FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[*]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended August 31, 2002
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ________to_____
Commission file number: 333-93711
ICON Health & Fitness, Inc.
(Exact name of registrant as specified in its charter)
Delaware 87-0531206
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 South 1000 West, Logan, Utah 84321
(Address and zip code of principal executive offices)
435 750-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
ICON Health & Fitness, Inc. 1,000 shares.
ICON Health & Fitness, Inc.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-5
Consolidated Condensed Balance
Sheets (unaudited) as of August 31, 2002 and
And May 31, 2002 3
Consolidated Condensed Statements of
Operations (unaudited) for the three months
ended August 31, 2002 and September 1, 2001 4
Consolidated Condensed Statements
of Cash Flows (unaudited) for the three months
ended August 31, 2002 and September 1, 2001 5
Notes to Consolidated Condensed
Financial Statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-17
PART II - OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Securities Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19-21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In Thousands)
August 31, 2002 May 31, 2002
--------------- ------------
Assets
Current assets
Cash $ 6,460 $ 4,773
Accounts receivable, net 155,679 153,178
Inventories:
Raw materials 79,451 60,136
Finished goods 105,490 73,617
-------- --------
Total inventories 184,941 133,753
Deferred income taxes 4,990 4,807
Other current assets 17,369 18,675
-------- --------
Total current assets 369,439 315,186
Property and equipment 100,638 95,950
Less accumulated depreciation (54,219) (50,965)
-------- --------
Property and equipment, net 46,419 44,985
Intangible assets, net 29,962 30,201
Deferred income taxes 12,088 12,084
Other assets, net 21,839 20,768
-------- --------
Total assets $479,747 $423,224
======== ========
Liabilities and Stockholder's Equity
Current liabilities
Current portion of long-term debt $ 5,011 $ 5,044
Accounts payable 125,819 113,927
Accrued expenses 22,602 23,751
Income taxes payable 1,805 5,421
Interest payable 3,616 3,045
-------- --------
Total current liabilities 158,853 151,188
Long term-debt 302,191 250,893
Other liabilities 6,160 4,934
-------- --------
Total liabilities 467,204 407,015
-------- --------
Stockholder's equity
Common stock and additional
paid-in capital 204,155 204,155
Receivable from Parent (2,200) (2,200)
Accumulated deficit (187,381) (183,941)
Accumulative other comprehensive loss (2,031) (1,805)
-------- --------
Total stockholder's equity 12,543 16,209
-------- --------
Total liabilities and
Stockholder's equity $479,747 $423,224
======== ========
See accompanying notes to consolidated condensed financial statements.
3
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For the Three Months Ended
August 31, 2002 September 1, 2001
--------------- -----------------
Net sales $170,223 $134,163
Cost of goods sold 126,820 100,298
-------- --------
Gross profit 43,403 33,865
-------- --------
Operating expenses:
Selling expenses 22,469 20,921
Research and development 2,620 2,991
General and administrative 16,846 14,986
-------- --------
Total operating expenses 41,935 38,898
-------- --------
Income (loss) from operations 1,468 (5,033)
Interest expense 6,399 6,852
Amortization of deferred financing fees 303 864
Other (income) expense, net (605) (452)
-------- -------
Loss before income taxes (4,629) (12,297)
Benefit for income taxes (1,189) (4,834)
-------- -------
Net loss (3,440) (7,463)
Other comprehensive income (loss),
comprised of foreign currency translation
adjustment, net of income tax benefit
of $144 in 2002 and income tax
expense of $145 in 2001. (226) 228
-------- -------
Comprehensive loss $ (3,666) $(7,235)
======== =======
See accompanying notes to consolidated condensed financial statements.
