million and accounts
receivable of $11.6 million, related to our increase in net sales.
Net cash used in investing was $22.8 million in fiscal 2001, as compared to
$19.9 million in fiscal 2000. Investing activities in fiscal 2001 consisted
primarily of capital expenditures of $16.1 million related to upgrades in plant
and tooling and purchases of additional manufacturing equipment and a strategic
acquisition of $4.0 million. Cash used in investing activities in fiscal 2000
was primarily for capital expenditures of $12.9 million, a loan to senior
management of $2.2 million and $4.4 million related to the purchase of
intangibles and trademarks.
Net cash provided by (used in) financing activities was $8.7 million in
fiscal 2001, as compared to $21.4 million in fiscal 2000. Cash provided by
financing activities consisted principally of borrowings under our existing
credit facility. Borrowings increased $19.5 million in fiscal 2001 and were
used to fund working capital needs. We were provided $21.4 million during
fiscal 2000 primarily as a result of our recapitalization in September 1999.
We made capital expenditures of approximately $11.6 million during fiscal
2002 and expect to make capital expenditures of approximately $15.0 million in
fiscal 2003. Capital expenditures are primarily for expansion of physical
plant, purchases of additional or replacement manufacturing equipment and
revisions and upgrades in plant tooling.
On January 22, 2002, Kmart, a customer for over a decade, filed for
bankruptcy protection. At the time of the filing we had $12.1 million of
unsecured accounts receivable outstanding with Kmart. As of May 31, 2002 we
have reserved $2.4 million against these receivables. We are in the process of
attempting to collect the remaining accounts receivable outstanding but may be
required to reserve additional amounts if it becomes clear that we will be
unsuccessful in our attempts to collect these amounts. In fiscal 2001, we had
net sales to Kmart of $38.9 million representing approximately 4.7% of our
total net sales for that fiscal year. In fiscal 2002 we had net sales to Kmart
of approximately $30.6 million representing approximately 3.4% of our total net
sales for that period. Kmart has secured debtor in possession financing and
will continue to operate in bankruptcy. We resumed shipments to Kmart as of
February 5, 2002 with payment terms of 30 days, reduced from 60 days.
41
Our primary short-term liquidity needs consist of financing seasonal
merchandise inventory buildups and paying cash interest expense under our
existing credit facilities and on the 11.25% subordinated notes due 2012. Our
principal source of financing for our seasonal merchandise inventory buildup
and increased accounts receivable is revolving credit borrowings under the
existing credit facilities. At May 31, 2002, we had $82.9 million of
availability under these facilities. Our working capital borrowing needs are
typically at their lowest level in April through June, increase somewhat
through the summer and sharply increase from September through November to
finance accounts receivable and purchases of inventory in advance of the
Christmas and post-holiday selling season. Generally, in the period from
November through February, our working capital borrowings remain at their
highest level and then are paid down to their lowest annual levels from April
through August.
In connection with our refinancing in April 2002, we entered into our
existing credit facility totaling $235.0 million of revolving and term loans
with a syndicate of banks and financial services companies.
Proceeds of our existing credit facility were used to refinance our then
existing senior credit facilities and 12% senior subordinated notes due 2005,
to fund transaction fees and expenses, and to provide for general working
capital.
As of May 31, 2002 the balance outstanding under the existing credit
facility consisted of (in millions):
Revolver.................................................... $ 79.3
Term Loan................................................... 23.8
------
$103.1
======
We have a significant amount of indebtedness. As of May 31, 2002, our
consolidated indebtedness was approximately $255.9 million, of which
approximately $103.1 million was senior indebtedness.
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance our indebtedness, including the notes, or to fund
planned capital expenditures will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based on our current level of operations, management believes that cash flow
from operations and available cash, together with available borrowings under
our new credit facility, will be adequate to meet our future liquidity needs
for at least the next few years. We may, however, need to refinance all or a
portion of the principal amount of the notes on or prior to maturity.
We cannot assure you that our business will generate sufficient cash flow
from operations, or that future borrowings will be available under our new
credit facility in an amount sufficient to enable us to service our
indebtedness, including the notes, or to fund our other liquidity needs. In
addition, we cannot assure you that we will be able refinance any of our
indebtedness, including our new credit facility and the notes, on commercially
reasonable terms or at all. See "Risk Factors--To service our indebtedness, we
will require a significant amount of cash. Our ability to generate cash depends
on many factors beyond our control."
42
At May 31, 2002, our contractual cash obligations and commercial commitments
were as follows:
Payments Due by Period (in millions)
- - ----------------------------------------------
Less than 1 After 5
Total Year 1-3 Years 4-5 Years Years
- - ------ ----------- --------- --------- -------
Credit facilities....................... $103.1 $ 5.0 $10.0 $88.1 $ --
Senior subordinated notes............... 152.8 -- -- -- 152.8
Operating leases........................ 39.9 12.9 20.2 4.6 2.2
------ ----- ----- ----- ------
Total contractual cash obligations...... $295.8 $17.9 $30.2 $92.7 $155.0
====== ===== ===== ===== ======
As part of our cash management activities, we seek to manage accounts
receivable credit risk, collections, and accounts payable and payments thereof
to maximize our free cash at any given time.
Careful management of credit risk has allowed us to avoid (except for Kmart,
as discussed above) significant accounts receivable losses in light of the poor
financial condition of many of our potential and existing customers. In light
of current and prospective global and regional economic conditions, we cannot
assure you that we will not be materially adversely affected by accounts
receivable losses in the future.
Market Risk
Fluctuations in the general level of interest rates on our current and
future fixed and variable rate debt obligations expose us to market risk.
We are vulnerable to significant fluctuations in interest rates on our variable
rate debt and on any future repricing or refinancing of our fixed rate debt and
on future debt.
We use long-term and medium-term debt as a source of capital. At May 31,
2002, we had approximately $152.8 million in outstanding fixed rate debt,
consisting of 11.25% subordinated notes maturing in April 2012. When debt
instruments of this type mature, we typically refinance such debt at the
then-existing market interest rates, which may be more or less than the
interest rates on the maturing debt.
Our credit facility has variable interest rates and any fluctuation in
interest rates could increase or decrease our interest expense. At May 31,
2002, we had approximately $103.1 million in outstanding variable rate debt.
Due to the uncertainty of fluctuations in interest rates and the specific
actions that might be taken by us to mitigate the impact of such fluctuations
and their possible effects, the foregoing sensitivity analysis assumes no
changes in our financial structure.
We import some finished products and components from Canada and Asia. All
purchases from Asia have been fixed in United States dollars and, therefore,
we are not subject to foreign currency fluctuations on such purchases, although
our vendors may respond to foreign currency fluctuations by seeking to raise
their prices. Purchases of inventory from Canada have been settled in Canadian
dollars and therefore we have been subject to fluctuations in the value of the
Canadian dollar which could have an impact on our operating results. In
connection with the importation of products and components from Canada, we from
time to time engage in
43
hedging transactions by entering into forward contracts for the purchase of
Canadian dollars which are designed to protect against such fluctuations. Our
hedging transactions do not subject us to exchange rate risk because gains and
losses on these contracts offset losses and gains on the transaction being
hedged. The unhedged portion of purchases from Canada is not significant.
As of May 31, 2002 and 2001, we had no open forward exchange contracts to
sell Canadian dollars. During fiscal years 2002 and 2001 we recognized no
significant gains or losses upon settlement of foreign currency transactions
denominated in Canadian dollars.
Recent Accounting Pronouncements
In fiscal 2002, we adopted Statements of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities." as amended.
This statement establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 was issued by the Financial
Accounting Standards Board ("FASB") in June of 1998 and requires that an entity
recognizes all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Because we had
no open forward exchange contracts at May 31, 2001, the adoption of SFAS No.
133 did not have a significant effect on our earnings and financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
provides a comprehensive standard of accounting for business combinations. SFAS
141 is effective for all business combinations after June 30, 2001. In June
2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets,"
which requires a change in accounting for goodwill and certain other intangible
assets. SFAS 142 is effective for fiscal years beginning after December 15,
2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. SFAS 143 is effective for fiscal years beginning after
June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
In November of 2001, the Emerging Issues Task Force issued EITF 01-9,
Accounting for Consideration Given by Vendor to a Customer ("EITF 01-9")
effective for annual or interim financial statements beginning after December
15, 2001. EITF 01-9 provides guidance on the accounting treatment of various
types of consideration given by a vendor to a customer. The Company will adopt
EITF 01-9 in fiscal 2003.
In April 2002, the FASB issued SFAS No. 145, "Recission of FAS Nos. 4, 44
and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which
rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritative
pronouncements to make various technical corrections, clarify meaning, or
describe their applicability under changed conditions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses significant issues relating
to the recognition, measurement, and reporting of costs associated with exit
and disposal activities. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002.
Based on current circumstances, except for SFAS 145 as discussed in Note 2
to the financial statements, we believe the application of the new accounting
rules described above will not have a material impact on our financial
statements.
Critical Accounting Policies
The SEC recently issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex
44
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 3 to the
Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, the following accounting policies could be deemed to be
critical.
Inventories--Inventories consist primarily of raw materials (principally
parts and supplies) and finished goods, and are valued at the lower of cost or
market. Cost is determined using standard costs which approximate the first-in,
first-out (FIFO) method.
Long-Lived Assets--Long-lived assets are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Assets to Be Disposed Of". SFAS 121 requires the assessment of whether there
has been an impairment whenever events or circumstances indicate that the
carrying amount of long-lived assets may not be recoverable. The carrying value
of a long-lived asset is considered impaired when the anticipated cumulative
undiscounted cash flow from that asset is less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset, which is generally based
on discounted cash flows. As a result of its review, the Company does not
believe that any impairment currently exists related to its long-lived assets.
Advertising Costs--The Company expenses the costs of advertising as
incurred, except for the cost of direct response advertising, which is
capitalized and amortized over its expected period of future benefit, generally
twelve months. Direct response advertising costs consist primarily of costs to
produce infomercials for the Company's products.
Revenue Recognition--The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs and warranty costs associated with these sales.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk include trade accounts receivable.
To minimize this risk, ongoing credit evaluations of customers' financial
condition are performed and reserves are maintained; however, collateral is not
required. A significant portion of the Company's sales are made to Sears
Roebuck ("Sears"). Sears accounted for approximately 44.5%, 42.4% and 39.1% of
total sales for the fiscal years ended May 31, 2002, 2001 and 2000,
respectively. Accounts receivable from Sears accounted for approximately 35.0%
and 42.0% of gross accounts receivable at May 31, 2002 and 2001, respectively.
The Company is not the exclusive supplier of home fitness equipment to any of
its major customers. The loss of, or a substantial decrease in the amount of
purchases by, or a write-off of any significant receivable due from, any of its
major customers would have a material adverse effect on the Company's business.
Income Taxes--The Company accounts for income taxes utilizing the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities at
currently enacted tax rates. If appropriate, deferred tax assets are reduced by
a valuation allowance which reflects expectations of the extent to which such
assets will be realized.
Contingencies. We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies." SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of
the Consolidated Financial Statements indicates that it is probable that an
asset has been impaired or a liability has been incurred at the date of the
Consolidated Financial Statements and the amount of the loss can be reasonably
estimated. Accounting for contingencies such as environmental, legal and
45
income tax matters requires us to use our judgment. While we believe that our
accruals for these matters are adequate, if the actual loss from a loss
contingency is significantly different from the estimated loss, our results of
operations may be overstated or understated.
Assessment of the Euro
On January 1, 1999, eleven of the member countries of the European Union
established fixed conversion rates between their existing currencies (called
"LEGACY CURRENCIES") and one common currency called the euro. The euro trades
on currency exchanges and may be used in business transactions. Beginning in
January 2002, the legacy currencies are being withdrawn from circulation. Our
subsidiaries affected by the conversion have established plans to address
issues raised by the conversion. We believe that, under current conditions, the
conversion of legacy currencies into the euro will not have a materially
adverse effect on us.
46
INDUSTRY OVERVIEW
The home fitness equipment industry in the United States includes
treadmills, other popular cardiovascular fitness equipment such as ellipticals
and exercise bikes and strength training fitness equipment such as
multi-purpose home gyms and weights and weight benches. These products are
distributed in various channels of distribution in a wide range of price
points, including: department stores such as Sears and JCPenney; mass retailers
and warehouse clubs such as Wal-Mart, Sam's Club, Kmart and Costco; sporting
goods retailers such as The Sports Authority, Gart Sports, Galyan's and Dick's
Sporting Goods; specialty fitness equipment retailers, and direct-to-consumers
through our own NordicTrack stores, catalogues, infomercials and the Internet.
According to the NSGA 2001 annual report, total retail sales industry-wide of
home fitness equipment, one of the largest hard goods categories of sporting
goods, are estimated to total $3.8 billion in calendar year 2001. According to
NSGA, in calendar year 2000 retail sales of home fitness equipment exceeded
retail sales of the following categories combined: camping, snowboarding,
downhill skiing, baseball, softball, basketball, hockey and football.
According to the NSGA, sales of home fitness equipment have grown at a CAGR
of 12.7% from $311.2 million 1980 to an estimated $3.8 billion in 2001, making
it among the fastest growing categories in the sporting goods hard goods
industry. The following chart illustrates the growth in retail sales of home
fitness equipment for the years 1980 through 2001E.
United States Personal Fitness Equipment Industry Retail Sales 1980--2001E
(dollars in billions)
[CHART]
United States Personal Fitness Equipment Industry Sales 1980-2001E
1980 0.3
1981 0.4
1982 0.6
1983 0.8
1984 0.9
1985 1.1
1986 1.1
1987 1.1
1988 1.5
1989 1.7
1990 1.8
1991 2.1
1992 2.1
1993 2.5
1994 2.4
1995 2.9
1996 3.2
1997 3.0
1998 3.2
1999 3.4
2000 3.6
2001E 3.8
We believe that the home exercise market has grown at a healthy pace in
response to several main factors: favorable demographics, increased awareness
of the compelling medical benefits of exercise and dedication of more
disposable income to activities at home, including fitness.
Favorable Industry Demographics
There has been a significant increase in the United States population, ages
45 to 64, and this age group accounts for the majority of purchases in most
categories of fitness equipment and approximately 68% of treadmill purchases in
the United States. Moreover, according to the United States Census Bureau, this
segment of the population (which accounts for the majority of households with a
yearly income greater than $50,000) is expected to increase by 26% from 2001 to
2010 (a CAGR of 2.6%). Depending on the type of equipment,
47
between 50% and 70% of the users of home exercise equipment have household
incomes of $50,000 or more. We believe that the aging of the American
population further supports the projected future growth in industry sales of
home fitness equipment as the preferred method for maintaining fitness.
Increased Awareness of the Compelling Medical Benefits of Exercise
According to SGMA, the number of Americans participating in fitness
activities has increased from 42.3 million in 1987 to 51.6 million in 2000, in
part because Americans have become increasingly aware of the compelling medical
evidence of the benefits of exercise. Medical research has demonstrated the
unique role exercise plays in managing chronic diseases such as heart disease
and diabetes and in preventing osteoporosis. As recently as December 2001,
United States Surgeon General David Satcher proclaimed the need for a national
plan to educate Americans to balance their caloric intake with regular physical
activity.
Increase in the Use of Fitness Equipment During Aerobic and Anaerobic Exercise
Consumers are increasingly exercising with home fitness equipment. While
cardiovascular exercise without the use of machines (primarily running and
walking) decreased in the period from 1990-2000, exercise with cardiovascular
equipment has increased 41% in the period from 1990-2000 and exercise with
strength training equipment has increased 69% in the period from 1990-2000.
Shift in Consumer Activity to Home-Orientated Activities
We believe the increased use of cardiovascular and strength training
equipment can be attributed to consumers' desires for time efficient, low
impact workouts and a shift in consumer activity to more activities at home,
including fitness.
Primary Product Categories
We believe the home fitness equipment industry is comprised of two main
product categories: cardiovascular equipment and strength training equipment.
The chart below reflects industry-wide sales and percentages in each product
category. We believe our product mix is generally consistent with that of the
industry.
United States Home Fitness Equipment Retail Sales In 2000--By Product Category
(dollars in millions)
Industry
[CHART]
Cardiovascular $2786.3
Strength Training $856.9
48
Cardiovascular Products
Treadmills, the largest subcategory in this product line, have become a
major home equipment category, popularized to a large extent by manufacturers
who have made treadmills affordable to many households. Treadmills have proven
to be one of the most effective and easy-to-use pieces of home exercise
equipment across a broad array of consumers. A study published in the May 1996
Journal of the American Medical Association asserted that treadmills are the
most efficient piece of exercise equipment for burning calories, as compared to
cross country skiers, stationary bikes, rowing machines and stair steppers.
According to NSGA and as illustrated by the chart below, retail sales of
treadmills have grown from $118.4 million in 1987 to $2.1 billion in 2000,
representing a CAGR of approximately 24.7%. According to SGMA, more people
named the treadmill as their favorite piece of cardiovascular exercise
equipment than any other piece of fitness equipment. The following chart
illustrates the growth in retail sales of treadmills from 1987 to 2000.
United States Retail Sales of Treadmills 1987-2000
(dollars in billions)
[CHART]
Treadmills Historical Market Size in Retail Dollars
1987 0.1
1988 0.3
1989 0.4
1990 0.5
1991 0.6
1992 0.5
1993 0.8
1994 0.9
1995 1.0
1996 1.2
1997 1.5
1998 1.8
1999 1.9
2000 2.1
Other cardiovascular fitness products include popular products such as
ellipticals and exercise bikes. In calendar year 2000, retail sales of other
cardiovascular products in the United States totaled $696.0 million, or
approximately 19% of the home fitness market. Elliptical trainers, a relatively
new product in this category, have grown at a CAGR of 11.3% since 1997. While
retail sales of other cardiovascular equipment as a group have increased at a
CAGR of 10.1% from $102.5 million in 1980 to $696.0 million in 2000, retail
sales have recently decreased from their high of $1.4 billion in 1996. We
believe that such a reduction in sales is primarily due to the decline of
infomercial advertising and the presence of a number of cardiovascular products
in this category that have relatively shorter life cycles, such as stair
steppers, gliders and abdominal exercisers, and the growing popularity of
treadmills.
Strength Training Products
Strength training products are designed to develop muscle tone and strength.
The most widely sold products in this category include home gyms, free weights
and weight benches and cages. In calendar year 2000, strength training products
sales in the United States were $856.9 million, or approximately 24% of the
home fitness market. This category has grown from approximately $208.7 million
in sales in 1980, a CAGR of 7.3%.
49
BUSINESS
General
Industry
The fitness equipment industry in the United States includes cardiovascular
and other fitness equipment, and strength training equipment. Cardiovascular
and other fitness equipment includes treadmills, ellipticals, exercise bike,
other cardiovascular fitness equipment, such as trampolines, relaxation
products such as spas, motorized massage chairs and massage pillows. Strength
training equipment includes multi-purpose home gyms, free weights and weight
benches and cages. Products in each product category are distributed in various
channels of distribution in a wide range of price points. According to the NSGA
2001 annual report, total retail sales industry-wide of home fitness equipment,
one of the largest hard goods categories of sporting goods, are estimated to
total $3.8 billion in calendar year 2001. According to NSGA, in calendar year
2000 retail sales of home fitness equipment exceeded retail sales of the
following categories combined: camping, snowboarding, downhill skiing,
baseball, softball, basketball, hockey and football.
Our Company
We manufacture and distribute a broad line of products in the fitness
equipment market. These fall into two product categories, namely:
cardiovascular and other fitness equipment, and strength training equipment. We
are one of the largest manufacturers and marketers of fitness equipment for
home use in the United States. In addition, we manufacture and distribute an
innovative line of products for the institutional fitness equipment market in
both our cardiovascular and other equipment category, and our strength training
equipment category. Our brand names include: ProForm, NordicTrack, HealthRider,
Weslo, Image, JumpKing, Free Motion Fitness and, under license, Reebok, Weider
and Gold's Gym. In fiscal 2002, we generated net sales of $896.1 million, net
income of $19.4 million and EBITDA of $75.7 million.
Our Brands and Distribution Channels
We market a complete line of products under multiple brands through multiple
distribution channels to reach a wide range of consumers at various price
points. We have some of the strongest brands in the industry, including
NordicTrack which ranks among the top seven most widely recognized sporting
goods brands according to American Sports Data. Our ProForm brand was ranked
number one in terms of fitness market share by SMRG in 2000. We market our
products through each distribution channel in which home fitness equipment
products are sold, including: department stores, mass retailers and warehouse
clubs, sporting goods and specialty fitness retailers, and direct-to-consumer
sales through catalogs, infomercials, the Internet and our company-owned
NordicTrack stores.
Our History
Our predecessor company, Weslo, was founded in 1977 by Scott Watterson, our
Chairman and Chief Executive Officer, and Gary Stevenson, our President and
Chief Operating Officer. In 1987, we acquired ProForm, and in 1988 we were
acquired by Weider Health and Fitness ("Weider"). In 1994, affiliates of Bain
Capital, LLC formed ICON Health and Fitness, Inc. and obtained control of us in
a recapitalization transaction. As part of that transaction, we incurred
substantial indebtedness and issued common and preferred stock to Weider. In
1996, we acquired HealthRider and CanCo, a Weider affiliated Canadian
manufacturing firm, and we repurchased the common and preferred stock issued to
Weider in that recapitalization. We funded these transactions with additional
indebtedness. In addition, in 1998 we acquired the assets of NordicTrack, Inc.
In 1999, we consummated a recapitalization that included a $40.0 million cash
contribution of capital, the exchange of our then-existing debt securities for
cash and new debt and equity securities and the refinancing of our then
existing senior secured credit facility.
50
Our Competitive Strengths
We attribute our market leadership, opportunities for continued growth and
increased profitability to the following competitive strengths:
. Leading Market Position. We are well positioned to grow as the overall
industry grows. We maintain a broad product line in each of our two
major product categories. Our broad range of products enables us to
appeal to consumers with varying fitness needs and incomes, which
reduces our dependence on any single product and enables us to respond
quickly to changes in consumer preferences. In addition, we are
well-positioned to serve retailers that want to increase their sales of
home fitness products, while reducing their number of vendors;
. Unique Multi-Brand, Multi-Channel Distribution Capability. Our ability
to serve multiple distribution channels with multiple products and
well-known brand names differentiates us from our competitors, insulates
us from the impact of a downturn in any single channel and allows us to
make products with varying designs and innovative features that address
the pricing strategies of our customers. In addition, we are able to
leverage our product development capabilities to maximize product
lifecycles by repositioning products into new channels and under
different brand names as they mature;
. Strong Customer Relationships. We have strong, long-term relationships
with many leading retailers. We have been a supplier to Sears since
1984. We have served Wal-Mart and The Sports Authority since 1985 and
1988, respectively. We have received numerous awards and recognition
from our customers. These include, among others, Sears' Vendor of the
Year in 2000 and their annual Partner in Progress award eleven times
since 1985; Wal-Mart's Vendor of the Quarter award once in each of
fiscal 1999 and fiscal 2000; and the SPARC Award ("Supplier Performance
Awards by Retail Category"), awarded by Discount Store News magazine and
based on votes by a committee of mass retailers, five times including
the last four years consecutively;
. Strong Commitment to Research and Development and Product
Innovation. We are dedicated to product innovation. We hold, or have
pending, an aggregate 250 United States and foreign patents and 711
United States and foreign trademarks. Our vertically integrated in-house
research and development capabilities enable us to develop a product
from concept to fully functional prototype and to launch products
rapidly;
. Flexible Manufacturing Capability. We have four manufacturing in
facilities in Utah, one in Texas and three in Canada. All of our
manufacturing, warehouse and logistical retail facilities in Utah are
ISO 9001 certified. We also have two suppliers in China dedicated
exclusively to us from whom we source some of our product requirements.
Our facilities are flexible and permit us to shift our product mix
quickly and efficiently to meet customer needs.
. Experienced Management Team with Significant Equity Ownership. Our top
12 senior executives have an average of approximately 15 years of
experience with us, which we believe, makes them among the most
experienced management teams in the industry. Our senior management owns
approximately 18.6% of our fully diluted shares outstanding.
Our Business Strategy
We plan to increase our net sales and EBITDA by continuing to pursue a
business strategy that has the following principal components:
. Participate in Industry Growth. We intend to continue to participate
in the dynamic home fitness equipment industry by continuing to develop
innovative products in our existing product lines as well as new product
lines, such as ellipticals. In addition, we intend to continue our
multi-brand, multi-channel distribution strategy.
51
. Increase Direct-to-Consumer Sales. We intend to continue to participate
in direct-to-consumer sales, which we believe also enhances our retail
sell-through and strengthens our brands. Our direct product and service
offerings sold through television and print advertising and the Internet
include selections from our core categories of treadmills, aerobic and
anaerobic equipment, and our iFIT products and services. Our patented
iFIT remote control interactive technology allows us to offer users the
opportunity to work with a personal trainer online and prepare
customized workout programs for a fee.
. Increase Our Presence in the Institutional Fitness Equipment
Market. According to SGMA, sales of fitness equipment to health clubs,
spas, hotels and other institutions have grown at a CAGR of 20.9% from
$77.0 million in 1988 to $750.0 million in 2000. This increase largely
reflects the growth in fitness club memberships in the United States,
from 17.0 million in 1987 to 32.8 million in 2000, according to the
International Health, Racquet and Sportsclub Association. In order to
gain entry into this growing market, we acquired the Free Motion Fitness
business in December 2000. This new division offers a full line of
innovative institutional fitness equipment including patented strength
training equipment under the Free Motion brand, and treadmills and
aerobic equipment under the NordicTrack brand name.
. Increase Our International Sales. We believe that we are positioned to
capitalize on our brands in order to increase our sales in several
international markets. In Europe, we intend to leverage our significant
sales and distribution infrastructure in France, Germany, Italy and the
United Kingdom.
. Selectively Pursue Acquisitions. The home and institutional fitness
equipment markets are highly fragmented, and we believe that there may
be attractive acquisition opportunities for us. We will selectively seek
opportunities to leverage our strong manufacturing, product development,
distribution and marketing capabilities to increase the cashflow from
acquired businesses.
Products
Cardiovascular and Other Fitness Equipment
Our products in the cardiovascular and other fitness equipment category
cover a broad range of technological sophistication and a variety of price
points. Primary products within this category includes the following:
Treadmills
We design, innovate, manufacture, market and distribute motorized and manual
treadmills, designed to promote cardiovascular fitness. Our principal
competitors in this category are Schwinn, Life Fitness, Pacemaster, Cybex,
Precor and Keys, whose products are primarily targeted at the higher price
point range of the market, and Sportcraft recently began supplying Wal-Mart a
motorized treadmill targeted at the lower price point range of the market.
We are the leading producer of motorized treadmills. Our treadmills include
proprietary technologies in the electronics console and drive train systems. In
the March 2002 issue of Consumer Reports, six of our treadmills ranked among
the top eleven treadmills worldwide, based on criteria such as quality,
durability, features and ease of use. Certain features offered by our motorized
treadmills that enhance the home user's experience include bio- feedback
electronics such as heartrate control, pulse and body fat, certain programmable
speeds and inclines, electronic feedback on speed, elapsed time, distance
traveled, calories/fat calories burned, and cross-training upper body exercise
functions. The SpaceSaver feature for treadmills (introduced in 1996), for
which we hold 16 United States patents, enables treadmills with this feature to
fold vertically for easy storage. As of the Fall of 2001, we have equipped all
our brands of treadmills with a price point of $599 and above with iFIT
technology, for which we hold one United States patent and have seven patents
pending. iFIT technology automatically controls a treadmill's speed and
incline. iFIT technology combines automatic equipment control, heart-rate paced
music, and the pre-recorded coaching of a personal trainer. Consumers can enjoy
iFIT technology using
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streaming workouts from the iFIT Website, music workouts on compact discs, or
multi-media iFIT videos. In addition, we also offer live personal training
services via the Internet for consumers who choose to subscribe to our service.
Other popular features on our treadmill line of products include: cushioning
mechanisms such as adjustable leaf springs and soft belts for a quiet,
shock-absorbent workout and the CrossWalk line of treadmills, which provides
users with upper body exercise for a total body workout.
