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 fiscal quarter ended August 30, 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 [*] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by checkmark 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
Condensed Consolidating Balance
Sheets (Unaudited) as of August 30, 2003,
May 31, 2003 and August 31, 2002 3
Condensed Consolidating Statements of
Operations (Unaudited) for the three months
ended August 30, 2003 and August 31, 2002 4
Condensed Consolidating Statements
of Cash Flows (Unaudited) for the three
months ended August 30, 2003 and August 31, 2002 5
Notes to Condensed Consolidating
Financial Statements (Unaudited) 6-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15-21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 22
Certifications 23-25
Exhibit Index 26
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited)
(In Thousands)
August 30, 2003 May 31, 2003 August 31, 2002
--------------- ------------ ---------------
ASSETS
Current assets:
Cash $ 4,442 $ 4,650 $ 6,460
Accounts receivable, net 182,064 175,164 155,679
Inventories, net:
Raw materials 66,518 53,748 79,451
Finished goods 130,711 107,960 105,490
-------- -------- --------
Total inventories, net 197,229 161,708 184,941
Income taxes receivable 162 - -
Deferred income taxes 7,206 7,323 4,990
Other current assets 9,067 9,830 17,369
-------- -------- --------
Total current assets 400,170 358,675 369,439
Property and equipment 103,708 98,266 100,638
Less accumulated depreciation (52,862) (49,489) (54,219)
-------- -------- --------
Property and equipment, net 50,846 48,777 46,419
Intangible assets, net 27,897 29,069 29,962
Deferred income taxes 9,573 8,379 12,088
Other assets, net 20,969 20,214 21,839
-------- -------- --------
Total assets $509,455 $465,114 $479,747
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of
long-term debt $ 5,000 $ 5,000 $ 5,011
Accounts payable 125,734 121,177 125,819
Accrued expenses 28,555 33,964 22,602
Income taxes payable - 4,228 1,805
Interest payable 3,165 7,484 3,616
-------- -------- --------
Total current liabilities 162,454 171,853 158,853
Long term-debt 292,478 239,232 302,191
Other liabilities 9,920 9,691 6,160
-------- -------- --------
Total liabilities 464,852 420,776 467,204
Minority interest 3,100 - -
Stockholder's equity
Common stock and additional
paid-in capital 204,155 204,155 204,155
Receivable from Parent (2,200) (2,200) (2,200)
Accumulated deficit (158,978) (157,252) (187,381)
Accumulated other
comprehensive loss (1,474) (365) (2,031)
-------- -------- --------
Total stockholder's equity 41,503 44,338 12,543
-------- -------- --------
Total liabilities and
stockholder's equity $509,455 $465,114 $479,747
======== ======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidating financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For the Three Months Ended
August 30, 2003 August 31, 2002
--------------- ---------------
Net sales $197,823 $170,223
Cost of sales 134,248 126,820
-------- --------
Gross profit 63,575 43,403
-------- --------
Operating expenses:
Selling 34,341 22,469
Research and development 3,251 2,620
General and administrative 21,212 16,241
-------- --------
Total operating expenses 58,804 41,330
-------- --------
Income from operations 4,771 2,073
Interest expense 5,993 6,399
Amortization of deferred
financing fees 41 303
-------- ---------
Loss before income taxes (1,263) (4,629)
Provision for (benefit from)
income taxes 463 (1,189)
-------- ---------
Net loss (1,726) (3,440)
Other comprehensive loss:
Foreign currency translation
adjustment, net of tax benefit
of $680 in fiscal 2004 and $144
in fiscal 2003. (1,109) (226)
--------- ---------
Comprehensive loss $ (2,835) $ (3,666)
========= =========
The accompanying notes are an integral part of the unaudited condensed
consolidating financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Three Months Ended
August 30, 2003 August 31, 2002
--------------- ---------------
OPERATING ACTIVITIES:
Net loss $ (1,726) $ (3,440)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Benefit from deferred taxes (397) (43)
Amortization of deferred
financing fees 41 303
Depreciation and amortization 5,477 4,177
Amortization of debt discount 91 32
Changes in operating assets and liabilities:
Accounts receivable, net (6,900) (2,501)
Inventories, net (35,521) (51,188)
Other assets, net 389 (150)
Accounts payable and accrued expenses (852) 10,969
Income taxes, net (4,390) (3,616)
Interest payable (4,319) 571
