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 March 1, 2003
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
incorporation or organization) No.)
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 3-6
Condensed Consolidated Balance
Sheets (unaudited) as of March 1, 2003
and May 31, 2002 3
Condensed Consolidated Statements of
Operations (unaudited) for the three months
ended March 1, 2003 and March 2, 2002 4
Condensed Consolidated Statements of
Operations (unaudited) for the nine months
ended March 1, 2003 and March 2, 2002 5
Condensed Consolidated Statements
of Cash Flows (unaudited) for the nine months
ended March 1, 2003 and March 2, 2002 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of
Securities Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
Certifications 26-28
Exhibit Index 29
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
March 1, 2003 May 31, 2002
------------- ------------
Assets
Current assets
Cash $ 4,508 $ 4,773
Accounts receivable, net 277,459 153,178
Inventories:
Raw materials 62,906 60,136
Finished goods 87,589 73,617
-------- --------
Total inventories 150,495 133,753
Deferred income taxes 5,942 4,807
Other current assets 9,562 18,675
-------- --------
Total current assets 447,966 315,186
Property and equipment 107,074 95,950
Less accumulated depreciation (58,449) (50,965)
-------- --------
Property and equipment, net 48,625 44,985
Intangible assets, net 30,191 30,201
Deferred income taxes 10,189 12,084
Other assets, net 13,113 20,768
-------- --------
Total assets $550,084 $423,224
======== ========
Liabilities and Stockholder's Equity
Current liabilities
Current portion of long-term debt $ 5,000 $ 5,044
Accounts payable 138,112 113,927
Accrued expenses 37,355 23,751
Income taxes payable 10,727 5,421
Interest payable 3,246 3,045
-------- --------
Total current liabilities 194,440 151,188
Long-term debt 301,489 250,893
Other liabilities 7,170 4,934
-------- --------
Total liabilities 503,099 407,015
-------- --------
Stockholder's Equity
Common stock and additional
paid-in capital 204,155 204,155
Receivable from parent (2,200) (2,200)
Accumulated deficit (153,357) (183,941)
Accumulated other comprehensive loss (1,613) (1,805)
-------- --------
Total stockholder's equity 46,985 16,209
-------- --------
Total liabilities and
stockholder's equity $550,084 $423,224
======== ========
See accompanying notes to condensed consolidated financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For the Three Months Ended
March 1, 2003 March 2, 2002
------------- -------------
Net sales $343,983 $295,976
Cost of sales 237,849 210,419
-------- --------
Gross profit 106,134 85,557
-------- --------
Operating expenses:
Selling 43,064 29,532
Research and development 3,210 2,502
General and administrative 22,284 19,769
-------- --------
Total operating expenses 68,558 51,803
-------- --------
Income from operations 37,576 33,754
Interest expense 6,340 5,977
Amortization of deferred financing fees 184 900
-------- --------
Income before income taxes 31,052 26,877
Provision for income taxes 10,728 1,372
-------- --------
Net income 20,324 25,505
Other comprehensive income (loss),
comprised of foreign currency
translation adjustment, net of
income tax provision of $375 in 2003
and net of income tax benefit of
$353 in 2002. 611 (575)
-------- --------
Comprehensive income $20,935 $24,930
======== ========
See accompanying notes to condensed consolidated financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For the Nine Months Ended
March 1, 2003 March 2, 2002
------------- -------------
Net sales $806,937 $694,770
Cost of sales 575,393 506,361
-------- --------
Gross profit 231,544 188,409
-------- --------
Operating expenses:
Selling 96,166 73,372
Research and development 8,419 7,884
General and administrative 58,625 50,957
-------- --------
Total operating expenses 163,210 132,213
-------- --------
Income from operations 68,334 56,196
Interest expense 19,266 19,707
Amortization of deferred
financing fees 670 2,652
-------- --------
Income before income taxes 48,398 33,837
Provision for income taxes 17,814 4,784
-------- --------
Net income 30,584 29,053
Other comprehensive loss,
comprised of foreign currency
translation adjustment, net of
income tax benefit of $99 in
2003 and $377 in 2002. (194) (615)
-------- --------
Comprehensive income $ 30,390 $ 28,438
======== ========
See accompanying notes to condensed consolidated financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Nine Months Ended
March 1, 2003 March 2, 2002
------------- -------------
OPERATING ACTIVITIES:
Net income $ 30,584 $ 29,053
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision (benefit) for deferred taxes 1,246 (11,697)
Amortization of gain on extinguishment
of debt - (975)
Amortization of deferred financing fees 670 2,652
Amortization of discount on 11.25%
Notes 59 -
Depreciation 9,742 10,013
Amortization 3,425 3,658
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable (124,281) (38,596)
Inventories (16,742) 24,075
Income taxes receivable/payable 5,306 12,630
Other assets, net 17,862 (9,757)
Accounts payable and accrued expenses 38,852 5,444
Interest payable 201 61
-------- --------
Net cash provided by (used in)
operating activities (33,076) 26,561
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (13,382) (8,921)
Purchase of intangible assets (3,415) (4,337)
Increase in other assets (53) (663)
Acquisitions, net of cash - (306)
-------- --------
Net cash used in investing activities (16,850) (14,227)
-------- --------
FINANCING ACTIVITIES:
Proceeds from old credit facility, net
of payments - 4,855
Proceed from new credit facility, net
of payments 54,270 -
Payments on term notes (3,750) (5,177)
Payments on other long-term debt (27) (2,414)
Payment of fees-debt (539) (503)
-------- --------
Net cash provided by (used in)
financing activities 49,954 (3,239)
-------- --------
Effect of exchange rates on cash (293) (992)
-------- --------
Net increase (decrease) in cash (265) 8,103
Cash, beginning of period 4,773 3,324
-------- --------
Cash, end of period $4,508 $11,427
======== ========
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED 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 have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statement presentation. In addition, certain reclassifications have
been made to the fiscal 2002 consolidated financial statements to conform to the
fiscal 2003 presentation.
