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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[*]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the fiscal year ended May 31, 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
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 24
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Auditors on
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 34
Item 13. Certain Relationships and Related Transactions 37
Item 14. Controls and Procedures 39
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 40
We have proprietary rights to a number of trademarks important to our
business, such as: ProForm(R), NordicTrack(TM), HealthRider(R), IMAGE(TM),
Weslo(R), JumpKing(R), Free Motion(TM), Workout Warehouse(TM), iFIT.com(TM),
iFIT(TM), SpaceSaver(TM), Cross Trainer(TM), Cross Walk(TM), Cardioglide(R),
Incline Trainer(TM), Trekker(TM), QuickSpeed(TM), QuickIncline(TM), EKG Grip
Pulse(TM), SoftDeck(TM), PowerIncline(TM), PowerRamp(TM), PRO SHOX(TM) and
CustomCushioning(TM), all of which are owned by us, and Reebok, Weider and
Gold's Gym, which are used by us under license agreements with the owners of
such trademarks.
PART I
Item 1. Business
Industry
The fitness equipment industry in the United States includes cardiovascular
and other fitness equipment, and strength training equipment. Cardiovascular and
other fitness equipment includes treadmills, ellipticals, exercise bikes, other
equipment, such as trampolines and relaxation products such as spas. Strength
training equipment includes multi-purpose home gyms, free weights and weight
benches and cages. According to the NSGA 2003 annual report, total retail sales
of exercise equipment on an industry-wide basis are estimated to total $4.6
billion in calendar year 2003.
Our Company
We market and distribute a broad line of products in the fitness equipment
market. These fall into two segments, namely cardiovascular and other fitness
equipment, and strength training equipment. We are one of the largest
manufacturers and marketers of home fitness equipment in the United States. In
addition, we manufacture and distribute an innovative line of cardiovascular and
strength training products for the institutional fitness equipment market. Our
brand names include ProForm, NordicTrack, Weslo, Image, JumpKing, Free Motion
Fitness and, under license, Reebok, Weider and Gold's Gym.
Our Brands and Distribution Channels
We market a complete line of products using multiple brands through
multiple distribution channels to reach a wide range of consumers at various
price points. This approach is enabled by our strong portfolio of brands which
are placed strategically to align consumer demographics with respective brand
attributes. We market our products through each distribution channel in which
home fitness equipment products are sold, including: department stores, mass
retailers and warehouse clubs, sporting goods and specialty fitness retailers,
home improvement stores, electronic retailers and direct-to-consumer sales
through catalogs, infomercials, the Internet and our company-owned
NordicTrack(TM) stores.
Products
Cardiovascular and Other Fitness Equipment
Our cardiovascular and other fitness equipment covers a broad range of
technological sophistication and a variety of price points which include the
following:
Treadmills. We design, innovate, manufacture, market and distribute
motorized and manual treadmills, designed to promote cardiovascular fitness.
We are the leading producer of motorized treadmills. Our treadmills include
proprietary technologies in the electronics console and drive train systems and
overall frame design. In the June 2003 issue of Consumer Reports, six of our
treadmills ranked among the top fifteen treadmills worldwide, based on criteria
such as quality, durability, features and ease of use. Certain features offered
by our motorized treadmills that enhance the home user's experience include
bio-feedback electronics such as heart rate control, pulse, certain
programmable speeds and inclines, electronic feedback on speed, elapsed time,
distance traveled, calories/fat calories burned, and cross-training upper body
exercise functions. The SpaceSaver(TM) feature for treadmills (introduced in
1996), for which we hold six United States patents, enables treadmills with this
feature to fold vertically for easy storage. As of the fall of 2001, we have
equipped all our brands of treadmills with a price point of $599 and above with
iFIT(TM) technology, for which we hold two United States patents and have seven
patents pending. iFIT(TM) technology allows us to control and program speed and
incline of a treadmill from remote locations for virtual personal training or
control the treadmill through CDs, VHS tapes, DVD, MP3 and the iFit.com website.
Consumers can benefit from iFIT(TM) technology using streaming workouts from the
iFIT(TM) website, music workouts on compact discs or MP3, or multi-media
iFIT(TM) videos and DVDs. In addition, we also offer live personal training
services via the Internet for consumers who choose to subscribe to our service.
Other popular features on our treadmill line of products include:
cushioning technologies such as PRO SHOX(TM) adjustable leaf springs and soft
belts for a quiet, shock-absorbent workout and the CrossWalk(TM) line of
treadmills, which provides users with upper body exercise for a total body
workout.
Ellipticals. Ellipticals are one of the fastest growing products in the
home fitness industry, growing at a Compound Annual Growth Rate (CAGR) of 24.4%
from 1997 to 2002. Ellipticals offer a low-impact, high-intensity aerobic
workout which harnesses the momentum of a natural striding motion, and reduces
the impact of typical running or walking. Our ellipticals typically provide an
electronic display that provides heart rate control, programmed workouts and
feedback on speed, time, distance and calories burned. Our iFIT(TM) technology,
which automatically adjusts resistance and pace on elliptical trainers, is
included on many elliptical trainers priced at $399 and above. Our ellipticals
were rated the number one, two and three ellipticals, respectively, in the March
2002 Consumer Reports ranking of home exercise equipment.
Exercise Bikes. We offer exercise bikes featuring a variety of resistance
mechanisms including electromagnetic, self-generating, flywheel and air;
electronic monitors which display elapsed time, speed, distance and calories
burned; and dual function design, which allows the user to exercise the upper
body, lower body or both simultaneously. Certain units include heart rate
control, motivational electronics and programmable resistance which allow users
to design their own workouts. Our iFIT(TM) technology, which automatically
adjusts pace and resistance, is included on several recumbent and upright bikes.
Recreational Sports Products. Through our JumpKing subsidiary, we
manufacture and market trampolines that include both mini-trampolines for indoor
home exercise use and full-sized trampolines for outdoor home recreational use.
Relaxation Products. In the spring of 1996, we introduced a full line of
hydrotherapy spas. These hydrotherapy spas are currently distributed through
various channels including department stores, mass retailers and warehouse
clubs, home improvement stores, specialty dealers and direct-to-consumers
through our own direct response marketing efforts.
Strength Training Equipment
We offer a complete line of anaerobic strength training equipment designed
to develop muscle tone and strength. Strength training equipment includes the
following:
Home Gyms. Our multi-purpose home gyms offer a range of resistance
mechanisms, from selectorized weight stacks to plate-loaded gyms to our
powerstroke leverage system and our CRS(TM) ("Compound Resistance System"(TM)).
New products include our Crossbow by Weider(TM) home gym and our patented Free
Motion(TM) equipment, which enables users to enjoy a full range of motion with
"functional movement" versus the rigid "fixed path movement" of traditional
equipment. Other products include our multi-purpose home gyms, which integrate
aerobic functions for cross training. Selected units are designed to allow
multiple users to use the equipment simultaneously, thereby allowing circuit
training.
Weight Benches, Cages and Free Weights. We offer a range of weight benches
and squat cages. We also offer a broad assortment of cast-iron weight plates,
vinyl and neoprene dipped weights and dumbbells, in standard and Olympic size
formats.
Exercise Accessories. We offer a line of back support belts, workout gloves
and exercise accessories, including ankle and hand weights and grip devices.
Product and Design Innovation
Product and design innovation has contributed significantly to our growth.