Other liabilities (168) 1,226
--------- ---------
Net cash used in
operating activities (48,275) (43,660)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,720) (4,612)
Purchases of property and
equipment - China (1,840) -
Purchase of intangible assets (814) (760)
Acquisition - (42)
--------- ---------
Net cash used in
investing activities (6,374) (5,414)
--------- ---------
FINANCING ACTIVITIES:
Borrowings on revolving credit
facility, net of payments 53,155 52,483
Payments on term note - (1,250)
Minority interest 3,100 -
Payment of fees - debt portion (25) (102)
--------- ---------
Net cash provided by
financing activities 56,230 51,131
--------- ---------
Effect of exchange rates on cash (1,789) (370)
--------- ---------
Net increase (decrease) in cash (208) 1,687
Cash at beginning of period 4,650 4,773
--------- ---------
Cash at end of period $ 4,442 $ 6,460
========= =========
The accompanying notes are an integral part of the unaudited condensed
consolidating financial statements.
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Unaudited)
-----------------------------------------------------------------
Note A - Basis of Presentation
This report covers ICON Health & Fitness, Inc. & Subsidiaries
(collectively, "the Company"). The Company's parent company, HF Holdings, Inc.
("HF Holdings"), is not a registrant.
The Company is one of the world's leading manufacturers and marketers of
fitness equipment. The Company is headquartered in Logan, Utah and has more than
4,500 employees worldwide. The Company develops, manufactures and markets
fitness equipment under the following company-owned brand names: NordicTrack,
ProForm, HealthRider, Weslo, Weider, IMAGE and Free Motion, as well as Reebok
and Gold's Gym under license.
The accompanying unaudited condensed consolidating 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 of
previously reported financial information were made to conform to the current
period's 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 ended August 30, 2003 and August 31, 2002.
The condensed consolidating financial statements and notes thereto should be
read in conjunction with the audited financial statements and notes for the year
ended May 31, 2003 included in the Company's annual report on Form 10-K/A as
amended with the Securities and Exchange Commission on October 14, 2003. 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
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 annual report on Form 10-K/A as amended with the Securities and
Exchange Commission on October 14, 2003 are those that depend most heavily on
these judgments and estimates. As of August 30, 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
See "Recent Accounting Standards" under Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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, 2003 to October 1, 2004 of up to $10.0 million per
occurrence and $10.0 million in the aggregate. The policy has a deductible on
each claim of up to $1.0 million. For occurrences prior to October 1, 2003, 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 $1.0
million. 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 $0.5 million. 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 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.
In December 2001, a claim was made against the Company alleging the Company
received $1.7 million of preferential transfers in connection with the 1999
Service Merchandise bankruptcy proceedings. The proposed claim is currently
being vigorously defended by the Company's counsel. At this time, the Company
and its counsel are unable to determine the likelihood of an unfavorable outcome
or the amount or range of potential recovery or loss.
The Company was involved in litigation with Vectra Fitness, Inc.
("Vectra"). Vectra filed a civil action in the United States District Court, for
the Western District of Washington in Seattle, Washington. In September 2003,
the Company, in settlement of litigation, entered into a license agreement with
Vectra for certain strength training equipment.
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.
In fiscal 2003, the Company formed a foreign subsidiary to build a
manufacturing facility in Xiamen, China. The Company's equity interest in the
foreign subsidiary is 70%. The total project cost is anticipated to be
approximately $12.0 million, which will be funded in the form of equity and
debt. The Company amended its credit agreement to provide for the debt portion.