The Company, in its opinion, has included all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the results
of operations for the three months and nine months ended March 1, 2003 and March
2, 2002, respectively. The condensed consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes for the year ended May 31, 2002 included in the Company's registration
statement on Form S-4 as filed with the Securities and Exchange Commission on
October 4, 2002 and quarterly reports on Form 10-Q for the quarterly periods
ended November 30, 2002 and August 31, 2002. Interim results including
comparative balance sheets are not necessarily indicative of results for the
full fiscal year due to the inherent seasonality in the Company's business. See
"Seasonality" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Critical Accounting Policies and Estimates
The Company's discussion of results of operations and financial condition
relies on its consolidated financial statements that are prepared based on
certain critical accounting policies that require management to make judgments
and estimates that are subject to varying degrees of uncertainty. The Company
believes that investors need to be aware of these policies and how they impact
its financial statements as a whole, as well as its related discussion and
analysis presented herein. While the Company believes that these accounting
policies are based on sound measurement criteria, actual future events can and
often do result in outcomes that can be materially different from these
estimates or forecasts. The accounting policies and related risks described in
the Company's registration statement on Form S-4 as filed with the Securities
and Exchange Commission on October 4, 2002 are those that depend most heavily on
these judgments and estimates. As of March 1, 2003, there have been no material
changes to any of the critical accounting policies contained therein other than
the adoption of the new accounting standards as discussed herein.
Note B - Accounting Changes
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"),
effective for annual or interim financial statements for periods beginning after
December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of
various types of consideration given by a vendor to a customer. The Company
adopted EITF 01-09 in fiscal 2003. Net sales for the three and nine months ended
March 2, 2002 are shown as if EITF 01-09 was adopted for those periods. Further
detail can be found in footnote 5 under the heading "Seasonality" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), was issued by the Financial Accounting
Standards Board in June 2001. The statement changes the accounting for goodwill
from an amortization method to an impairment only approach, and the Company was
required to adopt it for the fiscal year ended May 31, 2003. Prior to the
adoption of SFAS 142, the Company amortized goodwill using the straight-line
method over the estimated life of twenty years. Upon adoption of SFAS 142, the
Company ceased amortization of goodwill (which totaled $6.3 million, net, at
June 1, 2002) thereby eliminating approximately $100,000 and $296,000,
respectively, in amortization expense for the three month and nine month period
ended March 1, 2003 compared to the same periods in fiscal 2002.
SFAS 142 requires that companies perform evaluations of potential
impairment of goodwill upon adoption and at least annually. During the first
quarter of fiscal 2003, the Company completed an impairment evaluation of its
goodwill as of June 1, 2002. No impairment was identified.
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
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 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. For occurrences prior to October 1, 2002, the
policy provides coverage 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.
For occurrences prior to October 1, 2001, the policy provides coverage of up to
$5.0 million per occurrence and $25.0 million in the aggregate. The policy has a
deductible on each claim ranging from $100,000 to $250,000. 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, liquidity 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. The Company believes that adverse resolution of these lawsuits would
not have a material adverse effect upon its results of operations, liquidity 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, liquidity 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 the Company 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 $1.7 million in payments made to the Company as
a voidable preference. The summons was issued on April 16, 2001. The Company
believes that the ultimate outcome of these matters will not have a material
adverse effect upon its results of operations, liquidity or financial position.
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 condensed consolidating financial statements are
presented (in thousands):
1. Condensed consolidating balance sheets as of March 1, 2003 and May 31,
2002, condensed consolidating statements of operations for the three months and
nine months ended March 1, 2003 and March, 2, 2002, and condensed consolidating
statements of cash flows for the nine months ended March 1, 2003 and March 2,
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.