On an ongoing basis, we evaluate new product concepts and seek to respond to the
desires and needs of consumers by frequently introducing new products and
repositioning existing products. As of May 31, 2003, we had approximately 462
employees in our research and development group. We hold 178 United States
patents, we have 79 United States and 494 foreign trademarks, we have 34 United
States and 58 foreign patents pending and 21 United States and 78 foreign
trademarks pending.
We conduct most of our research and development in 40,000 square feet of
space in our Logan, Utah headquarters. This facility includes industrial design,
mechanical and electrical engineering capabilities that are used in creating
proprietary designs and features.
Customers
Our largest customer since 1985 has been Sears. In fiscal 2003, Sears
accounted for approximately 39% of net sales, a 5% decrease from fiscal 2002.
Other important customers include Sam's Club, Wal-Mart, The Sports Authority,
Dick's Sporting Goods, Costco, Target, Gold's Gym and 24 Hour Fitness. Although
Sears still accounts for a substantial portion of our sales, the percentage of
net sales to Sears has decreased over the past decade from a high of
approximately 68% in 1989. Nevertheless, the dollar amount of our net sales to
Sears has increased during this time period. Several customers have
distinguished us with vendor awards for our commitment in providing quality and
value to the consumer, including, among others, Sears' Vendor of the Year in
2000, Category Source of the Year in 2002 and their Partner in Progress award
twelve times since 1985. Wal-Mart has named us Vendor of the Quarter once in
each of fiscal 1999, 2000, 2001 and 2002. The Sports Authority named us Vendor
of the Year in 2002, and iFIT.com(TM) received The Sports Authority Victor Award
for the most innovative product. We have received the annual SPARC Award seven
times including the last six years consecutively. This annual award is the only
industry-wide vendor recognition program in mass-market retailing, and is
awarded by Discount Store News, a magazine which employs a panel made up of key
merchandising executives from the mass market retailing industry. This award
honors those who excel in new product innovation, on-time delivery, advertising
support and quality control.
We sell our products to customers representing over 7,600 consumer
locations, excluding those consumers we sell to directly through our retail,
direct response, television and Internet distribution channels. Consistent with
industry practice, we generally do not have long-term purchase agreements or
other commitments from our customers as to levels of future sales. The level of
our sales to large customers depends in large part on our continuing commitment
to home fitness products and the success of our efforts to market and promote
our products, as well as our competitiveness in terms of price, quality, product
innovation and customer service. We are not the exclusive supplier of home
fitness equipment to any of our major customers. The loss of, or a substantial
decrease in the amount of purchases by, or the uncollectibility of any
significant receivable due from any of our major customers could have a material
adverse effect on our business.
Competition
The fitness equipment market is highly competitive. It is characterized by
frequent introduction of new products, often accompanied by major advertising
and promotional programs. We believe that the principal competitive factors
affecting our business include price, quality, brand name recognition, product
innovation and customer service.
We compete with several domestic manufacturers and distributors such as
Cybex International, Inc., Fitness Quest, Life Fitness (a division of
Brunswick), Nautilus Group, Inc. and Precor (owned by Amer Group, PLC). We also
compete with a number of United States and foreign importers in both the United
States and global markets including Horizon, Impex and Stamina. In Europe, we
principally compete with BH (Spain), CARE (France), Helmut Kettler, Tunturi,
York (Great Britain) and other domestic competitors. The following table shows
who may be the five largest competitors in the United States:
United States Fitness Competitors
Company Name Primary Distribution Channel Principal Products
- ------------ ---------------------------- ------------------
Cybex International, Inc. Specialty fitness dealers, Cardiovascular,
institutional clubs and spas Strength Training
Fitness Quest TV infomercials, mass Cardiovascular,
distribution channels Strength Training
Life Fitness Institutional clubs and spas, Cardiovascular,
specialty fitness dealers Strength Training
Nautilus Group, Inc. TV infomercials, institutional Cardiovascular,
clubs and spas, sporting goods Strength Training
and specialty retailers
Precor Institutional clubs and spas, Cardiovascular,
specialty fitness dealers and Strength Training
sporting goods retailers
Distribution
We believe our distribution capabilities and post-sales support place us in
a good position to service major retailers. This has been accomplished through
the successful implementation of our integrated distribution and inventory
management system that is used to ensure that the necessary components are
available for manufacturing. This system is also capable of tracking finished
goods through all levels of the distribution chain. Through the effective use of
electronic data interchange, we are able to run manufacturing jobs to fill
specific customer orders, arrange for shipping from many of our manufacturing
facilities and make timely deliveries to our customer locations.
Manufacturing and Purchasing
In fiscal 2003, we manufactured or assembled our products at our company
facilities in Utah, Texas and Canada; or through third parties, principally in
Asia. We have long-standing supply relationships with several offshore vendors,
many of which have exclusive relationships in the fitness industry with us. The
combination of internal manufacturing and assembly capacity and our access to
third-party vendors has helped us meet customer demand on a competitive basis.
In addition, the third party vendors provide greater flexibility in
manufacturing capacity to satisfy seasonal demands.
We utilize more than 1.1 million square feet for manufacturing, including a
300,000 square foot facility in Logan, Utah. We constructed our Logan, Utah,
plant in 1990 and equipped the facility with modern manufacturing and assembly
features, including fully integrated metal fabrication, powdercoat painting,
robotic welding and injection molding equipment. In 1990, we purchased a
trampoline manufacturing operation in Dallas, Texas. In 1991, we began operating
our plant in Smithfield, Utah. In 1994, we began operating our Clearfield, Utah,
manufacturing facility. In 1995, we opened our Smithfield North Plant. In 1996,
we expanded our manufacturing capacity by 233,671 square feet through the
acquisition of our Canadian manufacturing facility in St. Jerome, Canada. In
2003, we announced our plan to set up a manufacturing facility in Xiamen, China.
This facility is expected to be operationally ready in 2004.
We apply a management system to control and monitor freight, labor,
overhead and material cost components of our finished goods. In fiscal 1994, we
received ISO 9001 certification for all of our non-retail facilities in Utah.
ISO is a nonprofit association that monitors industrial companies' manufacturing
processes, quality assurance controls, personnel management and customer service
in order to improve plant efficiency, product quality, customer satisfaction and
company profitability. ISO 9001 is a certification process used for companies
whose business includes a range of activities from design and development to
production, installation and servicing. ICON has been recertified by the ISO
9001 standards every year since 1994.
From fiscal 1996 to fiscal 2003, we have invested over $96.4 million in
tooling, molding, production and computer equipment to develop state-of-the-art
production, research and development, distribution and reporting systems. We
have a fully implemented Enterprise Resource Planning ("ERP") system that
integrates all manufacturing, planning, inventory, purchasing, order entry and
financial functions. Our inventory management and manufacturing productivity are
enhanced by our just-in-time system for purchasing materials and components. We
have also invested in Electronic Data Interchange ("EDI") capabilities,
including Wal-Mart's Retail Link system, which provides us and a substantial
number of our primary customers a seamless flow from initial retailer orders to
parts purchasing to product manufacturing to shipping.
Employees
As of May 31, 2003, we employed approximately 4,569 people, 105 of whom
were and are represented by a Canadian labor union. We are party to a collective
bargaining agreement with this union which expires on August 7, 2004. Factory
employees are compensated through a targeted incentive system. Managerial
employees receive bonuses tied to the achievement of performance targets. As of
May 31, 2003, approximately 462 employees were engaged in research and
development, 625 in sales and marketing, 2,956 in manufacturing and 526 in other
areas, primarily administrative. We are also subject to three employment
agreements with our senior executives.