Ellipticals. The relatively new category of elliptical crosstrainers was
launched in the institutional fitness market in the early 1990's. Ellipticals
are now the fastest growing category of products in the home fitness industry,
growing at a CAGR of 11.3% from 1997 to 2000. Ellipticals offer a low-impact,
high-intensity aerobic workout which harnesses the momentum of a natural
striding motion, and eliminates the impact of typical running or walking. We
pioneered an innovative mechanism that links upper-body motion with the
lower-body motion for a synchronized rhythmic total-body workout. Our
ellipticals typically provide an electronic display that provides heartrate
control, programmed workouts and feedback on speed, time, distance and calories
burned. Our iFIT technology, which automatically adjusts resistance on
elliptical trainers, is included on many elliptical trainers priced at $399 and
above. Retail prices of our ellipticals range from $179 to $999 and are
available in the NordicTrack, ProForm, HealthRider, Image, Reebok and Weslo
brands. Our Reebok, ProForm and NordickTrack brand ellipticals were rated the
number one, two and three ellipticals, respectively, in the March 2002 Consumer
Reports ranking of home exercise equipment. Our principal competitors in this
category are Fitness Quest and Thane.
Exercise Bikes. We offer exercise bikes featuring a variety of resistance
mechanisms including electromagnetic, self-generating, flywheel and air,
electronic monitors which display elapsed time, speed, distance and calories
burned, and dual function design, which allows the user to exercise the upper
body, lower body or both simultaneously. Certain units include heartrate
control, motivational electronics and programmable resistance which allow users
to design their own workouts. Our iFIT technology which automatically adjusts
resistance, is included on several recumbent and upright bikes priced at $299
and above.
Recreational Sports Products. Through our JumpKing subsidiary, we
manufacture and market a trampoline line that includes both mini-trampolines
for indoor home exercise use and full-sized trampolines for outdoor home
recreational use. The mini-trampoline retails for approximately $25 while
retail prices for our full-sized trampolines range from $179 to $399.
Relaxation Products. Beginning in the Spring of 1996, we introduced a line
of relaxation products such as acrylic and soft-sided hydrotherapy spas,
motorized massage chairs and massage pillows. These products are currently
distributed through various channels including department stores, mass
retailers and warehouse clubs, sporting goods retailers, and
direct-to-consumers through home shopping cable networks, catalogs and our own
direct response marketing efforts.
Strength Training Equipment
We offer a complete line of anaerobic strength training equipment designed
to develop muscle tone and strength under the NordicTrack, Image, ProForm,
Weslo, Weider, Gold's Gym, and Reebok brand names. Our principal competitors in
this category include Nautilus Group, Inc., Fitness Quest, Soloflex, Life
Fitness and Cybex. Our products in this category include the following:
Home Gyms. Our multi-purpose home gyms offer a range of resistance
mechanisms, from selectorized weight stacks to plate-loaded gyms to our
powerstroke leverage system. New products within this category include our
patented Free Motion equipment, which enables users to enjoy a full range of
motion with "functional movement" versus the rigid "fixed path movement" of
traditional equipment. Functional movement training is a significant trend in
strength training for home fitness as well as for professional athletes. Other
products within this category include our multi-purpose home gyms, which
integrate aerobic functions for
53
crosstraining. Selected units are designed to allow multiple users to use the
equipment simultaneously, thereby allowing circuit training. Our principal
competitors in this category include Direct Focus, Fitness Quest Paramount and
Life Fitness.
Weight Benches, Cages and Free Weights. We offer a range of weight benches
and squat cages under our NordicTrack, Image, Proform and Weider brand names.
Retail prices for these products range from $49 to $299. We also offer a broad
assortment of cast-iron weight plates, vinyl and neoprene dipped weights and
dumbbells, in standard and Olympic size formats.
Exercise Accessories. We offer a line of back support belts, workout gloves
and exercise accessories, including ankle and hand weights and grip devices.
These products are sold under the Reebok, HealthRider, Weider, ProForm and
NordicTrack brands.
Brands
We design, innovate, and market our products under some of the best known
brands in the fitness industry, including NordicTrack, HealthRider, Free
MotionFitness, ProForm, Image, Weslo, and under license, Reebok, Weider and
Gold's Gym. See "Trademarks."
Our NordicTrack brand name is recognized by 86.6% of Americans, according to
a quantitative survey conducted by American Sports Data, a market research
firm. NordicTrack ranked number 7 out of 185 sporting goods brands in this
study conducted in 1997, which included Nike and Reebok. The NordicTrack brand
has broad awareness, as evidenced by the nearly even awareness levels across
various age, income, ethnic and education groups in the American Sports Data
study. In addition, our ProForm brand is the number one fitness brand in the
United States according to SMRG.
Institutional Fitness Equipment
In order to gain entry into the growing market of institutional fitness
equipment, in December 2000 we acquired the Free Motion Fitness business, a
designer, manufacturer and marketer of innovative and patented institutional
strength training equipment called "Free Motion." As part of our strategy to
gain share in this market, we have also recently begun to offer treadmills and
other cardio fitness equipment, such as Incline Trainers, under the NordicTrack
brand into the institutional market. We use our institutional fitness equipment
sales force to market and distribute our institutional fitness equipment
predominantly to health clubs, corporate wellness centers and elite athlete
training centers. Our principal competitors in the institutional fitness market
are Life Fitness, Precor, StarTrac and Cybex.
Sales, Marketing and Distribution
Sales and Marketing. We market our products under multiple brands through
multiple distribution channels, including department stores, mass retailers and
warehouse clubs, sporting goods and specialty fitness retailers and
direct-to-consumers through our own Internet sites, catalogs and retail stores.
Distribution Capabilities. We believe our distribution capabilities and
post-sales support place us in a unique position to service major retailers.
This has been done through the successful implementation of our integrated
distribution plan that allows us to respond to customer orders with a
computerized bar-coded inventory management system that is used to insure that
the necessary components are available for manufacturing. This system is also
capable of tracking finished goods through all levels of the distribution
chain. Through the effective use of electronic data interchange, we are able to
run manufacturing jobs to fill specific customer orders, arrange for shipping
from many of our manufacturing facilities and make timely deliveries to any of
our customer locations.
54
International Operations
Foreign revenue (sales originating in countries other than the United
States) in fiscal years 2001, 2000 and 1999 was $72.2 million, $61.5 million
and $61.6 million, respectively. Revenue from no single country was material to
the consolidated revenues of the Company. Sales outside the United States are
concentrated in Europe, Asia/Pacific Rim, Canada and Central/South America. In
order to meet the growing demand for home and institutional fitness equipment,
we maintain offices, showrooms and warehouses in Leeds, England; Perugia,
Italy; and Carrieres, France, employing nearly 85 people.
Retail Operations
As of March 2, 2002, we operated 70 retail stores throughout the United
States serving metro New York City, Chicago, Seattle, San Francisco, Los
Angeles, Atlanta and other cities. Our NordicTrack product line in these stores
and other locations includes treadmills, ellipticals, incline trainers,
stationary bikes, multi-purpose home gyms, Pilates machines, jogging strollers
and fitness apparel.
Product Design and Innovation
Product and design innovation has contributed significantly to our growth.
On an ongoing basis, we evaluate new product concepts and seek to respond to
the desires and needs of consumers by frequently introducing new products and
repositioning existing products. As of March 2, 2002, we had approximately 382
employees in our research and development group. We hold 181 United States
patents, we have 97 United States and 509 foreign trademarks, we have 35 United
States and 34 foreign patents pending and 23 United States and 82 foreign
trademarks pending. We had research and development expenses of $10.9 million
in fiscal 2001.
We conduct most of our research and development in 40,000 square feet of
space in our Logan, Utah headquarters. This facility includes plastic,
mechanical and electrical engineering capabilities that are used in creating
proprietary designs and features.
Customers
Our largest customer since 1985 has been Sears. In fiscal 2002, Sears
accounted for approximately 44.5% of our total net sales, a 2.1% increase over
fiscal 2001. Other important customers include Wal-Mart, Sam's Club, The Sports
Authority, Gart's Sports, Galyan's and Dick's Sporting Goods. Although Sears
still accounts for a substantial portion of our sales, the percentage of net
sales to Sears has decreased over the past decade from a high of approximately
68% in fiscal 1989. Nevertheless, the dollar amount of our net sales to Sears
has increased during this time period. Several customers have distinguished us
with several vendor awards for our commitment in providing quality and value to
the American consumer, including, among others, Sears' Vendor of the Year in
2000 and their Partner in Progress award eleven times since 1985, Wal-Mart's
Vendor of the Quarter once in each of fiscal 1999 and fiscal 2000 and the
annual SPARC Award five times including the last four years consecutively. This
annual award is the only industry-wide vendor recognition program in mass
market retailing, and is awarded by Discount Store News, a magazine which
employs a panel made up of key merchandising executives from the mass market
retailing industry. This award honors those who excel in self-sell packaging,
new product innovation, on-time delivery, advertising support and quality
control.
We sell our products to customers representing over 7,600 consumer
locations, excluding those consumers we sell to directly through our retail and
Internet distribution channels. Consistent with industry practice, we generally
do not have long-term purchase agreements or other commitments from our
customers as to levels of future sales. The level of our sales to large
customers depends in large part on our continuing commitment to home fitness
products and the success of our efforts to market and promote our products, as
well as our competitiveness in terms of price, quality, product innovation and
customer service. We are not the exclusive supplier of home fitness equipment
to any of our major customers. The loss of, or a substantial decrease in the
55
amount of purchases by, or a write-off of any significant receivable due from
any of our major customers could have a material adverse effect on our
business. See "Risk Factors--We rely on a limited number of major customers,
the loss of any of which could have a material adverse effect on our business."
Competition
The fitness equipment market is highly competitive. It is characterized by
frequent introduction of new products, often accompanied by major advertising
and promotional programs. We believe that the principal competitive factors
affecting our business include price, quality, brand name recognition, product
innovation and customer service.
We compete with several domestic manufacturers and distributors such as
Fitness Quest, Life Fitness (a division of Brunswick), Cybex/Trotter, Precor (a
division of Illinois Tool Works), and Direct Focus. In Europe, we principally
compete with Tunturi, Helmut Kettler and other domestic competitors. The
following table shows our five largest competitors in the United States:
Top Five United States Fitness Competitors
Company Name Primary Distribution Channel Principal Products
- ------------ ---------------------------- ------------------
Cybex / Trotter............... Specialty fitness dealers, Cardiovascular,
institutional clubs and spas Strength Training
Nautilus Group, Inc........... TV infomercials, institutional Cardiovascular,
clubs and spas Strength Training
Fitness Quest................. TV infomercials, mass Cardiovascular,
distribution channels Strength Training
Life Fitness.................. Institutional clubs and spas, Cardiovascular,
specialty fitness dealers Strenth Training
Precor........................ Institutional clubs and spas,
specialty fitness dealers and Cardiovascular,
sporting goods retailers Strength Training
Manufacturing and Purchasing
In fiscal 2002, we manufactured or assembled over 80% of our products and
component parts at our facilities in Utah, Texas and Canada. The balance of our
products and component parts were manufactured and assembled by third parties,
principally in mainland China. We have long-standing supply relationships with
several offshore vendors, many of which have exclusive relationships in the
fitness industry with us. The combination of internal manufacturing and
assembly capacity and our access to third-party vendors has helped us meet
customer demand on a competitive basis. In addition, the third party vendors
provide greater flexibility in manufacturing capacity to satisfy seasonal
demands.
We utilize more than 1.1 million square feet for manufacturing, including a
300,000 square foot facility in Logan, Utah, where the majority of our
treadmills are manufactured or assembled. We constructed our Logan, Utah plant
in 1990 and equipped the facility with modern manufacturing and assembly
features, including fully integrated metal fabrication, powdercoat painting,
robotic welding and injection molding equipment. In 1990, we purchased a
trampoline manufacturing operation in Dallas, Texas, which produces the
JumpKing trampoline brand. In 1991, we began operating our plant in Smithfield,
Utah. In 1994, we began operating our Clearfield, Utah manufacturing facility.
In 1995, we opened our Smithfield North Plant. In 1996, we expanded our
manufacturing capacity by 233,671 square feet through the acquisition of our
Canadian manufacturing facility in St. Jerome, Canada.
56
We apply a management system to control and monitor freight, labor, overhead
and material cost components of our finished goods. We emphasize product
quality by monitoring operations according to uniform quality control
standards. In fiscal 1994, we received ISO 9001 certification for all of our
non-retail facilities in Utah. ISO is a nonprofit association that monitors
industrial companies' manufacturing processes, quality assurance controls,
personnel management and customer service in order to improve plant efficiency,
product quality, customer satisfaction and company profitability. ISO 9001 is a
certification process used for companies which business includes a range of
activities from design and development to production, installation and
servicing.
The primary raw materials and component parts that we use to manufacture our
products are electronics, steel tubing, belt material, motors, rollers, walking
decks and plastics. In fiscal 2001, no single raw material or component part
accounted for more than 10% of our materials cost. The Bush administration
recently announced proposed increased tariffs on raw steel imported from
certain countries into the United States. Steel is a primary raw material used
in the manufacture of components used into our finished products. Increased
steel tariffs may increase our cost of goods. The ultimate impact that this
tariff proposal will have on our results of operations remains uncertain.
From fiscal 1996 to fiscal 2002 we invested over $80.0 million in tooling,
molding, production and computer equipment to develop state-of-the-art
production, research and development, distribution and reporting systems. We
have a fully implemented Enterprise Resource Planning ("ERP") system that
integrates all manufacturing, planning, inventory, purchasing, order entry and
financial functions. We have not been required by our auditors to shut down for
physical inventories for six years due to the strength of our materials
management controls and systems. Our fully-automated management information and
reporting systems also allow for efficient operating performance, strong ties
to retailers and accurate performance analysis. Our inventory management and
manufacturing productivity are enhanced by our just-in-time system for
purchasing materials and components. We have also invested in Electronic Data
Interchange ("EDI") capabilities, including Wal-Mart's Retail Link system,
which provides us and a substantial number of our primary customers a seamless
flow from initial retailer orders to parts purchasing to product manufacturing
to shipping. We have also implemented EDI capabilities with substantially all
of our primary customers.
Employees
As of May 31, 2002, we employed approximately 3,910 people, 185 of whom were
and are represented by a Canadian labor union. We are party to a collective
bargaining agreement with this union which expires on
August 7, 2004. We believe that we have good relationships with our employees.
Factory employees are compensated through a targeted incentive system.
Managerial employees receive bonuses tied to the achievement of performance
targets. As of May 31, 2002, approximately 382 employees were engaged in
research and development, 425 in sales and marketing, 2,369 in manufacturing
and 397 in other areas, primarily administrative. We are also subject to two
employment agreements with senior executives. See "Certain Relationships and
Related Party Transactions--Employment Agreements."
Environmental Matters
Our operations are subject to federal, state and local health and safety and
environmental laws and regulations that impose workplace standards and
limitations on the discharge of pollutants into the environment and establish
standards for the handling, generation, emission, release, discharge,
treatment, storage and disposal of materials, substances and wastes. The nature
of our manufacturing and assembly operations exposes us to the risk of claims
with respect to environmental matters, and although compliance with local,
state and federal requirements relating to the protection of the environment
has not had a material adverse effect on our financial condition or results of
operations, there can be no assurance that material costs or liabilities will
not be incurred in connection with such environmental matters. Future events,
such as changes in existing laws and regulations or enforcement policies or the
discovery of contamination on sites owned or operated by us may give rise to
57
additional compliance costs or operational interruptions which could have a
material adverse effect on our financial condition. In addition, many but not
all of our properties have been the subject of either Phase I or Phase II
Environmental Site Assessments. While we are not aware of any existing
conditions that are likely to result in material costs or liabilities to us,
there can be no assurance that all potential instances of soil or ground water
contamination have been identified even where Environment Site Assessments have
been conducted. Accordingly, there can be no assurance that previously unknown
environmental conditions will not be discovered at any of our properties,
whether presently or formerly owned or leased, or that the cost of remediating
such condition will not be material.
Insurance and Product Recalls
Due to the nature of our products, we are subject to product liability
claims involving personal injuries allegedly related to our products. Our
involvement in the trampoline business through our JumpKing subsidiary has
especially exposed us to such claims. We currently carry an occurrence-based
product liability insurance policy. The current policy provides coverage for
the period from October 25, 2001 to October 1, 2002 of up to $5.0 million per
occurrence and $5.0 million in the aggregate. The policy has a deductible on
each claim of up to $500,000. We believe that our insurance is generally
adequate to cover product liability claims. Nevertheless, currently pending
claims and any future claims are subject to the uncertainties related to
litigation, and the ultimate outcome of any such proceedings or claims cannot
be predicted. Due to uncertainty with respect to the nature and extent of
manufacturers' and distributors' liability for personal injuries, we cannot
guarantee that our product liability insurance is or will be adequate to cover
such claims.
From time to time we are subject to product recalls of defective products.
Recently we, in conjunction with the Consumer Product Safety Commission,
initiated a recall of our Hiker Product. To date, we have received fourteen
reports from consumers that under certain circumstances an electrical component
in the control system of our Hiker product which included approximately 7,500
total units. These units could overheat causing a risk of fire. We effected a
recall of the units and remediation of the defective machines at our retail
outlets and those already purchased by consumers. While we cannot be certain of
the ultimate costs of effecting this remediation we do not believe the costs
will be material.
Facilities
Our headquarters are located in Logan, Utah, and we own the related land and
buildings. Additionally, we own land and buildings in Canada. The total square
footage of our owned buildings is approximately 485,000 square feet.
We lease additional facilities for manufacturing, warehouses and offices in
the United States and various foreign countries including the United Kingdom,
Italy, France and Germany. We sublease certain of these facilities where space
is not fully utilized or has been involved in restructuring activities.
We believe that these facilities are well maintained, in good operating
condition and are adequate for our current needs and that suitable additional
or substitute space will be available as needed to accommodate any expansion of
our operations.
In addition, as of May 31, 2002 we operated under lease 70 NordicTrack
retail stores in various cities in the United States.
Legal Proceedings
We are party to a variety of non-product liability commercial lawsuits
involving contract claims, arising in the ordinary course of our business. We
believe that adverse resolution of these lawsuits would not have a material
adverse effect upon our results of operations or financial position.
58
We are party to a variety of product liability lawsuits, arising in the
ordinary course of our business, as a result of injuries sustained by customers
while using a variety of our products. These claims include injuries sustained
by individuals using trampolines and treadmills. We vigorously defend any and
all product liability claims brought against us and do not believe that any
currently pending claim or series of claims will have a material adverse effect
on our results of operations or financial position.
We are also involved in several intellectual property and patent
infringement claims, arising in the ordinary course of our business. We believe
that the ultimate outcome of these matters will not have a material adverse
effect upon our results of operations or financial position.
We are involved in litigation with Service Merchandise in connection with
its filing for bankruptcy protection. Service Merchandise filed three (3)
separate adversarial proceedings against us in the United States Bankruptcy
Court, Middle District of Tennessee, Nashville Division, alleging preferential
transfer in Adversarial Proceeding Nos. 301-0738A and 301-0770A, and Breach of
Contract in Adversarial Proceeding No. 301-0586A. The bankruptcy trustee has
filed suit in connection with the foregoing seeking to recapture an aggregate
amount of $1,670,000 in payments made to us as a voidable preference. The
summons was issued on April 16, 2001.
On September 25, 2000, the United States Customs Service proposed an
assessment against us in the United States Court of International Trade, Court
No. 00-09-00467, for United States duties of approximately $1.3 million
regarding the disputed treatment of certain imports. On September 1, 2000 we
made a partial payment in the amount of $213,188. On September 25, 2000, we
initiated proceedings with the United States Customs Service to obtain a ruling
on the correct treatment of these imports. If this proceeding results in a
favorable ruling for us, we hope to obtain a refund of the partial payment paid
on September 1, 2000. We can make no assurance that we will obtain a favorable
result with respect to these amounts.
59
MANAGEMENT
Directors And Executive Officers
The directors and executive officers of our company, and their ages, are as
follows:
Years
Name Age with ICON Position
- ---- --- --------- --------
Scott R. Watterson................. 47 24 Chairman of the Board and Chief
Executive Officer
Gary E. Stevenson.................. 47 24 President, Chief Operating
Officer and Director
S. Fred Beck....................... 44 13 Chief Financial and Accounting
Officer, Vice President and
Treasurer
David J. Watterson................. 43 22 Senior Vice President,
Marketing and Research and
Development
Jon M. White....................... 54 15 Senior Vice President,
Manufacturing
William T. Dalebout................ 54 14 Vice President, Design
M. Joseph Brough................... 39 13 Vice President, Operations and
Information Technology
Matthew N. Allen................... 38 18 Vice President of Product
Development
Douglas L. Clausen................. 55 11 Vice President, Purchasing
Brad A. Bearnson................... 48 7 General Counsel, Secretary
Robert C. Gay...................... 50 -- Vice Chairman of the Board
Ronald P. Mika..................... 41 -- Director
Gregory Benson..................... 48 -- Director
David J. Matlin.................... 41 -- Director
Christopher R. Pechock............. 37 -- Director
Stanley C. Tuttleman............... 83 -- Director
W. McComb Dunwoody................. 57 -- Director
Scott R. Watterson. Mr. Watterson has served as Chairman of our Board of
Directors and Chief Executive Officer since 1988. Prior to 1988, Mr. Watterson
co-founded Weslo, Inc., a predecessor entity of the Company, in 1977. In
addition, Mr. Watterson is a director of the Utah State University Foundation.
He is also on the Board of Trustees for the Utah Foundation and the Make-A-Wish
Foundation of Utah.
Gary E. Stevenson. Mr. Stevenson has served as our President, Chief
Operating Officer and as one of our directors since 1988. Prior to 1988, Mr.
Stevenson co-founded Weslo, Inc., the predecessor entity of the Company, in
1977.
S. Fred Beck. Mr. Beck has served as our Chief Financial Officer and
Accounting Officer, Vice President and Treasurer since 1989.
60
David J. Watterson. Mr. Watterson has served as Senior Vice President of
Marketing and Research and Development since November 1992. Mr. Watterson is
Scott R. Watterson's brother.
Jon M. White. Mr. White has served as our Senior Vice President of
Manufacturing since 1994, and was our Vice President of Manufacturing from 1988
to 1994.
William T. Dalebout. Mr. Dalebout has served as our Vice President of
Design since 1987.
M. Joseph Brough. Mr. Brough joined us in 1989 and has served as our Vice
President of Operations and Information Technology since 1993.
Matthew N. Allen. Mr. Allen joined us in 1984 and has served as our Vice
President of Product Development since November 1999.
Douglas L. Clausen. Mr. Clausen has served as our Vice President of
Purchasing since 1991.
Brad A. Bearnson. Mr. Bearnson has served as our Secretary since November
1994 and our General Counsel since March 1995.
Robert C. Gay. Mr. Gay became Vice Chairman of our Board of Directors in
November 1994. Mr. Gay has been a Managing Director of Bain Capital, a private
investment firm, since April 1993 and has been a General Partner of Bain
Venture Capital, the venture capital arm of Bain Capital, which focuses on
first and second institutional round investing in software, technology-driven
business services, hardware and information companies, since February 1989. In
addition, Mr. Gay serves as a director of Nutraceutical, GS Technologies
Corporation, Anthony Crane, Alliance Laundry and Buhrmann.
Ronald P. Mika. Mr. Mika became one of our directors in November 1994. Mr.
Mika joined Bain Capital in 1989, where he has been Managing Director since
1996. In addition, Mr. Mika serves as a director of Professional Service
Industries.
Gregory Benson. Mr. Benson became one of our directors in September 1999.
Mr. Benson has been an executive vice president of Bain Capital since 1996.
Prior to joining Bain Capital, Mr. Benson was an executive vice president of
American Pad and Paper Company.
David J. Matlin. Mr. Matlin became one of our directors in September 1999.
Mr. Matlin joined Credit Suisse First Boston Corporation, an investment bank,
in May 1994, where he has served as a managing director since that time. Prior
to that, Mr. Matlin was a partner at Merrion Group LP, a boutique securities
firm that he co-founded in 1991. In addition, Mr. Matlin is a director of
Imagyn Medical Technologies, California Coastal Communities, Vasocor, Inc., and
Forstmann Textiles.
Christopher R. Pechock. Mr. Pechock became one of our directors in
September 1999. Mr. Pechock joined Credit Suisse First Boston Corporation in
November 1998, where he has served as an investment manager since that time.
Prior to joining Credit Suisse First Boston Corporation, Mr. Pechock was a
portfolio manager at Turnberry Capital Management from 1997 until 1998 and at
Eos Partners from 1996 until 1997. From 1993 until 1996, Mr. Pechock was a Vice
President at PaineWebber, Incorporated.
Stanley C. Tuttleman. Mr. Tuttleman became one of our directors in
September 1999. Mr. Tuttleman has been the Chief Executive Officer and
President of Tuttson Capital Corp., a financial services corporation, since
1983. Mr. Tuttleman also serves as the Chief Executive Officer of Telepartners
International, a wireless program company. In addition, Mr. Tuttleman is a
director of Mothers Work, Inc., and a trustee of the Franklin Institute, the
Philadelphia Orchestra, the Philadelphia Museum of Art, Graduate Hospital,
Gratz College and the Harrison Foundation.
W. McComb Dunwoody. Mr. Dunwoody became one of our directors in September
1999. Mr. Dunwoody founded The Inverness Group Incorporated in 1975 and has
served as its President since that time. He has served as Managing Director of
Inverness Management LLC, a private investment firm, since 1998. Through
Inverness Management LLC and its affiliates, Mr. Dunwoody has been engaged in
sponsoring and investing in private equity transactions since 1981. Mr.
Dunwoody was a member of the Corporate Finance Departments of the First Boston
Corporation and Donaldson, Lufkin & Jenrette Securities Corporation. He is
Chairman of the Executive Committee of the Board of Directors of
National-Oilwell, Inc.
61
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal 2002, 2001 and 2000 for Mr. Scott Watterson and our other four most
highly compensated executive officers (collectively, the "Named Executive
Officers"):
Summary Compensation Table
Annual Compensation Other Long-term All
------------------------ Annual Compensation Other
Fiscal Salary Bonus Compensation Options Compensation
Name and Principal Position Year ($) ($) ($) (#)(4) ($)(5)
- --------------------------- ------ ------- --------- ------------ ------------ ------------
Scott R. Watterson.................................. 2002 578,813 1,495,000 103,679(2)(7) -- 80,527(6)
Chairman of the Board and Chief Executive Officer 2001 551,250 448,905 116,808(2)(7) -- 42,000(6)
2000 525,000 746,447 2,053,794(1)(2)(3) -- 1,894
Gary E. Stevenson................................... 2002 524,000 1,175,600 62,213(2)(7) 68,969(6)
President and Chief Operating Officer 2001 498,750 398,149 62,900(2)(7) -- 42,000(6)
2000 475,000 656,874 1,650,136(1)(2)(3) -- 1,444
S. Fred Beck........................................ 2002 249,000 345,910 -- -- --
Chief Financial and Accounting Officer 2001 235,000 145,059 -- -- 9,230
Vice President and Treasurer 2000 223,000 201,459(8) -- 99,990 544
David J. Watterson.................................. 2002 300,000 595,910 -- -- 10,165
Vice President, Marketing and Research 2001 284,400 155,559 -- -- 8,500
and Development 2000 270,000 209,459(9) -- 119,957 1,717
Richard Hebert...................................... 2002 262,000 145,850 8,700(2) -- --
General Manager, ICON Du Canada, Inc. 2001 296,974 155,000 10,496(2) -- --
2000 297,945 109,459 10,893(2) -- --
- --------
(1) On September 27, 1999, HF Holdings issued to Mr. Watterson and Mr.
Stevenson, without cost, an aggregate of 666,700 shares of the common stock
of HF Holdings as part of the Company's Recapitalization. Mr. Watterson
received 375,000 of those shares, while Mr. Stevenson received 291,700
shares.