4
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
August 31, 2002 September 1, 2001
--------------- -----------------
OPERATING ACTIVITIES:
Net loss $ (3,440) $ (7,463)
Adjustments to reconcile net loss to net
cash used in operating activities:
Benefit for deferred taxes (43) (5,177)
Amortization of deferred financing fees 303 864
Depreciation and amortization 4,177 4,482
Amortization of gain on
extinguishment of debt - (325)
Changes in operating assets and liabilities:::
Accounts receivable (2,501) 15,949
Inventories (51,188) (37,294)
Income taxes payable (3,616) 2,834
Other assets, net (150) (3,568)
Accounts payable and accrued expenses 10,969 14,389
Other liabilities 1,226 -
Interest payable 571 (765)
-------- --------
Net cash used in operating activities (43,692) (16,074)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (4,612) (3,874)
Purchase of intangible assets (760) (1,414)
Acquisitions (42) (91)
-------- --------
Net cash used in investing activities (5,414) (5,379)
-------- --------
FINANCING ACTIVITIES:
Borrowings on revolving credit facility 222,511 176,603
Payments on revolving credit facility (170,017) (151,415)
Borrowings (payments) on other long-term
debt, net 21 (13)
Payments on April 2002 term notes (1,250) -
Payments on September 1999 term notes - (2,489)
Payment of fees - debt portion (102) (319)
-------- --------
Net cash provided by financing activities 51,163 22,367
-------- --------
Effect of exchange rates on cash (370) 518
-------- --------
Net increase in cash 1,687 1,432
Cash at beginning of period 4,773 3,324
-------- --------
Cash at end of period $ 6,460 $ 4,756
======== ========
See accompanying notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
- ----------------------------------------------------------------
Note A - Basis of Presentation
This report covers ICON Health & Fitness, Inc. and its subsidiaries
(collectively, "the Company"). The Company's parent company, HF Holdings, Inc.
("HF Holdings"), is not a registrant.
The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the Company's opinion, is necessary to present
fairly its financial position at August 31, 2002 and is results of operations
and cash flows for the periods ended August 31, 2002 and September 1, 2001. All
adjustments in the periods presented herein are normal and recurring in nature.
Certain reclassifications of previously reported financial information were
made to conform to the current period's presentation.
Note B - Accounting Changes
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 adopted EITF
01-9 in fiscal 2003. Net sales for the first quarter fiscal 2002 are shown as if
EITF 01-9 were adopted for that quarter. Net sales for the first quarter of
fiscal 2002 without the adjustment for EITF 01-9 were $138.1 million.
Effective June 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (
SFAS 142). This statement requires that goodwill and certain other intangibles
no longer be amortized, but instead be tested for impairment at least annually.
The Company will assess the impairment of goodwill on an annual basis or if
other indicators of impairment arise.
Note C - Commitments and Contingencies
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. These claims include injuries sustained by individuals using
trampolines and treadmills. The Company currently carries 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. Effective through September 30, 2002, the
deductible was $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. The Company vigorously defends any and all product liability
claims brought against it and does not believe that any currently pending claim
or series of claims will have a material adverse effect on its results of
operations or financial position.
The Company is a party to a variety of non-product liability commercial
lawsuits involving contract claims, arising in the ordinary course of its
business.
6
The Company believes that adverse resolution of these lawsuits would not have a
material adverse effect upon its results of operations or financial position.
The Company is a party 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.
The Company is involved in litigation with Service Merchandise in
connection with its filing for bankruptcy protection. Service Merchandise filed
three (3) separate adversarial proceedings against it 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 the Company 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 the Company 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, the Company made a partial payment in the amount of $213,188. On September
25, 2000, the Company 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 the Company, it hopes to obtain a
refund of the partial payment paid on September 1, 2000. The Company can make no
assurances that it will obtain a favorable result with respect to these amounts.
Note D - Guarantor/Non-Guarantor Financial Information
The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal
Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc.,
Free Motion Fitness, Inc. and ICON IP, 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 August 31, 2002 and May 31,
2002 and consolidating condensed statements of operations and cash flows for the
three months ended August 31, 2002 and September 1, 2001.
7
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.