Environmental Matters
Our operations are subject to federal, state and local health and safety
and environmental laws and regulations that impose workplace standards and
limitations on the discharge of pollutants into the environment and establish
standards for the handling, generation, emission, release, discharge, treatment,
storage and disposal of materials, substances and wastes. The nature of our
manufacturing and assembly operations exposes us to the risk of claims with
respect to environmental matters, and although compliance with local, state and
federal requirements relating to the protection of the environment has not had a
material adverse effect on our financial condition or results of operations,
there can be no assurance that material costs or liabilities will not be
incurred in connection with such environmental matters. Future events, such as
changes in existing laws and regulations or enforcement policies or the
discovery of contamination on sites owned or operated by us may give rise to
additional compliance costs or operational interruptions which could have a
material adverse effect on our financial condition. In addition, many but not
all of our properties have been the subject of either Phase I or Phase II
Environmental Site Assessments. While we are not aware of any existing
conditions that are likely to result in material costs or liabilities to us,
there can be no assurance that all potential instances of soil or ground water
contamination have been identified even where Environment Site Assessments have
been conducted. Accordingly, there can be no assurance that previously unknown
environmental conditions, or known conditions which have not been fully
evaluated, will not be discovered at any of our properties, whether presently or
formerly owned or leased, or that the cost of remediating such condition will
not be material.
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 year are generally the Company's weakest periods in terms of
sales. During these periods, ICON builds product inventory to prepare for the
heavy demand anticipated during the upcoming peak season. This operating
strategy helps ICON to realize the efficiencies of a steady pace of year-round
production.
Item 2. Properties
Our headquarters are located in Logan, Utah, and we own the related land
and buildings. Additionally, we own land and buildings in Canada. The total
square footage of our owned buildings is approximately 485,000 square feet.
We lease additional facilities for manufacturing, warehouses and offices in
the United States and various foreign countries including the United Kingdom,
Italy, France and Germany. We sublease certain of these facilities where space
is not fully utilized.
We believe that these facilities are well maintained, in good operating
condition and are adequate for our current needs and that suitable additional or
substitute space will be available as needed to accommodate any expansion of our
operations.
In addition, as of May 31, 2003 we operated under lease 69 NordicTrack(TM)
retail stores in various cities in the United States.
Item 3. Legal Proceedings
We are party to a variety of non-product liability commercial lawsuits
involving contract claims, arising in the ordinary course of our business. We
believe that adverse resolution of these lawsuits would not have a material
adverse effect on our results of operations or financial position.
We are party to a variety of product liability lawsuits, arising in the
ordinary course of our business, as a result of injuries sustained by customers
while using a variety of our products. These claims include injuries sustained
by individuals using trampolines and treadmills. We vigorously defend any and
all product liability claims brought against us and do not believe that any
currently pending claim or series of claims will have a material adverse effect
on our results of operations or financial position.
We are also involved in several intellectual property and patent
infringement claims, arising in the ordinary course of our business. We believe
that the ultimate outcome of these matters will not have a material adverse
effect on our results of operations or financial position.
We are involved in litigation with Service Merchandise in connection with
its filing for bankruptcy protection. Service Merchandise filed three separate
adversarial proceedings against us in the United States Bankruptcy Court, Middle
District of Tennessee, Nashville Division, alleging preferential transfer in
Adversarial Proceedings 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 us as a voidable preference. The summons was issued
on April 16, 2001. The proposed claim is currently being vigorously defended by
our counsel. At this time, we are unable to determine the likelihood of an
unfavorable outcome or the amount or range of potential recovery or loss.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for the Registrants' Common Equity and Related
Stockholder Matters
As of May 31, 2003, we had 1,000 shares of common stock outstanding all of
which were held by HF Holdings, Inc. ("HF Holdings"). There is not an
established trading market for the common stock of HF Holdings or us. Our
ability to pay dividends is limited under an indenture dated as of April 9, 2002
between us and Bank of New York, as trustee, and by our Credit Agreement.
Item 6. Selected Financial Data
The selected financial data set forth below with respect to our statements
of operations for the three years ended May 31, 2003 and the balance sheet data
for May 31, 2003 and May 31, 2002 have been derived from our financial
statements included elsewhere in this Form 10-K that have been audited by
PricewaterhouseCoopers LLP, independent auditors, as indicated in their report
included elsewhere in this Form 10-K. Our statement of operations data for the
years ended May 31, 2000 and 1999, and our balance sheet data as of May 31,
2001, 2000 and 1999, have been derived from the financial statements audited by
PricewaterhouseCoopers LLP but not included in this Form 10-K.
The data set forth should be read together with, and is qualified in its
entirety by, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements, and the related
notes thereto appearing elsewhere in this Form 10-K.
For the Year Ended May 31,
(in millions)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Data:
Net sales(1) $1,011.5 $871.4 $797.0 $712.8 $687.9
Cost of sales 713.4 635.0 580.5 531.6 514.0
-----------------------------------------------
Gross profit 298.1 236.4 216.5 181.2 173.9
Operating expenses:
Selling 134.1 101.4 86.3 75.8 85.3
Research and development 11.6 10.4 10.9 8.3 7.7
General and
administrative 81.8 68.1 64.5 61.3 53.4
-----------------------------------------------
Total operating expenses 227.5 179.9 161.7 145.4 146.4
-----------------------------------------------
Income from operations 70.6 56.5 54.8 35.8 27.5
Interest expense 25.1 26.2 34.8 33.9 33.1
Amortization of deferred
financing fees 1.2 3.1 3.2 2.7 7.0
Net income (loss) 26.7 19.4 13.3 (6.6) (24.7)
Other Financial Data:
Depreciation and
amortization $ 19.2 $ 19.2 $ 17.4 $ 16.7 $ 17.4
Purchases of property
and equipment(2) 17.0 11.6 16.1 12.9 11.6
Net cash provided by
operating activities 31.6 37.5 12.4 0.5 38.0
Net cash used in
investing activities (21.8) (17.1) (22.8) (19.9) (20.1)
Net cash provided by
(used in) financing
activities (12.3) (19.3) 8.7 21.4 (17.1)
Supplemental Data:
EBITDA(3) $ 89.8 $ 68.3 $ 72.1 $ 49.4 $ 44.9
Balance Sheet Data (at the end of the period):
Cash $ 4.7 $ 4.8 $ 3.3 $ 5.9 $ 4.3
Working capital 186.8 164.0 157.6 132.3 108.0
Total assets 465.1 423.2 405.5 368.1 331.9
Long-term obligations 248.9 255.8 253.3 242.2 253.4
- ----------
(1) 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. For comparative purposes, net sales are
shown as if EITF 01-09 had been adopted for all periods.
(2) Excludes purchases of intangibles and trademarks and acquisitions of $4.9
million for fiscal year 2003, $5.5 million for fiscal year 2002, $6.7
million for fiscal year 2001, $4.4 million for fiscal year 2000 and $8.5
million for fiscal year 1999.
(3) 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. Our definition of
EBITDA may differ from definitions of EBITDA used by other companies. A
reconciliation of net income to EBITDA can be found in Management's
Discussion and Analysis of Financial Condition and Results of Operations
under the heading Results of Operations. The following table includes a list
of unusual items that have affected EBITDA.