Supplemental Condensed Consolidating Balance Sheet
March 1, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ 2,699 $ 1,054 $ 755 $ - $ 4,508
Accounts receivable,
net 221,143 63,457 13,374 (20,515) 277,459
Inventories, net 82,398 57,904 10,630 (437) 150,495
Deferred income taxes 5,629 222 91 - 5,942
Other current assets 1,711 4,573 3,278 - 9,562
-------- -------- ------- --------- --------
Total current assets 313,580 127,210 28,128 (20,952) 447,966
-------- -------- ------- --------- --------
Property and equipment,
net 37,240 10,112 1,273 - 48,625
Receivable from
affiliates 98,986 22,922 - (121,908) -
Intangible assets, net 21,176 7,797 1,218 - 30,191
Deferred income taxes 9,444 745 - - 10,189
Investment in
subsidiaries 44,909 - - (44,909) -
Other assets, net 13,093 - 20 - 13,113
-------- -------- ------- --------- --------
Total Assets $538,428 $168,786 $30,639 $(187,769) $550,084
======== ======== ======= ========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 5,000 $ - $ - $ - $ 5,000
Accounts payable 108,745 25,228 24,654 (20,515) 138,112
Accrued expenses 22,788 10,126 4,441 - 37,355
Income taxes payable 6,430 3,686 611 - 10,727
Interest payable 3,246 - - - 3,246
-------- --------- ------- --------- --------
Total current
liabilities 146,209 39,040 29,706 (20,515) 194,440
-------- --------- ------- --------- --------
Long-term debt 301,473 16 - - 301,489
Other long-term
liabilities 3,473 3,697 - - 7,170
Payable to affiliates 22,922 78,015 20,971 (121,908) -
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)
Retained earnings
(Accumulated deficit) (140,255) 10,858 (23,523) (437) (153,357)
Accumulated other
comprehensive
income (loss) 482 (99) (1,996) - (1,613)
-------- --------- ------- --------- --------
Total stockholder's
equity (deficit) 64,351 48,018 (20,038) (45,346) 46,985
-------- --------- ------- --------- --------
Total Liabilities
and Stockholder's
Equity $538,428 $168,786 $30,639 $(187,769) $550,084
======== ======== ======= ========== ========
Supplemental Condensed Consolidating 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 16,280 4,998 2,473 - 23,751
Income taxes payable - 5,069 352 - 5,421
Interest payable 3,045 - - - 3,045
-------- -------- ------- --------- --------
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)
Retained earnings
(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 $413,701 $145,203 $24,230 $(159,910) $423,224
======== ======== ======= ========== ========
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 1, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $238,507 $90,180 $15,296 $ - $343,983
Cost of sales 180,461 48,599 8,860 (71) 237,849
-------- ------- ------- ---- --------
Gross profit 58,046 41,581 6,436 71 106,134
Total operating
expenses 31,690 31,539 5,329 - 68,558
-------- ------- ------- ---- --------
Income from operations 26,356 10,042 1,107 71 37,576
Interest expense 5,916 2 422 - 6,340
Amortization of deferred
financing fees 184 - - - 184
-------- ------- ------- ---- --------
Income before
income taxes 20,256 10,040 685 71 31,052
Provision for
income taxes 5,698 4,397 633 - 10,728
-------- ------- ------- ---- --------
Net income $ 14,558 $ 5,643 $ 52 $ 71 $ 20,324
======== ======= ======= ===== ========
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 2, 2002
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $227,039 $55,183 $13,754 $ - $295,976
Cost of sales 165,984 35,559 9,000 (124) 210,419
-------- ------- ------- ----- --------
Gross profit 61,055 19,624 4,754 124 85,557
Total operating
expenses 28,978 18,471 4,354 - 51,803
-------- ------- ------- ----- --------
Income from operations 32,077 1,153 400 124 33,754
Interest expense 5,555 (17) 439 - 5,977
Amortization of
deferred financing
fees 900 - - - 900
-------- ------- ------- ----- --------
Income (loss)
before taxes 25,622 1,170 (39) 124 26,877
Provision for
income taxes 178 992 202 - 1,372
-------- ------- ------- ----- --------
Net income (loss) $ 25,444 $ 178 $ (241) $ 124 $ 25,505
======== ======= ======== ===== ========
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 1, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $553,062 $214,765 $39,110 $ - $806,937
Cost of sales 421,282 131,088 22,895 128 575,393
-------- -------- ------- ----- --------
Gross profit 131,780 83,677 16,215 (128) 231,544
Total operating
expenses 75,763 73,999 13,448 - 163,210
-------- -------- ------- ----- --------
Income (loss)
from operations 56,017 9,678 2,767 (128) 68,334
Interest expense 17,953 7 1,306 - 19,266
Amortization of
deferred financing
fees 670 - - - 670
-------- -------- ------- ----- --------
Income (loss)
before taxes 37,394 9,671 1,461 (128) 48,398
Provision for
income taxes 12,500 4,445 869 - 17,814
-------- -------- ------- ----- --------