Supplemental Consolidating Condensed Balance Sheet
August 31, 2002
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ 2,925 $ 1,813 $ 1,722 $ - $ 6,460
Accounts receivable, net 113,808 50,195 9,785 (18,109) 155,679
Inventories, net 120,121 56,999 8,238 (417) 184,941
Deferred income taxes 4,538 211 241 - 4,990
Other current assets 8,316 7,191 1,862 - 17,369
--------- -------- ------ ------- --------
Total current assets 249,708 116,409 21,848 (18,526) 369,439
--------- -------- ------ -------- --------
Property and equipment, net 35,590 9,939 890 - 46,419
Receivable from affiliates 94,031 14,187 - (108,218) -
Intangible assets, net 20,576 8,190 1,196 - 29,962
Deferred income taxes 10,548 1,540 - - 12,088
Investment in subsidiaries 44,909 - - (44,909) -
Other assets, net 21,827 - 12 - 21,839
--------- -------- ------- ---------- --------
Total Assets $ 477,189 $150,265 $23,946 $(171,653) $479,747
========= ======== ======= ========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 5,000 $ 11 $ - $ - $ 5,011
Accounts payable 98,649 24,964 20,315 (18,109) 125,819
Accrued expenses 17,698 5,941 2,579 - 26,218
Income taxes payable (373) 1,808 370 - 1,805
--------- -------- -------- --------- --------
Total current liabilities 120,974 32,724 23,264 (18,109) 158,853
--------- -------- -------- --------- --------
Long-term debt 302,169 22 - - 302,191
Other long-term liabilities 2,463 3,697 - - 6,160
Payable to affiliates 14,186 72,872 21,160 (108,218) -
Stockholder's equity (deficit):
Common stock and additional
paid-in capital 206,323 37,260 5,481 (44,909) 204,155
Receivable from Parent (2,200) - - - (2,200)
Accumulated deficit (166,726) 4,425 (24,663) (417) (187,381)
Accumulated other
comprehensive loss - (735) (1,296) - (2,031)
--------- -------- -------- --------- --------
Total stockholder's equity
(deficit) 37,397 40,950 (20,478) (45,326) 12,543
--------- -------- -------- --------- --------
Total Liabilities and Stockholder's
Equity (Deficit) $ 477,189 $150,265 $ 23,946 $(171,653) $479,747
========= ======== ======== ========= ========
8
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
======== ======== ======= ========= =========
9
Supplemental Consolidating Condensed Statement of Operations
Three Months Ended August 31, 2002
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $106,399 $56,271 $ 7,553 $ - $170,223
Cost of sales 83,173 38,650 4,889 108 126,820
------- ------- ------- ----- --------
Gross profit 23,226 17,621 2,664 (108) 43,403
Total operating expenses 19,755 18,793 3,387 - 41,935
------- ------- ------- ----- --------
Income (loss) from operations 3,471 (1,172) (723) (108) 1,468
Interest expense 5,956 4 439 - 6,399
Amortization of deferred
financing fees 303 - - - 303
Other (income) expense, net - 9 (614) - (605)
------- ------- ------- ----- --------
Loss before income taxes (2,788) (1,185) (548) (108) (4,629)
Provision (benefit) for income taxes (1,211) 22 - - (1,189)
------- ------- ------- ----- --------
Net loss $(1,577) $(1,207) $ (548) $(108) $ (3,440)
======= ======= ======= ===== ========
Supplemental Consolidating Condensed Statement of Operations
Three Months Ended September 1, 2001
------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $85,397 $43,043 $ 5,723 $ - $134,163
Cost of sales 67,098 29,127 4,017 56 100,298
------- ------- ------- ----- --------
Gross profit 18,299 13,916 1,706 (56) 33,865
Total operating expenses 16,840 19,214 2,844 - 38,898
------- ------- ------- ----- --------
Income (loss) from operations 1,459 (5,298) (1,138) (56) (5,033)
Interest expense 5,960 527 365 - 6,852
Amortization of deferred
financing fees 864 - - - 864
Other (income) expense, net - 58 (510) - (452)
------- ------- ------- ----- --------
Loss before income taxes (5,365) (5,883) (993) (56) (12,297)
Provision (benefit) for income taxes (3,171) (1,684) 21 - (4,834)
------- ------- ------- ----- --------
Net loss $(2,194) $(4,199) $(1,014) $(56) $ (7,463)
======= ======= ======= ===== ========
10
Supplemental Consolidating Condensed Statement of Cash Flows
Three Months Ended August 31, 2002
------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash used in operating
activities: $(29,241) $(13,028) $(1,423) $- $(43,692)