For the Year Ended May 31,
-------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In millions)
Loss on extinguishment of debt - 7.4(a) - - -
Kmart bankruptcy bad debt 9.1(b) 2.4(b) - - -
Excess air freight charges - - - 6.0(c) -
Non-recurring recapitalization cost - - - 1.8(d) -
Equity grant to senior management - - - 3.1(e) -
Non-recurring costs in selling expense - - - - 10.5(f)
---------------
(a) A loss of approximately $7.4 million was recorded on the
extinguishment of the Company's Old 1999 Credit Facilities and the 12%
Notes.
(b) On January 22, 2002, Kmart filed for bankruptcy protection. On that
date, we had $12.1 million of unsecured accounts receivable
outstanding with Kmart. We disposed of the remaining balance of the
pre-bankruptcy receivables in the third quarter of fiscal 2003.
(c) We incurred $6.0 million of in-bound air freight charges (in cost of
sales) in excess of normal freight costs. Due to our significant
indebtedness, certain of our vendors shortened our payment terms prior
to our recapitalization in September 1999. Due to liquidity
constraints we had to delay the purchase of certain component parts
and finished goods, and we therefore incurred additional in-bound air
freight expenses related to these items that we needed to receive
rapidly in order to meet our customers' delivery schedules.
(d) We recorded $1.5 million of non-recurring costs (in general and
administrative expense) related to management retention bonuses, paid
to certain executive officers, and $0.3 million of one-time
non-recurring costs associated with the redemption of our 13% senior
subordinated notes due 2002, both in connection with our
recapitalization in September 1999.
(e) We recorded $3.1 million of non-recurring non-cash costs (in general
and administrative expense) related to an equity grant made to certain
members of senior management due to our recapitalization in September
1999.
(f) We recorded $10.5 million of non-recurring costs (in selling expenses)
related to the write-off of accounts receivable due to the bankruptcy
of Service Merchandise.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following should be read in conjunction with the financial statements
and the related notes thereto appearing elsewhere in this Form 10-K. Our fiscal
year ends on May 31 of the corresponding calendar year. For example, fiscal 2003
ended on May 31, 2003.
Recent Developments
In fiscal 2003, we formed a foreign subsidiary to build a manufacturing
facility in Xiamen, China. The total project cost is anticipated to be
approximately $12.0 million, with $7.0 million to be funded in the form of
capital contributions, and approximately $5.0 million in the form of debt. Our
share of the equity investment is expected to be approximately $5.0 million. We
are in the process of arranging for the debt portion of the financing, which is
expected to be provided by the Bank of China.
Overview
We manufacture and market a broad line of cardiovascular and other
equipment and strength training equipment. We are one of the largest
manufacturers and marketers of home fitness equipment in the United States. In
addition, we manufacture and distribute an innovative line of cardiovascular and
other equipment and strength training equipment for the institutional fitness
equipment market.
We sell our products under a wide variety of brand names and we use our
portfolio of brands to tailor our product offerings to specific distribution
channels. We sell our products to department stores, mass retailers and
warehouse clubs, sporting goods and specialty fitness retailers, directly to
consumers, and health clubs.
The following paragraphs provide a brief description of certain items that
appear in our Consolidated Statements of Operations.
Net sales. Net sales primarily represent our gross sales adjusted for
returns and allowances. We limit our customers' ability to return merchandise to
us to products sold to their customers in which defects were discovered within
the warranty coverage period (usually 90 days from the time of retail sale). We
do not permit our customers to return unsold merchandise.
Cost of sales. Cost of sales primarily includes the cost of components that
we purchase, direct manufacturing labor and overhead, inbound shipping and
freight and depreciation expense related to our property, plant, equipment and
tooling.
Selling expense. Selling expense primarily includes our direct advertising
expense, advertising allowances provided to certain customers and the costs
related to our sales and marketing staff for our home fitness and institutional
fitness business.
Research and development expense. Research and development expense relates
primarily to the activities of our product development group and external
sources related to the development of new products and product enhancements.
General and administrative expense. General and administrative expense
primarily includes expenses related to our senior management team, all
accounting and finance functions, management information systems, legal and
human resources expenses and unallocated overhead expenses.
Critical Accounting Policies
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, the following accounting policies could be deemed to be
critical.
Inventories - Inventories consist primarily of raw materials (principally
parts and supplies) and finished goods, and are valued at the lower of cost or
market. Cost is determined using standard costs which approximate the first-in,
first-out (FIFO) method.
Intangible Assets - We adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets" effective June 1, 2002. SFAS No. 142 no longer
requires the amortization of goodwill and other indefinite lived intangibles. As
a result, results for the year ended May 31, 2003 were positively impacted by a
$0.4 million elimination of such amortization. As of May 31, 2003, we had
approximately $5.6 million of unamortized goodwill. Under the provisions of SFAS
No. 142, we are required to test these assets for impairment at least annually.
The annual impairment tests have been completed and did not result in an
impairment charge. To the extent an impairment is identified in the future, we
will record the amount of the impairment as an operating expense in the period
in which it is identified.
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of long-lived assets
may not be recoverable. The carrying value of a long-lived asset is considered
impaired when the anticipated cumulative undiscounted cash flows from that asset
is less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset, which is generally based on discounted cash flows. As a result
of our review, we do not believe that any impairment currently exists related to
our long-lived assets.
Revenue Recognition - We recognize revenue upon the shipment of product to
the customer. Allowances are recognized for estimated returns, discounts,
advertising programs and warranty costs associated with these sales.
Income Taxes - We account for income taxes utilizing the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities at
currently enacted tax rates. If appropriate, deferred tax assets are reduced by
a valuation allowance which reflects expectations of the extent to which such
assets will be realized.
Contingencies - We account for contingencies in accordance with SFAS No. 5,
"Accounting for Contingencies". SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of the
consolidated financial statements indicates that it is probable that an asset
has been impaired or a liability can be reasonably estimated. Accounting for
contingencies such as environmental, legal and income tax matters requires us to
use our judgment. While we believe that our accruals for these matters are
adequate, if the actual loss from a loss contingency is significantly different
from the estimated loss, our results of operations will be affected in the
period the contingency is resolved.
Results of Operations
The following table sets forth certain of our financial data, expressed as
a percentage of net sales, for fiscal years ended May 31, 2003, 2002 and 2001:
For the Year Ended May 31,
--------------------------
2003 2002 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 70.5% 72.9% 72.8%
----- ----- -----
Gross profit 29.5% 27.1% 27.2%
Operating expenses:
Selling 13.3% 11.6% 10.8%
Research and development 1.1% 1.2% 1.4%
General and administrative 8.1% 7.8% 8.1%
----- ----- -----
Total operating expenses 22.5% 20.6% 20.3%
----- ----- -----
Income from operations 7.0% 6.5% 6.9%
Interest expense 2.5% 3.0% 4.4%
Amortization of deferred
financing fees 0.1% 0.4% 0.4%
Loss on debt extinguishment - 0.9% -
----- ----- -----
Income before income taxes 4.4% 2.2% 2.1%
Provision for income taxes 1.7% 0.0% 0.4%
----- ----- -----
Net income 2.7% 2.2% 1.7%
===== ===== =====
EBITDA 8.9% 7.8% 9.0%
===== ===== =====
Year Ended May 31, 2003 Compared to Year Ended May 31, 2002
- -----------------------------------------------------------
Net sales for fiscal 2003 increased $140.1 million, or 16.1%, to $1,011.5
million from $871.4 million in the comparable period in 2002. Sales increased
primarily due to increased direct consumer sales and customer demand. Sales of
our cardiovascular and other equipment in fiscal 2003 increased $80.5 million,
to $825.6 million. Sales of our strength training equipment in fiscal 2003
increased $59.6 million, to $185.9 million.