Net income (loss) $ 24,894 $ 5,226 $ 592 $(128) $ 30,584
======== ======== ======= ====== ========
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 2, 2002
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $515,824 $146,383 $32,563 $ - $694,770
Cost of sales 385,846 99,107 21,656 (248) 506,361
-------- -------- ------- ----- --------
Gross profit 129,978 47,276 10,907 248 188,409
Total operating
expenses 71,262 50,455 10,496 - 132,213
-------- -------- ------- ----- --------
Income (loss) from
operations 58,716 (3,179) 411 248 56,196
Interest expense 17,207 1,152 1,348 - 19,707
Amortization of
deferred financing
fees 2,652 - - - 2,652
-------- -------- ------- ----- --------
Income (loss) before
income taxes 38,857 (4,331) (937) 248 33,837
Provision (benefit)
for income taxes 5,467 (800) 117 - 4,784
-------- -------- ------- ----- --------
Net income (loss) $ 33,390 $(3,531) $(1,054) $ 248 $ 29,053
======== ========= ======== ===== ========
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 1, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash used in operating
activities: $(22,295) $ (9,875) $ (906) $ - $(33,076)
-------- -------- ------- ------ --------
Investing activities:
Net cash used in
investing activities: (14,040) (2,105) (705) - (16,850)
-------- -------- ------- ------ --------
Financing activities:
Proceeds from new
credit facility, net 54,270 - - - 54,270
Payments on term note (3,750) - - - (3,750)
Payments on other
long-term debt, net - (27) - - (27)
Payment of fees-debt (539) - - - (539)
Other (10,789) 10,671 118 - -
-------- -------- ------- ------ --------
Net cash provided by
financing activities: 39,192 10,644 118 - 49,954
-------- -------- ------- ------ --------
Effect of exchange rate
changes on cash (485) 942 (750) - (293)
-------- -------- ------- ------ --------
Net increase (decrease)
in cash 2,372 (394) (2,243) - (265)
Cash, beginning of period 327 1,448 2,998 - 4,773
-------- -------- ------- ------ --------
Cash, end of period $ 2,699 $ 1,054 $ 755 $ - $ 4,508
======== ======== ======= ====== ========
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 2, 2002
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash provided by
(used in) operating
activities: $ 28,105 $ (1,412) $ (132) $ - $ 26,561
-------- -------- ------ ---- --------
Investing activities:
Net cash used in
investing activities: (11,172) (2,672) (383) - (14,227)
-------- -------- ------ ---- --------
Financing activities:
Proceeds from old
credit facility, net 4,855 - - - 4,855
Payments on old
term notes (5,177) - - - (5,177)
Payments on other
long-term debt (2,389) (25) - - (2,414)
Payment of fees-debt (503) - - - (503)
Other (9,382) 8,479 903 - -
-------- -------- ------ ---- --------
Net cash provided by
(used in)financing
activities: (12,596) 8,454 903 - (3,239)
-------- -------- ------ ---- --------
Effect of exchange rate
changes on cash - (1,104) 112 - (992)
-------- -------- ------ ---- --------
Net increase in cash 4,337 3,266 500 - 8,103
Cash, beginning
of period 1,036 1,192 1,096 - 3,324
-------- -------- ------ ---- --------
Cash, end of period $ 5,373 $ 4,458 $1,596 $ - $ 11,427
======== ======== ====== ==== ========
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The war in Iraq, the terrorist attacks on the United States and other acts
of violence have created immediate significant economic and political
uncertainty. The long-term effects of the war and such other attacks on the
world economy and the Company's business are unknown, but could be material.
Further terrorists acts or acts of war, whether in the United States or abroad,
including the war in Iraq, could cause damage or disruption to the Company, its
suppliers, strategic partners or customers, or could create political or
economic instability, any of which could have a material adverse effect on the
Company's business.
Three Months Ended March 1, 2003 Compared to Three Months Ended March 2, 2002
- -----------------------------------------------------------------------------
Net sales for the third quarter of fiscal 2003 increased $48.0 million, or
16.2%, to $344.0 million from $296.0 million in the comparable period in 2002.
Sales increased primarily due to increased customer demand. Sales of the
Company's cardiovascular and other equipment in the third quarter of fiscal 2003
increased $13.0 million, or 4.8%, to $283.4 million. Sales of the Company's
strength training equipment in the third quarter of fiscal 2003 increased $19.5
million, or 47.4%, to $60.6 million.
Gross profit in the third quarter of fiscal 2003 was $106.1 million, or
30.8% of net sales, compared to $85.6 million, or 28.9% of net sales, in the
third quarter of fiscal 2002. This 23.9% increase was largely due to increased
direct consumer sales, changes in product mix and manufacturing efficiencies.