-------- -------- ------- -- --------
Investing activities:
Net cash used in
investing activities: (4,763) (541) (110) - (5,414)
-------- -------- ------- -- --------
Financing activities:
Borrowings (payments) on
revolving credit facility, net 52,494 - - - 52,494
Borrowings (payments) on other
long-term debt, net 32 (11) - - 21
Payments on April 2002 term note (1,250) - - - (1,250)
Payment of fees-debt portion (102) - - - (102)
Other (14,572) 14,264 308 - -
-------- -------- ------- -- --------
Net cash provided by
financing activities: 36,602 14,253 308 - 51,163
-------- -------- ------- -- --------
Effect of exchange rate
changes on cash - (319) (51) - (370)
-------- -------- ------- -- --------
Net increase (decrease)in cash 2,598 365 (1,276) - 1,687
Cash, beginning of period 327 1,448 2,998 - 4,773
-------- -------- ------- -- --------
Cash, end of period $ 2,925 $ 1,813 $ 1,722 $- $ 6,460
======== ======== ======= == ========
Supplemental Consolidating Condensed Statement of Cash Flows
Three Months Ended September 1, 2001
------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash used in operating
activities: $(12,585) $ (2,451) $(1,038) $- $(16,074)
-------- -------- ------- -- --------
Investing activities:
Net cash used in
investing activities: (4,194) (984) (201) - (5,379)
-------- -------- ------- -- --------
Financing activities:
Borrowings (payments) on
revolving credit facility, net 25,188 - - - 25,188
Payments on other long-term debt - (13) - - (13)
Payments on September 1999 term note (2,489) - - - (2,489)
Payment of fees-debt portion (319) - - - (319)
Other (4,864) 4,324 540 - -
-------- -------- ------- -- --------
Net cash provided by
financing activities: 17,516 4,311 540 - 22,367
-------- -------- ------- -- --------
Effect of exchange rate
changes on cash - 59 459 - 518
-------- -------- ------- -- --------
Net increase (decrease)in cash 737 935 (240) - 1,432
Cash, beginning of period 1,036 1,192 1,096 - 3,324
-------- -------- ------- -- --------
Cash, end of period $ 1,773 $ 2,127 $ 856 $- $ 4,756
======== ======== ======= == ========
11
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Recent Developments
- -------------------
On July 1, 2002, the labor contract between the International Longshore and
Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) expired. This
contract affects all of the ports on the Western Coast of the United States. The
members of the ILWU are primarily responsible for the removal of cargo from
container loaded shipping vessels. The members had been working under a daily
extension of the contract; however, on September 27, 2002 the ILWU began a work
slowdown, which resulted in a PMA lockout of the longshoremen. On October 8,
2002, a federal court judge imposed an 80-day cooling-off period which will
temporarily reopen the West Coast ports. Many of our shipments from Asia move
through these West Coast United States ports. The current lockout, if it
continues, could affect the timely delivery of our products, which could
negatively impact our sales. Beginning in the fourth quarter of fiscal 2002 and
continuing into the first quarter of fiscal 2003, we began a gradual buildup of
merchandise inventory in anticipation of a possible work stoppage and have put
into place contingency plans. The contingency plans will not offset the
significant impact of a prolonged work stoppage. The contingency plans include
increased usage of airfreight transportation, which could substantially increase
our selling costs and have a negative impact on our future earnings.
Three Months Ended August 31, 2002 Compared to Three months ended September 1,
- ------------------------------------------------------------------------------
2001
- ----
Net sales for the first quarter of fiscal 2003 increased $36.0 million, or
26.8%, to $170.2 million from $134.2 million in the comparable period in 2002.
Sales increased primarily due to increased customer demand. Sales of our
cardiovascular and other equipment in the first quarter of fiscal 2003 increased
$38.3 million, or 35.3%, to $146.7 million. Sales of our strength training
equipment in the first quarter of fiscal 2003 decreased $2.2 million, or 8.7%,
to $23.5 million.