The Company is in the process of arranging for the debt portion of the
financing, which is expected to be provided by the Bank of China. As of August
30, 2003, the Company has made contributions of $2.0 million and the minority
interest contributions were $3.1 million. The minority interest shareholder is
also a long-time vendor of the Company and has transacted approximately $23.5
million in sales with the Company during the three month period ended August 30,
2003. He also holds an equity interest in the Company. As a result of the
Company's controlling interest in the foreign subsidiary, the investment has
been reported on a consolidated basis beginning in the first quarter of fiscal
2004.
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. ("Guarantor Subsidiaries") 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 August 30, 2003, May 31,
2003 and August 31, 2002 and condensed consolidating statements of operations
and cash flows for the three months ended August 30, 2003 and August 31, 2002.
2. The Company's combined Guarantor Subsidiaries 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
August 30, 2003
----------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash $ 880 $ 2,978 $ 584 $ - $ 4,442
Accounts
receivable, net 116,651 73,435 9,953 (17,975) 182,064
Inventories, net 129,861 57,524 10,471 (627) 197,229
Income taxes
receivable 1,018 (313) (543) - 162
Deferred income
taxes 6,743 238 225 - 7,206
Other current assets 493 4,786 3,788 - 9,067
-------- -------- ------- --------- --------
Total current assets 255,646 138,648 24,478 (18,602) 400,170
-------- -------- ------- --------- --------
Property and
equipment, net 38,383 11,221 1,242 - 50,846
Intangible
assets, net 19,363 7,316 1,218 - 27,897
Deferred income taxes 8,543 1,030 - - 9,573
Receivable from
affiliates 113,303 23,229 - (136,532) -
Investment in
subsidiary 46,909 - - (46,909) -
Other assets, net 13,316 7,632 21 - 20,969
-------- -------- ------- --------- --------
Total Assets $495,463 $189,076 $26,959 $(202,043) $509,455
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 5,000 $ - $ - $ - $ 5,000
Accounts payable 87,472 29,169 27,068 (17,975) 125,734
Accrued expenses 18,191 7,429 2,935 - 28,555
Interest payable 3,165 - - - 3,165
-------- -------- ------- --------- --------
Total current
liabilities 113,828 36,598 30,003 (17,975) 162,454
-------- -------- ------- --------- --------
Long-term debt 292,464 14 - - 292,478
Other liabilities 4,412 5,508 - - 9,920
Payable to affiliates 23,229 91,574 21,729 (136,532) -
Minority interest - - - 3,100 3,100
Stockholder's equity (deficit):
Common stock and
additional paid-in
capital 206,324 42,359 5,481 (50,009) 204,155
Receivable from
Parent (2,200) - - - (2,200)
Retained earnings
(accumulated
deficit) (143,075) 11,390 (26,666) (627) (158,978)
Accumulated other
comprehensive
income (loss) 481 1,633 (3,588) - (1,474)
-------- -------- ------- --------- --------
Total stockholder's
equity (deficit) 61,530 55,382 (24,773) (50,636) 41,503
-------- -------- ------- --------- --------
Total Liabilities
and Stockholder's
Equity (Deficit) $495,463 $189,076 $26,959 $(202,043) $509,455
======== ======== ======= ========= ========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash $ 941 $ 2,385 $ 1,324 $ - $ 4,650
Accounts
receivable, net 103,461 74,425 12,376 (15,098) 175,164
Inventories, net 101,297 51,142 9,825 (556) 161,708
Deferred income
taxes 6,838 241 244 - 7,323
Other current
assets 1,611 4,397 3,822 - 9,830
-------- -------- ------- --------- --------
Total current
assets 214,148 132,590 27,591 (15,654) 358,675
-------- -------- ------- --------- --------
Property and
equipment, net 37,813 9,581 1,383 - 48,777
Receivable from
affiliates 116,479 25,889 - (142,368) -
Intangible assets,
net 20,295 7,556 1,218 - 29,069
Deferred income
taxes 8,154 225 - - 8,379
Investment in
subsidiaries 57,793 - - (57,793) -
Other assets, net 12,936 7,255 23 - 20,214
-------- -------- ------- --------- --------
Total Assets $467,618 $183,096 $30,215 $(215,815) $465,114
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 5,000 $ - $ - $ - $ 5,000
Accounts payable 86,192 25,876 24,207 (15,098) 121,177