Selling expenses increased $13.6 million, or 46.1%, to $43.1 million in the
third quarter of fiscal 2003. This increase reflected increased bad debt expense
associated with the pre-bankruptcy receivables of Kmart of $5.4 million and
increased direct consumer advertising and commissions. Expressed as a percentage
of net sales, selling expenses were 12.5% in the third quarter of fiscal 2003
and 10.0% in the third quarter of fiscal 2002. Absent the Kmart bad debt
expense, selling expenses were 11.0% in the third quarter of fiscal 2003.
Research and development expenses increased $0.7 million, or 28%, to $3.2
million in the third quarter of fiscal 2003. Expressed as a percentage of net
sales, research and development expenses were 0.9% in the third quarter of
fiscal 2003 and 0.8% in the third quarter of fiscal 2002.
General and administrative expenses increased $2.5 million, or 12.6%, to
$22.3 million in the third quarter of fiscal 2003. This increase is a factor of
normal salary increases, planned additions to staff, increased insurance costs
and increases attributable to performance based bonus and incentive programs.
Rent and lease expense also contributed to the increase. Expressed as a
percentage of net sales, general and administrative expenses were 6.5% in the
third quarter of fiscal 2003 and 6.7% in the third quarter of fiscal 2002.
As a result of the foregoing factors, operating income increased $3.8
million, or 11.2%, to $37.6 million in the third quarter of fiscal 2003.
Expressed as a percentage of net sales, operating income was 10.9% in the third
quarter of fiscal 2003 compared with 11.4% in the third quarter of fiscal 2002.
As a result of the foregoing factors, earnings before interest, taxes,
depreciation and amortization ("EBITDA") was $42.5 million, or 12.4% of net
sales, in the third quarter of fiscal 2003, compared to $38.7 million, or 13.1%
of net sales, in the third quarter of fiscal 2002. A detailed computation of
EBITDA can be found in footnote 6 under the heading "Seasonality" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Interest expense including amortization of deferred financing fees
decreased $0.4 million, or 5.8%, to $6.5 million for the third quarter of fiscal
2003. This decrease reflects lower interest rates during the 2003 period. In
addition, deferred financing fees decreased as a result of the April 2002 debt
refinancing. Expressed as a percentage of net sales, interest expense including
amortization of deferred financing fees was 1.9% in the third quarter of fiscal
2003 and 2.3% in the third quarter of fiscal 2002.
The provision for income taxes was $10.7 million for the third quarter of
fiscal 2003, compared to a provision of $1.4 million in the third quarter of
fiscal 2002. Income tax expense, as a percentage of pre-tax income, was 34.4% in
the third quarter of fiscal 2003, compared to 5.2% in the third quarter of
fiscal 2002. The lower effective tax rate in the third quarter of fiscal 2002
resulted from adjustments pursuant to an Internal Revenue Service audit where
previously deducted expenses were capitalized and are being amortized over a
fifteen year period. These adjustments created a deferred tax asset of
approximately $11.5 million which resulted in an income tax benefit.
As a result of the foregoing factors, net income was $20.3 million for the
third quarter of fiscal 2003, compared to net income in the third quarter of
fiscal 2002 of $25.5 million, a decrease of 20.4% over the same period last
year.
Nine Months Ended March 1, 2003 Compared to Nine Months Ended March 2, 2002
- ---------------------------------------------------------------------------
During the first nine months of fiscal 2003, net sales increased $112.1
million, or 16.1%, to $806.9 million from $694.8 million in the first nine
months of fiscal 2002. Sales increased primarily due to customer demand. Sales
of the Company's cardiovascular and other equipment in the first nine months of
fiscal 2003 increased $69.2 million, or 11.4%, to $676.4 million. Sales of the
Company's strength training equipment in the first nine months of fiscal 2003
increased $22.7 million, or 21.1%, to $130.5 million.
Gross profit for the first nine months of fiscal 2003 was $231.5 million,
or 28.7% of net sales, compared to $188.4 million, or 27.1% of net sales,
for the first nine months of fiscal 2002. This 22.9% increase was largely due to
increased direct consumer sales, changes in product mix and manufacturing
efficiencies.
Selling expenses increased $22.8 million, or 31.1%, to $96.2 million in the
first nine months of fiscal 2003. This increase reflected increased bad debt
expense related to pre-bankruptcy receivables of Kmart of $9.1 million.
Increased direct consumer advertising and commissions also contributed to the
increase. Expressed as a percentage of net sales, selling expenses were 11.9% in
the first nine months of fiscal 2003 and 10.6% in the first nine months of
fiscal 2002. Absent the Kmart bad debt expense, selling expenses were 10.8% in
the first nine months of fiscal 2003.
Research and development expenses increased $0.5 million, or 6.3%, to $8.4
million in the first nine months of fiscal 2003. Expressed as a percentage of
net sales, research and development expenses were 1.0% in the first nine months
of fiscal 2003 and 1.1% in the first nine months of fiscal 2002.