Gross profit in the first quarter of fiscal 2003 was $43.4 million, or
25.5% of net sales, compared to $33.9 million, or 25.2% of net sales, in the
first quarter of fiscal 2002.
Selling expenses increased $1.5 million, or 7.4%, to $22.5 million in
fiscal 2002. This increase was the result of higher selling costs associated
with the increase in sales. Expressed as a percentage of net sales, selling
expenses were 13.2% in the first quarter fiscal 2003 compared to 15.6% in the
first quarter of fiscal 2002.
Research and development expenses decreased $0.4 million, or 12.4%, to $2.6
million in the first quarter of fiscal 2003. Expressed as a percentage of net
sales, research and development expenses were 1.5% in first quarter of fiscal
2003 and 2.2% in the first quarter of fiscal 2002.
General and administrative expenses increased $1.9 million, or 12.4%, to
$16.8 million in the first quarter of fiscal 2003. This increase was
attributable in part to higher insurance costs. Expressed as a percentage of net
sales, general and administrative expenses were 9.9% in the first quarter of
fiscal 2003 and 11.2% in first quarter of fiscal 2002.
As a result of the foregoing factors, operating income increased $6.5
million, or 129.2%, to $1.5 million in the first quarter of fiscal 2003.
Expressed as a percentage of net sales, operating income was 0.9% in the first
quarter of fiscal
12
2003 compared with (3.8)% in the first quarter of fiscal 2002.
As a result of the foregoing factors, EBITDA increased $6.4 million to $6.3
million in the first quarter of fiscal 2003. Expressed as a percentage of net
sales, EBITDA was 3.7% in the first quarter of fiscal 2003 compared with (0.1)%
in the first quarter of fiscal (2002).
Interest expense including amortization of deferred financing fees
decreased $1.0 million, or 13.1%, to $6.7 million for the first quarter of
fiscal 2003. This decrease reflects our lower borrowing levels during the period
combined with lower interest rates on our borrowings during the period.
Income tax benefit, as a percentage of pre-tax loss, for the first quarter
of fiscal 2003 was 26.0%, compared to 39.0% in the first quarter of fiscal 2002.
The change in the effective tax rate was primarily due to the combined effects
of the computational impact of expenses not deductible for tax purposes and
state tax liabilities in certain jurisdictions.
As a result of the foregoing factors, our net loss was $3.4 million for the
first quarter of fiscal 2003, compared to a net loss in the first quarter of
fiscal 2002 of $ 7.5 million.
Seasonality
The following are the net sales, net income (loss) and EBITDA by quarter
for fiscal years 2003, 2002 and 2001:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- --------- ----------
(dollars in millions)
Net Sales (5)
2003 $170.2 $ - $ - $ -
2002 134.2 272.1 304.9 181.0
2001 129.5 276.0 254.6 160.5
Net Income (Loss)
2003 (3.4) - - -
2002 (7.5) 11.1 25.5 (9.7)
2001 (8.2) 11.7 10.8 (1.0)
EBITDA
2003 6.3 - - -
2002 (0.1) 31.3 38.7 5.8
2001 1.6 34.2 32.2 4.1
- -----------
(1) Our first quarter ended August 31, September 1, and September 2 for fiscal
years 2003, 2002 and 2001, respectively.
(2) Our second quarter ended December 1 and December 2 for fiscal years 2002 and
2001, respectively.
(3) Our third quarter ended March 2 and March 3 for fiscal years 2002 and 2001,
respectively.
(4) Our fourth quarter ended May 31 for the fiscal years 2002 and 2001,
respectively.
(5) 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 adopted EITF
01-9 in fiscal 2003. Net sales for the first quarter fiscal 2002 are shown as if
EITF 01-9 were adopted for that quarter. Net sales for the first quarter of
fiscal 2002 without the adjustment for EITF 01-9 were $138.1 million.