Accrued expenses 21,772 6,802 5,390 - 33,964
Income taxes payable 3,969 (856) 1,115 - 4,228
Interest payable 7,484 - - - 7,484
-------- -------- ------- --------- --------
Total current
liabilities 124,417 31,822 30,712 (15,098) 171,853
-------- -------- ------- --------- --------
Long-term debt 239,217 15 - - 239,232
Other liabilities 4,015 5,676 - - 9,691
Payable to
affiliates 25,889 95,128 21,351 (142,368) -
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) (130,525) 11,191 (24,478) (13,440) (157,252)
Accumulated other
comprehensive
income (loss) 481 2,005 (2,851) - (365)
-------- -------- ------- --------- --------
Total stockholder's
equity (deficit) 74,080 50,455 (21,848) (58,349) 44,338
-------- -------- ------- --------- --------
Total Liabilities
and Stockholder's
Equity (Deficit) $467,618 $183,096 $30,215 $(215,815) $465,114
======== ======== ======= ========= ========
Supplemental Condensed Consolidating 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
Intangible
assets, net 20,576 8,190 1,196 - 29,962
Deferred income taxes 10,548 1,540 - - 12,088
Receivable from
affiliates 94,031 14,187 - (108,218) -
Investment in
subsidiary 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 14,082 5,941 2,579 - 22,602
Income taxes payable (373) 1,808 370 - 1,805
Interest payable 3,616 - - - 3,616
-------- -------- ------- --------- --------
Total current
liabilities 120,974 32,724 23,264 (18,109) 158,853
-------- -------- ------- --------- --------
Long-term debt 302,169 22 - - 302,191
Other 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)
Retained earnings
(accumulated
deficit) (166,726) 4,425 (24,663) (417) (187,381)
Accumulated other
comprehensive
income (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
======== ======== ======= ========= ========
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended August 30, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Net sales $112,576 $76,141 $ 9,106 $ - $197,823
Cost of sales 82,253 46,262 5,662 71 134,248
-------- ------- ------- ------- --------
Gross profit 30,323 29,879 3,444 (71) 63,575
Total operating
expenses 24,430 28,821 5,553 - 58,804
-------- ------- ------- ------- --------
Income (loss) from
operations 5,893 1,058 (2,109) (71) 4,771
Interest expense 5,517 1 475 - 5,993
Amortization of deferred
financing fees 41 - - - 41
Equity in losses
(earnings)
of subsidiaries 2,061 - - (2,061) -
-------- ------- ------- ------- --------
Income (loss) before
income taxes (1,726) 1,057 (2,584) 1,990 (1,263)
Provision for
(benefit from)
income taxes - 859 (396) - 463
-------- ------- ------- ------- --------
Net income (loss) $ (1,726) $ 198 $(2,188) $ 1,990 $ (1,726)
======== ======= ======= ======= ========
Supplemental Condensed Consolidating 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 18,802 2,773 - 41,330
-------- ------- ------- ------- --------
Income (loss) from
operations 3,471 (1,181) (109) (108) 2,073
Interest expense 5,956 4 439 - 6,399
Amortization of deferred
financing fees 303 - - - 303
Equity in losses
(earnings)
of subsidiaries 1,863 - - (1,863) -
-------- ------- ------- ------- --------
Income (loss) before
income taxes (4,651) (1,185) (548) 1,755 (4,629)
Provision for
(benefit from)
income taxes (1,211) 22 - - (1,189)
-------- ------- ------- ------- --------
Net income (loss) $ (3,440) $(1,207) $ (548) $ 1,755 $ (3,440)
======== ======= ======= ======= ========
Supplemental Condensed Consolidating Statement of Cash Flows
Three Months Ended August 30, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Operating activities:
Net cash used in
operating
activities: $(46,967) $ (908) $ (400) $ - $(48,275)
-------- ------- ------- ------ --------
Investing activities:
Net cash provided by
(used in) investing
activities: (4,060) (2,333) 19 - (6,374)
-------- ------- ------- ------ --------
Financing activities:
Borrowings on
revolving credit
facility, net 53,155 - - - 53,155
Minority interest (2,000) 5,100 - - 3,100
Payment of fees-
debt portion (25) - - - (25)
Intercompany loan 515 (892) 377 - -
-------- ------- ------- ------ --------
Net cash provided
by financing