(2) Includes the annual cost of providing the named person with the use of an
automobile during the year.
(3) On September 27, 1999, the Company and HF Holdings entered into management
agreements with each of Mr. Watterson and Mr. Stevenson, which provide for
a closing fee of $417,000 in the aggregate and shared equally. Messrs.
Watterson and Stevenson also receive an annual management fee of $67,000 in
the aggregate and shared equally.
(4) Options to purchase shares of HF Holdings' common stock
(5) Includes amounts contributed by the Company for the benefit of the Named
Executive Officers under the Company's 401 (K) Plan and the Company's
deferred compensation plan.
(6) Includes a management fee of $33,500 paid by the Company.
(7) Includes amounts for personal use of the Company jet.
(8) Includes a one-time retention bonus of $92,000 as an incentive to stay
through the 1999 restructuring.
(9) Includes a one-time retention bonus of $100,000 as an incentive to stay
through the 1999 restructuring.
62
The following table sets forth information as of May 31, 2002, concerning
options of HF Holdings, Inc. exercised by each of the named executive officers
in 2002 and year-end option values:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Value of Unexercised
Number of Unexercised In-the-Money
Shares Acquired Value Options at May 31, 2001 (#) Options at May 31, 2001 ($)(1)
on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/ Unexercisable
--------------- ------------ --------------------------- ------------------------------
Common Common Common Common
Name Stock Stock Stock Stock
- ---- --------------- ------------ --------------------------- ------------------------------
Scott Watterson.......... -- -- -- --
Gary Stevenson........... -- -- -- --
S. Fred Beck............. -- -- 49,995/49,995 --
David J. Watterson....... -- -- 59,979/59,979 --
Richard Hebert........... -- -- -- --
- --------
(1) As of May 31, 2002 there was no market for the common stock of HF Holdings,
Inc., no value has been attributed to the equity underlying these options.
There has been no arm's length sales of HF Holding's common stock since the
closing of the recapitalization in September of 1999.
1999 Junior Management Stock Option Plan
In September 1999, HF Holdings adopted its 1999 Junior Management Stock
Option Plan (the "1999 Stock Option Plan") which provides for the grant to
eligible employees of the Company of nonstatutory options. A total of 333,300
shares of common stock of HF Holdings were reserved and issued under the 1999
Stock Option Plan, which is administered by the Board of Directors or a
committee thereof.
Committee Interlocks and Insider Participation
We did not maintain a compensation committee during 2002. Messrs. Scott
Watterson's and Stevenson's fiscal 2002 compensation was determined prior to
the September restructuring pursuant to employment contracts that had been in
place since 1989 and, after the September restructuring, pursuant to the newly
entered into employment agreements described below under the caption
"--Employment Agreements". Messrs. Watterson and Stevenson participated in the
deliberations concerning the compensation of other officers, and Mr. Beck
participated in the deliberations concerning the compensation of officers other
than himself and Messrs. Watterson and Stevenson.
Compensation of Directors
Our directors do not receive any compensation for serving on the Board of
Directors except for Messrs. Tuttleman and Dunwoody who are paid $25,000
annually for their services as directors. Directors are reimbursed for their
out-of-pocket expenses incurred in connection with their service as directors.
The Company also maintains liability insurance policies for its directors. See
"Certain Relationships and Related Party Transactions--Management Fees" for a
more detailed description of these arrangements.
Performance Bonus
On June 18, 2002, the Board of Directors approved the establishment of a
bonus pool of $1.5 million. The Board gave discretion to Gary Stevenson and
Scott Watterson to determine eligible employees and the amounts payable to each
employee. The Board also granted an incremental performance bonus to Scott
Watterson and Gary Stevenson, over and above any bonus payable pursuant to
their employment agreements (as described below), in the amount of $500,000 and
$350,000 respectively. These bonuses were paid in August and accrued in our
May 31, 2002 financial statements.
63
Employment Agreements
On September 27, 1999, we entered into three-year employment agreements with
each of Mr. Watterson and Mr. Stevenson. Subsequently these agreements have
been extended to May 31, 2003. The employment agreements provide for the
continued employment of Mr. Watterson as Chairman and Chief Executive Officer
with an increase in base salary from $450,000 to $525,000, and Mr. Stevenson as
President and Chief Operating Officer with an increase in base salary from
$400,000 to $475,000. Except as set forth below, in all other material respects
the agreements are substantially identical.
On September 27, 1999, each of Mr. Watterson and Mr. Stevenson received a
bonus of $500,000. Each executive is also entitled to participate in a bonus
program providing for a bonus equal to a percentage of the consolidated EBITDA
(as defined in the Company's credit facility) of the Company and its
subsidiaries (the Company's "EBITDA") which percentage shall equal 1.25% for
Mr. Watterson and 1.10% for Mr. Stevenson. The executives will not be entitled
to a bonus, however, unless the Company's Profits exceed 5.5% of net sales.
We may terminate each executive's employment (1) for cause as provided in
each agreement, (2) upon six months' disability, or (3) without cause. Each
executive may similarly terminate his employment immediately for cause as
provided in his employment agreement, upon three months notice to perform
full-time church service or for any reason upon six months' notice. In the
event we terminate either executive's employment for cause, or such employment
terminates as a result of the death of the executive, as the case may be, the
executive will not be entitled to further salary, benefits or bonus. If we
terminate the executive's employment without cause, or the executive terminates
his employment with or without cause, we will be obligated to pay the executive
his salary and bonus for a period of two years from the date of termination. If
we terminate the executive's employment upon the executive's disability, we are
obligated to pay as severance an amount equal to one month's base salary then
in effect for each calendar year or part thereof elapsed since January 1, 1988,
provided that such severance pay is reduced by payments under applicable
disability insurance.
The employment agreements prohibit the executives from engaging in outside
business activity during the term, subject to exceptions. The employment
agreements provide for customary confidentiality obligations and, in addition,
a non-competition obligation for a period of four years following termination
(two years if the executive quits with cause or without cause or is terminated
without cause, except that we may, at our option, extend such period for up to
two additionally years by paying the executive his salary and bonus during the
extended period).
Under the employment agreements, the executives (and their affiliates) shall
be entitled to indemnification to the fullest extent allowed by Delaware law
with respect to all losses, costs, expenses and other damages in connection
with any lawsuits or other claims brought against them in their capacity as
officers or directors or shareholders (or affiliates thereof) of HF Holdings or
any of its past or present parent or subsidiary or other affiliated companies.
64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
HF Holdings, Inc. owns all of our outstanding common stock. The following
table and related notes set forth information with respect to the beneficial
ownership of HF Holdings' 7,771,613 outstanding shares of common stock as of
May 31, 2002 by (i) each person known to HF Holdings to beneficially own more
than 5.0% of the outstanding shares of common stock of HF Holdings, and (ii)
each director and executive officer of HF Holdings individually and (iii) all
directors and executive officers of HF Holdings as a group.
Common Stock
Beneficially Owned (1)
Percent of
Number of Outstanding
Names Shares Shares
----- --------- -----------
Scott R. Watterson+ (2)........................... 376,000 4.86%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Gary E. Stevenson+ (3)............................ 292,700 3.78%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
The Bain Funds (4)................................ 5,161,035 66.69%
c/o Bain Capital, Inc.
111 Huntington Avenue
Boston, Massachusetts 02199
Robert C. Gay+ (5)................................ 5,161,035 66.69%
c/o Bain Capital, Inc.
111 Huntington Avenue
Boston, Massachusetts 02199
Ronald P. Mika+ (5)............................... 5,161,035 66.69%
c/o Bain Capital, Inc.
111 Huntington Avenue
Boston, Massachusetts 02199
Gregory Benson+ (5)............................... 5,161,035 66.69%
c/o Bain Capital, Inc.
Devonshire House
Mayfair Place
London WIJ 8AJ
Credit Suisse First Boston Corporation (6)........ 1,312,934 16.96%
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Christopher R. Pechock+ (7)....................... 1,312,934 16.96%
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
65
Percent of
Number of Outstanding
Names Shares Shares
- ----- --------- -----------
David Matlin+ (7)........................................... 1,312,934 16.96%
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
HF Investment Holdings, LLC................................. 5,160,035 66.69%
c/o ICON Health & Fitness, Inc.
1500 South 100 West
Logan, Utah 8432
W. McComb Dunwoody+......................................... 344,002 3.44%
c/o Inverness/Phoenix Capital LLC
630 Fifth Avenue, Suite 2435
New York, New York 10111
Stanley C. Tuttleman+....................................... 172,002 1.72%
Tuttson's Inc.
349 Montgomery Avenue
P.O. Box 22405
Bala Cynwyd, Pennsylvania 19004
David J. Watterson (8)...................................... 18,173 --
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
S. Fred Beck (8)............................................ 15,149 --
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
All directors and executive officers as a group (11 persons) 7,692,264 98.55%
+ Director of HF Holdings................................... 7,314,620
- --------
(1) Except as otherwise indicated, (a) each owner has sole voting and
investment power with respect to the shares set forth and (b) the figures
in this table are calculated in accordance with Rule 13d-3, under the
Exchange Act of 1934, as amended. The table includes the HF Holdings
Warrants (which have an exercise price, subject to adjustment, of $.01 per
share) which are presently exercisable. The shares reported in this table
as owned by a stockholder do not include the shares over which such
stockholder has the right to direct the vote pursuant to the Stockholders
Agreement.
(2) Includes 1,000 shares of common stock owned by HF Investment Holdings, of
which Mr. Watterson is deemed the beneficial owner by virtue of being a
director. Mr. Watterson disclaims beneficial ownership of any such shares
in which he does not have a pecuniary interest.
(3) Includes 1,000 shares of common stock owned by HF Investment Holdings, of
which Mr. Stevenson is deemed the beneficial owner by virtue of being a
director. Mr. Stevenson disclaims beneficial ownership of any such shares
in which he does not have a pecuniary interest.
(4) Includes 5,160,035 shares of common stock beneficially owned by HF
Investment Holdings, of which the Bain Funds may be deemed the beneficial
owners by virtue of their control of HF Investment Holdings pursuant to its
operating agreement. Also includes 1,000 shares of common stock owned by HF
Investment Holdings, of which the Bain Funds may be deemed the beneficial
owners by virtue of the fact that one or more of their general partners or
principals, or one or more general partners or principals of one of their
general partners, is a director of HF Investment Holdings. The Bain Funds
disclaim beneficial ownership of any shares in which they do not have a
pecuniary interest.
66
(5) Includes the shares beneficially owned by each of the Bain Funds, of which
each of Mr. Gay, Mr. Mika and Mr. Benson may be deemed the beneficial owner
by virtue of being a general partner or principal, or a general partner or
a principal of the general partner, of such Bain Fund. Also includes 1,000
shares owned by HF Investment Holdings, of which each of Mr. Gay, Mr. Mika
or Mr. Benson may be deemed the beneficial owner by virtue of each being a
director. Each of Mr. Gay, Mr. Mika and Mr. Benson disclaims beneficial
ownership of any such shares in which he does not have a pecuniary interest.
(6) Includes 669,179 shares of common stock subject to purchase upon exercise
of warrants that are presently exercisable.
(7) Includes 1,312,934 shares beneficially owned by Credit Suisse First Boston
Corporation, of which each of Mr. Pechock or Mr. Matlin may be deemed the
beneficial owner by virtue of each being officers of Credit Suisse First
Boston Corporation. Each of Mr. Pechock and Mr. Matlin disclaims beneficial
ownership of any such shares in which he does not have a pecuniary interest.
(8) Represents shares of common stock issuable upon exercise of the vested
portion of options awarded pursuant to the 1999 HF Holdings Junior
Management Stock Option Plan.
67
CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS
Our 1999 Recapitalization
General. As part of our recapitalization in September 1999, Bain Capital
Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust
Associates (collectively "Bain"), Scott Watterson, Gary Stevenson, and Credit
Suisse First Boston Corporation ("CSFB") made an equity investment in HF
Holdings which then made a $40.0 million cash contribution of capital to us.
Investment By Bain Affiliates And Senior Management. Bain, CSFB and Gary
Stevenson and Scott Watterson purchased membership interests in HF Investment
Holdings, LLC ("HF Investment Holdings") for an aggregate of $30.0 million of
cash. Bain purchased $14,950,000 worth of membership interests in the form of
Class B Units, each member of our senior management purchased an aggregate of
$5,000,000 worth of membership interests in the form of Class A Units, CSFB
purchased for $5,000,000 a warrant (the "CSFB Warrant") to purchase Class C
Units and Bain purchased an aggregate of $5,050,000 worth of Class C Units.
HF Investment Holdings in turn purchased, for $30.0 million in cash,
5,160,035 shares of the common stock of HF Holdings (or approximately 51.6% of
the common stock of HF Holdings outstanding on a fully diluted basis upon
consummation of the 1999 recapitalization).
Investment By CSFB. In addition to its investment in HF Investment
Holdings, CSFB, in September, 1999 purchased for an aggregate purchase price of
$10.0 million in cash: (i) $7.5 million principal amount of convertible notes
(which are reflected as common stock on the balance sheet of HF Holdings) that
were convertible into shares of common stock of HF Holdings and (ii) 643,755
shares of common stock of HF Holdings. The convertible notes purchased by CSFB
will mature on September 27, 2011, with no interest accruing thereon and no
payments of principal until maturity. The notes (x) are convertible (by the
holders thereof or by HF Holdings), subject to limited exceptions, into shares
of common stock of HF Holdings upon a liquidation, insolvency or Liquidity
Event (as defined below) and (y) automatically convert into shares of common
stock of HF Holdings upon a bankruptcy, in each case at a conversion price of
$3.88347 per share (subject to readjustment upon stock splits, stock dividends
and combinations of shares).
CSFB received, as a participant in a private exchange offering, including
the retirement of the above described convertible notes, an aggregate of
approximately $4.0 million in cash, $4.5 million principal amount of 12%
subordinated notes due 2005 and warrants to purchase 669,179 shares of common
stock of HF Holdings. It is anticipated that a portion of the proceeds from the
sale of the notes will be used to redeem the 12% senior subordinated notes due
2005 held by CFSB.
Management Equity Grant. On September 27, 1999, HF Holdings issued to Scott
Watterson and Gary Stevenson, without cost, an aggregate of 666,700 shares of
the common stock of HF Holdings (or approximately 6.7% of its common stock
outstanding on a fully diluted basis upon the consummation of the September
recapitalization). Mr. Watterson received 375,000 of these shares, while Mr.
Stevenson received 291,700 shares.
Stockholders Agreement. On September 27, 1999, we entered into a
stockholders agreement (the "Stockholders Agreement") with HF Holdings, HF
Investment Holdings, Bain, Credit Suisse First Boston Corporation and Scott
Watterson and Gary Stevenson.
Under the Stockholders Agreement, holders of HF Holdings' common stock, who
received such common stock in the exchange offer, are subject to transfer
restrictions with respect to their common stock. In addition, these holders
received customary tag along and drag along rights with respect to sales of
common stock of HF Holdings (including sales by any Bain Holder) and
pre-emptive rights with respect to any issuances of common stock by HF Holdings
to HF Investment Holdings. The tag along, drag along and registration rights of
our
68
management are subject to the condition that our senior management own at least
25% of the common stock held by all management holders and the junior
management own at least 15% of the common stock of HF Holdings held by all
management holders, provided such person is still employed by us or has been
employed within the 12 preceding months and the purchaser of the common stock
is a financial buyer.
Holders of warrants to purchase common stock of HF Holdings issued in the
exchange offer received registration rights with respect to the common stock
issuable upon exercise of such warrants.
Pursuant to the Stockholders Agreement, HF Investment Holdings granted to
CSFB an option to purchase a certain percentage (based on the date of exercise
of such option) of the common stock of HF Holdings held by HF Investment
Holdings. HF Investment Holdings also granted to members of our junior
management an option to purchase 216,700 shares of the common stock of HF
Holdings held by HF Investment Holdings. Each of these options is exercisable
only upon the occurrence of a Liquidity Event (as defined in the Stockholders
Agreement).
In addition, HF Investment Holdings is entitled to appoint seven directors
and CSFB is entitled to appoint two directors to our Board of Directors. Upon a
liquidation of HF Investment Holdings, Bain will be entitled to appoint five
directors and Scott Watterson and Gary Stevenson shall have the right to be
directors, provided they remain employed by us.
Management Agreements. On September 27, 1999, our company and HF Holdings
also entered into a new management agreement with a Bain which provides an
annual management fee not to exceed $366,500 in exchange for management
consulting services including providing advice on strategic planning,
development and acquisitions. In addition, if we enter into any acquisition
transactions involving a gross purchase price of at least $10.0 million, Bain
will receive (subject in some circumstances to CSFB's fee described below) a
fee in an amount which will approximate 1% of the gross purchase price of the
transaction (including assumed debt).
Additionally, HF Holdings entered into a management arrangement with CSFB
which provides for an annual management fee of $366,500 in exchange for
consulting services. In addition, if we enter into transactions which
constitute a Liquidity Event (as defined in the Stockholders Agreement), CSFB
will receive a fee in an amount which will approximate 50% of the fee payable
under the management agreement with Bain in connection with such transaction.
On September 27, 1999, our company and HF Holdings also entered into
management agreements with each of Mr. Watterson and Mr. Stevenson which
provide, so long as Bain is receiving a management fee under its management
agreement, an annual management fee of $67,000 in the aggregate shall be paid
to Mr. Watterson and Mr. Stevenson.
The respective management agreements include full indemnification and
expense reimbursement provisions in favor of Bain, CSFB, Mr. Watterson and Mr.
Stevenson, respectively.
Loans to Senior Management
On September 27, 1999 we made non-recourse loans to Scott Waterson and Gary
Stevenson in the principal amounts of $1,209,340 and $990,660 respectively. The
loans were made in connection with stock grants made to Messrs. Waterson and
Stevenson at the time of our September 1999 recapitalization. The notes bear
interest only to the extent that we have taxable net income less than $0 in any
given fiscal year. The notes are secured by shares of ICON and shares of HF
Investment Holdings LCC held by Messrs. Waterson and Stevenson. The notes have
a maturity of 10 years and may be accelerated upon specified events of default
and liquidity events.
Aircraft Lease
On February 8, 2002, we entered into an agreement with FG Aviation, Inc.
("FG"), a company which is jointly owned by certain of our officers, whereby we
have committed to lease a Gulf Stream II jet from FG. Minimum rentals under the
lease, which expires February 2009, are $120,000 per month. In addition, we are
responsible for payment of the aircraft crew and any unscheduled maintenance of
the aircraft.
69
DESCRIPTION OF SENIOR INDEBTEDNESS
Senior Credit Facility
We are party to a credit agreement (the "Credit Agreement") with General
Electric Capital Corporation ("GE"), as administrative and collateral agent
sole and exclusive lead arranger and the lenders, pursuant to which the
lenders, subject to certain conditions, have made available to us a credit
facility of up to $235.0 million.
Structure
The credit facility consists of (i) revolving loans of up to $210.0 million
including a letter of credit subfacility of up to $10.0 million (the "Revolving
Credit Facility"), and (ii) a term loan of $25.0 million (the "Term Loan
Facility").
Availability and Use of Proceeds
The Revolving Credit Facility is subject to a borrowing base defined as up
to 85% of our and our subsidiary guarantors' eligible accounts receivable and
up to the lesser of (a) 60% of our and our subsidiary guarantors' eligible
inventory (with a seasonal increase to 70% during the months from July through
November) valued at the lower of cost or market value, less reserves or (b) 85%
of the appraised net orderly liquidation value of inventory. The undrawn
portion of the Revolving Credit Facility is available to us for general
corporate purposes, including to effect permitted acquisitions. The full amount
of the Term Loan Facility was borrowed pursuant to a single drawing on April 9,
2002, and any amounts repaid or prepaid under the Term Loan Facility may not be
reborrowed.
Interest; Fees
Borrowings under the Revolving Credit Facility will, at our option, bear
interest at either (i) a floating rate equal to the index rate (to be defined
as the higher of the prime rate as reported by the Wall Street Journal or the
Overnight Federal Funds rate plus 50 basis points) plus 1.250%, or (ii) a fixed
rate for periods of one, two, three or six months equal to the reserve adjusted
LIBOR plus 2.625%. Borrowings under the Term Loan Facility will, at our option,
bear interest at either (i) a floating rate equal to the above-described index
rates plus 1.750%, or (ii) a fixed rate for periods of one, two, three or six
months equal to the reserve adjusted LIBOR plus 3.125%. Interest will be
payable monthly in arrears for all index rate loans and at the expiration of
each LIBOR period for all LIBOR loans, provided that with respect to LIBOR
periods greater than three months interest will be payable at three-month
intervals and on the expiration of such LIBOR period. We will be subject to
certain LIBOR breakage fees in connection with any LIBOR based advances. We are
required to pay administration fees, commitment fees and certain expenses and
to provide certain indemnities, all of which we believe are customary for
financings of this type. For so long as any event of default is continuing, any
applicable interest rate shall be increased by 2.0% per annum.
An unused facility fee calculated at a rate equal to 0.50% on the average
unused daily balance of the Revolving Credit Facility will be payable monthly
in arrears. This unused facility fee is subject to upward adjustment annually
to 0.75% if the average annual utilization of the facility is less than 50%.
Fees in respect of letters of credit issued under the Revolving Credit
Facility will be equal to 2.0% per annum on the face amount of the letters of
credit, payable monthly in arrears. We are also required to pay any costs and
expenses incurred by GE in arranging for the issuance or guaranty of letters of
credit and any charges assessed by the issuing bank.
Maturity and Amortization
Loans made under the Revolving Credit Facility will mature on the fifth
anniversary of the closing date. The loan made under the Term Loan Facility
will mature over five years, and amounts due thereunder will amortize
70
on a quarterly basis in twenty equal installments. In the event that the
Revolving Credit Facility is terminated for any reason the Term Loan Facility
shall become immediately due and payable.
Mandatory Repayments
We are required to prepay borrowings under our new credit facility with net
cash proceeds from any of the following: (i) asset sales not in the ordinary
course of business, subject to certain exceptions (ii) sales of equity or debt
securities, (iii) insurance casualty events or condemnation events respecting
any of our property, subject to exceptions for replacement or repair, and (iv)
50% of our consolidated excess cash flow. The foregoing prepayments shall be
applied against principal due, in the inverse order of maturity, on the Term
Loan Facility until such loan is paid in full and thereafter against the
Revolving Credit Facility.
Voluntary Prepayments
We are permitted to make voluntary prepayments of the Term Loan Facility and
to permanently reduce the commitment under the Revolving Credit Facility, in
each case in whole or in part, at our option and without premium or penalty,
subject to certain requirements including reimbursement of the Lenders'
redeployment costs in the case of prepayment of Adjusted LIBOR borrowings other
than at the end of an interest period.
Security and Guarantees
Our parent, HF Holdings, has guaranteed the repayment of the new credit
facility and has secured its guarantee by the pledge of all of the outstanding
common stock of our company. The new credit facility is also secured by
substantially all of our assets, including the assets of our existing and
future domestic and Canadian subsidiaries. Substantially all of the capital
stock of each of our Domestic Subsidiaries has been pledged as part of the
security for the new credit facility. Additionally, substantially all of the
capital stock of ICON du Canada Inc. and 65% of the capital stock of certain
foreign subsidiaries has been pledged as part of the security for the new
credit facility. Each of our domestic and Canadian subsidiaries has directly or
indirectly guaranteed the repayment of the credit facility (with the guarantee
of our Quebec subsidiary to consist of its guarantee of the obligations of our
New Brunswick subsidiary, which in turn will undertake, pursuant to its
guarantee, to guarantee repayment of the new credit facility).
Covenants
The credit agreement contains affirmative and negative covenants customary
for such financings. The covenants, among other things:
. Require us to provide the lenders with monthly unaudited financial
statements and annual audited financial statements;
. Require us to maintain cash management systems consistent with our
current practices;
. Require us to obtain and maintain commercially reasonable insurance
protection for all assets and risks;
. Limit commercial transactions, management agreements, service agreements
and loan transactions between us and our officers, directors, employees
and affiliates;
. Limit certain sale-leaseback transactions;
. Limit our ability to pay cash dividends and other payments or
distributions to our stockholders and holders of our subordinated debt
and limit payments of management fees to affiliates in certain
circumstances;
. Require any acquisitions funded through a sub-facility of $25.0 million
established under the Revolving Credit Facility to meet certain
criteria, including (a) compliance with all financial and other
71
covenants on a pro forma basis after giving effect to any proposed
transaction; (b) $20.0 million in minimum remaining availability after
giving effect to the proposed acquisition; and (c) the lenders' right to
approve contingent liabilities associated with any acquisition including
without exception environmental reviews;
. Prohibit the sale of our stock or material portion of our assets; and
. Prohibit a direct or indirect change in control.
The Credit Agreement also contains standard financial covenants customary in
connection with facilities of this type.
Events of Default
The credit agreement contains events of default customary for such
financings, including, but not limited to: nonpayment of principal, interest,
fees or other amounts when due; violation of covenants; failure of any
representation or warranty to be true in all material respects when made or
deemed made; cross defaults; ERISA; change of control; bankruptcy events;
material judgments; and actual or company-asserted invalidity of the loan
documents, liens or security interests or other material agreements. Such
events of default allow for certain grace periods and materiality concepts.
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DESCRIPTION OF EXCHANGE NOTES
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, "ICON" refers only
to ICON Health & Fitness, Inc. and not to any of its subsidiaries.
ICON issued the initial notes to the initial purchases on April 9, 2002
under an indenture among itself, the Guarantors and The Bank of New York, as
trustee, in a private transaction not subject to the registration requirements
of the Securities Act. The initial purchasers sold all of the outstanding
initial notes to "qualified institutional buyers" as defined in Rule 144A,
under the Securities Act and to persons outside the United States under
Regulation S. The form and terms of the exchange notes are the same as the form
and terms of the initial notes they will replace except that:
. ICON will register the exchange notes under the securities act;
. the exchange notes will not bear legends restricting transfer; and
. holders of the exchange notes will not be entitled to some rights under
the registration rights agreement.
See "Notice to Investors." The terms of the notes include those stated in
the indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of the notes. Copies of the indenture and the
registration rights agreement are available as set forth below under
"--Additional Information." Certain defined terms used in this description but
not defined below under "--Certain Definitions" have the meanings assigned to
them in the indenture.
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indenture.
Brief Description of the Notes and the Guarantees
The Notes
The notes:
. are general unsecured obligations of ICON;
. are subordinated in right of payment to all existing and future Senior
Debt of ICON;
. are pari passu in right of payment with any future senior subordinated
Indebtedness of ICON; and
. are unconditionally guaranteed by the Guarantors.
The Guarantees
The notes are guaranteed by all of ICON's Domestic Subsidiaries.
Each guarantee of the notes:
. is a general unsecured obligation of the Guarantor;
. is subordinated in right of payment to all existing and future Senior
Debt of that Guarantor; and
. is pari passu in right of payment with any future senior subordinated
indebtedness of that Guarantor.
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As indicated above and as discussed in detail below under the caption
"--Subordination," payments on the notes and under these guarantees will be
subordinated to the payment of Senior Debt. The indenture will permit us and
the Guarantors to incur additional Senior Debt.
Not all of our subsidiaries will guarantee the notes. In the event of a
bankruptcy, liquidation or reorganization of any of these non-guarantor
subsidiaries, the non-guarantor subsidiaries will pay the holders of their debt
and their trade creditors before they will be able to distribute any of their
assets to us. See footnote 19 to our Consolidated Financial Statements included
at the back of this offering circular for detail about the division of our
consolidated revenues and assets between our guarantor and non-guarantor
subsidiaries.
As of the date of the indenture, all of our Domestic Subsidiaries will be
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "--Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries," we will be permitted to designate certain of our
subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will
not be subject to many of the restrictive covenants in the indenture. Our
Unrestricted Subsidiaries and our Foreign Subsidiaries will not guarantee the
notes. Our Canadian Subsidiaries will guarantee the notes.