Gross profit for fiscal 2003 was $298.1 million, or 29.5% of net sales,
compared to $236.4 million, or 27.1% of net sales, in fiscal 2002. This 26.1%
increase was largely due to increased direct consumer sales which have higher
margins, changes in product mix and manufacturing efficiencies.
Selling expenses increased $32.7 million, or 32.2%, to $134.1 million in
fiscal 2003. This increase reflected increased bad debt expense related to
pre-bankruptcy receivables of Kmart of $9.1 million. Increased direct consumer
advertising, commissions and freight also contributed to the increase. Expressed
as a percentage of net sales, selling expenses were 13.3% in fiscal 2003 and
11.6% in fiscal 2002. Absent the Kmart bad debt expense, selling expenses were
12.4% in fiscal 2003.
Research and development expenses increased $1.2 million, or 11.5%, to
$11.6 million in 2003. Expressed as a percentage of net sales, research and
development expenses were 1.1% in fiscal 2003 and 1.2% in fiscal 2002.
General and administrative expenses increased $13.7 million, or 20.1%, to
$81.8 million in 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. Increased rent
and lease expense also contributed to the increase. Expressed as a percentage of
net sales, general and administrative expenses were 8.1% in fiscal 2003 compared
with 7.8% in fiscal 2002.
As a result of the foregoing factors, operating income increased $14.1
million, or 25.0%, to $70.6 million in fiscal 2003. Expressed as a percentage of
net sales, operating income was 7.0% in 2003 compared with 6.5% in fiscal 2002.
As a result of the foregoing factors, EBITDA increased $21.5 million, or
31.5%, to $89.8 million in fiscal 2003. Expressed as a percentage of net sales,
EBITDA was 8.9% in fiscal 2003 compared with 7.8% in fiscal 2002.
Interest expense, including amortization of deferred financing fees,
decreased $3.0 million, or 10.2%, to $26.3 million in fiscal 2003. This decrease
reflects lower interest rates during fiscal 2003. 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 2.6% in fiscal 2003 compared with 3.4% in fiscal
2002.
The provision for income taxes increased $17.2 million, or 4300.0%, to
$17.6 million in fiscal 2003. Our effective tax rate was 39.7% in 2003 compared
to 1.9% in fiscal 2002. The lower effective tax rate in fiscal 2002 is the
result of adjustments pursuant to an Internal Revenue Service audit. These
adjustments created a deferred tax benefit of approximately $11.5 million. No
valuation allowance was recorded against this asset because we believe that we
will generate sufficient future taxable income through operations to realize the
net deferred asset. However, there can be no assurance that we will generate any
specific level of taxable earnings or that we will be able to realize any of the
deferred tax asset in future periods. If we are unable to generate sufficient
taxable income in the future, an additional valuation allowance against this
deferred tax asset would result in a charge to earnings.
As a result of the foregoing factors, net income was $26.7 million in
fiscal 2003 compared to net income in fiscal 2002 of $19.4 million.
Year Ended May 31, 2002 Compared to Year Ended May 31, 2001
- -----------------------------------------------------------
Net sales for fiscal 2002 increased $74.4 million, or 9.3%, to $871.4
million from $797.0 million in the comparable period in 2001. Sales increased
primarily due to increased customer demand and the introduction of our new line
of institutional fitness equipment which represented $11.0 million, or 14.8%, of
the sales increase. Sales of our cardiovascular and other equipment in fiscal
2002 increased $57.9 million, to $745.1 million. Sales of our strength training
equipment in fiscal 2002 increased $16.5 million, to $126.3 million.
Gross profit for fiscal 2002 was $236.4 million, or 27.1% of net sales,
compared to $216.5 million, or 27.2% of net sales in fiscal 2001.
Selling expenses increased $15.1 million, or 17.5%, to $101.4 million in
fiscal 2002. This increase was the result of higher selling costs associated
with the increase in sales combined with the impact of the introduction of our
new line of institutional fitness equipment as well as increased advertising
expenses. Expressed as a percentage of net sales, selling expenses were 11.6% in
fiscal 2002 compared to 10.8% in fiscal 2001.
Research and development expenses decreased $0.5 million, or 4.6%, to $10.4
million in fiscal 2002. Expressed as a percentage of net sales, research and
development expenses were 1.2% in fiscal 2002 and 1.4% in fiscal 2001.
General and administrative expenses increased $3.6 million, or 5.6%, to
$68.1 million in fiscal 2002. This increase was the result of higher costs
associated with our increase in sales combined with the impact of the
introduction of our new line of institutional fitness equipment. Expressed as a
percentage of net sales, general and administrative expenses were 7.8% in fiscal
2002 and 8.1% in fiscal 2001.
As a result of the foregoing factors, operating income increased $1.7
million, or 3.1%, to $56.5 million in fiscal 2002. Expressed as a percentage of
net sales, operating income was 6.5% in fiscal 2002 compared with 6.9% in fiscal
2001.
As a result of the foregoing factors, EBITDA decreased $3.8 million, or
5.3%, to $68.3 million in fiscal 2002. Expressed as a percentage of net sales,
EBITDA was 7.8% in fiscal 2002 compared with 9.0% in fiscal 2001.
Interest expense, including amortization of deferred financing fees,
decreased $8.7 million, or 22.9%, to $29.3 million in fiscal 2002. This
decrease reflects our lower borrowing levels during the period combined with
lower interest rates on our borrowings.
A loss of $7.4 million was recorded on the extinguishment of the existing
credit facility and the 12% Notes.
The provision for income taxes decreased $3.0 million, or 88.2%, to $0.4
million in fiscal 2002. Our effective tax rate was 1.9% in fiscal 2002 compared
to 20.7% in fiscal 2001. The lower effective tax rate in fiscal 2002 was the
result of adjustments pursuant to an Internal Revenue Service audit. These
adjustments created a deferred tax benefit of approximately $11.5 million.
As a result of the foregoing factors, our net income was $19.4 million in
fiscal 2002 compared to net income in fiscal 2001 of $13.3 million.
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 year are generally the Company's weakest periods in terms of
sales. During these periods, ICON builds product inventory to prepare for the
heavy demand anticipated during the upcoming peak season. This operating
strategy helps ICON to realize the efficiencies of a steady pace of year-round
production.