activities: 51,645 4,208 377 - 56,230
-------- ------- ------- ------ --------
Effect of exchange rate
changes on cash (680) (372) (737) - (1,789)
-------- ------- ------- ------ --------
Net increase (decrease)
in cash (62) 595 (741) - (208)
Cash, beginning of
period 941 2,385 1,324 - 4,650
-------- ------- ------- ------ --------
Cash, end of period $ 879 $ 2,980 $ 583 $ - $ 4,442
======== ======= ======= ====== ========
Supplemental Condensed Consolidating 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: $(29,209) $(13,028) $(1,423) $ - $(43,660)
-------- -------- ------- ----- --------
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 (11) - - 52,483
Payments on
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: 36,570 14,253 308 - 51,131
-------- -------- ------- ----- --------
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
======== ======== ======= ===== ========
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended August 30, 2003 Compared to Three Months Ended
August 31, 2002
- -----------------------------------------------------------------------
We are one of the world's leading manufacturers and marketers of fitness
equipment. We are headquartered in Logan, Utah and have more than 4,500
employees worldwide. We develop, manufacture and market fitness equipment under
the following company-owned brand names: NordicTrack, ProForm, HealthRider,
Weslo, Weider, IMAGE and Free Motion, as well as Reebok and Gold's Gym under
license.
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements contained in this report
involve risks and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements. Forward-looking
statements include, without limitation, statements containing the words
"anticipates," "believes," "expects," "intends," "future," and words and terms
of similar substance express management's belief, expectations or intentions
regarding future performance. Our actual results could differ materially from
our historical operating results and from those anticipated in these
forward-looking statements as a result of certain factors, including without
limitation, those set forth in our Annual Report on Form 10-K/A and other
factors and uncertainties contained in our other filings with the Securities and
Exchange Commission. You are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date they were made. We
disclaim any obligation or undertaking to provide any updates or revisions to
any forward-looking statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which the forward-looking
statement is based.
Net sales for the first quarter of fiscal 2004 increased $27.6 million, or
16.2%, to $197.8 million from $170.2 million in the comparable period in 2003.
The increase in sales was not attributable to a single customer, distributor or
any other specific factor. The increase was across all product lines for which
there was increased demand, particularly direct to consumer sales. Sales of our
cardiovascular and other equipment in the first quarter fiscal 2004 increased
$12.0 million, or 8.2%, to $158.7 million. Sales of our strength training
equipment in the first quarter of fiscal 2004 increased $15.6 million, or 66.4%,
to $39.1 million.
Gross profit in the first quarter of fiscal 2004 was $63.6 million, or
32.2% of net sales, compared to $43.4 million, or 25.5% of net sales, in the
first quarter of fiscal 2003. This increase was due to the increase in direct to
consumer sales, changes in product mix and manufacturing efficiencies.
Selling expenses increased $11.8 million, or 52.4%, to $34.3 million in the
first quarter of fiscal 2004. This increase occurred primarily due to increased
spending for advertising and freight charges. Expressed as a percentage of net
sales, selling expenses were 17.3% in the first quarter of fiscal 2004 compared
to 13.2% in the first quarter of fiscal 2003.
Research and development expenses increased $0.6 million, or 23.1%, to $3.2
million in the first quarter of fiscal 2004. Expressed as a percentage of net
sales, research and development expenses were 1.6% in first quarter of fiscal
2004 and 1.5% in the first quarter of fiscal 2003.