Principal, Maturity and Interest
The notes are initially being offered in the principal amount of $155.0
million. We may, without the consent of the holders, increase such principal
amount in the future on the same terms and conditions and with the same CUSIP
number(s) as the notes being offered hereby. Any offering of additional notes
is subject to the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." The
notes and any additional notes subsequently issued under the indenture will be
treated as a single class for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase.
ICON will issue notes in denominations of $1,000 and integral multiples of
$1,000. The notes will mature on April 1, 2012.
Interest on the notes will accrue at the rate of 11.25% per annum and will
be payable semi-annually in arrears on January 1 and July 1, commencing on July
1, 2002. ICON will make each interest payment to the holders of record on the
immediately preceding December 15 and June 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a holder has given wire transfer instructions to ICON, ICON will pay all
principal, interest and premium and Additional Interest, if any, on that
holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless ICON elects to make interest
payments by check mailed to the holders at their address set forth in the
register of holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. ICON may
change the paying agent or registrar without prior notice to the holders of the
notes, and ICON or any of its subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of
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notes. Holders will be required to pay all taxes due on transfer. ICON is not
required to transfer or exchange any note selected for redemption. Also, ICON
is not required to transfer or exchange any note for a period of 15 days before
a selection of notes to be redeemed.
Subsidiary Guarantees
The notes will be guaranteed, directly or indirectly, by each of ICON's
current and future Domestic subsidiaries (with the Subsidiary Guarantee of our
Quebec subsidiary to consist of its guarantee of the obligations of our New
Brunswick subsidiary, which in turn will undertake, pursuant to its Subsidiary
Guarantee, to guarantee repayment of the notes). These subsidiary guarantees
will be joint and several obligations of the guarantors. Each subsidiary
guarantee will be subordinated to the prior payment in full of all Senior Debt
of that Guarantor on the same basis and to the same extent as the notes are
subordinated to the Senior Debt of ICON. The obligations of each guarantor
under its subsidiary guarantee will be limited as necessary to prevent that
subsidiary guarantee from constituting a fraudulent conveyance under applicable
law. See, however, "Risk Factors--Federal and state statutes allow courts,
under specific circumstances, to void guarantees and require noteholders to
return payments received from guarantors."
A guarantor may not sell or otherwise dispose of all or substantially all of
its assets to, or consolidate with or merge with or into (whether or not such
guarantor is the surviving person), another person, other than ICON or another
guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition
or the Person formed by or surviving any such consolidation or merger
assumes all the obligations of that guarantor under the indenture, its
subsidiary guarantee and the registration rights agreement pursuant to a
supplemental indenture reasonably satisfactory to the trustee; or
(b) the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the indenture.
The subsidiary guarantee of a guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that guarantor (including by way of
merger or consolidation) to a Person that is not (either before or after
giving effect to such transaction) a subsidiary of ICON, if such sale or
other disposition, merger or consolidation complies with the relevant
provisions of the indenture;
(2) in connection with any sale of all of the Capital Stock of a
guarantor to a person that is not (either before or after giving effect to
such transaction) a subsidiary of ICON, if the sale complies with the "Asset
Sale" provisions of the indenture; or
(3) if the guarantor is designated by ICON as an Unrestricted Subsidiary
in accordance with the applicable provisions of the indenture.
See "--Repurchase at the Option of Holders--Asset Sales."
Subordination
The payment of principal, interest and premium and Additional Interest, if
any, on the notes will be subordinated to the prior payment in full in cash of
all Senior Debt of ICON, including Senior Debt incurred after the date of the
indenture.
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The holders of Senior Debt will be entitled to receive payment in full in
cash of all obligations due in respect of Senior Debt (including interest after
the commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt) before the holders of notes will be entitled to receive
any payment with respect to the notes (except that holders of notes may receive
and retain Permitted Junior Securities and payments made from the trust
described under "--Legal Defeasance and Covenant Defeasance"), in the event of
any distribution to creditors of ICON or any guarantor:
(1) in a liquidation or dissolution of ICON or any guarantor;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to ICON or any guarantor or their respective property;
(3) in an assignment for the benefit of creditors of ICON or any
guarantor; or
(4) in any marshaling of ICON's or any guarantor's assets and liabilities.
ICON also may not make any payment or distribution on account of or in
respect of the notes (except in Permitted Junior Securities or from the trust
described under "--Legal Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2) any other default occurs and is continuing on any series of
Designated Senior Debt that permits holders of that series of Designated
Senior Debt to accelerate its maturity and the trustee receives a notice of
the default (a "Payment Blockage Notice") from ICON or the holders (or their
representative) of any Designated Senior Debt.
Payments on the notes may and will be resumed:
(1) in the case of a payment default, upon the date on which the default
is cured or waived; and
(2) in the case of a nonpayment default, upon the earlier of the date on
which the nonpayment default is cured or waived or 179 days after the date
on which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, interest and premium and
Additional Interest, if any, on the notes that have come due have been paid
in full in cash.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the trustee will be, or be made, the basis
for a subsequent Payment Blockage Notice unless the default has been cured or
waived for a period of not less than 90 days.
If the trustee or any holder of the notes receives a payment in respect of
the notes (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") when:
(1) the payment is prohibited by these subordination provisions; and
(2) the trustee or the Holder has actual knowledge that the payment is
prohibited;
the trustee or the holder, as the case may be, will hold the payment in trust
for the benefit of the holders of Senior Debt. Upon the proper written request
of the holders of Senior Debt, the trustee or the Holder, as the case may be,
will deliver the amounts in trust to the holders of Senior Debt or their proper
representative.
ICON must promptly notify holders of Designated Senior Debt (or their
representative) if payment of the notes is accelerated because of an Event of
Default.
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As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of ICON, holders of notes may
recover less ratably than creditors of ICON who are holders of Senior Debt. See
"Risk Factors--The notes and the guarantees will be junior to our and the
guarantors' senior debt respectively."
Optional Redemption
At any time prior to April 1, 2005, ICON may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 111.25% of the principal amount thereof,
plus accrued and unpaid interest and Additional Interest, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings;
provided that:
(1) at least 65% of the aggregate principal amount of notes issued under
the indenture remains outstanding immediately after the occurrence of a
redemption (excluding notes held by ICON and its Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of a
Equity Offering.
Except pursuant to the preceding paragraph, the notes may not be redeemed at
the option of ICON prior to April 1, 2007. Thereafter, the notes may be
redeemed at the option of ICON in whole or, in part, upon not less than 30 nor
more than 60 days' notice by mail to holders of the notes.
The redemption prices (expressed as percentages of principal amount) are as
follows for notes redeemed during the periods set forth below:
Redemption
Period Price
- ------ ----------
April 1, 2007 through March 31, 2008............................. 105.625%
April 1, 2008 through March 31, 2009............................. 103.750%
April 1, 2009 through March 31, 2010............................. 101.875%
April 1, 2010 and thereafter..................................... 100.000%
in each case together with accrued interest up to but not including the
redemption date; provided that if the redemption date falls after an interest
payment record date and on or before an interest payment date, then the
interest payment shall be payable to holders of record on the relevant record
date.
Mandatory Redemption
ICON is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require ICON to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control
Offer on the terms set forth in the indenture. In the Change of Control Offer,
ICON will offer a Change of Control Payment in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid
interest and Additional Interest, if any, on the notes repurchased, to the date
of purchase. Within 30 days following any Change of Control, ICON will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control Payment Date specified in the notice. The Change of Control Payment
date will be no earlier than 30 days and no later than 60 days from the date
such notice is mailed. To the extent that the provisions of any securities laws
or regulations conflict with the Change of Control provisions of the indenture,
ICON will comply with the applicable securities laws and regulations and will
not be deemed to have breached its obligations under the Change of Control
provisions of the indenture by virtue of any conflict.
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On the Change of Control Payment Date, ICON will, to the extent lawful and
subject to the provisions set forth under the caption "--Subordination":
(1) accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by ICON.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for the notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
The indenture provides that prior to complying with any of the provisions of
this "Change of Control" covenant, but in any event within 60 days following a
Change of Control, ICON will either repay all outstanding Senior Debt or obtain
the requisite consents, if any, under all agreements governing outstanding
Senior Debt to permit the repurchase of notes required by this covenant. ICON
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
The provisions described above that require ICON to make a Change of Control
Offer following a Change of Control will be applicable whether or not any other
provisions of the indenture are applicable. Except as described above with
respect to a Change of Control, the indenture does not contain provisions that
permit the holders of the notes to require that ICON repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
ICON will not be required to make a Change of Control Offer if a third party
makes the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the indenture applicable to a
Change of Control Offer made by ICON and purchases all notes properly tendered
and not withdrawn under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of ICON and its Subsidiaries
taken as a whole. Although there is a limited body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law and it may be unclear as to whether a Change of
Control has occurred. Accordingly, the ability of a Holder of notes to require
ICON to repurchase its notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of the assets of ICON and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
ICON will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) ICON (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) the fair market value is determined by ICON's Board of Directors and
evidenced by a resolution of the Board of Directors set forth in an
officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration received in the Asset Sale by ICON
or a Restricted Subsidiary is in the form of cash. For purposes of this
provision, each of the following will be deemed to be cash:
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(a) any liabilities, as shown on ICON's or such Restricted
Subsidiary's most recent balance sheet, of ICON or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are
by their terms subordinated to the notes or any Subsidiary Guarantee)
that are assumed by the transferee of any such assets pursuant to a
customary agreement that releases ICON or such Restricted Subsidiary
from further liability;
(b) any securities, notes or other obligations received by ICON or
any such Restricted Subsidiary from such transferee that are converted
within 30 days by ICON or such Restricted Subsidiary into cash, to the
extent of the cash received in that conversion; and
(c) any payment of Senior Debt secured by the assets sold in the
Asset Sale.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
ICON may apply those Net Proceeds at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving
credit Indebtedness, to correspondingly reduce commitments with respect
thereto;
(2) to acquire all or substantially all of the assets of, or a majority
of the Voting Stock of, another Permitted Business;
(3) to make capital expenditures;
(4) to acquire other long-term assets that are used or useful in a
Permitted Business; or
(5) for any combination of clauses (1) through (4) above.
Pending the final application of any Net Proceeds, ICON may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, ICON will make an
Asset Sale Offer to all Holders of notes and all holders of other Indebtedness
that is pari passu with the notes. The offer price in any Asset Sale Offer will
be equal to 100% of principal amount plus accrued and unpaid interest and
Additional Interest, if any, to the date of purchase, and will be payable in
cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer,
ICON may use those Excess Proceeds for any purpose not otherwise prohibited by
the indenture. If the aggregate principal amount of notes and other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the trustee will select the notes and such other pari passu
Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset
Sale Offer, the amount of Excess Proceeds will be reset at zero.
ICON will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, ICON will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the Asset Sale
provisions of the indenture by virtue of such conflict.
The agreements governing ICON's Senior Debt prohibit ICON from purchasing
any notes, and also provide that certain change of control or asset sale events
with respect to ICON will constitute a default under these agreements. Any
future credit agreements or other agreements relating to Senior Debt to which
ICON becomes a party may contain similar restrictions and provisions. In the
event a Change of Control or Asset Sale occurs at a time when ICON is
prohibited from purchasing notes, ICON could seek the consent of its senior
lenders to the purchase of notes or could attempt to refinance the borrowings
that contain such prohibition. If ICON does not obtain such a consent or repay
the borrowings, ICON will remain prohibited from purchasing notes. In this
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case, ICON's failure to purchase tendered notes would constitute an Event of
Default under the indenture which would, in turn, constitute a default under
such Senior Debt. In such circumstances, the subordination provisions in the
indenture would likely restrict payments to the Holders of notes.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by a method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior
to a redemption date if the notice is issued in connection with a defeasance of
the notes or a satisfaction and discharge of the indenture. Notices of
redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that
note that is to be redeemed. A new note in principal amount equal to the
unredeemed portion of the original note will be issued in the name of the
Holder of notes upon cancellation of the original note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
Certain Covenants
Restricted Payments
ICON will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of ICON's or any of its Restricted Subsidiaries' Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving ICON or any of its Restricted Subsidiaries) or to
the direct or indirect holders of ICON's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as a holder (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of ICON or to ICON or a Restricted Subsidiary of ICON);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
ICON) any Equity Interests of ICON or any direct or indirect parent of ICON;
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Subsidiary Guarantees, except a payment of
interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all payments and other actions set
forth in these clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of the Restricted Payment; and
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(2) ICON would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by ICON and its Restricted Subsidiaries after
the date of the indenture (excluding Restricted Payments permitted by
clauses (2), (3), (4), (6), (7) and (8) of the next succeeding paragraph),
is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of ICON for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the indenture to the end of ICON's most
recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus
(b) 100% of the aggregate net cash proceeds received by ICON since
the date of the indenture as a contribution to its common equity capital
or from the issue or sale of Equity Interests of ICON (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of ICON that have been converted into or exchanged for such
Equity Interests (other than Equity Interests (or Disqualified Stock or
debt securities) sold to a Subsidiary of ICON), plus
(c) to the extent that any Restricted Investment that was made after
the date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (i) the cash return of capital with
respect to the Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment, plus
(d) to the extent that any of our Unrestricted Subsidiaries is
redesignated as a Restricted Subsidiary after the date of the indenture,
the fair market value of ICON's Investment in such Subsidiary as of the
date of such redesignation.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of ICON or any Guarantor or of
any Equity Interests of ICON in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of
ICON) of, Equity Interests of ICON (other than Disqualified Stock); provided
that the amount of any net cash proceeds that are utilized for any
redemption, repurchase, retirement, defeasance or other acquisition will be
excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of ICON or any Guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of ICON to the
holders of its Equity Interests on a pro rata basis;
(5) so long as no Default has occurred and is continuing or would be
caused thereby, the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of ICON or any
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Restricted Subsidiary of ICON held by any of ICON's (or any of its
Subsidiaries') current or former employees, officers or directors pursuant to
any management equity subscription agreement, stock option agreement,
employment agreement, severance agreement, employee benefits plan or similar
agreement or plan; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests may not exceed $5.0
million;
(6) repurchases of Equity Interests deemed to occur upon exercise of
stock options if those Equity Interests represent a portion of the exercise
price of those options;
(7) distributions to a parent corporation for administrative expenses in
an amount not to exceed $500,000 in any fiscal year;
(8) cash dividends to a parent corporation in amounts required for that
parent corporation to pay any federal, state or local income taxes to the
extent that the income taxes are directly attributable to the income of ICON
and its Subsidiaries; and
(9) so long as no Default has occurred and is continuing or would be
caused thereby, other Restricted Payments in an amount not to exceed $5.0
million.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by ICON or such Subsidiary, as
the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this covenant will
be determined by the Board of Directors whose resolution with respect thereto
will be delivered to the trustee. The Board of Directors' determination must be
based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if the fair market value exceeds
$5.0 million. Not later than the date of making any Restricted Payment, ICON
will deliver to the trustee an officers' certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this "Restricted Payments" covenant were computed,
together with a copy of any fairness opinion or appraisal required by the
indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
ICON will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt). In
addition, ICON will not, and will not permit any of the Guarantors to, issue
any Disqualified Stock and will not permit any of its Subsidiaries that do not
guarantee the notes to issue any shares of preferred stock; provided, however,
that ICON and any Guarantor may incur Indebtedness (including Acquired Debt) or
issue Disqualified Stock, if the Fixed Charge Coverage Ratio for ICON's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which the additional
Indebtedness is incurred or the Disqualified Stock is issued would have been at
least (a) 2.25 to 1.0, if the incurrence or issuance is on or prior to April 1,
2004 or (b) 2.50 to 1.0, if the incurrence or issuance is after April 1, 2004,
in each case, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred or Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by ICON and any Guarantor of additional Indebtedness
and letters of credit under Credit Facilities in an aggregate principal
amount at any one time outstanding under this clause (1) (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of ICON and its Subsidiaries thereunder) not to exceed
the greater of (x) $235.0 million (provided that such amount
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shall be reduced to the extent of any reduction or elimination of any
commitment under any Credit Facility resulting from or relating to the
formation of any Receivables Subsidiary or the consummation of any Qualified
Receivables Transaction and shall thereafter be increased to an amount not
greater than $235.0 million to the extent of any increase in the commitment
under any Credit Facility resulting from or relating to the termination of
any Qualified Receivables Transaction or the elimination of any Receivables
Subsidiary) or (y) the amount of the Borrowing Base as of the date of such
incurrence;
(2) the incurrence by ICON and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by ICON and the Guarantors of Indebtedness represented
by the notes and the related Subsidiary Guarantees to be issued on the date
of the indenture and the exchange notes and the related Subsidiary
Guarantees to be issued pursuant to the registration rights agreement;
(4) the incurrence by ICON or any of its Restricted Subsidiaries of
Indebtedness (including, without limitation, Capital Lease Obligations)
incurred for the purpose of financing all or any part of the purchase price
or cost of construction or improvement of property, plant or equipment used
in the business of ICON or a Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any Indebtedness incurred pursuant to this
clause (4), not to exceed $10.0 million at any time outstanding;
(5) the incurrence by ICON or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4), (5), (10) or (13) of this paragraph;
(6) the incurrence by ICON or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among ICON and any of its Restricted
Subsidiaries; provided, however, that:
(a) if ICON or any Guarantor is the obligor on such Indebtedness,
such Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes, in the case
of ICON, or the Subsidiary Guarantee (other than in the case of
intercompany Indebtedness of a Guarantor to ICON), in the case of a
Guarantor except to the extent the notes are pledged as collateral for
Senior Debt; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any Indebtedness being held by a Person other than ICON or a
Restricted Subsidiary of ICON and (ii) any sale or other transfer of any
Indebtedness to a Person that is not either ICON or a Restricted
Subsidiary of ICON; will be deemed, in each case, to constitute an
incurrence of such Indebtedness by ICON or a Restricted Subsidiary, as
the case may be, that was not permitted by this clause (6);
(7) the incurrence by ICON or any of its Restricted Subsidiaries of
Hedging Obligations in the ordinary course of business or to the extent
required under the Credit Facilities;
(8) the guarantee by ICON or any of the Guarantors of Indebtedness of
ICON or a Restricted Subsidiary of ICON that was permitted to be incurred by
another provision of this covenant;
(9) the incurrence by ICON's Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any Indebtedness ceases to be Non-Recourse
Debt of an Unrestricted Subsidiary, such event will be deemed to constitute
an incurrence of Indebtedness by a Restricted Subsidiary of ICON that was
not permitted by this clause (9);
(10) the incurrence by ICON or any Restricted Subsidiary of Indebtedness
arising from agreements of ICON or any Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in
each case, incurred or assumed in connection with the disposition of any
business, assets or a Subsidiary, other than guarantees of Indebtedness
incurred by any Person acquiring all or any portion of the business, assets
or Subsidiary for the purpose of financing the acquisition; provided,
however, that (i)
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the Indebtedness is not reflected on the balance sheet of ICON or any
Restricted Subsidiary (contingent obligations referred to in a footnote or
footnotes to financial statements and not otherwise reflected on the balance
sheet will not be deemed to be reflected on such balance sheet for purposes
of this clause (i)) and (ii) the maximum assumable liability in respect of
such Indebtedness shall at no time exceed the gross proceeds, including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any subsequent
changes in value), actually received by ICON and/or the Restricted
Subsidiary in connection with the disposition;
(11) the incurrence by any Foreign Subsidiaries of ICON in an aggregate
principal amount (or accreted value, as applicable) at any time outstanding
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (11),
not to exceed $10.0 million;
(12) the incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction that is without recourse to ICON or to any
other Restricted Subsidiary of ICON or their assets (other than a
Receivables Subsidiary and its assets and, as to ICON or any of its
Restricted Subsidiaries, other than pursuant to representations, warranties,
covenants and indemnities customary for transactions this type) and is not
guaranteed by any such Person; and
(13) the incurrence by ICON or any of the Guarantors of additional
Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (13), not to exceed $7.0 million.
The accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on Disqualified
Stock in the form of additional shares of the same class of Disqualified Stock
will not be deemed to be an incurrence of Indebtedness or an issuance of
Disqualified Stock for purposes of this covenant; provided, in each case, that
the amount thereof is included in Fixed Charges of ICON as accrued.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (13) above, or is entitled to
be incurred pursuant to the first paragraph of this covenant, ICON will, in its
sole discretion, be permitted to classify the item of Indebtedness on the date
of its incurrence, or later reclassify all or a portion of the item of
Indebtedness, in any manner that complies with this covenant. Indebtedness
under Credit Facilities outstanding on the date on which notes are first issued
and authenticated under the indenture will be deemed to have been incurred on
that date in reliance on the exception provided by clause (1) of the definition
of Permitted Debt.
Sale and Leaseback Transactions
ICON will not, and will not permit any of its Restricted Subsidiaries to,
enter into any sale and leaseback transaction; provided that ICON or any
Restricted Subsidiary may enter into a sale and leaseback transaction if:
(1) ICON or that Restricted Subsidiary, as applicable, could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating
to such sale and leaseback transaction under the covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described below under the caption "--Liens;"
(2) the gross cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by the
Board of Directors and set forth in an officers' certificate delivered to
the trustee, of the property that is the subject of that sale and leaseback
transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and ICON applies the proceeds of such transaction in
compliance with, the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales."
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Notwithstanding the foregoing, ICON or any of its Restricted Subsidiaries
may enter into sale and leaseback transactions that in the aggregate amount do
not exceed $2.0 million in any twelve-month period without complying with the
above provisions.
Anti-Layering
ICON will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt of ICON and senior in any respect in right of payment to the
notes. No Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to the Senior Debt of such Guarantor and senior in any respect in right
of payment to such Guarantor's Subsidiary Guarantee.
Liens
ICON will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien of any kind
securing Indebtedness, Attributable Debt or trade payables on any asset now
owned or hereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
ICON will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its capital stock to
ICON or any of its Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to ICON or any of its Restricted Subsidiaries;
(2) make loans or advances to ICON or any of its Restricted Subsidiaries;
or
(3) transfer any of its properties or assets to ICON or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities as
in effect on the date of the indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of those agreements, provided that the amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those contained
in those agreements on the date of the indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by ICON or any of its Restricted Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness or Capital
Stock was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(5) customary non-assignment provisions in contracts or leases entered
into in the ordinary course of business and consistent with past practices;
85
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on that property of the nature
described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of the Capital Stock
or assets of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending the closing of such sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained
in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption "--Liens"
that limit the right of the debtor to dispose of the assets subject to such
Liens;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course
of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) agreements not described in clause (1) in effect on the date of the
indenture;
(13) covenants in agreements relating to the Indebtedness of Foreign
Subsidiaries;
(14) Indebtedness or other contractual requirements of a Receivables
Subsidiary in connection with a Qualified Receivables Transaction, provided
that such restrictions apply only to such Receivables Subsidiary; and
(15) any amendments to any of the foregoing that, when taken as a whole,
are not more restrictive than those contained in the agreement being amended.
Merger, Consolidation or Sale of Assets
ICON may not, directly or indirectly: (1) consolidate or merge with or into
another Person (whether or not ICON is the surviving corporation); or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of
the properties or assets of ICON and its Restricted Subsidiaries taken as a
whole, in one or more related transactions, to another Person; unless:
(1) either: (a) ICON is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than ICON)
or to which such sale, assignment, transfer, conveyance or other disposition
has been made is a corporation organized or existing under the laws of the
United States, any state of the United States or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than ICON) or the Person to which such sale, assignment, transfer,
conveyance or other disposition has been made assumes all the obligations of
ICON under the notes, the indenture and the registration rights agreement
pursuant to a supplemental indenture or other agreements reasonably
satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) ICON or the Person formed by or surviving any consolidation or merger
(if other than ICON), or to which the sale, assignment, transfer, conveyance
or other disposition has been made will, on the date of the transaction
after giving pro forma effect thereto and any related financing transactions
as if the same had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
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In addition, ICON may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to:
(1) a sale, assignment, transfer, conveyance or other disposition of
assets between or among ICON and any of the Guarantors;
(2) a merger or consolidation of a Restricted Subsidiary into ICON; or
(3) the merger or consolidation of ICON into an affiliate of ICON
consummated for the sole purpose of reincorporating in another jurisdiction
under the laws of the United States, any state of the United States or the
District of Columbia.
Transactions with Affiliates
ICON will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
ICON or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by ICON or such Restricted Subsidiary
with an unrelated Person; and
(2) ICON delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.0 million, a resolution of the Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by ICON or any of its
Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of ICON or such Restricted Subsidiary;
(2) payment of fees, compensation, benefits, indemnities or similar
payments and issuances of stock options to officers, directors and employees
of ICON or any of its Restricted Subsidiaries in the ordinary course of
business;
(3) transactions between or among ICON and/or its Restricted Subsidiaries
or transactions between a Receivables Subsidiary and any Person in which the
Receivables Subsidiary has an Investment;
(4) transactions with a Person that is an Affiliate of ICON solely
because ICON owns an Equity Interest in, or controls, such Person;
(5) payment of reasonable directors fees to Persons who are not otherwise
Affiliates of ICON;
(6) loans or advances by ICON or any of its Restricted Subsidiaries to
employees of ICON or any of its Restricted Subsidiaries that are entered
into in the ordinary course of business and that are approved by the Board
of Directors of ICON; provided that the aggregate principal amount of all
such loans or advances do not exceed $1.5 million at any one time
outstanding;
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(7) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of ICON;
(8) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "--Restricted Payments;"
(9) transactions pursuant to the Stockholders Agreement;
(10) payments of fees and the reimbursement of expenses by ICON for
management services pursuant to the management agreements, each dated
September 27, 1999, with Bain Capital, LLC, Credit Suisse First Boston
Corporation and Gary Stevenson and Scott Watterson, as such agreements may
be amended from time to time; provided that the amendments do not contain
modifications that are materially adverse to the holders of the notes; and
(11) payments of rent and other expenses by ICON to FG Aviation, Inc.
made pursuant to the aircraft lease agreement, dated February 8, 2002, as
that agreement may be amended from time to time; provided that the
amendments do not contain modifications that are materially adverse to the
holders of the notes.
Additional Subsidiary Guarantees
If ICON or any of its Subsidiaries acquires or creates another Domestic
Subsidiary (other than a Receivables Subsidiary) after the date of the
indenture, then that newly acquired or created Domestic Subsidiary will become
a Guarantor and execute a supplemental indenture. However, any Domestic
Subsidiary that has been properly designated as an Unrestricted Subsidiary in
accordance with the indenture shall not be required to become a Guarantor so
long as it continues to constitute an Unrestricted Subsidiary.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the
aggregate fair market value of all outstanding Investments owned by ICON and
its Restricted Subsidiaries in the Subsidiary properly designated will be
deemed to be an Investment made as of the time of the designation and will
reduce the amount available for Restricted Payments under the first paragraph
of the covenant described above under the caption "--Restricted Payments" or
under one or more clauses of the definition of Permitted Investments, as
applicable, as determined by ICON. That designation will only be permitted if
the Investment would be permitted at that time and if the Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. The Board of
Directors may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary if the redesignation would not cause a Default. Any Unrestricted
Subsidiary properly designated to be a Restricted Subsidiary will become a
Guarantor and execute a supplemental indenture and deliver an opinion of
counsel satisfactory to the trustee within 10 Business Days of the date of such
designation.
Business Activities
ICON will not, and will not permit any Restricted Subsidiary to, engage in
any business other than Permitted Businesses, except to such extent as would
not be material to ICON and its Restricted Subsidiaries taken as a whole.
Payments for Consent
ICON will not, and will not permit any of its Subsidiaries to, directly or
indirectly, pay or cause to be paid any consideration to or for the benefit of
any Holder of notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the indenture or the notes unless such
consideration is offered to
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be paid and is paid to all Holders of the notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
Reports
Whether or not required by the Commission, so long as any notes are
outstanding, ICON will furnish to the Holders of notes, within the time periods
specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if
ICON were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by ICON's certified independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if ICON were required to file such reports.