13
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 used in operating activities was $43.7 million in the first
quarter of fiscal 2003, as compared to $16.1 million of cash used in operating
activities in the first quarter of fiscal 2002. In the first quarter of fiscal
2003, major sources of funds were non-cash provisions of $4.2 million for
depreciation and amortization, and an increase in accounts payable and accrued
expenses of $10.9 million. These changes were offset by increases in inventories
of $51.2 million and accounts receivable of $2.5 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 the first quarter of fiscal 2002, major sources of funds were
non-cash provisions of $4.5 million for depreciation and amortization, a
decrease in accounts receivable of $15.9 million and increases in accounts
payable and accrued expenses of $14.4 million. These increases were offset by
increases in inventories of $37.3 million. Such increases were due to the
aforementioned factors relating to sales increases.
Net cash used in investing activities was $5.4 million in the first quarter
of fiscal 2003, compared to $5.4 million in the first quarter of fiscal 2002.
Investing activities in the first quarter of fiscal 2003 consisted primarily of
capital expenditures of $4.6 million related to upgrades in plant and tooling
and purchases of additional manufacturing equipment and purchases of intangibles
of $0.8 million. Cash used in investing activities in the first quarter of
fiscal 2002, was primarily for capital expenditures of $3.9 million and
purchases of intangibles of $1.4 million.
Net cash provided by financing activities was $51.2 million in the first
quarter of fiscal 2003, compared to $22.4 million of cash provided by financing
activities in the first quarter of fiscal 2002. Cash provided by financing
activities resulted from our net borrowings on our new credit facility.
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 August 31, 2002 we
have a dedicated reserve of $2.4 million against these receivables. In addition
to this dedicated reserve, we carry other account receivable reserves that are
based on historical loss experiences and current economic events. We recognize
that a considerable amount of judgment is required to assess the ultimate
realization of accounts receivable, and, therefore, we re-evaluate the
collectibility of these pre-petition receivables from Kmart on a continuous
basis. Additional adjustments for our Kmart and other bad debts may be
appropriate in future periods. In the first quarter fiscal 2003, we had net
sales to Kmart of $5.3 million representing approximately 3.1% of our total net
sales for that quarter. 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.
Our primary short-term liquidity needs consist of financing seasonal
14
merchandise inventory buildups and paying cash interest expense under our
existing credit facilities and on the 11.25% subordinated notes due in April
2012. Our principal source of financing for our seasonal merchandise inventory
buildup and increased accounts receivable is revolving credit borrowings under
our existing credit facilities. At August 31, 2002, we had $73.5 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 August 31, 2002, the balance outstanding under the existing credit
facility consisted of (in millions):
Revolver $131.8
Term Loan 22.6
------
$154.4
We have a significant amount of indebtedness. As of August 31, 2002, our
consolidated indebtedness was approximately $307.2 million, of which
approximately $152.8 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 11.25% 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 11.25% 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 11.25% notes, on
commercially reasonable terms or at all.
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.
15
We use long-term and medium-term debt as a source of capital. At August 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 August 31,
2002, we had approximately $154.4 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. U.S. 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
addition, European purchases of inventory from Canada and the U.S. have been
settled in U.S. and Canadian dollars and therefore we have been subject to
fluctuations in the value of the U.S. and Canadian dollars, which also 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 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 August 31, 2002, 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 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.
16
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 and will require the modification
of prior financial statements to reclassify the 2002 loss on debt extinguishment
from extraordinary to income from continuing operations.
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, we believe the
application of the new accounting rules described above will not have a material
impact on our financial statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See note B
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
ICON Health & Fitness, Inc.
(Registrant)
By /s/ Gary E. Stevenson Date: October 15, 2002
-----------------------------
Gary E. Stevenson
Chief Operating Officer
By /s/ S. Fred Beck Date: October 15, 2002
----------------------------
S. Fred Beck
Chief Financial Officer
18
CERTIFICATION
-------------
I, Scott R. Watterson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ Scott R. Watterson Date: October 15, 2002
- -------------------------
Scott R. Watterson
Chief Executive Officer
19
CERTIFICATION
-------------
I, Gary E. Stevenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ Gary E. Stevenson Date: October 15, 2002
- -----------------------
Gary E. Stevenson
Chief Operating Officer
20
CERTIFICATION
-------------
I, S. Fred Beck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ S. Fred Beck Date: October 15, 2002
- --------------------
S. Fred Beck
Chief Financial Officer
21