The following are the net sales, operating income (loss) and net income
(loss) of our Company by quarter for fiscal years 2003, 2002 and 2001:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- ---------- ----------
(in millions)
Net Sales(5)
2003 $170.2 $292.7 $344.0 $204.6
2002 134.2 264.6 296.0 176.6
2001 125.9 267.6 247.6 155.9
Operating Income (Loss)
2003 $ 2.0 $ 28.8 $ 37.5 $ 2.3
2002 (4.5) 26.9 33.8 0.3
2001 (2.3) 31.9 29.4 (4.2)
Net Income (Loss)
2003 $ (3.4) $ 13.7 $ 20.3 $ (3.9)
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) to EBITDA by quarter (6):
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------
2003
Net income (loss) $ (3.4) $ 13.7 $ 20.3 $ (3.9) $ 26.7
Add back:
Depreciation and
amortization 4.2 4.0 5.0 6.0 19.2
Provision (benefit)
for income tax (1.2) 8.3 10.7 (0.2) 17.6
Interest expense 6.4 6.5 6.3 5.9 25.1
Amortization of deferred
financing fees 0.3 0.2 0.2 0.5 1.2
------ ------ ------ ------ ------
EBITDA $ 6.3 $ 32.7 $ 42.5 $ 8.3 $ 89.8
====== ====== ====== ====== ======
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------
2002
Net income (loss) $ (7.5) $ 11.1 $ 25.5 $ (9.7) $ 19.4
Add back:
Depreciation and
amortization 4.5 4.3 4.9 5.5 19.2
Provision (benefit)
for income tax (4.8) 8.2 1.4 (4.4) 0.4
Interest expense 6.8 6.8 6.0 6.6 26.2
Amortization of deferred
financing fees 0.9 0.9 0.9 0.4 3.1
------ ------ ------ ------ ------
EBITDA $ (0.1) $ 31.3 $ 38.7 $ (1.6) $ 68.3
====== ====== ====== ====== ======
2001
Net income (loss) $ (8.2) $ 11.7 $ 10.8 $ (1.0) $ 13.3
Add back:
Depreciation and
amortization 4.0 4.0 4.3 5.1 17.4
Provision (benefit)
for income tax (3.2) 8.0 7.0 (8.4) 3.4
Interest expense 8.2 9.7 9.3 7.6 34.8
Amortization of deferred
financing fees 0.8 0.8 0.8 0.8 3.2
------ ------ ------ ------ ------
EBITDA $ 1.6 $ 34.2 $ 32.2 $ 4.1 $ 72.1
====== ====== ====== ====== ======
The following is a reconciliation of net loss to EBITDA for the fiscal years
ended May 31, 2000 and 1999.
2000 1999
-----------------------------
Net loss $ (6.6) $(24.7)
Add back:
Depreciation and
amortization 16.7 17.4
Provision for income tax 2.7 12.1
Interest expense 33.9 33.1
Amortization of deferred
financing fees 2.7 7.0
-----------------------------
EBITDA $ 49.4 $ 44.9
=============================
(1) Our first quarter ended August 31, September 1, and September 2 for fiscal
years 2003, 2002 and 2001, respectively.
(2) Our second quarter ended November 30, December 1, and December 2 for fiscal
years 2003, 2002 and 2001, respectively.
(3) Our third quarter ended March 1, March 2, and March 3 for fiscal years 2003,
2002 and 2001, respectively.
(4) Our fourth quarter ended May 31 for the fiscal years 2003, 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. 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 Quarter Quarter Quarter
----------------------------------------------
(in millions)
Net Sales
2003 $175.8 $301.5 $354.8 $210.9
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.
Liquidity and Capital Resources
Net cash provided by operating activities was $31.6 million in fiscal 2003,
as compared to $37.5 million of cash provided by operating activities in fiscal
2002. In fiscal 2003, major sources of funds were net income of $26.7 million,
non-cash provisions of $19.2 million for depreciation and amortization and an
increase in accounts payable and accrued expenses of $18.5 million. These
changes were offset by increases in accounts receivable of $22.0 million, due
partially to increased direct response receivables, and inventories of $28.0
million, due primarily to building inventory levels to meet anticipated sales
levels. In fiscal 2002, major sources of funds were net income of $19.4 million,
non-cash provisions of $19.2 million for depreciation and amortization, and a
decrease in inventories of $12.2 million. These changes were offset by an
increase in accounts receivable of $20.0 million.
Net cash used in investing activities was $21.8 million in fiscal 2003,
compared to $17.1 million of cash used in investing activities in fiscal 2002.
Investing activities in fiscal 2003 consisted primarily of capital expenditures
of $17.0 million related to upgrades in plant and tooling and purchases of
additional manufacturing equipment and purchases of intangible assets of $4.9
million. Cash used in investing activities in fiscal 2002 consisted primarily of
capital expenditures of $11.6 million related to upgrades in plant and tooling
and purchases of additional manufacturing equipment and purchases of intangible
assets of $5.2 million.
Net cash used in financing activities was $12.3 million in fiscal 2003,
compared to $19.3 million of cash used in financing activities in fiscal 2002.
Cash used in financing activities in fiscal 2003 resulted from payments on the
revolving credit facility, payments on the April 2002 term notes, payment of
debt issuance fees and payments on other long-term debt. Cash used in financing
activities in fiscal 2002 resulted from the issuance in April 2002 of the 11.25%
Senior Subordinated Notes, borrowings on our new credit facility, repayment of
our old credit facility and the redemption of our 12% subordinated notes.
Net cash provided by operating activities was $37.5 million in fiscal 2002,
as compared to $12.4 million of cash provided by operations in fiscal 2001. In
fiscal 2002, major sources of funds were net income of $19.4 million, non-cash
provisions of $19.2 million for depreciation and amortization, and a decrease in
inventories of $12.2 million. These changes were offset by increases in accounts
receivable of $20.0 million. In fiscal 2001, major sources of funds were net
income of $13.3 million, non-cash provisions of $17.4 million for depreciation
and amortization, and increases in accounts payable and accrued expenses of
$10.0 million. These increases were offset by increases in accounts receivable
of $14.1 million and inventories of $14.8 million. Such increases were due to
the aforementioned factors relating to sales increases.
Net cash used in investing activities was $17.1 million in fiscal 2002,
compared to $22.8 million in fiscal 2001. Investing activities in fiscal 2002
consisted primarily of capital expenditures of $11.6 million related to upgrades
in plant and tooling and purchases of additional manufacturing equipment and
purchases of intangible assets of $5.2 million. Cash used in investing
activities in fiscal 2001 was primarily for capital expenditures of $16.1
million, acquisitions of $4.0 million and purchases of intangible assets of $2.7
million.
Net cash used in financing activities was $19.3 million in fiscal 2002,
compared to $8.7 million of cash provided by financing activities in fiscal
2001. Cash used in financing activities in fiscal 2002 resulted from the
issuance in April 2002 of the 11.25% Senior Subordinated Notes, borrowings on
our new credit facility, repayment of our old credit facility and the redemption
of our 12% subordinated notes. Cash provided by financing activities in fiscal
2001 resulted from borrowings on the revolving credit facility, payments on the
September 1999 term notes, payments of debt issuance fees and payments on other
long-term debt.
We made capital expenditures of approximately $17.0 million during fiscal
2003 and expect to make capital expenditures of approximately $15.0 million in
fiscal 2004. Capital expenditures are primarily for expansion of physical plant,
purchases of additional or replacement manufacturing equipment and revisions and
upgrades in plant tooling.
On January 22, 2002, Kmart, a customer for over a decade, filed for
bankruptcy protection. At the time of the bankruptcy filing, we had $12.1
million of unsecured accounts receivable outstanding with Kmart. We disposed of
the remaining balance of the pre-bankruptcy receivable in the third quarter of
fiscal 2003. We had net sales to Kmart of $26.7 million in fiscal 2003,
representing approximately 2.6% of total net sales for that period. In fiscal
2002, we had net sales to Kmart of approximately $28.9 million, representing
approximately 3.3% of total net sales for that period. We resumed shipments to
Kmart on February 5, 2002 and continue with payment terms of 30 days. Kmart
emerged from Chapter 11 protection on May 6, 2003.
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
2012. Our principal source of financing for our seasonal merchandise inventory
buildup and increased accounts receivable is revolving credit borrowings under
the existing credit facilities. At May 31, 2003, we had $110.7 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
Christmas and post-holiday selling season. Generally, in the period from
November through February, our working capital borrowings remain at their
highest level and then are paid down to their lowest annual levels from April
through August.