If ICON has designated any of its Subsidiaries as Unrestricted Subsidiaries,
then the quarterly and annual financial information required by the preceding
paragraph will include a reasonably detailed presentation, either on the face
of the financial statements or in the footnotes thereto, and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, of
the financial condition and results of operations of ICON and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of ICON.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the
Commission, ICON will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, ICON and the Subsidiary Guarantors have agreed that, for
so long as any notes remain outstanding, they will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Additional Interest with respect to, the notes whether or not prohibited by
the subordination provisions of the indenture;
(2) default in payment when due of the principal of, or premium, if any,
on the notes, whether or not prohibited by the subordination provisions of
the indenture;
(3) failure by ICON or any of its Subsidiaries to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control," "--Certain Covenants--Restricted Payments," or
"--Certain Covenants--Merger, Consolidation or Sale of Assets;"
(4) failure by ICON or any of its Subsidiaries for 30 days after notice
to comply with the provisions described under the captions "--Repurchase at
the Option of Holders--Asset Sales" and "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(5) failure by ICON or any of its Subsidiaries for 60 days after notice
to comply with any of the other agreements in the indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by ICON or any of its
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Subsidiaries (or the payment of which is guaranteed by ICON or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $15.0 million or
more;
(7) failure by ICON or any of its Subsidiaries to pay final judgments
aggregating in excess of $15.0 million (net of applicable insurance which
has not been denied in writing by the insurer), which judgments are not
paid, discharged or stayed for a period of 60 days;
(8) except as permitted by the indenture, any Subsidiary Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and
(9) certain events of bankruptcy or insolvency described in the indenture
with respect to ICON, any Restricted Subsidiary that is a Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together,
would constitute a Significant Subsidiary.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to ICON, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or the Holders of
at least 25% in principal amount of the then outstanding notes may declare all
the notes to be due and payable immediately by notice in writing to the trustee
and ICON; provided that so long as any Indebtedness permitted to be incurred
pursuant to Credit Facilities shall be outstanding, such acceleration shall not
be effective until the earlier of (1) the acceleration of such Indebtedness
under Credit Facilities or (2) five business days after receipt by ICON of
written notice of such acceleration.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
Holders of the notes notice of any continuing Default or Event of Default if it
determines that withholding notice is in their interest, except a Default or
Event of Default relating to the payment of principal or interest or Additional
Interest.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Additional Interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of ICON with the
intention of avoiding payment of the premium that ICON would have had to pay if
ICON then had elected to redeem the notes pursuant to the optional redemption
provisions of the indenture, an equivalent premium will also become and be
immediately due and payable to the extent permitted by law upon the
acceleration of the notes. If an Event of Default occurs prior to April 1,
2007, by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of ICON with the intention of avoiding the prohibition on redemption
of the notes prior to April 1, 2007, then the premium specified in the
indenture will also become immediately due and payable to the extent permitted
by law upon the acceleration of the notes.
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ICON is required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, ICON is required to deliver to the trustee a statement specifying such
Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of ICON or any
Guarantor, as such, will have any liability for any obligations of ICON or the
Guarantors under the notes, the indenture or the Subsidiary Guarantees or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
federal securities laws.
Legal Defeasance and Covenant Defeasance
ICON may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all
obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Additional Interest,
if any, on such notes when such payments are due from the trust referred to
below;
(2) ICON's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or stolen
notes and the maintenance of an office or agency for payment and money for
security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
ICON's and the Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, ICON may, at its option and at any time, elect to have the
obligations of ICON and the Guarantors released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "--Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) ICON must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, or interest and premium and Additional Interest, if
any, on the outstanding notes on the stated maturity or on the applicable
redemption date, as the case may be, and ICON must specify whether the notes
are being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, ICON has delivered to the trustee an
opinion of counsel reasonably acceptable to the trustee confirming that (a)
ICON has received from, or there has been published by, the Internal Revenue
Service a ruling or (b) since the date of the indenture, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel will confirm that,
the Holders of the outstanding notes will not recognize income, gain or
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loss for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, ICON has delivered to the trustee
an opinion of counsel reasonably acceptable to the trustee confirming that
the Holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on the
date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the indenture) to which ICON or any of its
Subsidiaries is a party or by which ICON or any of its Subsidiaries is bound;
(6) ICON must deliver to the trustee an officers' certificate stating
that the deposit was not made by ICON with the intent of defeating,
hindering, delaying or defrauding creditors of ICON or others; and
(7) ICON must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next three succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, or Additional Interest, if any, on the notes (except
a rescission of acceleration of the notes by the Holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Additional Interest, if
any, on the notes;
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(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders");
(8) release any Guarantor from any of its obligations under its
Subsidiary Guarantee or the indenture, except in accordance with the terms
of the indenture; or
(9) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the indenture
relating to subordination that adversely affects the rights of the Holders of
the notes will require the consent of the Holders of at least 75% in aggregate
principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of notes,
ICON, the Guarantors and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of ICON's obligations to Holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of ICON's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the legal
rights under the indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust indenture Act; or
(6) to add Guarantors with respect to the notes.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to ICON,
have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within
one year either upon Stated Maturity or by virtue of earlier redemption
under arrangements reasonably satisfactory to the trustee in accordance
with the terms of the indenture and ICON or any Guarantor has
irrevocably deposited or caused to be deposited with the trustee as
trust funds in trust solely for the benefit of the Holders, cash in U.S.
dollars, non-callable Government Securities, or a combination of cash in
U.S. dollars and non-callable Government Securities, in amounts as will
be sufficient without consideration of any reinvestment of interest, to
pay and discharge the entire indebtedness on the notes not previously
delivered to the trustee for cancellation for principal, premium and
Additional Interest, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit and the deposit
will not result in a breach or violation of, or constitute a default under,
any other instrument to which ICON or any Guarantor is a party or by which
ICON or any Guarantor is bound;
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(3) ICON or any Guarantor has paid or caused to be paid all other sums
payable by it under the indenture; and
(4) ICON has delivered irrevocable instructions to the trustee under the
indenture to apply the deposited money toward the payment of the notes at
maturity or the redemption date, as the case may be.
In addition, ICON must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction
and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of ICON or any Guarantor, the indenture
limits its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this offering circular may obtain a copy of the
indenture and registration rights agreement without charge by writing to ICON
Health & Fitness, Inc., 1500 South 1000 West, Logan, Utah 84321, Attention:
Brad Bearnson, Esq.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings. No Person (other than ICON or any Restricted
Subsidiary of
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ICON) in whom a Receivables Subsidiary makes an Investment in connection with a
Qualified Receivables Transaction will be deemed to be an Affiliate of ICON or
any of its Restricted Subsidiaries solely by reason of such Investment.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business and
the granting of Liens permitted under the terms of the indenture; provided
that the sale, conveyance or other disposition of all or substantially all
of the assets of ICON and its Subsidiaries taken as a whole will be governed
by the provisions of the indenture described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant; and
(2) the issuance of Equity Interests in any of ICON's Restricted
Subsidiaries or the sale of Equity Interests in any of its Restricted
Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $2.0 million;
(2) a transfer of assets between or among ICON and its Restricted
Subsidiaries,
(3) an issuance of Equity Interests by a Restricted Subsidiary to ICON or
to another Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) the licensing or sub-licensing of intellectual property in the
ordinary course of business consistent with past practice;
(6) the sale, lease or other disposition of obsolete equipment;
(7) the sale or other disposition of cash or Cash Equivalents;
(8) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments;"
(9) sales of accounts receivable and related assets of the type specified
in the definition of "Qualified Receivables Transaction" to a Receivables
Subsidiary for the fair market value thereof, including cash in an amount at
least equal to 75% of the book value thereof as determined in accordance
with GAAP, it being understood that, for the purposes of this clause (9),
notes received in exchange for the transfer of accounts receivable and
related assets will be deemed cash if the Receivables Subsidiary or other
payor is required to repay said notes as soon as practicable from available
cash collections less amounts required to be established as reserves
pursuant to contractual agreements with entities that are not Affiliates of
ICON entered into as part of a Qualified Receivables Transaction; and
(10) transfers of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" (or a
fractional undivided interest therein) by a Receivables Subsidiary in a
Qualified Receivables Transaction.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
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"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Borrowing Base" means, as of any date, an amount equal to:
(1) 85% of the face amount of all accounts receivable owned by ICON and
the Guarantors as of the end of the most recent fiscal quarter preceding
such date that were not more than 90 days past due; plus
(2) 60% of the book value of all inventory owned by ICON and the
Guarantors during the period of December 1 through June 30 of any fiscal
year or 70% of the book value of all inventory owned by ICON and its
Restricted Subsidiaries during the period from July 1 through November 30 of
any fiscal year, in each case as of the end of the most recent fiscal
quarter preceding such date;
provided, however, that any accounts receivable owned by a Receivables
Subsidiary, or which ICON or any Guarantor has agreed to transfer to a
Receivables Subsidiary, shall be excluded for purposes of determining such
amount.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of six months or less from the date of acquisition, bankers' acceptances
with maturities not exceeding six months and overnight bank deposits, in
each case, with any domestic commercial bank having capital and surplus in
excess of $500.0 million and a Thomson Bank Watch Rating of "B" or better;
96
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of ICON and its Restricted Subsidiaries, taken as a
whole, to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act) other than a Principal or a Related Party of a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
ICON;
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals and their Related Parties, becomes
the Beneficial Owner, directly or indirectly, of more than 50% of the Voting
Stock of ICON, measured by voting power rather than number of shares;
provided, that any transaction that results in any "person" (as defined
above) Beneficially Owning less than 50% of the Voting Stock of ICON,
measured by voting power rather than number of shares, subject to the
Stockholders Agreement or the LLC Agreement shall not, in any case,
constitute a Change of Control under this clause (3) unless such person
Beneficially Owns in the aggregate more than 50% of the Voting Stock of ICON;
(4) the first day on which a majority of the members of the Board of
Directors of ICON are not Continuing Directors; or
(5) the first day on which HF Holdings ceases to own 100% of the
outstanding Equity Interests of ICON.
"Consolidated Cash Flow" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision
for taxes was deducted in computing such Consolidated Net Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or received pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses
97
(excluding any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person
and its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue or the reversal of reserves in the
ordinary course of business,
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting will
be included only to the extent of the amount of dividends or distributions
paid in cash to the specified Person or a Restricted Subsidiary of the
Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has
not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded; and
(5) the Net Income (but not loss) of any Unrestricted Subsidiary will be
excluded, whether or not distributed to the specified Person or one of its
Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of ICON who:
(1) was a member of such Board of Directors on the date of the indenture;
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election; or
(3) was nominated for election by, or is a designee of, a Principal.
"Credit Agreement" means that certain Credit Agreement, dated as of April 9,
2002, by and among ICON, the lenders signatory thereto and General Electric
Capital Corporation, as administrative agent, providing for up to $210.0
million of revolving loan credit borrowings and a term loan of $25.0 million,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
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"Default" means any event that is, or with the passage of time or the giving
of notice, or both, would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Credit Facilities; and
(2) after payment in full of all Obligations under the Credit Facilities,
any other Senior Debt permitted under the indenture the principal amount of
which is $25.0 million or more and that has been designated in writing by
ICON as "Designated Senior Debt" for purposes of the indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder of the Capital Stock, in whole or in part, on or prior to the
date that is 91 days after the date on which the notes mature. Notwithstanding
the preceding sentence, any Capital Stock that would constitute Disqualified
Stock solely because the holders of the Capital Stock have the right to require
ICON to repurchase such Capital Stock upon the occurrence of a change of
control or an asset sale will not constitute Disqualified Stock if the terms of
such Capital Stock provide that ICON may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Domestic Subsidiary" means any Subsidiary of ICON that was formed under the
laws of the United States or any state of the United States or the District of
Columbia or that guarantees or otherwise provides direct credit support for any
Indebtedness of ICON.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public offering of Capital Stock of ICON (other
than Disqualified Stock).
"Existing Indebtedness" means the Indebtedness of ICON and its Restricted
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net of the effect of
all payments made or received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and whether
or not in cash, on any series of preferred stock of such Person or any of
its Restricted Subsidiaries, other than dividends on Equity
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Interests payable solely in Equity Interests of ICON (other than
Disqualified Stock) or to ICON or a Restricted Subsidiary of ICON, times (b)
a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person for
any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated and on or prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated
giving pro forma effect to such incurrence, assumption, Guarantee, repayment,
repurchase or redemption of Indebtedness, or such issuance, repurchase or
redemption of preferred stock, and the use of the proceeds therefrom as if the
same had occurred at the beginning of the applicable four-quarter reference
period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date will be given pro forma effect as if they had occurred
on the first day of the four-quarter reference period and Consolidated Cash
Flow for such reference period will be calculated on a pro forma basis in
accordance with Regulation S-X under the Securities Act, but without giving
effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, will be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of
the specified Person or any of its Restricted Subsidiaries following the
Calculation Date.
"Foreign Subsidiary" means any Subsidiary of ICON that is not a Domestic
Subsidiary.
"GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) each Domestic Subsidiary of ICON; and
(2) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the indenture;
and their respective successors and assigns.
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"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) any commodities future contract, commodity option or other similar
agreement or arrangement designed to protect against fluctuations in the
price of commodities used by that entity at the time;
(3) agreements entered into for the purpose of fixing or hedging the
risks associated with fluctuations in foreign currency exchange rates; and
(4) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"HF Holdings" means HF Holdings, Inc., a Delaware corporation.
"Indebtedness" means, with respect to any specified Person, any indebtedness
of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued expense or
trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
the specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any interest
on the Indebtedness that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers
and employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If ICON or any
Restricted Subsidiary of ICON sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of ICON such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary
of ICON, ICON will be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided in
the final paragraph of the covenant described above under the caption
"--Certain Covenants--Restricted Payments." The acquisition by ICON or any
Restricted Subsidiary of ICON of a Person that holds an Investment in a third
Person will be deemed to be an
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Investment by ICON or such Restricted Subsidiary in such third Person in an
amount equal to the fair market value of the Investment held by the acquired
Person in such third Person in an amount determined as provided in the final
paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and, except in connection with any Qualified Receivables
Transaction, any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"LLC Agreement" means that certain Limited Liability Company Agreement by
and among Credit Suisse First Boston Corporation, affiliates of Bain Capital,
LLC and certain other persons listed therein, as in effect on the date of the
indenture; provided, however, that such Limited Liability Company Agreement may
be amended from time to time if after giving effect to such amendment Credit
Suisse First Boston Corporation and its affiliates and Bain Capital, LLC and
its affiliates Beneficially Own more than 50% of the common equity of HF
Holdings subject to the LLC Agreement.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale; or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by ICON or any of
its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of
the Asset Sale, in each case, after taking into account any available tax
credits or deductions and any tax sharing arrangements, and amounts required to
be applied to the repayment of Indebtedness, other than Indebtedness under a
Credit Facility, secured by a Lien on the asset or assets that were the subject
of such Asset Sale and any reserve for adjustments in respect of the sale price
of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither ICON nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both any
holder of any other Indebtedness (other than the notes) of ICON or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment of the Indebtedness to be accelerated or payable prior
to its stated maturity; and
(3) as to which the lenders have been notified in writing, or the terms
of which provide, that they will not have any recourse to the stock or
assets of ICON or any of its Restricted Subsidiaries.
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"Obligations" means any principal, interest, penalties, fees, expenses,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business that derives a majority of its
revenues from the business engaged in by ICON and its Restricted Subsidiaries
on the date of original issuance of the notes and/or activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which ICON and its Restricted
Subsidiaries are engaged on the date of original issuance of the notes.
"Permitted Investments" means:
(1) any Investment in ICON or in a Restricted Subsidiary of ICON;
(2) any Investment in Cash Equivalents;
(3) any Investment by ICON or any Restricted Subsidiary of ICON in a
Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of ICON; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, ICON or a Restricted Subsidiary of ICON;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales;"
(5) any acquisition of assets (including Capital Stock) in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of ICON or
HF Holdings;
(6) any Investments received in compromise of obligations of such persons
incurred in the ordinary course of trade creditors or customers that were
incurred in the ordinary course of business, including pursuant to any plan
of reorganization or similar arrangement upon the bankruptcy or insolvency
of any trade creditor or customer;
(7) Investments arising in connection with Hedging Obligations;
(8) Investments existing on the date of the indenture;
(9) loans or advances by ICON or any of its Restricted Subsidiaries to
employees of ICON or any of its Restricted Subsidiaries that are entered
into in the ordinary course of business and that are approved by the Board
of Directors of ICON; provided that the aggregate principal amount of all
such loans or advances do not exceed $1.5 million at any one time
outstanding;
(10) the acquisition by a Receivables Subsidiary in connection with a
Qualified Receivables Transaction of Equity Interests of a trust or other
Person established by such Receivables Subsidiary to effect such Qualified
Receivables Transaction; and any other Investment by ICON or a Restricted
Subsidiary of ICON in a Receivables Subsidiary or any Investment by a
Receivables Subsidiary in any other Person in connection with a Qualified
Receivables Transaction, provided, that such other Investment is in the form
of a note or other instrument that the Receivables Subsidiary or other
Person is required to repay as soon as practicable from available cash
collections less amounts required to be established as reserves pursuant to
contractual agreements with entities that are not Affiliates of ICON entered
into as part of a Qualified Receivables Transaction; and
(11) other Investments in any Person other than HF Holdings or an
Affiliate of HF Holdings that is not also a Subsidiary of ICON having an
aggregate fair market value (measured on the date each such Investment was
made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (11) that
are at the time outstanding not to exceed $10.0 million.
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"Permitted Junior Securities" means:
(1) Equity Interests in ICON or any Guarantor; or
(2) debt securities that are subordinated to all Senior Debt and any debt
securities issued in exchange for Senior Debt to substantially the same
extent as, or to a greater extent than, the notes and the Subsidiary
Guarantees are subordinated to Senior Debt under the indenture.
"Permitted Liens" means:
(1) Liens on all assets of ICON or any Subsidiary securing Senior Debt;
(2) Liens in favor of ICON or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with ICON or any Restricted Subsidiary
of ICON; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets of ICON or any Restricted Subsidiary other than those of the Person
merged into or consolidated with ICON or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition of the property
by ICON or any Subsidiary of ICON, provided that such Liens were in
existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business (including, without limitation,
landlord liens on leased properties);
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(9) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries;
(10) carriers' warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like liens arising in the ordinary course of business
in respect of obligations not overdue for a period in excess of 60 days or
which are being contested in good faith by appropriate proceedings promptly
instituted and diligently prosecuted; provided that any reserve or other
appropriate provisions as shall be required to conform with GAAP shall have
been made therefore;
(11) easements, right-of-way, zoning and similar restrictions and other
similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, which do not in any
case materially detract from the value of the property subject thereto or do
not interfere with, or adversely affect in any material respect, the
ordinary conduct of the business of ICON and its Restricted Subsidiaries
taken as a whole;
(12) liens in favor of customs and revenue authorities to secure payment
of custom duties in connection with the importation of goods in the ordinary
course of business and other similar liens arising in the ordinary course of
business;
(13) leases or subleases granted to third persons not interfering with
the ordinary course of business of ICON or any of its Restricted
Subsidiaries;
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(14) liens (other than any Lien imposed by ERISA or any rule or
regulation promulgated thereunder) incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance, and other types of social security;
(15) deposits, in an aggregate amount not to exceed $250,000, made in the
ordinary course of business to secure liability to insurance carriers;
(16) any attachment or judgment Lien not constituting an Event of Default
under clause (6) of the first paragraph of the section described above under
the caption "--Events of Default and Remedies;"
(17) any interest or title of a lessor or sublessor under any operating
lease;
(18) liens arising solely by virtue of any statutory, contractual or
common law provisions relating to banker's liens, right of set-off or
similar rights and remedies as to deposit accounts or other funds maintained
with a depositary institution; provided that:
(a) such deposit account is not a dedicated cash collateral account
and is not subject to restrictions against access by ICON or the issuer,
as applicable, in excess of those set forth by regulations promulgated
by the Federal Reserve Board of the United States or other applicable
governmental or banking regulatory authority; and
(b) such deposit account is not intended by ICON or any of its
Restricted Subsidiaries to provide collateral to the depositary
institution;
(19) liens under any title retention agreement entered into in the
ordinary course of business;
(20) liens arising under Uniform Commercial Code financing statement
filings regarding operating leases entered into by ICON and its Restricted
Subsidiaries in the ordinary course of business;
(21) Liens on assets of ICON or a Receivables Subsidiary incurred in
connection with a Qualified Receivables Transaction;
(22) Liens on assets of Foreign Subsidiaries; and
(23) other Liens incurred in the ordinary course of business of ICON or
any Subsidiary of ICON with respect to obligations that do not exceed $10.0
million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of ICON or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of ICON or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) or, in the
case of a Credit Facility, the committed amount of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) or, in the case of a Credit Facility, the committed
amount of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus all accrued interest on such Indebtedness and the
amount of all expenses and premiums incurred in connection with such
extension, refinancing, renewal, replacement, defeasement or refund);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the Holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
105
(4) such Indebtedness is incurred either by ICON or by the Restricted
Subsidiary (or both) who are the obligors on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Principals" means Bain Capital, LLC and its affiliates and Credit Suisse
First Boston Corporation and its affiliates and the collective parties to the
Stockholders Agreement or the LLC Agreement.
"Qualified Receivables Transaction" means any transaction or series of
transactions entered into by ICON or any of its Restricted Subsidiaries
pursuant to which ICON or any of its Restricted Subsidiaries sells, conveys or
otherwise transfers to (i) a Receivables Subsidiary (in the case of a transfer
by ICON or any of its Restricted Subsidiaries) and (ii) any other Person (in
the case of a transfer by a Receivables Subsidiary), or grants a security
interest in, any accounts receivable (whether now existing or arising in the
future) of ICON or any of its Restricted Subsidiaries, and any assets related
thereto including, without limitation, all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations in respect of
such accounts receivable, proceeds of such accounts receivable and other assets
which are customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable.
"Receivables Subsidiary" means a Subsidiary of ICON which engages in no
activities other than in connection with the financing of accounts receivable
and which is designated by the Board of Directors of ICON (as provided below)
as a Receivables Subsidiary (a) no portion of the Indebtedness or any other
Obligations (contingent or otherwise) of which (i) is guaranteed by ICON or any
of its Restricted Subsidiaries (excluding guarantees of Obligations (other than
the principal of, and interest on, Indebtedness) pursuant to representations,
warranties, covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction), (ii) is
recourse to or obligates ICON or any of its Restricted Subsidiaries in any way
other than pursuant to representations, warranties, covenants and indemnities
entered into in the ordinary course of business in connection with a Qualified
Receivables Transaction or (iii) subjects any property or asset of ICON or any
of its Restricted Subsidiaries (other than accounts receivable and related
assets as provided in the definition of "Qualified Receivables Transaction"),
directly or indirectly, contingently or otherwise, to the satisfaction thereof,
other than pursuant to representations, warranties, covenants and indemnities
entered into in the ordinary course of business in connection with a Qualified
Receivables Transaction, (b) with which neither ICON nor any of its Restricted
Subsidiaries has any material contract, agreement, arrangement or understanding
other than on terms no less favorable to ICON or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of ICON, other than fees payable in the ordinary course of business
in connection with servicing accounts receivable and (c) with which neither
ICON nor any of its Restricted Subsidiaries has any obligation to maintain or
preserve such Subsidiary's financial condition or cause such Subsidiary to
achieve certain levels of operating results. Any such designation by the Board
of Directors of ICON will be evidenced to the trustee by filing with the
trustee a certified copy of the resolution of the Board of Directors of ICON
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing conditions.
"Related Party" means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of any Principal; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of any one or
more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means:
(1) all Indebtedness of ICON or any Guarantor outstanding under Credit
Facilities and all Hedging Obligations with respect thereto;
(2) any other Indebtedness of ICON or any Guarantor permitted to be
incurred under the terms of the indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the notes or any Subsidiary
Guarantee; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:
(1) any liability for federal, state, local or other taxes owed or owing
by ICON;
(2) any intercompany Indebtedness of ICON or any of its Subsidiaries to
ICON or any of its Affiliates;
(3) any trade payables; or
(4) that portion of any Indebtedness that is incurred in violation of the
indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal or any final amount of principal on any series of Indebtedness, the
date on which the payment of interest or principal was scheduled to be paid in
the original documentation governing such Indebtedness, and will not include
any contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"Stockholders Agreement" means that certain Stockholders Agreement by and
among certain common equity stockholders of HF Investment Holdings, LLC,
including Credit Suisse First Boston Corporation, affiliates of Bain Capital,
LLC and certain other persons listed therein, as in effect on the date of the
indenture; provided, however, that such Stockholders Agreement may be amended
from time to time if after giving effect to such amendment Credit Suisse First
Boston Corporation and its affiliates and Bain Capital, LLC and its affiliates
Beneficially Own more than 50% of the common equity of HF Holdings subject to
the Stockholders Agreement.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are that Person or one or more Subsidiaries
of that Person (or any combination thereof).
"Subsidiary Guarantee" means, the Guarantee by each Guarantor of ICON's
payment obligations under the indenture and the notes, executed pursuant to the
terms of the indenture.
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"Unrestricted Subsidiary" means any Subsidiary of ICON that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with ICON or any Restricted Subsidiary of ICON unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
ICON or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of ICON;
(3) is a Person with respect to which neither ICON nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of ICON or any of its Restricted
Subsidiaries; and
(5) has at least one director on its Board of Directors that is not a
director or executive officer of ICON or any of its Restricted Subsidiaries
and has at least one executive officer that is not a director or executive
officer of ICON or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of ICON as an Unrestricted Subsidiary will
be evidenced to the trustee by filing with the trustee a certified copy of the
Board Resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the preceding conditions and was
permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the preceding requirements as an Unrestricted Subsidiary, it
will thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary will be deemed to be incurred
by a Restricted Subsidiary of ICON as of such date and, if such Indebtedness is
not permitted to be incurred as of such date under the covenant described under
the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," ICON will be in default of such covenant. The Board of
Directors of ICON may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation will be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of ICON of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
will only be permitted if (1) such Indebtedness is permitted under the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period;
and (2) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
108
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income
tax consequences expected to apply to the exchange of initial notes for
exchange notes and the ownership and disposition of exchange notes under
currently applicable law. The discussion is based on the Internal Revenue Code
of 1986, as amended (the "Code"), the final and temporary U.S. Treasury
Regulations promulgated thereunder, published administrative positions of the
Internal Revenue Service ("IRS") and reported judicial decisions, all as now
existing and currently applicable and all of which are subject to change
(possibly with retroactive effect) or to different interpretations. We have not
sought and will not seek a ruling from the IRS with respect to the U.S. federal
income tax consequences of acquiring, owning and disposing of an exchange note.
There can be no assurance that the IRS will not challenge one or more of the
tax considerations described herein.
This discussion does not cover all aspects of U.S. federal income taxation
that may be relevant to, or the actual tax effect that any of the matters
described herein will have on, particular holders, and does not address other
aspects of U.S. federal taxation or state, local, foreign and other tax laws.
Further, the U.S. federal income tax treatment of a holder of the initial notes
and the exchange notes may vary depending on the holder's particular situation.
Certain holders (including banks, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, taxpayers subject to the
alternative minimum tax, dealers in securities, persons holding a note as part
of a "straddle", "hedge", "conversion transaction" or other risk reduction
transaction, persons who have a "functional currency" other than the U.S.
dollar, U.S. expatriates and non-U.S. holders) may be subject to special rules
not discussed below. Also, the description below applies only to those holders
of the initial notes and the exchange notes who hold them as "capital assets"
(generally, property held for investment purposes) within the meaning of
Section 1221 of the Code, and it does not address notes held through a
partnership or other pass-through entity.
Holders of the initial notes and of the exchange notes should consult their
own tax advisors with respect to their particular circumstances and with
respect to the effects of state, local and foreign tax laws to which they may
be subject.
The Exchange
An exchange of initial notes for exchange notes should be treated as a
"non-event" for U.S. federal income tax purposes because the exchange notes
should not be considered to differ materially in kind or extent from the
initial notes. As a result, no U.S. federal income tax consequences would
result to holders exchanging initial notes for exchange notes.