General and administrative expenses increased $5.0 million, or 30.9%, to
$21.2 million in the first quarter of fiscal 2004. This increase for the period
can be attributed to increases in depreciation expense, loss on currency
translation and legal fees. Expressed as a percentage of net sales, general and
administrative expenses were 10.7% in the first quarter of fiscal 2004 and 9.5%
in the first quarter of fiscal 2003.
As a result of the foregoing factors, income from operations increased $2.7
million, or 128.6%, to $4.8 million in the first quarter of fiscal 2004.
Expressed as a percentage of net sales, income from operations was 2.4% in the
first quarter of fiscal 2004 compared with 1.2% in the first quarter of fiscal
2003.
As a result of the foregoing factors, EBITDA (as defined under
"Seasonality") increased $3.9 million or 61.9% to $10.2 million in the first
quarter of fiscal 2004. Expressed as a percentage of net sales, EBITDA was 5.2%
in the first quarter of fiscal 2004 compared with 3.7% in the first quarter of
fiscal 2003.
Interest expense, including amortization of deferred financing fees,
decreased $0.7 million, or 10.4%, to $6.0 million in the first quarter of fiscal
2004. This decrease is a result of lower interest rates on our borrowings during
the period.
The provision for income taxes was $0.4 million in the first quarter of
fiscal 2004, compared with a benefit of $1.2 million in the first quarter of
fiscal 2003. The increase in income taxes is due to the change in deferred tax
assets.
As a result of the foregoing factors, the net loss was $1.7 million in the
first quarter of fiscal 2004, compared to a net loss in the first quarter of
fiscal 2003 of $3.4 million.
Seasonality
The market for exercise equipment is highly seasonal, with peak periods
occurring from late fall through February. As a result, the first and fourth
quarters of every fiscal year are generally our weakest periods in terms of
sales. During these periods, we build product inventory to prepare for the heavy
demand anticipated during the upcoming peak season. This operating strategy
helps us to realize the efficiencies of a steady pace of year-round production.
The following are the net sales, net income (loss) and EBITDA by quarter
for fiscal years 2004, 2003 and 2002:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- --------- ----------
(dollars in millions)
Net Sales (5)
2004 $197.8 $ - $ - $ -
2003 170.2 292.7 344.0 204.6
2002 134.2 264.6 296.0 176.6
Net Income (Loss)
2004 (1.7) - - -
2003 (3.4) 13.7 20.3 (3.9)
2002 (7.5) 11.1 25.5 (9.7)
The following is a reconciliation of net income (loss) to EBITDA by quarter (6):
EBITDA
2004
Net loss $(1.7) $ - $ - $ -
Add back:
Depreciation and amortization 5.5 - - -
Provision for income tax 0.4 - - -
Interest expense 6.0 - - -
Amortization of deferred
financing fees - - - -
----- ----- ----- -----
EBITDA $10.2 $ - $ - $ -
===== ===== ===== =====
2003
Net income (loss) $(3.4) $13.7 $20.3 $(3.9)
Add back:
Depreciation and amortization 4.2 4.0 5.0 6.0
Provision for (benefit from)
income tax (1.2) 8.3 10.7 (0.2)
Interest expense 6.4 6.5 6.3 5.9
Amortization of deferred
financing fees 0.3 0.2 0.2 0.5
----- ----- ----- -----
EBITDA $ 6.3 $32.7 $42.5 $ 8.3
===== ===== ===== =====
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 for (benefit from)
for income tax (4.8) 8.2 1.4 (4.4)
Interest expense 6.8 6.8 6.0 6.6
Amortization of deferred
financing fees 0.9 0.9 0.9 0.4
----- ----- ----- -----
EBITDA $(0.1) $31.3 $38.7 $(1.6)
===== ===== ===== =====
- -----------
<FN>
(1) Our first quarter ended August 30, August 31, and September 1 for fiscal
years 2004, 2003 and 2002, respectively.
(2) Our second quarter ended November 30 and December 1 for fiscal years 2003
and 2002, respectively.