In connection with our debt refinancing in April 2002, we entered into our
existing credit facility totaling $235.0 million of revolving and term loans
with a syndicate of banks and financial services companies. The revolving and
term loans are due in 2007.
Proceeds of our existing credit facility were used to refinance our then
existing credit facility and 12% senior subordinated notes due 2005, to fund
transaction fees and expenses and to provide general working capital.
As of May 31, 2003 the balance outstanding under the existing credit
facility consisted of (in millions):
Revolver $ 72.6
Term Loan 18.7
------
$ 91.3
======
As of May 31, 2003, our consolidated indebtedness was approximately $244.2
million, of which approximately $91.3 million was senior indebtedness.
Based on our current level of operations, management believes 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.
As of May 31, 2003, our contractual cash obligations and commercial
commitments were as follows:
Payments Due by Period (in millions)
-----------------------------------------------------
Less Than 1 After 5
Total Year 2-3 Years 4-5 Years Years
-----------------------------------------------------
Credit facilities $ 91.3 $ 5.0 $ 86.3 $ - $ -
Senior subordinated notes 152.9 - - - 152.9
Operating leases 36.4 9.1 18.7 6.2 2.4
-----------------------------------------------------
Total contractual cash
obligations $280.6 $ 14.1 $105.0 $ 6.2 $155.3
=====================================================
As part of our cash management activities, we seek to manage accounts
receivable credit risk, collections and accounts payable and payments thereof to
maximize our free cash at any given time.
Careful management of credit risk has allowed us to avoid (except for
Kmart, as discussed above) significant accounts receivable losses in light of
the poor financial condition of many of our potential and existing customers. In
light of current and prospective global regional economic conditions, we cannot
assure you that we will not be materially adversely affected by accounts
receivable losses in the future.
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 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 resulted in the 2002 loss on
debt extinguishment being reclassified from an extraordinary item 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 and is not expected to have a
material effect on our financial position or results of operations.
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 SFAS No. 123 to
ensure that fair value disclosures are prominent in both annual and interim
financial statements. We have adopted the disclosure provisions of SFAS No. 148,
but will continue to account for our stock-based compensation plans in
accordance with APB 25.
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. The Company has adopted EITF 01-09 effective
June 1, 2002 which reduced net sales for the fiscal year ended May 31, 2003 by
approximately $31.5 million with a corresponding reduction of selling, general
and administrative expenses. This change has no effect on income from operations
or net income. For comparative purposes, net sales for fiscal years ended May
31, 2002 and 2001 have been reduced by approximately $24.7 million and $23.5
million, respectively, with a corresponding reduction of selling, general and
administrative expenses.
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, 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 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. We do not expect FIN 45 to 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. We do not expect FIN 46 to have a material effect on our consolidated
financial statements.
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 are currently evaluating the effects SFAS No. 150 may have on our
financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Fluctuations in the general level of interest rates on our current and
future fixed and variable rate debt obligations expose us to market risk. We are
vulnerable to significant fluctuations in interest rates on our variable rate
debt and on any future repricing or refinancing of our fixed rate debt and on
future debt.
We use long-term and medium-term debt as a source of capital. At May 31,
2003, we 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, we typically refinance such debt at the
then-existing market interest rates, which may be more or less than the interest
rates on the maturing debt.
Our credit facility has variable interest rates and any fluctuation in
interest rates could increase or decrease our interest expense. At May 31, 2003,
we had approximately $91.3 million in outstanding variable rate debt. The
weighted average rate of interest on the variable interest rate debt was
approximately 4.8% for the fiscal year ended May 31, 2003. If the interest rate
for our variable rate debt increased or decreased by 1% during fiscal year 2003,
our interest expense on outstanding variable rate debt would increase or
decrease by approximately $1.5 million.
Due to the uncertainty of fluctuations in interest rates and the specific
actions that might be taken by us to mitigate the impact of such fluctuations
and their possible effects, the foregoing sensitivity analysis assumes no
changes in our financial structure.
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 forecast foreign currency sales. As of May 31, 2003 and 2002, 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 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
and Schedule
Page
----
Report of Independent Auditors 46
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2003 and 2002 47
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended May 31, 2003, 2002 and 2001 48
Consolidated Statement of Stockholder's Equity (Deficit)
for the Years Ended May 31, 2003, 2002 and 2001 49
Consolidated Statements of Cash Flows for the Years
Ended May 31, 2003, 2002 and 2001 50
Notes to Consolidated Financial Statements 51
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for
the Three Years Ended May 31, 2003 79
Item 9. Changes in and Disagreements with Auditors on Accounting
and Financial Disclosure None
PART III
Item 10. Directors and Executive Officers of the Registrant
Management Directors and Officers
The directors and executive officers of the Company, their ages and number
of years with ICON Health & Fitness are as follows:
Years
Name Age with ICON Position
- --------------------- --- --------- -------------------------------------
Scott R. Watterson 48 25 Chairman of the Board and Chief
Executive Officer
Gary E. Stevenson 48 25 President, Chief Operating Officer
and Director
S. Fred Beck 45 14 Chief Financial and Accounting
Officer, Vice President and
Treasurer
David J. Watterson 44 23 President, North American Operations
Jon M. White 55 16 Senior Vice President, Manufacturing
William T. Dalebout 55 15 Vice President, Design
M. Joseph Brough 39 14 Vice President, Operations and
Information Technology
Matthew N. Allen 39 19 Vice President, Product Development
Douglas L. Clausen 56 12 Vice President, Purchasing
Brad H. Bearnson 49 8 General Counsel, Secretary
Wallace J. Smith 60 14 Vice President, Business Development
Jeff Carmignani 55 20 Vice President, Imports,
Transportation and New Business
Development
Giovanni Lato 45 10 President, ICON Europe
Richard Hebert 58 9 President, ICON Canada
Colleen Logan 41 8 Director, Marketing
David Packham 42 7 Director, NordicTrack Retail Stores
Jace Jergensen 40 9 Vice President and General Manager,
JumpKing
Lynn C. Brenchley 57 13 Vice President, Business Development
Robert C. Gay 51 - Vice Chairman of the Board
Ronald P. Mika 42 - Director
Gregory Benson 49 - Director
Stanley C. Tuttleman 84 - Director
Alan H. Freudenstein 38 - Director
W. Steve Albrecht 56 - Director
Scott R. Watterson. Mr. Watterson has served as Chairman of the Board of
Directors and CEO since 1988. Prior to 1988, Mr. Watterson co-founded Weslo,
Inc., a predecessor entity of the Company, in 1977. In addition, Mr. Watterson
is a director of the Utah State University Foundation. He is also on the Board
of Trustees for the Utah Foundation and the Make-A-Wish Foundation of Utah. Mr.
Watterson graduated from Utah State University College of Business, Cum Laude,
in 1979 with a B.S. in Business Marketing and a minor in Chinese.
Gary E. Stevenson. Mr. Stevenson has served as President, COO and as one
of the Company's directors since 1988. Prior to 1988, Mr. Stevenson co-founded
Weslo, Inc., the predecessor entity of the Company, in 1977. Mr. Stevenson's
current and past affiliations include: Utah State University President's
National Advisory Council, Utah State University College of Business and
Engineering Advisory Board, Marriott School, Brigham Young University National
Advisory Council, among others. Mr. Stevenson graduated from Utah State
University College of Business in 1979 with a B.S. in Business Administration
and a minor in Japanese.