The Exchange Notes
Interest Payments on the Exchange Notes. The stated interest on the
exchange notes should be considered to be "qualified stated interest" and,
therefore, will be includible in a holder's gross income (except to the extent
attributable to accrued interest at the time of purchase) as ordinary income
for U.S. federal income tax purposes in accordance with the holder's regular
method of tax accounting.
Tax Basis. A holder's adjusted tax basis (determined by taking into account
accrued interest at the time of purchase) in an exchange note received in
exchange for an initial note will equal the cost of the initial note to the
holder, increased by the amounts of market discount previously included in
income by the holder and reduced by any principal payments received by the
holder with respect to the exchange note and by amortized bond premium. A
holder's adjusted tax basis in an exchange note purchased by the holder will be
equal to the price paid for such an exchange note (determined by taking into
account accrued interest at the time of purchase), increased by amounts of
market discount previously included in income by the holder and reduced by any
principal payments received by the holder with respect to the exchange note and
by amortized bond premium. See "Market Discount and Bond Premium" below.
109
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of an
exchange note, a holder will recognize taxable gain or loss, if any, equal to
the difference between the amount realized on the sale, exchange or retirement
and the holder's adjusted tax basis in the exchange note. The gain or loss will
be a capital gain or loss (except to the extent of any accrued market
discount), and will be a long-term capital gain or loss if the exchange note
has been held for more than one year at the time of such sale, exchange or
retirement. The amount realized does not include any amount received that is
attributable to the payment of accrued interest on an exchange note not
previously included in income, which amount will be taxable as ordinary income.
Market Discount and Bond Premium. Holders should be aware that the market
discount provisions of the Code may affect the exchange notes. These rules
generally provide that a holder who purchases an exchange note for an amount
that is less than its principal amount will be considered to have purchased the
exchange note at a "market discount" equal to the amount of such difference.
The holder will be required to treat any gain realized upon the disposition of
the exchange note as interest income to the extent of the market discount that
is treated as having accrued during the period that the holder held the
exchange note, unless an election is made to include such market discount in
income on a current basis. A holder of an exchange note who acquires the
exchange note at a market discount and who does not elect to include market
discount in income on a current basis may also be required to defer the
deduction of a portion of the interest on any indebtedness incurred or
continued to purchase or carry the exchange note until the holder disposes of
the exchange note in a taxable transaction.
If a holder's tax basis in an exchange note immediately after acquisition
exceeds the stated redemption price at maturity of the exchange note, the
holder may be eligible to elect to deduct the excess as amortizable bond
premium pursuant to Section 171 of the Code.
Purchasers of the exchange notes should consult their own tax advisors
concerning the application to such purchasers of the market discount and bond
premium rules.
Backup Withholding
The holder of an initial note and the holder of an exchange note may be
subject, under certain circumstances, to "backup withholding" at the applicable
rate with respect to certain "reportable payments", including interest on the
note and the gross proceeds from the disposition of the note. The backup
withholding rules apply if the holder is not otherwise exempt and, among other
things, (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) is notified by the IRS that it has failed to report properly the receipt
of interest or dividends, or (iv) under certain circumstances, fails to provide
a certified statement, signed under penalties of perjury, that the TIN
furnished is the correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply with respect to payments made to
certain holders, including corporations and tax-exempt organizations, provided
their exemptions from backup withholding are properly established. Any amounts
withheld under the backup withholding rules may be allowed as a refund or a
credit against the holder's U.S. federal income tax liability provided the
requisite procedures are followed.
HOLDERS OF THE INITIAL NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND
DISPOSING OF THE INITIAL NOTES AND THE EXCHANGE NOTES, INCLUDING THE
APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND POSSIBLE FUTURE
CHANGES IN SUCH FEDERAL TAX LAWS.
110
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be issued by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Initial
Notes where such Notes were acquired as a result of market-making activities or
other trading activities. The Issuer has agreed that for a period of 180 days
after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until ________ __, 2002, all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Issuer will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
brokerdealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Notes (including any brokerdealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the notes and the guarantees
offered hereby will be passed upon for us by Weil, Gotshal & Manges LLP,
Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of May 31, 2002 and 2001 and for
each of the three years in the period ended May 31, 2002, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4, covering the exchange notes offered in this prospectus.
This prospectus does not contain all the information that is included in the
registration statement. You will find additional information in the
registration statement.
111
Statements made in this prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. For a more complete
understanding and description of each contract, agreement or other document
filed as an exhibit to the registration statement, we encourage you to read the
documents contained in the exhibits.
You may read and copy the registration statement and any other documents we
file with the Securities and Exchange Commission at the Securities and Exchange
Commission's public reference room located at 450 Fifth St., N.W., Washington,
D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. In addition, reports and other filings will be available to the public on
the Securities and Exchange Commission's web site at www.sec.gov.
If for any reason we are not subject to the reporting requirements of the
Securities Exchange Act of 1934 in the future, we will still be required under
the indenture governing the notes to furnish the holders of the notes with
annual reports containing financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
financial statements for each of the first three quarters of each fiscal year.
112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) F-4
Consolidated Statement of Stockholder's Equity (Deficit)............. F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Financial Statement Schedule II...................................... F-32
F-1
Report of Independent Accountants
To the Board of Directors and Shareholder of
ICON Health & Fitness, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), of
stockholder's equity (deficit) and of cash flows present fairly, in all
material aspects, the financial position of ICON Health & Fitness, Inc. and its
subsidiaries at May 31, 2001 and 2002, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 2002
in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
July 18, 2002
F-2
ICON HEALTH & FITNESS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
May 31,
--------------------
2001 2002
--------- ---------
ASSETS
Current assets:
Cash......................................................... $ 3,324 $ 4,773
Accounts receivable, net..................................... 142,946 153,178
Inventories, net............................................. 145,984 133,753
Deferred income taxes........................................ 5,058 4,807
Other current assets......................................... 15,846 18,675
--------- ---------
Total current assets..................................... 313,158 315,186
Property and equipment, net..................................... 46,758 44,985
Intangible assets, net.......................................... 30,517 30,201
Deferred income taxes........................................... 1,824 12,084
Other assets, net............................................... 13,247 20,768
--------- ---------
Total Assets............................................. $ 405,504 $ 423,224
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................ $ 11,346 $ 5,044
Accounts payable............................................. 120,155 113,927
Accrued expenses............................................. 19,608 23,751
Income taxes payable......................................... 345 5,421
Interest payable............................................. 4,118 3,045
--------- ---------
Total current liabilities................................ 155,572 151,188
Long-term debt.................................................. 253,327 250,893
Other liabilities............................................... -- 4,934
--------- ---------
Total liabilities........................................ 408,899 407,015
--------- ---------
Commitments and contingencies (Notes 9 and 13)
Stockholder's equity (deficit):
Common stock and additional paid-in capital.................. 204,155 204,155
Receivable from Parent....................................... (2,200) (2,200)
Accumulated deficit.......................................... (203,335) (183,941)
Accumulated other comprehensive loss......................... (2,015) (1,805)
--------- ---------
Total stockholder's equity (deficit)..................... (3,395) 16,209
--------- ---------
Total Liabilities and Stockholder's Equity (Deficit)..... $ 405,504 $ 423,224
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ICON HEALTH & FITNESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended May 31,
----------------------------
2000 2001 2002
-------- -------- --------
Net sales................................................................. $733,022 $820,496 $896,079
Cost of sales............................................................. 531,622 580,484 635,046
-------- -------- --------
Gross profit.............................................................. 201,400 240,012 261,033
-------- -------- --------
Operating expenses:
Selling................................................................ 95,973 109,781 126,035
Research and development............................................... 8,309 10,851 10,405
General and administrative............................................. 61,675 63,477 68,756
-------- -------- --------
Total operating expenses........................................... 165,957 184,109 205,196
-------- -------- --------
Income from operations.................................................... 35,443 55,903 55,837
Interest expense.......................................................... (33,899) (34,771) (26,149)
Amortization of deferred financing fees................................... (2,743) (3,189) (3,146)
Other income (expense), net............................................... 404 (1,154) 667
-------- -------- --------
Income (loss) before income taxes and extraordinary item.................. (795) 16,789 27,209
Provision for income taxes................................................ 3,913 3,483 3,205
-------- -------- --------
Income (loss) before extraordinary item................................... (4,708) 13,306 24,004
Extraordinary loss on extinguishment of debt, net of income tax benefit of
$1,244 in 2000 and $2,825 in 2002....................................... (1,948) -- (4,610)
-------- -------- --------
Net income (loss)......................................................... (6,656) 13,306 19,394
Other comprehensive income (loss), comprised of foreign currency
translation adjustment, net of income tax expense of $285 in 2000 and
income tax benefit of $325 in 2001 and $129 in 2002..................... (466) (532) 210
-------- -------- --------
Comprehensive income (loss)............................................... $ (7,122) $ 12,774 $ 19,604
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ICON HEALTH & FITNESS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(In thousands, except share amounts)
Common stock and
additional Accumulated
paid-in capital Receivable from other Total
--------------- officers and Accumulated comprehensive stockholder's
Shares Amount Parent deficit loss equity (deficit)
------ -------- --------------- ----------- ------------- ----------------
Balance at May 31, 1999......... 1,000 $163,819 $ (656) $(209,985) $(1,017) $(47,839)
Cash contribution of capital
from Parent (net of
financing fees of $4,375).. -- 35,625 -- -- -- 35,625
Common stock of HF
Holdings, Inc. issued to
management................. -- 3,175 -- -- -- 3,175
Cancellation of receivables
from officers.............. -- (656) 656 -- -- --
Warrants of HF Holdings,
Inc. granted to holders of
13% Notes.................. -- 2,192 -- -- -- 2,192
Other comprehensive loss..... -- -- -- -- (466) (466)
Receivable from Parent....... -- -- (2,200) -- -- (2,200)
Net loss..................... -- -- -- (6,656) -- (6,656)
----- -------- ------- --------- ------- --------
Balance at May 31, 2000......... 1,000 204,155 (2,200) (216,641) (1,483) (16,169)
Other comprehensive loss..... -- -- -- -- (532) (532)
Net income................... -- -- -- 13,306 -- 13,306
----- -------- ------- --------- ------- --------
Balance at May 31, 2001......... 1,000 204,155 (2,200) (203,335) (2,015) (3,395)
Other comprehensive
income..................... -- -- -- -- 210 210
Net income................... -- -- -- 19,394 -- 19,394
----- -------- ------- --------- ------- --------
Balance at May 31, 2002......... 1,000 $204,155 $(2,200) $(183,941) $(1,805) $ 16,209
===== ======== ======= ========= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ICON HEALTH & FITNESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended May 31,
------------------------------
2000 2001 2002
--------- -------- ---------
Operating activities:
Net income (loss)................................................................... $ (6,656) $ 13,306 $ 19,394
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision (benefit) for deferred taxes.............................................. 1,859 (588) (7,313)
Depreciation and amortization....................................................... 16,749 17,372 19,162
Amortization of deferred financing fees............................................. 2,743 3,189 3,146
Amortization of gain on extinguishment of debt...................................... (816) (1,300) (1,191)
Amortization of debt discount....................................................... -- -- 18
Common stock of HF Holdings, Inc. issued to management.............................. 3,175 -- --
Write-off of loans to junior management............................................. 452 -- --
Extraordinary loss on extinguishment of debt........................................ 1,948 -- 4,610
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net............................................................ (11,625) (14,097) (19,968)
Inventories, net.................................................................... (23,939) (14,784) 12,231
Income taxes payable................................................................ (939) 345 5,076
Other assets, net................................................................... 3,797 (3,098) (4,162)
Accounts payable and accrued expenses............................................... 13,287 10,040 (671)
Other liabilities................................................................... -- -- 4,934
Interest payable.................................................................... 506 2,022 2,272
--------- -------- ---------
Net cash provided by operating activities........................................... 541 12,407 37,538
--------- -------- ---------
Investing activities:
Purchase of property and equipment.................................................. (12,877) (16,095) (11,624)
Purchase of intangible assets....................................................... (4,382) (2,693) (5,200)
Receivable from Parent.............................................................. (2,200) -- --
Loans to junior management.......................................................... (452) -- --
Acquisition, net of cash acquired................................................... -- (3,997) (306)
--------- -------- ---------
Net cash used in investing activities............................................... (19,911) (22,785) (17,130)
--------- -------- ---------
Financing activities:
Borrowings (payments) on revolving credit facility, net............................. (113,051) 19,497 32,831
Payments on other long-term debt.................................................... (580) (376) (48)
Proceeds from April 2002 term notes................................................. -- -- 25,000
Payments on April 2002 term notes................................................... -- -- (1,250)
Proceeds from September 1999 term notes............................................. 180,000 -- --
Payments on September 1999 term notes............................................... (5,321) (9,273) (172,834)
Payments on old term notes.......................................................... (19,464) -- --
Proceeds from 11.25% notes.......................................................... -- -- 152,813
Payments to 12% noteholders......................................................... -- -- (46,053)
Payments to 13% noteholders......................................................... (40,908) -- --
Payment of fees-debt portion........................................................ (14,876) (1,153) (9,757)
Cash contribution of capital from Parent............................................ 40,000 -- --
Payment of fees-equity portion...................................................... (4,375) -- --
--------- -------- ---------
Net cash provided by (used in) financing activities................................. 21,425 8,695 (19,298)
--------- -------- ---------
Effect of exchange rate changes on cash................................................. (466) (857) 339
--------- -------- ---------
Net increase (decrease) in cash......................................................... 1,589 (2,540) 1,449
Cash, beginning of period............................................................... 4,275 5,864 3,324
--------- -------- ---------
Cash, end of period..................................................................... $ 5,864 $ 3,324 $ 4,773
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
Basis of Presentation--The consolidated financial statements include the
accounts of ICON Health & Fitness, Inc. and its wholly-owned subsidiaries ("the
Company"). At May 31, 2002 and 2001, the Company was a wholly-owned subsidiary
of HF Holdings, Inc. ("HF Holdings" or the "Parent")
On July 20, 1999, prior to the September 1999 Restructuring discussed in
Note 8, a new holding company, HF Holdings was formed. HF Holdings was formed
through equity investments by current shareholders of IHF Capital, Inc.,
members of Company management and other investors. Following the September 1999
Restructuring, a wholly-owned subsidiary of HF Holdings merged with the
Company, whereupon the Company became a wholly-owned subsidiary of HF Holdings.
There was no adjustment to the assets and liabilities of the Company as a
result of this transaction.
Description of Business--The Company is principally involved in the
development, manufacturing and distribution of home fitness equipment. The
Company's revenues are derived from the sale of various aerobic and anaerobic
fitness product lines in domestic and foreign markets. Because product life
cycles can be short in the fitness industry, the Company emphasizes new product
innovation and product repositioning. The Company primarily sells its products
to retailers and, to a limited extent, to end-users through direct response
advertising efforts and retail outlets.
2. Significant Accounting Policies
Principles of Consolidation--All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Cash--At May 31, 2002, substantially all of the Company's cash is held by
two banks located in Chicago and Massachusetts. The Company does not believe
that as a result of this concentration it is subject to any unusual financial
risk beyond the normal risk associated with commercial banking relationships.
Inventories--Inventories consist primarily of raw materials (principally
parts and supplies) and finished goods, and are valued at the lower of cost or
market. Cost is determined using standard costs which approximate the first-in,
first-out (FIFO) method.
Property, Equipment and Tooling--Property and equipment is stated at cost
and depreciated using the straight-line method over the estimated useful lives
of the respective assets. Tooling is stated at cost and depreciated using the
straight-line method over the estimated useful life, approximately three years.
Expenditures for renewals and improvements are capitalized, and maintenance and
repairs are charged to expense as incurred.
Intangible Assets--Intangible assets are recorded at cost and are amortized
on a straight-line basis over the following estimated useful lives:
Goodwill.. 5 years
Trademarks 20 years
Other..... 5 years
Long-Lived Assets--Long-lived assets are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS 121 requires the assessment of
whether there has
F-7
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been an impairment whenever events or circumstances indicate that the carrying
amount of long-lived assets may not be recoverable. The carrying value of a
long-lived asset is considered impaired when the anticipated cumulative
undiscounted cash flow from that asset is less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset, which is generally based
on discounted cash flows. As a result of its review, the Company does not
believe that any impairment currently exists related to its long-lived assets.
Deferred Financing Costs--The Company deferred certain debt issuance costs
relating to the establishment of the New 2002 Credit Facilities and the
issuance of the 11.25% Notes as part of the April 2002 Refinancing (see Note
9). These costs are capitalized in other long-term assets and are being
amortized using the effective interest method. Deferred costs relating to the
13% Notes and existing bank credit agreement were written-off as part of the
Restructuring in September of 1999 (see Note 8). Deferred costs relating to the
12% Notes and existing bank credit agreement were written off as part of the
April 2002 Refinancing.
Advertising Costs--The Company expenses the costs of advertising as
incurred, except for the cost of direct response advertising, which is
capitalized and amortized over its expected period of future benefit, generally
twelve months. Direct response advertising costs consist primarily of costs to
produce infomercials for the Company's products. At May 31, 2001 and 2002,
$1,629,000 and $1,586,000, respectively, of capitalized advertising costs were
included in other assets. For the fiscal years ended May 31, 2000, 2001 and
2002, total advertising expense was approximately $9,198,000, $13,011,000 and
$17,169,000, respectively.
Revenue Recognition--The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs and warranty costs associated with these sales.
Concentration of Credit Risk--The primary financial instruments which
potentially expose the Company to concentration of credit risk include trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed and reserves are maintained;
however, collateral is not required. A significant portion of the Company's
sales are made to Sears Roebuck ("Sears"). Sears accounted for approximately
40%, 42% and 45% of total sales for the fiscal years ended May 31, 2000, 2001
and 2002, respectively. Accounts receivable from Sears accounted for
approximately 42% and 35% of gross accounts receivable at May 31, 2001 and
2002, respectively. The Company is not the exclusive supplier of home fitness
equipment to any of its major customers. The loss of, or a substantial decrease
in the amount of purchases by, or a write-off of any significant receivable due
from, any of its major customers would have a material adverse effect on the
Company's business.
Research and Development Costs--Research and development costs are expensed
as incurred. Research and development activities include the design of new
products and product enhancements, and are performed by both internal and
external sources.
Income Taxes--The Company accounts for income taxes utilizing the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities at
currently enacted tax rates. If appropriate, deferred tax assets are reduced by
a valuation allowance which reflects expectations of the extent to which such
assets will be realized.
F-8
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of May 31, 2002 and 2001, the Company was included as part of the
consolidated tax return filed by HF Holdings, Inc. Prior to the September 1999
Restructuring, the Company was included as part of the consolidated tax return
filed by IHF Capital, Inc. The income tax provision for the Company has been
prepared on a separate company basis.
Foreign Operations--Assets and liabilities of the Company's European and
Canadian subsidiaries are translated into U.S. dollars at the applicable rates
of exchange at each period end. The Company's foreign transactions are
primarily denominated in Canadian dollars, British pounds, German marks, French
francs, Italian lire and Euro and transactions with foreign entities that
result in income and expense for the Company are translated at the weighted
average rate of exchange during the period. Translation gains and losses are
reflected as a separate component of other comprehensive income (loss).
Transaction gains and losses are recorded in the consolidated statements of
operations and comprehensive income (loss) and were not material in the fiscal
years ended May 31, 2000, 2001 and 2002. For the fiscal years ended May 31,
2000, 2001 and 2002, the Company's foreign operations represented less than 11%
of the Company's net sales and the effects of exchange rate changes did not
have a material impact on the Company's earnings.
Barter Transaction--Included in other current and other long-term assets at
May 31, 2001 and 2002 are barter credits of $2,477,000 and $1,063,000,
respectively, which were recorded in connection with a barter agreement the
Company entered into during the fiscal year ended May 31, 1997. The Company
intends to use these barter credits primarily to purchase certain products from
vendors and advertising through August 31, 2003, the expiration date of the
barter credits. The total amount of cash required to utilize the credits will
range from $1,300,000 to $2,000,000 over the next year.
Fair Value of Financial Instruments--The following methods and assumptions
were used to estimate the fair value disclosures for financial instruments:
11.25% Notes--based on face value at May 31, 2002, due to timing of issuance.
12% Notes--estimated by discounting the future cash flows using rates
currently offered for borrowings of similar remaining maturities at May 31,
2001.
Other long-term debt--fair value approximates carrying value since such debt
is primarily variable rate debt.
The carrying amounts and fair values of long-term debt at May 31, 2001 and
2002 were as follows (in thousands):
2001 2002
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
11.25% Notes........ $ -- $ -- $152,831 $152,831
12% Notes........... 48,614 44,282 -- --
Other long-term debt 216,059 216,059 103,106 103,106
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 for the period presented. Actual results could differ
from those estimates.
F-9
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Standards--Effective June 1, 2001, the Company adopted the
provisions of Statements of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities." as amended. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 requires that an entity recognizes all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. Because the Company had no open forward exchange
contracts at May 31, 2002 and 2001, the adoption of SFAS 133 did not have any
effect on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
provides a comprehensive standard of accounting for business combinations. SFAS
141 is effective for all business combinations after June 30, 2001. In
addition, in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which requires that amortization of goodwill and certain
other intangible assets be replaced with an annual impairment test. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. Other than
eliminating goodwill amortization effective June 1, 2002, the adoption of SFAS
141 and 142 is not expected to have a material effect on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Company has not yet determined whether SFAS 143 will have a
material effect on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 is not expected to have a material effect on the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44
and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which
rescinds SFAS Nos. 4, 44 and 64 and amends other existing authoritative
pronouncements to make various technical corrections, clarify meaning, or
describe their applicability under changed conditions. SFAS 145 is effective
for fiscal years beginning after May 15, 2002 and will require the modification
of prior financial statements to reclassify the 2002 and 2000 losses on debt
extinguishment from extraordinary to income from continuing operations.
In November of 2001, the Emerging Issues Task Force issued EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer". EITF 01-09
provides guidance on the accounting treatment of various types of consideration
given by a vendor to a customer. The Company will adopt EITF 01-9 effective
June 1, 2002. If the Company had adopted EITF 01-09 for the fiscal years ended
May 31, 2000, 2001 and 2002, net sales would have been reduced by approximately
$20,200,000, $23,500,000 and $24,600,000, respectively, with a corresponding
reduction of selling, general and administrative expenses. This change will
have no effect on income from operations or net income (loss).
Reclassifications--Certain balances of the prior years have been
reclassified to conform to the current year's presentation. These
reclassifications had no effect on net income (loss) or total assets.
F-10
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Accounts Receivable
Accounts receivable, net, consist of the following (table in thousands):
May 31,
------------------
2001 2002
-------- --------
Trade accounts receivable................................................... $149,698 $161,117
Less allowance for doubtful accounts, advertising discounts and credit memos (6,752) (7,939)
-------- --------
$142,946 $153,178
======== ========
4. Inventories
Inventories, net, consist of the following (table in thousands):
May 31,
-----------------
2001 2002
-------- --------
Raw materials, principally parts and supplies $ 62,666 $ 60,136
Finished goods............................... 83,318 73,617
-------- --------
$145,984 $133,753
======== ========
Inventories are net of allowances (primarily for finished goods) of
$3,185,000 and $3,275,000 at May 31, 2001 and 2002, respectively. These
allowances are established based on management's estimates of inventory held at
fiscal year end that is potentially obsolete or for which its market value is
below cost.
5. Property and Equipment
Property and equipment, net, consist of the following (table in thousands):
May 31,
Estimated ------------------
Useful Lives 2001 2002
------------ -------- --------
(Years)
Land......................... -- $ 1,472 $ 1,472
Building and improvements.... up to 31 20,513 21,174
Equipment and tooling........ 3-7 70,620 73,304
-------- --------
92,605 95,950
Less accumulated depreciation (45,847) (50,965)
-------- --------
$ 46,758 $ 44,985
======== ========
For the fiscal years ended May 31, 2000, 2001 and 2002, the Company recorded
depreciation expense of $14,223,000, $13,619,000 and $13,398,000, respectively.
F-11
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Intangible Assets
Intangible assets, net, consist of the following (table in thousands):
May 31,
------------------
2001 2002
-------- --------
Goodwill..................... $ 11,973 $ 12,279
Trademarks................... 23,227 23,227
Other........................ 6,071 10,813
-------- --------
41,271 46,319
Less accumulated amortization (10,754) (16,118)
-------- --------
$ 30,517 $ 30,201
======== ========
7. Other Assets
Other assets, net, consist of the following (table in thousands):
May 31,
---------------
2001 2002
------- -------
Deferred financing costs, net $11,333 $ 9,142
Long-term receivables, net... 626 10,362
Other........................ 1,288 1,264
------- -------
$13,247 $20,768
======= =======
At May 31, 2001 and 2002, capitalized deferred financing costs are net of
accumulated amortization of $5,856,000 and $171,000, respectively.
Long-term receivables consist of receivables whose collection is not
considered to be current because the customer is in bankruptcy and whose
carrying values have been written down to net realizable value. At May 31, 2001
and 2002, long-term receivables are net of an allowance for doubtful accounts
of $0 and $2,434,000, respectively.
8. September 1999 Restructuring
To provide ongoing funding for the Company's operations and debt repayment
requirements, on September 27, 1999, the Company consummated a troubled debt
restructuring of its capital structure (the "September 1999 Restructuring") and
refinanced its existing bank credit facility.
As part of the September 1999 Restructuring, the Company consummated an
exchange offer (the "Exchange Offer") for all of its outstanding 13% Senior
Subordinated Notes ("13% Notes"). Significant components of the Exchange Offer
were as follows:
The 13% noteholders received:
i. $39,408,000 in cash,
ii. $44,282,000 in new 12% Subordinated Notes ("12% Notes") of the Company
issued in connection with the Exchange Offer,
F-12
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
iii. $10,086,000 payment for accrued interest, and
iv. warrants to purchase 423,939 shares of HF Holdings common stock for a
nominal exercise price which were valued at $2,192,000 and rights to
purchase an aggregate of 343,336 shares of HF Holdings common stock at a
purchase price of $5.83 per share, or an aggregate purchase price of
$2,000,000, which were assigned no value.
In connection with the Exchange Offer, the indentures governing the 13%
Notes were amended to eliminate most of the related restrictive covenant
provisions of the 13% Notes.
No gain was realized on the extinguishment of the 13% Notes. Unamortized
deferred financing fees of $6,346,000 related to the 13% Notes were reflected
as a component of the adjustment to establish the carrying value of the 12%
Notes.
9. Long-Term Debt
Long-term debt consists of the following (table in thousands):
May 31,
------------------
2001 2002
-------- --------
Old 1999 Revolving Credit Facility......................................... $ 46,478 $ --
2002 Revolver.............................................................. 79,312
2002 Term Loan............................................................. 23,750
Term Loan A................................................................ 23,182 --
Term Loan B................................................................ 78,075 --
Term Loan C................................................................ 58,482 --
Intellectual Property Loan................................................. 9,750 --
12% Subordinated Notes, face amount $44,282, including unamortized net gain
of $4,332 at May 31, 2001................................................ 48,614 --
11.25% Senior Subordinated Notes, face amount $155,000 including
unamortized discount of $2,169 at May 31, 2002........................... -- 152,831
Other...................................................................... 92 44
-------- --------
264,673 255,937
Less current portion.................................................... (11,346) (5,044)
-------- --------
Total long-term debt................................................ $253,327 $250,893
======== ========
April 2002 Refinancing
In April 2002, the Company entered into new credit facilities and issued new
11.25% senior subordinated notes ("April 2002 Refinancing"). The Company used
the net proceeds of the 11.25% Notes and the New 2002 Credit Facilities to
repay all outstanding indebtedness under the existing credit agreement, to
redeem in full all of the outstanding 12% subordinated notes due 2005, to pay
accrued interest and premiums thereon, and pay certain transaction fees and
expenses.
New Credit Facilities
In connection with the April 2002 Refinancing, the Company entered into new
credit facilities (the "New 2002 Credit Facilities") of $235 million with a
syndicate of banks and financial services companies.