General and administrative expenses increased $7.6 million, or 14.9%, to
$58.6 million in the first nine months of fiscal 2003. This increase is a factor
of normal salary increases, planned additions to staff, increased insurance
costs and increases attributable to performance based bonus and incentive
programs. Rent and lease expenses also contributed to the increase. Expressed as
a percentage of net sales, general and administrative expenses were 7.3% in the
first nine months of fiscal 2003 and fiscal 2002.
As a result of the foregoing factors, operating income increased $12.1
million, or 21.5%, to $68.3 million in the first nine months of fiscal 2003.
Expressed as a percentage of net sales, operating income was 8.5% in the first
nine months of fiscal 2003 compared with 8.1% in the first nine months of fiscal
2002.
As a result of the foregoing factors, EBITDA was $81.5 million compared to
$69.9 million, or 10.1% of net sales, in the first nine months of fiscal 2003
and fiscal 2002. A detailed computation of EBITDA can be found in footnote 6
under the heading "Seasonality" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Interest expense including amortization of deferred financing fees
decreased $2.4 million, or 10.8%, to $19.9 million in the first nine months of
fiscal 2003. This decrease reflects lower interest rates during the 2003 period.
In addition, deferred financing fees decreased as a result of the April 2002
debt refinancing. Expressed as a percentage of net sales, interest expense
including amortization of deferred financing fees was 2.5% in the first nine
months of fiscal 2003 and 3.2% in the first nine months of fiscal 2002.
The provision for income taxes was $17.8 million for the first nine months
of fiscal 2003, compared to a provision of $4.8 million for the first nine
months of fiscal 2002. Income tax expense, as a percentage of pre-tax income,
for the nine month period ended March 1, 2003, was 36.8%, compared to 14.2% in
the nine month period ended March 2, 2002. The lower effective tax rate in the
nine month period ended March 2, 2002 resulted from adjustments from an Internal
Revenue Service audit where previously deducted expenses were capitalized and
are being amortized over a fifteen year period. These adjustments created
a deferred tax asset of approximately $11.5 million which resulted in an income
tax benefit.
As a result of the foregoing factors, net income was $30.6 million for the
first nine months of fiscal 2003, compared to net income in the first nine
months of fiscal 2002 of $29.1 million, an increase of 5.2% over the same period
last year.
Seasonality
The Company sells a majority of its products to customers in its 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 the
Company's 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 the Company's cash flow
for that quarter and future quarters could be adversely affected. The timing of
large orders from customers and the mix of products sold may also contribute to
periodic fluctuations.
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 $292.7 $344.0 $ -
2002 134.2 264.6 296.0 176.6
2001 125.9 267.6 247.6 155.9
Net Income (Loss)
2003 (3.4) 13.7 20.3 -
2002 (7.5) 11.1 25.5 (9.7)
2001 (8.2) 11.7 10.8 (1.0)
The following is a reconciliation of net income (loss) as reflected in the
condensed consolidated statement of operations to EBITDA (6):
EBITDA
2003
Net Income (loss) (3.4) 13.7 20.3 -
Add back:
Depreciation and Amortization 4.2 4.0 5.0 -
Provision (Benefit)
for income tax (1.2) 8.3 10.7 -
Interest expense 6.4 6.5 6.3 -
Amortization of deferred
financing fees 0.3 0.2 0.2 -
---- ---- ---- ----
EBITDA 6.3 32.7 42.5 -
==== ==== ==== ====
2002
Net income (loss) (7.5) 11.1 25.5 (9.7)
Add back:
Depreciation and Amortization 4.5 4.3 4.9 5.5
Provision (Benefit)for
income tax (4.8) 8.2 1.4 (1.6)
Interest expense 6.8 6.8 6.0 6.6
Amortization of deferred
financing fees 0.9 0.9 0.9 0.4
Loss on extinguishments
of debt - - - 4.6
---- ---- ---- ----
EBITDA (0.1) 31.3 38.7 5.8
===== ==== ==== ====
2001
Net income (loss) (8.2) 11.7 10.8 (1.0)
Add back:
Depreciation and Amortization 4.0 4.0 4.3 5.1
Provision (Benefit)
for income tax (3.2) 8.0 7.0 (8.4)
Interest expense 8.2 9.7 9.3 7.6
Amortization of deferred
financing fees 0.8 0.8 0.8 0.8
--- ---- ---- ---
EBITDA 1.6 34.2 32.2 4.1
=== ==== ==== ===
- -----------
<FN>
(1) The Company's first quarter ended August 31, September 1, and September 2
for fiscal years 2003, 2002 and 2001, respectively.
(2) The Company's second quarter ended November 30, December 1, and December 2
for fiscal years 2003, 2002 and 2001, respectively.
(3) The Company's third quarter ended March 1, March 2, and March 3 for fiscal
years 2003, 2002 and 2001, respectively.