(3) Our third quarter ended March 1 and March 2 for fiscal years 2003 and 2002,
respectively.
(4) Our fourth quarter ended May 31 for fiscal years 2003 and 2002,
respectively.
(5) In November of 2001, the Emerging Issues Task Force issued EITF 01-09,
"Accounting for Consideration Given by 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. We 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
2004 $202.8 $ - $ - $ -
2003 175.8 301.5 354.8 210.9
2002 138.1 272.1 304.9 181.0
(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. In addition, performance bonuses paid to management are
based in part on EBITDA. 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 $48.3 million in the first
quarter of fiscal 2004, as compared to $43.7 million of cash used in operating
activities in the first quarter of fiscal 2003. In the first quarter of fiscal
2004, major sources of funds were non-cash provisions of $5.5 million for
depreciation and amortization, and an increase in accounts payable of $4.6
million. These changes were offset by increases in inventory of $35.5 million,
accounts receivable of $6.9 million and a decrease in accrued expenses of $5.5
million. These changes are due to 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 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 $11.0
million. These changes were offset by increases in inventory of $51.2 million
and accounts receivable of $2.5 million. Such increases were due to the
aforementioned factors relating to sales increases.
Net cash used in investing activities was $6.4 million in the first quarter
of fiscal 2004, compared to $5.4 million in the first quarter of fiscal 2003.
Investing activities in the first quarter of fiscal 2004 consisted primarily of
capital expenditures of $5.6 million related to upgrades in plant and tooling
and purchases of additional manufacturing equipment of which $1.8 million
related to China and purchases of intangible assets of $0.8 million. Cash used
in investing activities in the first quarter of fiscal 2003, was primarily for
capital expenditures of $4.6 million and purchases of intangible assets of $0.8
million.
Net cash provided by financing activities was $56.2 million in the first
quarter of fiscal 2004, compared to $51.1 million of cash provided by financing
activities in the first quarter of fiscal 2003. Cash provided by financing
activities resulted from borrowings on our new credit facility and the minority
contribution of $3.1 million from our recent expansion to China.
Our primary short-term liquidity needs consist of financing seasonal
merchandise inventory buildups and paying cash interest expense under our
existing credit facilities and on the 11.25% subordinated notes due in April of
2012. Our principal source of financing for our seasonal merchandise inventory
buildup and increased accounts receivable is revolving credit borrowings under
the existing credit facilities. At August 30, 2003, we had $84.3 million of
availability under these facilities. Our working capital borrowing needs are
typically at their 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 holiday
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.
The balance outstanding under the existing credit facility consisted of (in
millions):
August 30, 2003 August 31, 2002 May 31, 2003
--------------- --------------- ------------
Revolver $125.7 $131.8 $ 72.6
Term Loan 18.7 22.6 18.7
------ ------ ------
$144.4 $154.4 $ 91.3
====== ====== ======
As of August 30, 2003, our consolidated indebtedness was approximately
$297.5 million, of which approximately $144.4 million was senior indebtedness.
With the exception of the increases in the revolver noted above, our contractual
cash obligations and commercial commitments remained consistent with those at
the end of fiscal 2003.
Based on our current level of operations, we believe that cash flow from
operations and available cash, together with available borrowings under our
existing credit facility, will be adequate to meet 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. In May of 2003, we
amended our credit agreement to provide for the debt financing in China.
Critical Accounting Policies
Our discussion of results of operations and financial condition relies on
our 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. We believe that
investors need to be aware of these policies and how they impact our financial
statements as a whole, as well as our related discussion and analysis presented
herein. While we believe 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 our annual report on Form
10-K/A as amended with the Securities and Exchange Commission on October 14,
2003 are those that depend most heavily on these judgments and estimates. As of
August 30, 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.
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 No. 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143, effective June 1, 2003, did
not have a material effect on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of
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 No. 144 also broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not have a material effect
on our financial position or results of 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 report of costs associated with
exit or disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 did not have a material effect on our financial position or results
of operations.