F-13
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The New 2002 Credit Facilities include a $210 million revolving credit line
(the "2002 Revolver"), which includes a letter of credit sub-facility of up to
$10 million and a swing line sub-facility of up to $10 million. The term is
five years. Borrowing availability is limited to certain percentages of
qualified assets as specified in the agreement. The letter of credit margin of
2% and an unused facility fee of .50% per annum of the average unused daily
balance of the 2002 Revolver is due monthly.
In addition, the New 2002 Credit Facilities include a $25 million Term Loan
("2002 Term Loan") with a 58-month term. The 2002 Term Loan amortizes quarterly
at a rate of $1,250,000. At the Company's option, the 2002 Revolver and 2002
Term Loan bear interest at either (a) a floating rate equal to the Index Rate
plus the applicable margin of 1.25% and 1.75%, respectively, or (b) a floating
rate equal to the LIBOR rate plus the applicable margin of 2.625% and 3.125%,
respectively. If the 2002 Revolver is terminated, the 2002 Term Loan will
immediately be due and payable in full. If the 2002 Revolver is terminated or
if the 2002 Term Loan is prepaid, certain prepayment premiums will apply.
All loans under the New 2002 Credit Facilities are collateralized by a first
priority security interest in all of the existing and subsequently acquired
assets of the Company and its domestic and Canadian subsidiaries, subject to
specified exceptions, and a pledge of 65% of the stock of the Company's
first-tier foreign subsidiaries. All loans are cross-collateralized and contain
cross default provisions.
All of the outstanding common stock of the Company, owned by HF Holdings,
has been pledged to the lenders under the New 2002 Credit Facilities. If the
Company was to default under these New 2002 Credit Facilities, the lenders
would foreclose on the pledge and take control of the Company.
The new credit agreement contains a number of restrictive covenants that,
among other things, limit or restrict the Company's and its subsidiaries'
ability to dispose of assets, incur additional indebtedness, incur guarantee
obligations, prepay other indebtedness, make restricted payments, create liens,
make equity or debt investments, make certain acquisitions, modify terms of the
indenture, engage in mergers or consolidations, enter into operating leases or
engage in transactions with affiliates. In addition, the Company is expected to
comply with various financial ratios and tests, including a maximum capital
expenditures test, minimum debt service coverage ratio, minimum EBITDA, maximum
senior leverage ratio and minimum revenue. At May 31, 2002, the Company was in
compliance with all of its debt covenants.
11.25% Senior Subordinated Notes
The new 11.25% Notes are due April 2012. The 11.25% Notes were issued with a
face principal amount of $155 million at a price of 98.589%. Interest is due
January 1 and July 1 of each year, beginning on July 1, 2002. The 11.25% Notes
are redeemable for a premium of between 1% and 5.625% anytime after April 2007,
as outlined in the indenture. Up to 35% of the 11.25% Notes can be redeemed
prior to April 1, 2005 at an 11.25% premium. The 11.25% Notes are guaranteed on
an unsecured, senior subordinated basis by the Company's existing and future
Domestic Subsidiaries.
The 11.25% Notes contain certain restrictive covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
additional debt, pay dividends or make other distributions, make investments,
dispose of assets, issue capital stock of subsidiaries, enter into mergers or
consolidations or sell all, or substantially all, of their assets.
F-14
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below reflects the scheduled principal payment terms of the
Company's long-term debt (table in thousands):
Year ending May 31,
-------------------
2003........... $ 5,044
2004........... 5,000
2005........... 5,000
2006........... 5,000
2007........... 83,062
Thereafter..... 152,831
--------
$255,937
========
Old Credit Facilities
In connection with the September 1999 Restructuring, the Company entered
into new credit facilities (the "Old 1999 Credit Facilities") of $300 million
with a syndicate of banks and financial services companies. The Old 1999 Credit
Facilities consisted of a $120 million revolving credit facility, a $30 million
term loan ("Term Loan A"), an $80 million term loan ("Term Loan B"), a $55
million term loan ("Term Loan C"), and a $15 million term loan ("Intellectual
Property Loan").
At the Company's option, all loans bore interest at either (a) a floating
rate equal to the "index rate" plus an applicable margin of between 1.5% and
5.5% or (b) a fixed rate for periods of one, two, three or six months equal to
an interest rate based on the LIBOR rate plus an applicable margin of between
3% and 7%. The index rate was a floating rate equal to the higher of (i) the
rate quoted by The Wall Street Journal as the "base rate on corporate loans at
large U.S. money center commercial banks" and (ii) the federal funds rate plus
0.5%. In addition, the Term Loan C accrued additional interest at 5% per annum
which was added to the loan principal quarterly.
12% Subordinated Notes
The 12% Subordinated Notes were due September 2005 and were guaranteed by
each of the Company's Domestic Subsidiaries (Note 17). The 12% Notes were
redeemable at any time for a premium of 1%-4%, as outlined in the indenture.
The Company was paying a rate of 13.5% on the 12% Notes until the notes were
registered pursuant to an effective registration statement under the Securities
Act of 1933. The notes were not registered prior to their redemption
For the fiscal year ended May 31, 2002, an extraordinary loss of
approximately $7.4 million ($4.6 million net of income tax benefit) was
recorded on the extinguishment of the existing credit facilities and the 12%
Notes.
For the fiscal year ended May 31, 2000, an extraordinary loss of
approximately $3.2 million ($1.9 million net of income tax benefit) was
recorded on the extinguishment of the Company's existing senior credit
facilities and the remaining 13% Notes.
10. Stockholder's Equity
The Company has 3,000 shares of $.01 par value common stock authorized, and
1,000 shares issued and outstanding.
F-15
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to the September 1999 Restructuring, the Company established a
new junior management stock option plan (the "Plan") and issued 333,300 options
to purchase common stock of HF Holdings with an exercise price of $5.83 to
members of the Plan. These options have a ten-year life, 25% vest immediately
and the balance vests in 25% increments on each anniversary of the grant date.
The following table summarizes activity under the Plan for the fiscal years
ended May 31, 2000, 2001 and 2002:
May 31, 2000 May 31, 2001 May 31, 2002
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year..... -- -- 333,300 $5.83 333,300 $5.83
Granted.............................. 333,300 $5.83 -- -- -- --
Expired.............................. -- -- -- -- -- --
Exercised............................ -- -- -- -- -- --
Forfeited............................ -- -- -- -- -- --
-------- -------- --------
Outstanding at end of year........... 333,300 $5.83 333,300 $5.83 333,300 $5.83
======== ======== ========
Options exercisable at end of year... 83,325 166,650 249,975
======== ======== ========
Weighted average fair market value of
options granted during year........ $ 1.51 $ -- $ --
======== ======== ========
The following table summarizes information about stock options outstanding
at May 31, 2002:
Options Outstanding Options Exercisable
- ------------------------------------------- -----------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (in years) Exercise Price Exercisable Exercise Price
- --------------- ----------- --------------- -------------- ----------- --------------
$5.83 333,300 7.3 $5.83 249,975 $5.83
No compensation expense has been recognized for these options. Had the
compensation expense associated with these options been determined based on the
fair value of such options on the respective grant dates, the Company's pro
forma net income (loss) would have been as indicated below (table in thousands):
------- ------- -------
2000 2001 2002
------- ------- -------
Net income (loss):
As reported....... $(6,656) $13,306 $19,394
Pro forma......... (6,865) 13,173 19,261
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1)
risk-free interest rate of 6.00%; (2) expected life of five years; (3) dividend
yield of zero; and (4) a volatility of zero.
F-16
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
The provision for (benefit from) income taxes consists of the following
(table in thousands):
Year ended May 31,
--------------------------
2000 2001 2002
------- ------- --------
Current:
Federal............................................... $ 412 $ 2,720 $ 10,178
State................................................. 77 233 872
Foreign............................................... 1,280 1,118 2,293
------- ------- --------
Total current..................................... 1,769 4,071 13,343
------- ------- --------
Deferred:
Federal............................................... 1,503 (1,041) (9,720)
State................................................. 218 (90) (833)
Foreign............................................... 423 543 415
------- ------- --------
Total deferred.................................... 2,144 (588) (10,138)
------- ------- --------
Provision for income taxes before extraordinary loss..... 3,913 3,483 3,205
Benefit from extraordinary loss on extinguishment of debt (1,244) -- (2,825)
------- ------- --------
Total provision for income taxes......................... $ 2,669 $ 3,483 $ 380
======= ======= ========
The components of the Company's income (loss) before income taxes and
extraordinary item are as follows (table in thousands):
Year ended May 31,
------------------------
2000 2001 2002
------- ------- -------
Domestic................................................ $(6,452) $14,964 $17,017
Foreign................................................. 2,465 1,825 2,757
------- ------- -------
$(3,987) $16,789 $19,774
======= ======= =======
Income (loss) before income taxes and extraordinary item $ (795) $16,789 $27,209
Pre-tax extraordinary loss.............................. (3,192) -- (7,435)
------- ------- -------
$(3,987) $16,789 $19,774
======= ======= =======
F-17
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes as follows:
Year ended May 31,
-----------------
2000 2001 2002
---- ---- ----
Statutory federal income tax rate...................................... (35)% 35% 35%
State tax provision (benefit).......................................... (2) 3 3
Losses for which no benefit has been recognized........................ 40 -- --
Benefit from net operating loss related to September 1999 Restructuring -- (17) --
Benefit from Internal Revenue Service adjustment....................... -- -- (59)
Foreign income taxes................................................... -- 9 25
Foreign tax credit..................................................... -- (1) (9)
Other.................................................................. 15 (8) 7
Change in valuation allowance.......................................... 49 -- --
--- --- ---
Provision for income taxes............................................. 67% 21% 2%
=== === ===
As of May 31, 2001 and 2002, the Company recorded gross deferred tax
assets and gross deferred tax liabilities as follows (table in thousands):
May 31,
----------------
2001 2002
------- -------
Gross deferred tax assets..... $19,741 $28,959
Gross deferred tax liabilities (5,239) (3,824)
------- -------
14,502 25,135
Valuation allowance........... (7,620) (8,244)
------- -------
$ 6,882 $16,891
======= =======
As of May 31, 2001 and 2002, net deferred tax assets consist of the
following (table in thousands):
May 31,
----------------
2001 2002
------- -------
Foreign net operating loss carryforwards.... $ 7,620 $ 8,244
Expenses capitalized for income tax purposes -- 11,332
Property and equipment...................... (2,364) (2,044)
Reserves and allowances..................... 4,637 4,478
Uniform capitalization of inventory......... 647 728
Restructuring gain.......................... 2,944 --
Other, net.................................. 1,018 2,397
------- -------
14,502 25,135
Valuation allowance......................... (7,620) (8,244)
------- -------
Net deferred tax asset...................... $ 6,882 $16,891
======= =======
F-18
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 2002, the Internal Revenue Service ("IRS") completed an
examination of the Company's taxable years ended May 31, 1997, 1996 and 1995.
As a result of this examination, approximately $35.0 million of previously
deducted expenses were capitalized and will be amortized over the next fifteen
years. These adjustments created a long-term deferred tax asset of
approximately $11.5 million. Because of the nature of the audit, the final
examination report must be reviewed and approved by the Congressional Joint
Committee. The Company does not anticipate that any changes to the final
examination report will be made as a result of this review.
During fiscal year ended May 31, 2002, the valuation allowance increased by
$624,000 due to additional foreign net operating loss carryforwards that may
not be utilized in future years. During the fiscal year ended May 31, 2001, the
valuation allowance decreased by $16,466,000 due to the elimination of net
operating loss carryforwards that would provide no future benefit to the
Company. During the fiscal year ended May 31, 2000, the valuation allowance
increased by $6,456,000, primarily as a result of the increase in the net
operating loss carryforwards that may not be realized.
Management believes that it is more likely than not that the Company will
generate sufficient future taxable income to realize the balance of the net
deferred tax asset at May 31, 2002. However, there can be no assurance that the
Company will generate any specific level of taxable income or that it will be
able to realize any of the remaining deferred tax assets in future periods. If
the Company were unable to generate sufficient taxable income in the future, an
additional valuation allowance against this deferred tax asset would result in
a charge to earnings.
During the fiscal year ended May 31, 2001, the Company utilized
approximately $9.5 million in net operating loss carryforwards generated during
the period from September 1999 to May 2000.
During the fiscal year ended May 31, 2000, the Company did not realize any
income tax benefit from federal and state net operating loss carryforwards.
At May 31, 2002, the Company had approximately $21.1 million of foreign net
operating loss carryforwards which may be carried forward indefinitely. The
Company has provided a full valuation allowance against the deferred tax asset
related to these carryforwards.
12. Supplemental Disclosures of Cash Flow Information
Year Ended May 31,
-----------------------
2000 2001 2002
------- ------- -------
Cash paid during the year for (table in thousands):
Interest........................................ $34,121 $34,063 $27,222
Income taxes, net............................... 3,688 6,131 8,221
Non-cash investing and financing activities:
During the fiscal years ended May 31, 2001 and 2000, the Company added
interest of $2.9 million and $1.2 million, respectively, to long-term debt
principal.
During the fiscal year ended May 31, 2000, the Company exchanged the 13%
Notes for 12% Notes (Notes 8); issued warrants to the holders of 13% Notes
(Note 8); and canceled loans to officers (Note 14).
F-19
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Commitments and Contingencies
Leases--The Company has noncancellable operating leases, primarily for
warehouse and production facilities and computer and production equipment, that
expire over the next five years. These leases generally contain renewal options
for periods ranging from three to five years and require the Company to pay all
executory costs such as maintenance and insurance. Future minimum payments
under noncancellable operating leases consist of the following (table in
thousands):
Year ending May 31,
-------------------
2003........... $12,891
2004........... 11,356
2005........... 8,866
2006........... 3,474
2007........... 1,086
Thereafter..... 2,233
-------
$39,906
=======
Rental expense under noncancellable operating leases was approximately
$13,960,000, $15,282,000 and $15,060,000 for the fiscal years ended May 31,
2000, 2001 and 2002, respectively.
Environmental Issues--The Company's operations are subject to federal, state
and local health, safety and environmental laws and regulations that impose
workplace standards and limitations on the discharge of pollutants into the
environment and establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of materials, substances
and wastes. At this time, the Company is unaware of any environmental, health
or safety violations.
Product Liability--Due to the nature of the Company's products, the Company
is subject to product liability claims involving personal injuries allegedly
related to the Company's products. The Company currently carries an
occurrence-based product liability insurance policy. The current policy
provides coverage for the period from October 25, 2001 to October 1, 2002 of up
to $5.0 million per occurrence and $5.0 million in the aggregate. The policy
has a deductible on each claim of up to $500,000. The Company believes that its
insurance is generally adequate to cover product liability claims.
Nevertheless, currently pending claims and any future claims are subject to the
uncertainties related to litigation, and the ultimate outcome of any such
proceedings or claims cannot be predicted. Due to uncertainty with respect to
the nature and extent of manufacturers' and distributors' liability for
personal injuries, the Company cannot guarantee that its product liability
insurance is or will be adequate to cover such claims.
Product Recall--In January 2002, the Company notified the Consumer Product
Safety Commission that it would be recalling and remediating a defect in the
Hikers product. To date, the Company has not received any reports of injuries.
The Company does not believe that this recall will have a material effect on
its financial position or results of operations.
Other Litigation--The Company is party to a variety of non-product liability
commercial lawsuits involving contract claims. The Company believes that
adverse resolution of these lawsuits would not have a material adverse effect
upon its results of operations or financial position.
F-20
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2001, a claim was made against the Company alleging the Company
received $1.7 million of preferential transfers in connection with the 1999
Service Merchandise bankruptcy proceedings. The proposed claim is currently
being vigorously defended by the Company's counsel. At this time, the Company
and its counsel are unable to determine the likelihood of an unfavorable
outcome or the amount or range of potential recovery or loss.
The Company has received a proposed assessment from United States Customs
Service for approximately $1.3 million with respect to a series of issues
regarding compliance with the North American Free Trade Agreement ("NAFTA").
The Company believes it has complied with NAFTA. The proposed assessment is
currently being vigorously defended by the Company's counsel. The Company does
not believe the outcome will have a material adverse effect upon the Company's
results of operations or financial position.
The Company is also involved in several intellectual property and patent
infringement claims, arising in the ordinary course of its business. The
Company believes that the ultimate outcome of these matters will not have a
material adverse effect upon its results of operations or financial position.
Warranty--The Company warrants its products against defects in materials and
workmanship for a period of 90 days after sale to the end-user.
As of May 31, 2001 and 2002, the Company had an accrual for warranty costs
on products sold of approximately $2,557,000 and $1,290,000, respectively,
included in accrued expenses.
Retirement Plans--All employees who have met minimum age and service
requirements are eligible to participate in the 401(k) savings plan. Company
contributions to the plan for the fiscal years ended May 31, 2000, 2001, and
2002 were $512,000, $540,000 and $610,000, respectively.
In September 2001, the Company established a nonqualified deferred
compensation plan that permits certain employees to annually elect to defer a
portion of their compensation for their retirement. The amount of compensation
deferred and related investment earnings have been placed in an irrevocable
rabbi trust and recorded within other assets in the Company's consolidated
balance sheet, as this trust will be available to the Company's general
creditors in the event of insolvency. An offsetting deferred compensation
liability, which equals the total value of the trust at May 31, 2002 of
$1,238,000, reflects amounts due to employees who contributed to the plan. The
Company's contributions to the deferred compensation plan were $120,000 in the
fiscal year ended May 31, 2002.
Employment Agreements--On September 27, 1999, the Company entered into new
three-year employment agreements with two senior officers. The employment
agreements provide for the continued employment of the Chairman and Chief
Executive Officer with a base salary of $525,000 and the President and Chief
Operating Officer with a base salary of $475,000.
The Company may terminate each executive's employment (1) for cause as
provided in each agreement, (2) upon six months' disability, or (3) without
cause. Each executive may similarly terminate his employment immediately for
cause as provided in his employment agreement, upon three months notice to
perform full-time church service or for any reason upon six months' notice.
The employment agreements prohibit the executives from engaging in outside
business activity during the term, subject to certain exceptions. The
employment agreements provide for customary confidentiality obligations and, in
addition, a non-competition obligation for a period of four years following
termination (two
F-21
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
years if the executive quits with cause or without cause or is terminated
without cause, except that the Company may, at the Company's option, extend
such period for up to two additional years by paying the executive his salary
and bonus during the extended period).
14. Related Party Transactions
Management Fees
The Company has an agreement with major stockholders of HF Holdings who
provide management and advisory services to the Company. Total annual fees due
under this agreement are $800,000 for the fiscal years ended May 31, 2000,
2001, and 2002. The Company recorded management fee expense of $800,000 each
year. In addition, the Company paid a fee of $3,500,000 upon closing of the
September 1999 Restructuring to certain major stockholders of HF Holdings. In
addition, if the Company enters into any acquisition transaction involving at
least $10 million, the Company must pay a fee of approximately 1% of the gross
purchase price, including liabilities assumed, of the transaction to these
stockholders.
Airplane Lease
In June 1996, the Company entered into an agreement with FG Aviation, Inc.
("FG"), a company which is jointly owned by officers of the Company, whereby
the Company has committed to lease an airplane from FG. Minimum rentals under
the lease, which expires in May 2005, are $56,610 per month. On February 8,
2002, the Company entered into a new agreement with FG, whereby the Company
terminated the original airplane lease and committed to lease a new airplane
from FG. Minimum lease rentals under the lease, which expires February 2009,
are $120,000 per month. The Company is responsible for scheduled maintenance
and fuel costs; however, these costs reduce the monthly rental. In addition,
the Company is responsible for payment of the aircraft crew and any unscheduled
maintenance of the aircraft. In connection with its airplane lease commitments,
the Company recorded $938,000, $903,000 and $695,000 of rental expense for the
fiscal years ended May 31, 2000, 2001 and 2002, respectively. In addition, in
February 2002, the Company advanced $280,000 to FG as a security deposit on the
aircraft lease.
Receivables from Officers and Parent
In connection with the purchase of stock in 1994, the Company accepted as
partial payment, notes bearing interest at a per annum rate of 7.5% in the
amount of $656,000 from officers. During the fiscal year ended May 31, 2000, as
a result of the September 1999 Restructuring, the Company canceled these notes.
The stock collateralizing such loans was delivered back to the Company.
As part of the September 1999 Restructuring, HF Holdings loaned to senior
management an aggregate of $2.2 million against non-recourse notes with a
maturity of 10 years. HF Holdings used funds advanced from the Company to make
the loans. The notes bear interest at a rate equal to that of the New Credit
Facilities, payable in cash until the first date as of which the cumulative net
taxable income of the Company arising on or after the date of consummation of
the September 1999 Restructuring exceeds $0. As of May 31, 2002 and 2001, these
notes are non-interest bearing. The notes may be accelerated upon specified
defaults and liquidity events, and are collaterized by shares of HF Holdings
common stock. In addition, as part of the September 1999 Restructuring, the
Company made loans in the aggregate amount of $452,000 to certain members of
junior management. Such loans were forgiven (both as to principal and interest)
as of May 31, 2000.
F-22
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management Equity Grant
In connection with the September 1999 Restructuring, HF Holdings granted two
members of senior management 666,700 shares of HF Holdings common stock at no
cost. The Company recognized a compensation charge and contribution of capital
of $3,175,000, the estimated fair value assigned to this common stock grant.
15. Acquisition of Business
On December 20, 2000, the Company acquired certain assets of a corporation.
The aggregate purchase price was $4,000,000, less cash acquired of $3,438. The
acquisition was accounted for under the purchase method of accounting.
The costs of the acquisition have been allocated on the basis of the
estimated fair market value of the assets acquired and the liabilities assumed
as reflected in the following table (in thousands). The results of the
operations of the acquired business have been included in the accompanying
financial statements since the date of acquisition. The acquired corporation's
historical revenue and net income for the period preceding the acquisition date
is not significant to the Company.
Fair value of assets acquired:
Trade accounts receivable......... $ 756
Inventories....................... 835
Property and equipment............ 429
Goodwill.......................... 4,430
Other............................. 32
-------
Total assets acquired......... 6,482
Liabilities assumed:
Accounts payable.................. (2,320)
Other............................. (100)
Note payable...................... (65)
-------
Total liabilities assumed..... (2,485)
-------
Cash paid for acquisition............ $ 3,997
=======
As a result of a contingent purchase price agreement, the Company paid
$306,000 of additional costs during the fiscal year ended May 31, 2002, which
were classified as goodwill.
16. Geographic Segment Information
Based on the Company's method of internal reporting, the Company operates
and reports as a single industry segment, which is, development, manufacturing
and distribution of home fitness equipment.
F-23
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue and long-lived asset information by geographic area as of and for
the fiscal years ended May 31 is as follows (table in thousands):
Long-lived assets
Revenues for the years ended May 31, (net) as of May 31,
------------------------------------ -------------------
2000 2001 2002 2001 2002
-------- -------- -------- ------- -------
United States $671,550 $748,301 $814,196 $43,407 $41,650
Foreign...... 61,472 72,195 81,883 3,351 3,335
-------- -------- -------- ------- -------
Total..... $733,022 $820,496 $896,079 $46,758 $44,985
======== ======== ======== ======= =======
Foreign revenue is based on the country in which the sales originate (i.e.,
where the legal subsidiary is domiciled). Revenue from no single foreign
country was material to the consolidated revenues of the Company.
17. Consolidating Condensed Financial Statements
The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal
Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc.
and Free Motion Fitness, Inc. ("Subsidiary Guarantors") have fully and
unconditionally guaranteed on a joint and several basis, the obligation to pay
principal and interest with respect to the 11.25% Notes. A significant portion
of the Company's operating income and cash flow is generated by its
subsidiaries. As a result, funds necessary to meet the Company's debt service
obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Company's
subsidiaries, could limit the Company's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the 11.25% Notes. Although holders of
the 11.25% Notes will be direct creditors of the Company's principal direct
subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries
located primarily in Europe ("Non-Guarantor Subsidiaries") that are not
included among the Guarantor Subsidiaries, and such subsidiaries will not be
obligated with respect to the 11.25% Notes. As a result, the claims of
creditors of the Non-Guarantor Subsidiaries will effectively have priority with
respect to the assets and earnings of such companies over the claims of
creditors of the Company, including the holders of the 11.25% Notes.
The following supplemental consolidating condensed financial statements are
presented (in thousands):
1. Consolidating condensed balance sheets as of May 31, 2001 and 2002 and
consolidating condensed statements of operations and cash flows for each
of the years in the three year period ended May 31, 2002.
2. The Company's combined Subsidiary Guarantors and combined Non-Guarantor
subsidiaries with their investments in subsidiaries accounted for using
the equity method.
3. Elimination entries necessary to consolidate the Company and all of its
subsidiaries.