(4) The Company's 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 01-09,
Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-09")
effective for annual or interim financial statements for periods beginning after
December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of
various types of consideration given by a vendor to a customer. The Company
adopted EITF 01-09 in fiscal 2003. Net sales are shown as if EITF 01-09 were
adopted for all periods presented. Net sales without the adjustment for EITF
01-09 were as follows:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- --------- ----------
(dollars in millions)
Net Sales
2003 $175.8 $301.5 $354.8 $ -
2002 138.1 272.1 304.9 181.0
2001 129.5 276.0 254.6 160.4
(6) EBITDA is a presentation of "earnings before interest, taxes, depreciation,
and amortization." EBITDA data is included because management understands that
such information is considered by bankers and certain investors as an additional
basis on evaluating a company's ability to pay interest, repay debt and make
capital expenditures. EBITDA may not be comparable to similarly titled measures
reported by other companies. In addition, EBITDA is a non-GAAP measure and
should not be considered an alternative to operating or net income in measuring
company results.
</FN>
Liquidity and Capital Resources
Net cash used in operating activities was $33.1 million in the first nine
months of fiscal 2003, compared to $26.6 million of cash provided by operating
activities in the first nine months of fiscal 2002. In the first nine months of
fiscal 2003, major sources of funds were non-cash provisions of $13.2 million
for depreciation and amortization, and an increase in accounts payable and
accrued expenses of $38.9 million. The increase in accounts payable and accrued
expenses is due to timing of trade payments. These changes were offset by
increases in inventories of $16.7 million and accounts receivable of $124.3
million. Accounts receivable increased as a result of increased sales and the
discontinuance of certain discounts taken by customers prior to May 31, 2002 on
payments of receivables owed to the Company on thirty day terms, instead of the
customary sixty day terms. Inventories increased as a result of anticipated
future sales which are expected to be sold off in the normal course of business
over the next two quarters. These changes are also due to the Company's
increasing sales during the course of the first several months of the fiscal
year leading up to its peak selling season, which occurs between the months of
October and February. In the first nine months of fiscal 2002, major sources of
funds were non-cash provisions of $13.7 million for depreciation and
amortization, an increase in accounts payable and accrued expenses of $5.4
million, a decrease in income taxes receivable of $12.6 million, and a decrease
in inventories of $24.1 million. These increases were offset by an increase in
other assets of $9.8 million and accounts receivable of $38.6 million. Such
increase in accounts receivable was due to the aforementioned factors relating
to sales increases.
Net cash used in investing activities was $16.9 million in the first nine
months of fiscal 2003, compared to $14.2 million in the first nine months of
fiscal 2002. Investing activities in the first nine months of fiscal 2003
consisted primarily of capital expenditures of $13.4 million related to upgrades
in plant and tooling, purchases of additional manufacturing equipment and
purchases of intangibles of $3.4 million. Cash used in investing activities in
the first nine months of fiscal 2002 was primarily for capital expenditures of
$8.9 million and purchases of intangibles of $4.3 million.
Net cash provided by financing activities was $50.0 million in the first
nine months of fiscal 2003, compared to $3.2 million of cash used in financing
activities in the first nine months of fiscal 2002. Cash provided by financing
activities resulted from the Company's net borrowings on its existing credit
facilities offset by payments on term notes and other long-term debt.
On January 22, 2002, Kmart, a customer for over a decade, filed for
bankruptcy protection. At the time of the bankruptcy filing, the Company had
$12.1 million of unsecured accounts receivable outstanding with Kmart. As of
March 1, 2003, the Company had disposed of 100 percent of the pre-bankruptcy
receivables. For the nine month period ending March 1, 2003, the Company had net
sales to Kmart of $26.8 million, representing approximately 3.3% of total net
sales for that nine month period. In the first nine months of fiscal 2002, the
Company had net sales to Kmart of approximately $31.2 million, representing
approximately 4.5% of total net sales for that period. Kmart has secured debtor
in possession financing and continues to operate in bankruptcy. The Company
resumed shipments to Kmart as of February 5, 2002 with payment terms of 30 days,
reduced from 60 days.
The Company's primary short-term liquidity needs consist of financing
seasonal merchandise inventory buildups and paying cash interest expense under
its existing credit facilities and on the 11.25% subordinated notes due in April
2012. The Company's principal source of financing for its seasonal merchandise
inventory buildup and increased accounts receivable is revolving credit
borrowings under its existing credit facilities. At March 1, 2003, the Company
had $76.4 million of availability under these facilities. The Company's working
capital borrowing needs are typically at its lowest level from 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, working capital borrowings remain at its
highest level and then are paid down to its lowest annual levels from April
through August.
In connection with the Company's debt refinancing in April 2002, the
Company entered into its existing credit facility totaling $235.0 million of
revolving and term loans with a syndicate of banks and financial services
companies.
Proceeds of the Company's existing credit facility were used to refinance
their then existing senior credit facilities and 12% senior subordinated notes
due 2005, to fund transaction fees and expenses, and to provide general working
capital.