In November 2001, the Emerging Issues Task Force issued EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer". EITF 01-09
provides guidance on the accounting treatment of various types of consideration
given by a vendor to a customer. We have adopted EITF 01-09 effective June 1,
2002, which reduces net sales with a corresponding reduction of selling, general
and administrative expenses. This change had no effect on income from operations
or net income.
In November 2002, the FASB issued 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, we must recognize an initial liability for the fair value,
or market value, and of the obligations we assume under that guarantee and must
disclose that information in our interim and annual financial statements. FIN 45
is effective on a prospective basis for 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 adoption of FIN 45 did not have a material effect on our consolidated
financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities", which 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 adoption of FIN 46 did not have a material effect on our consolidated
financial statements.
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 No. 148 did not
have a material effect on our financial position, operations or cash flows.
In April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. We do not participate in such transactions, however, we are
evaluating the effects of this new pronouncement, and, if any, will adopt FASB
149 within the prescribed time.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and to all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003. We do not expect SFAS No. 150 to have a material effect on our
consolidated financial statements.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Fluctuations in the general level of interest rates on our current and
future fixed and variable rate debt obligations expose us to market risk. We are
vulnerable to significant fluctuations in interest rates on our variable rate
debt and on any future repricing or refinancing of our fixed rate debt and on
future debt.
We use long-term and medium-term debt as a source of capital. At
August 30, 2003, we had approximately $153.0 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 30,
2003, we had approximately $144.5 million in outstanding variable rate debt.
Foreign Currency Risk
In addition to the United States, we have operations or transact business
in Canada, United Kingdom, France, Italy, Germany, and Asia. The operations in
these foreign countries conduct business in their local currencies as well as
other regional currencies. To mitigate our exposure to transactions denominated
in currencies other than the functional currency of each entity, we enter into
forward exchange contracts from time to time to protect our margin on a portion
of our forecasted foreign currency sales. As of August 30, 2003, no forecast
sales were hedged by forward exchange contracts. Because of the variety of
currencies in which purchases and sales are transacted, it is not possible to
predict the impact of a movement in foreign currency exchange rates on future
operating results. However, we intend to continue to mitigate our exposure to
foreign exchange gains or losses.
Assessment of the Euro
On January 1, 1999, eleven of the member countries of the European Union
established fixed conversion rates between their existing currencies (called
"LEGACY CURRENCIES") and one common currency called the euro. The euro trades on
currency exchanges and may be used in business transactions. In January 2002,
the legacy currencies began being withdrawn from circulation. Our subsidiaries
affected by the conversion have established plans to address issues raised by
the conversion. We believe that, under current conditions, the conversion of
legacy currencies to the euro will not have a material adverse effect on our
results of operations or financial position.
Item 4 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer have
evaluated the effectiveness of our 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 August 30, 2003
(the "Evaluation Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them, on a timely basis, to material information relating
to us (including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in our internal controls or in other factors that
could significantly affect such controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note B in Item 1 of Part I.
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
Report on Form 8-K dated August 29, 2003 containing the Company's press
release dated August 29, 2003 announcing earnings for the fourth quarter and
fiscal 2003 which ended May 31, 2003.
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 Stevensen Date: October 14, 2003
-----------------------------
Gary Stevenson, President
By /s/ S. Fred Beck Date: October 14, 2003
--------------------------------------
S. Fred Beck, Chief Financial Officer
CERTIFICATION
-------------
I, Scott R. Watterson, certify that:
1. I have reviewed this quarterly report 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: October 14, 2003
/s/ Scott R. Watterson
- ----------------------
Scott R. Watterson
Chief Executive Officer
CERTIFICATION
--------------
I, Gary E. Stevenson, certify that:
1. I have reviewed this quarterly report 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: October 14, 2003
/s/ Gary E. Stevenson
- ---------------------
Gary E. Stevenson
Chief Operating Officer
CERTIFICATION
--------------
I, S. Fred Beck, certify that:
1. I have reviewed this quarterly report 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: October 14, 2003
/s/ S. Fred Beck
- ----------------
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