F-24
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Balance Sheet
May 31, 2001
-----------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash................................... $ 1,615 $ 613 $ 1,096 $ -- $ 3,324
Accounts receivable, net............... 110,586 33,543 11,156 (12,339) 142,946
Inventories, net....................... 103,903 35,584 6,949 (452) 145,984
Deferred income taxes.................. 4,714 344 -- -- 5,058
Other current assets................... 11,394 3,110 1,342 -- 15,846
--------- ------- -------- --------- ---------
Total current assets...................... 232,212 73,194 20,543 (12,791) 313,158
--------- ------- -------- --------- ---------
Property and equipment, net............... 39,934 6,230 594 -- 46,758
Receivable from affiliates................ 73,872 6,314 -- (80,186) --
Intangible assets, net.................... 25,093 5,424 -- -- 30,517
Deferred income taxes..................... 1,625 199 -- -- 1,824
Investment in subsidiaries................ 44,909 -- -- (44,909) --
Other assets, net......................... 7,872 4,061 1,314 -- 13,247
--------- ------- -------- --------- ---------
Total Assets.............................. $ 425,517 $95,422 $ 22,451 $(137,886) $ 405,504
========= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt...... $ 11,255 $ 91 $ -- $ -- $ 11,346
Accounts payable....................... 92,423 21,788 18,283 (12,339) 120,155
Accrued expenses....................... 20,434 1,557 1,735 -- 23,726
Income taxes payable................... -- -- 345 -- 345
--------- ------- -------- --------- ---------
Total current liabilities................. 124,112 23,436 20,363 (12,339) 155,572
--------- ------- -------- --------- ---------
Long-term debt............................ 253,326 1 -- -- 253,327
--------- ------- -------- --------- ---------
Payable to affiliates..................... 29,337 31,778 19,071 (80,186) --
Stockholder's equity (deficit):
Common stock and additional paid-in
capital.............................. 232,484 11,099 5,481 (44,909) 204,155
Receivable from Parent................. (2,200) -- -- -- (2,200)
Accumulated deficit.................... (211,522) 30,422 (21,783) (452) (203,335)
Accumulated other comprehensive loss... (20) (1,314) (681) -- (2,015)
--------- ------- -------- --------- ---------
Total stockholder's equity (deficit)...... 18,742 40,207 (16,983) (45,361) (3,395)
--------- ------- -------- --------- ---------
Total Liabilities and Stockholder's Equity
(Deficit)............................... $ 425,517 $95,422 $ 22,451 $(137,886) $ 405,504
========= ======= ======== ========= =========
F-25
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Balance Sheet
May 31, 2002
-----------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash................................... $ 327 $ 1,448 $ 2,998 $ -- $ 4,773
Accounts receivable, net............... 104,553 54,071 11,249 (16,695) 153,178
Inventories, net....................... 82,558 45,657 5,847 (309) 133,753
Deferred income taxes.................. 4,591 214 2 -- 4,807
Other current assets................... 8,472 8,457 1,746 -- 18,675
--------- -------- -------- --------- ---------
Total current assets...................... 200,501 109,847 21,842 (17,004) 315,186
--------- -------- -------- --------- ---------
Property and equipment, net............... 34,031 10,101 853 -- 44,985
Receivable from affiliates................ 81,636 16,361 -- (97,997) --
Intangible assets, net.................... 20,466 8,517 1,218 -- 30,201
Deferred income taxes..................... 11,402 377 305 -- 12,084
Investment in subsidiaries................ 44,909 -- -- (44,909) --
Other assets, net......................... 20,756 -- 12 -- 20,768
--------- -------- -------- --------- ---------
Total Assets....................... $ 413,701 $145,203 $ 24,230 $(159,910) $ 423,224
========= ======== ======== ========= =========
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt...... $ 5,000 $ 44 $ -- $ -- 5,044
Accounts payable....................... 81,909 28,586 20,127 (16,695) 113,927
Accrued expenses....................... 19,325 4,998 2,473 -- 26,796
Income taxes payable................... -- 5,069 352 -- 5,421
--------- -------- -------- --------- ---------
Total current liabilities................. 106,234 38,697 22,952 (16,695) 151,188
--------- -------- -------- --------- ---------
Long-term debt............................ 247,197 3,696 -- -- 250,893
Other liabilities......................... 4,934 -- -- -- 4,934
Payable to affiliates..................... 16,361 60,784 20,852 (97,997) --
Stockholder's equity (deficit):
Common stock and additional paid-in
capital.............................. 206,324 37,259 5,481 (44,909) 204,155
Receivable from Parent................. (2,200) -- -- -- (2,200)
Accumulated deficit.................... (165,149) 5,632 (24,115) (309) (183,941)
Accumulated other comprehensive
loss................................. -- (865) (940) -- (1,805)
--------- -------- -------- --------- ---------
Total stockholder's equity (deficit)...... 38,975 42,026 (19,574) (45,218) 16,209
--------- -------- -------- --------- ---------
Total Liabilities and Stockholder's Equity
(Deficit)............................... $ 413,701 $145,203 $ 24,230 $(159,910) $ 423,224
========= ======== ======== ========= =========
F-26
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Statement of Operations
Year Ended May 31, 2000
-------------------------------------------------------------------
Combined Combined
ICON Health Guarantor Non-Guarantor
& Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------- ------------ ------------
Net sales........................................ $594,388 $107,458 $31,176 $ -- $733,022
Cost of sales.................................... 433,492 77,047 20,850 233 531,622
-------- -------- ------- ----- --------
Gross profit..................................... 160,896 30,411 10,326 (233) 201,400
Total operating expenses......................... 128,095 25,446 12,416 -- 165,957
-------- -------- ------- ----- --------
Income from operations........................... 32,801 4,965 (2,090) (233) 35,443
Interest expense................................. (31,742) (797) (1,360) -- (33,899)
Amortization of deferred financing fees.......... (2,743) -- -- -- (2,743)
Other income, net................................ 404 -- -- -- 404
-------- -------- ------- ----- --------
Income (loss) before income taxes and
extraordinary item............................. (1,280) 4,168 (3,450) (233) (795)
Provision for income taxes....................... 2,742 1,024 147 -- 3,913
-------- -------- ------- ----- --------
Income (loss) before extraordinary item.......... (4,022) 3,144 (3,597) (233) (4,708)
Extraordinary loss on extinguishment of debt, net
of income tax benefit of $1,244................ (1,948) -- -- -- (1,948)
-------- -------- ------- ----- --------
Net income (loss)................................ $ (5,970) $ 3,144 $(3,597) $(233) $ (6,656)
======== ======== ======= ===== ========
F-27
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Statement of Operations
Year Ended May 31, 2001
-------------------------------------------------------------------
Combined Combined
ICON Health Guarantor Non-Guarantor
& Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------- ------------ ------------
Net sales.............................. $670,354 $111,878 $38,264 $ -- $820,496
Cost of sales.......................... 474,343 81,163 25,055 (77) 580,484
-------- -------- ------- ---- --------
Gross profit........................... 196,011 30,715 13,209 77 240,012
Total operating expenses............... 138,895 31,063 14,151 -- 184,109
-------- -------- ------- ---- --------
Income from operations................. 57,116 (348) (942) 77 55,903
Interest expense....................... (31,875) (1,408) (1,488) -- (34,771)
Amortization of deferred financing fees (3,189) -- -- -- (3,189)
Other expense, net..................... (1,154) -- -- -- (1,154)
-------- -------- ------- ---- --------
Income (loss) before income taxes...... 20,898 (1,756) (2,430) 77 16,789
Provision for income taxes............. 3,089 60 334 -- 3,483
-------- -------- ------- ---- --------
Net income (loss)...................... $ 17,809 $ (1,816) $(2,764) $ 77 $ 13,306
======== ======== ======= ==== ========
Supplemental Consolidating Condensed Statement of Operations
Year Ended May 31, 2002
-----------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Net sales................................ $641,598 $211,848 $42,633 $ -- $896,079
Cost of sales............................ 464,431 141,733 29,025 (143) 635,046
-------- -------- ------- ----- --------
Gross profit............................. 177,167 70,115 13,608 143 261,033
Total operating expenses................. 117,497 73,782 13,917 -- 205,196
-------- -------- ------- ----- --------
Income from operations................... 59,670 (3,667) (309) 143 55,837
Interest expense......................... (23,200) (1,177) (1,772) -- (26,149)
Amortization of deferred financing fees.. (3,146) -- -- -- (3,146)
Other income, net........................ 667 -- -- -- 667
-------- -------- ------- ----- --------
Income (loss) before income taxes and
extraordinary item..................... 33,991 (4,844) (2,081) 143 27,209
Provision for (benefit from) income taxes 3,358 (404) 251 -- 3,205
-------- -------- ------- ----- --------
Income (loss) before extraordinary item.. 30,633 (4,440) (2,332) 143 24,004
Extraordinary loss on extinguishment
of debt, net of income tax benefit
of $2,825.............................. (4,610) -- -- -- (4,610)
-------- -------- ------- ----- --------
Net income (loss)........................ $ 26,023 $ (4,440) $(2,332) $ 143 $ 19,394
======== ======== ======= ===== ========
F-28
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Statement of Cash Flows
Year Ended May 31, 2000
-----------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Operating activities:
Net cash provided by (used in) operating
activities............................. $ 4,950 $(4,950) $ (115) $ 656 $ 541
--------- ------- ------ --------- ---------
Investing activities:
Net cash provided by (used in) investing
activities............................. (18,445) (1,306) (160) -- (19,911)
--------- ------- ------ --------- ---------
Financing activities:
Borrowings (payments) on revolving credit
facility, net.......................... (108,756) (4,295) -- -- (113,051)
Payments on other long-term debt......... (470) (110) -- -- (580)
Proceeds from September 1999 term notes.. 180,000 -- -- -- 180,000
Payments on September 1999 term notes.... (5,321) -- -- -- (5,321)
Payments on old term notes............... (19,464) -- -- -- (19,464)
Payments to 13% noteholders.............. (40,908) -- -- -- (40,908)
Payment of fees-debt portion............. (14,876) -- -- -- (14,876)
Cash contribution of capital from parent. 205,988 -- -- (165,988) 40,000
Payment of fees-equity portion........... (4,375) -- -- -- (4,375)
Other.................................... (177,312) 11,531 449 165,332 --
--------- ------- ------ --------- ---------
Net cash provided by (used in) financing
activities............................. 14,506 7,126 449 (656) 21,425
Effect of exchange rate changes on cash.. -- (414) (52) -- (466)
--------- ------- ------ --------- ---------
Net increase (decrease) in cash.......... 1,011 456 122 -- 1,589
Cash, beginning of period................ 2,622 77 1,576 -- 4,275
--------- ------- ------ --------- ---------
Cash, end of period...................... $ 3,633 $ 533 $1,698 $ -- $ 5,864
========= ======= ====== ========= =========
F-29
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Statement of Cash Flows
Year Ended May 31, 2001
-----------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Operating activities:
Net cash provided by (used in) operating
activities............................. $ 27,960 $(14,425) $ (330) $(798) $ 12,407
-------- -------- ------ ----- --------
Investing activities:
Net cash provided by (used in) investing
activities............................. (16,526) (7,271) 149 863 (22,785)
-------- -------- ------ ----- --------
Financing activities:
Borrowings (payments) on revolving credit
facility, net.......................... 19,497 -- -- -- 19,497
Payments on other long-term debt......... (393) 17 -- -- (376)
Payments on September 1999 term notes.... (9,273) -- -- -- (9,273)
Payment of fees-debt portion............. (1,153) -- -- -- (1,153)
Other.................................... (22,195) 22,381 (186) -- --
-------- -------- ------ ----- --------
Net cash provided by (used in) financing
activities............................. (13,517) 22,398 (186) -- 8,695
Effect of exchange rate changes on cash.. -- (622) (235) -- (857)
-------- -------- ------ ----- --------
Net increase (decrease) in cash.......... (2,083) 80 (602) 65 (2,540)
Cash, beginning of period................ 3,633 533 1,698 -- 5,864
-------- -------- ------ ----- --------
Cash, end of period...................... $ 1,550 $ 613 $1,096 $ 65 $ 3,324
======== ======== ====== ===== ========
F-30
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Consolidating Condensed Statement of Cash Flows
Year Ended May 31, 2002
-------------------------------------------------------------------
Combined Combined
ICON Health Guarantor Non-Guarantor
& Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------- ------------ ------------
Operating activities:
Net cash provided by operating activities $ 30,169 $ 6,133 $1,236 $-- $ 37,538
--------- ------- ------ --- ---------
Investing activities:
Net cash used in investing activities.... (13,747) (2,834) (549) -- (17,130)
--------- ------- ------ --- ---------
Financing activities:
Borrowings (payments) on revolving
credit facility, net................... 32,831 -- -- -- 32,831
Payments on other long-term debt......... -- (48) -- -- (48)
Proceeds from April 2002 term notes...... 25,000 -- -- -- 25,000
Payments on April 2002 term notes........ (1,250) -- -- -- (1,250)
Payments on September 1999 term notes.... (172,834) -- -- -- (172,834)
Proceeds from 11.25% notes............... 152,813 -- -- -- 152,813
Payments to 12% noteholders.............. (46,053) (46,053)
Payment of fees-debt portion............. (9,757) -- -- -- (9,757)
Other.................................... 1,540 (2,688) 1,149 -- --
--------- ------- ------ --- ---------
Net cash provided by (used in) financing
activities............................. (17,710) (2,737) 1,149 -- (19,298)
Effect of exchange rate changes on cash.. -- 273 66 -- 339
--------- ------- ------ --- ---------
Net increase (decrease) in cash.......... (1,288) 835 1,902 -- 1,449
Cash, beginning of period................ 1,615 613 1,096 -- 3,324
--------- ------- ------ --- ---------
Cash, end of period...................... $ 327 $ 1,448 $2,998 $-- $ 4,773
========= ======= ====== === =========
F-31
Valuation Qualifying Accounts Financial Statement Schedule II (in thousands)
Year Ended May 31,
----------------------------
2000 2001 2002
-------- -------- --------
Accounts Receivable--
Allowances for Doubtful Accounts,
Advertising Discounts and Credit Memos:
Balance at beginning of year.................................................. $ 8,219 $ 7,004 $ 6,752
Additions:
Charged to costs and expenses (allowance for doubtful accounts and
credit memos)........................................................... 2,055 3,582 4,658
Charged to costs and expenses (discounts and advertising)................. 29,714 41,668 45,998
Recoveries on accounts charged off........................................ 156 -- --
Deductions:
Accounts charged off (allowance for doubtful accounts and credit memos)... (2,759) (5,044) (3,906)
Accounts charged off (advertising)........................................ (30,381) (40,458) (45,563)
-------- -------- --------
Balance at end of year........................................................ $ 7,004 $ 6,752 $ 7,939
======== ======== ========
Year Ended May 31,
----------------------------
2000 2001 2002
-------- -------- --------
Inventory Reserve:
Balance at beginning of year.................................................. $ 4,815 $ 2,829 $ 3,185
Additions:
Charged to costs and expenses (Inventory reserve)......................... 769 506 679
Charged to costs and expenses (NordicTrack purchase accounting)........... -- -- --
Deductions:
NordicTrack purchase accounting........................................... (2,216) -- --
Reduction in reserve...................................................... (539) (150) (589)
-------- -------- --------
Balance at end of year........................................................ $ 2,829 $ 3,185 $ 3,275
======== ======== ========
Year Ended May 31,
----------------------------
2000 2001 2002
-------- -------- --------
Warranty Reserve:
Balance at beginning of year.................................................. $ 2,301 $ 2,570 $ 2,557
Additions:
Charged to costs and expenses............................................. 269 30 --
Deductions:
Reduction in reserve...................................................... -- (43) (1,267)
-------- -------- --------
Balance at end of year........................................................ $ 2,570 $ 2,557 $ 1,290
======== ======== ========
Year Ended May 31,
----------------------------
2000 2001 2002
-------- -------- --------
Long-term Receivables, Allowances for
Doubtful Accounts:
Balance at beginning of year.................................................. $ 14,738 $ 18,843 $ --
Additions:
Charged to costs and expenses............................................. 4,105 -- 2,434
Deductions:
Reduction in reserve...................................................... -- 18,843 --
-------- -------- --------
Balance at end of year........................................................ $ 18,843 $ -- $ 2,434
======== ======== ========
F-32
PART II
Item 20. Indemnification of Directors and Officers
ICON is a Delaware corporation. In its Certificate of Incorporation, ICON
has adopted the provisions of Section 102(b)(7) of the Delaware General
Corporation Law (the "Delaware Law"), which enables a corporation in its
original certificate of incorporation or an amendment thereto to eliminate or
limit the personal liability of a director for monetary damages for breach of
the director's fiduciary duty, except (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the Delaware law (providing
for liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director
will personally receive a benefit in money, property or services to which the
director is not legally entitled.
ICON has also adopted indemnification provisions pursuant to Section 145 of
the Delaware Law, which provides that a corporation may indemnify any persons,
including officers and directors, who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation), by reason of the fact
that such person was an officer, director, employee or agent of the
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer,
director, employee or agent acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to criminal proceedings, had no reasonable cause to believe that his
conduct was unlawful. A Delaware corporation may indemnify officers or
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against expenses (including attorney's fees) that such officer or
director actually and reasonably incurred.
ICON has entered into indemnification agreements with each of ICON's
officers and directors.
Item 21. Exhibits and Financial Statement Schedules
(A) Exhibits
2.1* Agreement and Plan of Merger dated as of September 27, 1999, among HF Holdings, Inc., ICON
Health & Fitness, Inc. and HF Acquisition, Inc.
3.1* Certificate of Incorporation of ICON Health & Fitness, Inc.
3.2* By-Laws of ICON Health & Fitness, Inc.
4.1* Indenture, dated April 9, 2002 between ICON Health & Fitness, Inc., the Guarantors set forth therein
and The Bank of New York, as Trustee
5.1*** Opinion of Weil, Gotshal & Manges LLP
10.1* Lease Agreement, dated January 29, 1990, by and between The Prudential Insurance Company of
America and Unit Distribution of Utah
10.2* Sublease, dated July 6, 1994, by and between Unit Distribution of Utah and ICON Health & Fitness,
Inc. (formerly known as Proform Fitness Products, Inc. and Weslo, Inc.), including amendments
thereto
10.3* Lease, dated June 29, 1998, by and between Ogden City and ICON Health & Fitness, Inc., including
all amendments thereto
10.4* Lease Agreement by and between Panattoni/Hillwood Development Company, LLC and ICON
Health & Fitness, Inc, including all amendments thereto
II-1
10.5* Lease Agreement, dated March 30, 2000, by and between International Center I, LLC and ICON
Health & Fitness, Inc.
10.6* Lease, dated March 1, 1997, by and between Aeroterm De Montreal, Inc. and ICON of Canada Inc.
10.7* Lease, dated October 1, 1994, by and between Freeport Center Associates and Proform Fitness
Products, Inc., including all amendments thereto
10.8* Deed of Lease, dated January 26, 2001, by and between Indome 43 Inc. and ICON of Canada Inc.
10.9* Purchase Agreement, dated as of March 28, 2002, by and between ICON Health & Fitness, Inc., the
Guarantors named therein, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., and
Fleet Securities, Inc. (the "Purchase Agreement")
10.10* Registration Rights Agreement dated April 9, 2002 by and between ICON Health and Fitness, Inc., the
Guarantors set forth therein and Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc.
and Fleet Securities, Inc.
10.11* Credit Agreement dated as of April 9, 2002 among ICON Health & Fitness, Inc., HF Holdings, Inc.,
JumpKing, Inc., Universal Technical Services, ICON International Holdings, Inc., ICON IP, Inc.,
Free Motion Fitness, Inc., NordicTrack, Inc., ICON du Canada Inc. and 510152 N.B. Ltd., General
Electric Capital Corporation, as Agent and Lender, and GECC Capital Markets Group, Inc.
10.12* Stockholders Agreement, dated as of September 27, 1999, among HF Holdings, Inc., ICON Health &
Fitness, Inc., HF Investment Holdings, LLC, Bain, certain Bain designees, Scott Watterson and
Gary Stevenson and Credit Suisse First Boston Corporation
10.13* Joinder and Supplement to Stockholders Agreement, among HF Holdings, Inc., ICON Health &
Fitness, Inc. and the Employee Stockholders named therein
10.14* Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health &
Fitness, Inc. and Scott Watterson
10.15* Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health &
Fitness, Inc. and Gary Stevenson
10.16* Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Scott Watterson
in the principal amount of $1,209,340
10.17* Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Gary Stevenson
in the principal amount of $990,660
10.18* Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and Scott
Watterson
10.19* Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and Gary
Stevenson
10.20* 1999 HF Holdings, Inc. Junior Management Stock Option Plan
10.21* 1999 ICON Health & Fitness, Inc. Junior Management Deferred Bonus Plan
10.22* Management Agreement, dated as of September 27, 1999, among HF Holdings, Inc. ICON Health &
Fitness, Inc. and a Bain affiliate
10.23* Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF
Holdings, Inc. and Scott Watterson
10.24* Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF
Holdings, Inc. and Gary Stevenson
10.25* Tax Agreement, dated as of September 27, 1999, among HF Holdings, Inc. and its subsidiaries
12.1* Statements re Computation of Ratios
21.1* Subsidiaries of Registrant
23.1** Consent of PricewaterhouseCoopers LLP
II-2
23.2*** Consent of Weil, Gotshal & Manges LLP (included in their opinion filed as Exhibit 5.1)
24.1* Power of Attorney (included on the signature page of the registration statement)
25.1* Statement on Form T-1 of Eligibility of Trustee
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Letter to Clients
99.4* Form of Letter to Nominees
- --------
* Previously filed
** Filed herewith
*** Supercedes previously filed exhibit
Item 22. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the option of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
II-3
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(e) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, ICON Health & Fitness,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing a Form S-4 and has duly caused this Amendment No. 3
to the Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 4th day of October, 2002.
ICON HEALTH & FITNESS, INC.
By: /s/ S. FRED BECK
-----------------------------
Name: S. Fred Beck
Title: Chief Financial and
Accounting
Officer, Vice President and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board and October 4, 2002
- ----------------------------- Chief Executive Officer
Scott R. Watterson (Principal Executive
Officer)
/S/ GARY E. STEVENSON President and Chief Operating October 4, 2002
- ----------------------------- Officer and Director
Gary E. Stevenson
/s/ S. FRED BECK Chief Financial and October 4, 2002
- ----------------------------- Accounting Officer, Vice
S. Fred Beck President and Treasurer
(Principal Financial and
Accounting Officer)
* Vice Chairman of the Board October 4, 2002
- -----------------------------
Robert C. Gay
* Director October 4, 2002
- -----------------------------
Ronald P. Mika
* Director October 4, 2002
- -----------------------------
Greg Benson
- ----------------------------- Director
David J. Matlin
* Director October 4, 2002
- -----------------------------
Chris R. Pechock
* Director October 4, 2002
- -----------------------------
Stanley C. Tuttleman
- ----------------------------- Director
W. McComb Dunwoody
* /s/ S. FRED BECK
- -----------------------------
S. Fred Beck
Attorney-in-Fact
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, Jumpking, Inc. certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing a Form S-4 and has duly caused this Amendment No. 3 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 4th day of October, 2002.
JUMPKING, INC.
By: /s/ S. FRED BECK
-----------------------------
Name: S. Fred Beck
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following person in the capacity and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ S. FRED BECK President and Sole October 4, 2002
- ----------------------------- Director (Principal
S. Fred Beck Executive, Financial and
Accounting Officer)
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, 510152 N.B. Ltd.
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Amendment No. 3 to
the Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 4th day of October, 2002.
510152 N.B. LTD.
By: /S/ M. JOSEPH BROUGH
-----------------------------
Name: M. Joseph Brough
Title: President
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following person in the capacity and on the date indicated.
Signature Title Date
--------- ----- ----
/S/ M. JOSEPH BROUGH President and Sole October 4, 2002
- ----------------------------- Director (Principal
M. Joseph Brough Executive, Financial and
Accounting Officer)
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act, Universal Technical
Services, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing a Form S-4 and has duly caused this
Amendment No. 3 to the Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Logan,
State of Utah, on the 4th day of October, 2002.
UNIVERSAL TECHNICAL SERVICES, INC.
By: /S/ GARY E. STEVENSON
-----------------------------
Name: Gary E. Stevenson
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GARY E. STEVENSON President and October 4, 2002
- ----------------------------- Director (Principal
Gary E. Stevenson Executive Officer)
/s/ S. FRED BECK Assistant Secretary and October 4, 2002
- ----------------------------- Director (Principal
S. Fred Beck Financial and Accounting
Officer)
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, ICON International
Holdings, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing a Form S-4 and has duly caused this
Amendment No. 3 to the Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Logan,
State of Utah, on the 4th day of October, 2002.
ICON INTERNATIONAL HOLDINGS, INC.
By: /S/ GARY E. STEVENSON
-----------------------------
Name: Gary E. Stevenson
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GARY E. STEVENSON President and Director October 4, 2002
- ----------------------------- (Principal Executive
Gary E. Stevenson Officer)
/s/ S. FRED BECK Treasurer and Director October 4, 2002
- ----------------------------- (Principal Financial and
S. Fred Beck Accounting Officer)
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act, NordickTrack, Inc.
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Amendment No. 3 to
the Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 4th day of October, 2002.
NORDICKTRACK, INC.
By: /S/ DAVID WATTERSON
-----------------------------
Name: David Watterson
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ DAVID WATTERSON President and Sole Director October 4, 2002
- ----------------------------- (Principal Executive
David Watterson Officer)
/S/ S. FRED BECK Treasurer (Principal October 4, 2002
- ----------------------------- Financial and Accounting
S. Fred Beck Officer)
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act, Free Motion Fitness,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing a Form S-4 and has duly caused this Amendment No. 3
to the Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 2nd day of October, 2002.
FREE MOTION FITNESS, INC.
By: /S/ ROY SIMONSON
-----------------------------
Name: Roy Simonson
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GARY E. STEVENSON Director October 4, 2002
- -----------------------------
Gary E. Stevenson
/S/ DAVID WATTERSON Director October 4, 2002
- -----------------------------
David Watterson
/S/ ROY SIMONSON President and Director October 2, 2002
- ----------------------------- (Principal Executive
Roy Simonson Officer)
* Director October 4, 2002
- -----------------------------
Lynn Brenchley
/S/ S. FRED BECK Treasurer and Director October 4, 2002
- ----------------------------- (Principal Financial and
S. Fred Beck Accounting Officer)
* /S/ S. FRED BECK
- -----------------------------
S. Fred Beck
Attorney-in-Fact
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act, ICON IP, Inc. certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing a Form S-4 and has duly caused this Amendment No. 3 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on
the 4th day of October, 2002.
ICON IP, INC.
By: /s/ S. FRED BECK
-----------------------------
Name: S. Fred Beck
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ S. FRED BECK President (Principal October 4, 2002
- ----------------------------- Executive, Financial and
S. Fred Beck Accounting Officer)
/S/ BRAD H. BEARNSON Sole Director October 4, 2002
- -----------------------------
Brad H. Bearnson
II-12
EXHIBIT INDEX
2.1* Agreement and Plan of Merger dated as of September 27, 1999, among HF Holdings, Inc., ICON
Health & Fitness, Inc. and HF Acquisition, Inc.
3.1* Certificate of Incorporation of ICON Health & Fitness, Inc.
3.2* By-Laws of ICON Health & Fitness, Inc.
4.1* Indenture, dated April 9, 2002 between ICON Health & Fitness, Inc., the Guarantors set forth
therein and The Bank of New York, as Trustee
5.1*** Opinion of Weil, Gotshal & Manges LLP
10.1* Lease Agreement, dated January 29, 1990, by and between The Prudential Insurance Company of
America and Unit Distribution of Utah
10.2* Sublease, dated July 6, 1994, by and between Unit Distribution of Utah and ICON Health & Fitness,
Inc. (formerly known as Proform Fitness Products, Inc. and Weslo, Inc.), including amendments
thereto
10.3* Lease, dated June 29, 1998, by and between Ogden City and ICON Health & Fitness, Inc., including
all amendments thereto
10.4* Lease Agreement by and between Panattoni/Hillwood Development Company, LLC and ICON
Health & Fitness, Inc, including all amendments thereto
10.5* Lease Agreement, dated March 30, 2000, by and between International Center I, LLC and ICON
Health & Fitness, Inc.
10.6* Lease, dated March 1, 1997, by and between Aeroterm De Montreal, Inc. and ICON of Canada Inc.
10.7* Lease, dated October 1, 1994, by and between Freeport Center Associates and Proform Fitness
Products, Inc., including all amendments thereto
10.8* Deed of Lease, dated January 26, 2001, by and between Indome 43 Inc. and ICON of Canada Inc.
10.9* Purchase Agreement, dated as of March 28, 2002, by and between ICON Health & Fitness, Inc., the
Guarantors named therein, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc.,
and Fleet Securities, Inc. (the "Purchase Agreement")
10.10* Registration Rights Agreement dated April 9, 2002 by and between ICON Health and Fitness, Inc.,
the Guarantors set forth therein and Credit Suisse First Boston Corporation, J.P. Morgan
Securities Inc. and Fleet Securities, Inc.
10.11* Credit Agreement dated as of April 9, 2002 among ICON Health & Fitness, Inc., HF Holdings, Inc.,
JumpKing, Inc., Universal Technical Services, ICON International Holdings, Inc., ICON IP, Inc.,
Free Motion Fitness, Inc., NordicTrack, Inc., ICON du Canada Inc. and 510152 N.B. Ltd.,
General Electric Capital Corporation, as Agent and Lender, and GECC Capital Markets Group,
Inc.
10.12* Stockholders Agreement, dated as of September 27, 1999, among HF Holdings, Inc., ICON Health
& Fitness, Inc., HF Investment Holdings, LLC, Bain, certain Bain designees, Scott Watterson and
Gary Stevenson and Credit Suisse First Boston Corporation
10.13* Joinder and Supplement to Stockholders Agreement, among HF Holdings, Inc., ICON Health &
Fitness, Inc. and the Employee Stockholders named therein
10.14* Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health
& Fitness, Inc. and Scott Watterson
10.15* Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health
& Fitness, Inc. and Gary Stevenson
10.16* Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Scott
Watterson in the principal amount of $1,209,340
10.17* Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Gary
Stevenson in the principal amount of $990,660
10.18* Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and
Scott Watterson
10.19* Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and
Gary Stevenson
10.20* 1999 HF Holdings, Inc. Junior Management Stock Option Plan
10.21* 1999 ICON Health & Fitness, Inc. Junior Management Deferred Bonus Plan
10.22* Management Agreement, dated as of September 27, 1999, among HF Holdings, Inc. ICON Health
& Fitness, Inc. and a Bain affiliate
10.23* Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF
Holdings, Inc. and Scott Watterson
10.24* Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF
Holdings, Inc. and Gary Stevenson
10.25* Tax Agreement, dated as of September 27, 1999, among HF Holdings, Inc. and its subsidiaries
12.1* Statements re Computation of Ratios
21.1* Subsidiaries of Registrant
23.1** Consent of PricewaterhouseCoopers LLP
23.2*** Consent of Weil, Gotshal & Manges LLP (included in their opinion filed as Exhibit 5.1)
24.1* Power of Attorney (included on the signature page of the registration statement)
25.1* Statement on Form T-1 of Eligibility of Trustee
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Letter to Clients
99.4* Form of Letter to Nominees
- --------
* Previously filed
** Filed herewith
*** Supercedes previously filed exhibit