The Company has a significant amount of indebtedness. The Company's
consolidated indebtedness consists of the following (table in thousands):
March 1, 2003 May 31, 2002
------------- ------------
Revolver $133.6 $ 79.3
Term Loan 20.0 23.8
11.25% Senior Subordinated Notes 152.9 152.8
------ ------
$306.5 $255.9
====== ======
The Company's ability to make scheduled payments of principal, or to pay
the interest, or to refinance its indebtedness, including the 11.25% Notes, or
to fund planned capital expenditures will depend on its 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 the Company's control.
Based on the Company's current level of operations, management believes
that cash flow from operations and available cash, together with available
borrowings under the Company's existing credit facility, will be adequate to
meet future liquidity needs for at least the next few years. The Company may,
however, need to refinance all or a portion of the principal amount of the notes
on or prior to maturity.
The Company cannot assure you that its business will generate sufficient
cash flow from operations, or that future borrowings will be available under its
existing credit facility in an amount sufficient to enable the Company to
service its indebtedness, including the 11.25% Notes, or to fund its other
liquidity needs. In addition, the Company cannot assure you that it will be able
refinance any of its indebtedness, including the existing credit facility and
the 11.25% Notes, on commercially reasonable terms or at all.
Recent Accounting Pronouncements
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 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 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 any gains or losses 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB 123". This
statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock based employee compensation.
In addition, this statement amends disclosure requirements of Statement 123 to
ensure that fair value disclosures are prominent in both annual and interim
financial statements. The adoption of the provisions of SFAS 148 will not have a
material effect on the Company's financial position, operations or cash flows.
In November 2002, the FASB approved FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the Company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
FIN 45 is effective on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company is currently evaluating the impact of the application of this
interpretation, but does not expect a material impact from the application of
FIN 45 on its consolidated financial statements.
FIN 46, "Consolidation of Variable Interest Entities", clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is applicable
immediately for variable interest entities created after January 31, 2003. For
variable interest entities created prior to January 31, 2003, the provisions of
FIN 46 are applicable no later than July 1, 2003. The Company does not expect
this Interpretation to have a material effect on the consolidated financial
statements. Based on current circumstances, except for SFAS 145, the Company
believes that the application of the new accounting rules described above will
not have a material impact on its financial statements.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Fluctuations in the general level of interest rates on the Company's
current and future fixed and variable rate debt obligations expose it to market
risk. The Company is vulnerable to significant fluctuations in interest rates on
its variable rate debt and on any future repricing or refinancing of its fixed
rate debt and on future debt.
The Company uses long-term and medium-term debt as a source of capital. At
March 1, 2003, the Company had approximately $152.9 million in outstanding fixed
rate debt, consisting of 11.25% subordinated notes maturing in April 2012. When
debt instruments of this type mature, the Company typically refinances such debt
at the then-existing market interest rates, which may be more or less than the
interest rates on the maturing debt.
The Company's credit facility has variable interest rates and any
fluctuation in interest rates could increase or decrease its interest expense.
At March 1, 2003, the Company had approximately $153.6 million in outstanding
variable rate debt.
The Company imports certain finished products and components from Canada
and Asia. All purchases from Asia have been fixed in United States dollars and,
therefore, the Company is not subject to foreign currency fluctuations on such
purchases, although the Company's vendors may respond to foreign currency
fluctuations by seeking to raise their prices. U.S. purchases of inventory from
Canada are settled in Canadian dollars and therefore the Company is subject to
fluctuations in the value of the Canadian dollar, which could have an impact on
the Company's operating results. In addition, European purchases of inventory
from Canada and the U.S. are settled in U.S. and Canadian dollars and,
therefore, are subject to fluctuations in the value of the U.S. and Canadian
dollars, which also could have an impact on the Company's operating results. In
connection with the importation of products and components from Canada, the
Company from time to time engages in hedging transactions by entering into
forward contracts for the purchase of Canadian dollars, which are designed to
protect against such fluctuations. The Company's hedging transactions do not
subject it to exchange rate risk because gains and losses on these contracts
offset losses and gains on the transaction being hedged.
As of March 1, 2003, the Company had no open forward exchange contracts to
sell Canadian dollars. During the first nine months of fiscal years 2002 and
2003, the Company recognized no significant gains or losses upon settlement of
foreign currency transactions denominated in Canadian dollars.
Item 4 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this quarterly report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in alerting them, on a timely basis, to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect such controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See note C.
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
99.01. Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.02. Certification of Chief Operating Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.03. Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
None.
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: April 14, 2003
-----------------------------
Gary E. Stevenson
Chief Operating Officer
By /s/ S. Fred Beck Date: April 14, 2003
----------------------------
S. Fred Beck
Chief Financial Officer
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: April 14, 2003
- -------------------------
Scott R. Watterson
Chief Executive Officer
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: April 14, 2003
- -----------------------
Gary E. Stevenson
Chief Operating Officer
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: April 14, 2003
- -----------------------
S. Fred Beck
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Name
- ----------- ----
99.01 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.02 Certification of Chief Operating Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.03 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002