S. Fred Beck. Mr. Beck has served as the Company's CFO and Accounting
Officer, VP and Treasurer since 1989. Mr. Beck is a CPA and a member of the
AICPA (national chapter of CPAs) and the UACPA (the Utah chapter of CPAs). Mr.
Beck is also a member of the Board of Directors of Regence BlueCross BlueShield
of Utah and a member of The Regence Group Board of Directors. Mr. Beck graduated
from Utah State University with a B.S. in Accounting.
David J. Watterson. Mr. Watterson was recently named President of North
America. Prior to his role as President of North America, Mr. Watterson served
as SVP of Marketing and Research and Development since November 1992. Prior to
1992, Mr. Watterson served as ICON's Sales Manager and VP of Sales since joining
the Company in 1980. Mr. Watterson is Scott R. Watterson's brother. Mr.
Watterson graduated from Utah State University with a B.S. in Marketing.
Jon M. White. Mr. White has served as SVP and VP of Manufacturing since
1988. Mr. White is responsible for all domestic manufacturing operations in the
Logan, Clearfield and Smithfield plants in Utah and product distribution at the
Clearfield distribution center. Prior to 1988, Mr. White served as Plant Manager
of Weathershield Manufacturing Inc.'s, Nibley, Utah plant and production control
manager for the Wurlitzer Co.'s, Logan, Utah, manufacturing plant.
William T. Dalebout. Mr. Dalebout has served as VP of Design since 1987.
Prior to working for ICON, Mr. Dalebout was President and founder of Ziba Design
Inc., an industrial design consultancy. Prior to founding and managing Ziba
Design Inc., Mr. Dalebout worked for Hewlett-Packard, Tektronix Inc. and Smith
Corona Marchant. Mr. Dalebout graduated with a B.A. in Industrial Design from
Brigham Young University.
M. Joseph Brough. Mr. Brough joined the Company in 1989 and has served as
VP of Operations and Information Technology since 1995. Prior to working for
ICON, Mr. Brough worked for Andersen Consulting. Mr. Brough graduated with a
M.B.A from the University of Utah in 1987 where he was ranked number one in his
graduating class.
Matthew N. Allen. Mr. Allen joined the Company in 1984 and has served as VP
of Product Development since 1999. He served as VP of Sales from 1996-1999.
Between 1984 and 1996, Mr. Allen served in various roles in sales, quality
control and production. Mr. Allen graduated with B.S. in Business Marketing
from Utah State University.
Douglas L. Clausen. Mr. Clausen has served as VP of Purchasing since
joining the Company in 1992. Prior to working for ICON, Mr. Clausen worked for
the Jacobsen Division of Textron as a Purchasing Manager/Materials Manager from
1987 to 1992. Prior to working for Textron, Mr. Clausen worked for Lunar
Radiation, Spring Mills and the U.S. Air Force. Mr. Clausen has a M.B.A. from
Capital University in Columbus, Ohio and has a Bachelor's degree in Business
Administration from the University of Wisconsin-Madison.
Brad A. Bearnson. Mr. Bearnson joined the Company in 1995 and presently
serves as General Counsel and Secretary. Mr. Bearnson is a CPA and was admitted
to the Utah State Bar in 1982. Mr. Bearnson has also served as a Member of the
Legislative Affairs Committee of the Utah State Bar from 1997-2000. Mr.
Bearnson graduated with a B.S. from Utah State University and then earned his
Juris Doctorate degree from the University of Utah.
Wallace J. Smith. Mr. Smith joined the Company in 1989 and has served as
VP in the Business Development Division. Prior to this, Mr. Smith was the Chief
Operating Officer of IMAGE, Inc., which was a wholly owned business of ICON
Health and Fitness, Inc. IMAGE supplied fitness products primarily to specialty
fitness dealers. Prior to managing IMAGE, Inc., Mr. Smith was responsible for
the planning, development and construction of ICON's main office and
manufacturing facility in Logan, Utah. Mr. Smith is Scott R. Watterson's
brother-in-law. Mr. Smith earned a B.S. degree in Psychology and Chemistry at
the University of Utah. He then completed his M.B.A. degree at the same
university.
Jeff Carmignani. Mr. Carmignani joined the Company in 1983 and has served
as VP of Imports, Transportation and New Business Development from 1987 to
present. Prior to joining ICON, Mr. Carmignani served as VP of Operations of
Exectech Inc.
Giovanni Lato. Mr. Lato has served as the President of ICON Europe since
1999. Mr. Lato joined Weider, Inc. in 1993. Previously, Mr. Lato served as VP
of Sales for Gianni Versace SpA since 1989. Mr. Lato graduated in 1981 with a
B.S. in Business Administration from Luiss University in Rome, Italy.
Richard Hebert. Mr. Hebert has served as President of ICON Canada since
1994. Mr. Hebert founded his first manufacturing company in 1967 named
Athletimonde, Inc. In 1980, Mr. Hebert established his second manufacturing
company named Rickbend Industries, Inc. In 1990, Mr. Hebert began a third
company called Fitquip, Inc. These three companies were consolidated into one
entity in an acquisition by ICON Health & Fitness Inc. in 1994.
Colleen Logan. Ms. Logan has served as Director of Marketing since 1996.
Prior to working for ICON, Ms. Logan was VP, Management Supervisor at Oglivy &
Mather in Chicago, working in their Public Relations, Advertising, and Direct
Response divisions. During her nearly 10 years at Ogilvy, she created marketing
plans for such diverse clients as Sears, Roebuck and Co., Equal sweetener, and
various brands of Kraft General Foods. Her prior experience also includes
William Cook Advertising in Jacksonville, Florida as part of the team that
launched the Mayo Clinic Florida. Ms. Logan holds a B.S. in Journalism from the
University of Florida with a minor in Microbiology & Cell Science.
David Packham. Mr. Packham has served as the head of the retail group
since 1996. Prior to working for ICON, Mr. Packham spent three years in
strategic marketing at the Walt Disney Company and three years at General Mills
in national brand management. Mr. Packham has also served on the Fitness
Institute Board since 1999. Mr. Packham earned his Masters of Management from
Kellogg Business School in 1990 with majors in Marketing, Finance and
International Business.
Jace Jergensen. Mr. Jergensen has served as the VP and General Manager of
ICON's JumpKing operation since 1999. From 1994 to 1999, Mr. Jergensen served
as the Director of New Product Development for ICON. Prior to joining ICON, Mr.
Jergensen held various positions with Black & Decker, First Interstate Bank and
Ernst & Whinney. Mr. Jergensen earned an M.B.A. in 1989 and B.S. in Accounting
in 1987 from Brigham Young University.
Lynn C. Brenchley. Mr. Brenchley joined the Company in 1989 and has served
as VP of Business Development since 1992. Mr. Brenchley has been involved with
Mergers and Acquisitions since joining the Company. Prior to working for ICON,
Mr. Brenchley worked for a regional meat processing company where he was Chief
Financial Officer for nine years and President and Chief Executive Officer for 8
years. Mr. Brenchley served as an officer in the Army Reserves for 12 years.
Mr. Brenchley graduated from Utah State University with a B.S. degree in
Accounting and minor in Business Administration.
Robert C. Gay. Mr. Gay became Vice Chairman of our Board of Directors in
November 1994. Mr. Gay has been a Managing Director of Bain Capital, a private
investment firm, since April 1993 and has been a General Partner of Bain Venture
Capital, the venture capital arm of Bain Capital, which focuses on first
and second institutional round investing in software, technology-driven business
services, hardware and information companies, since February 1989. In addition,
Mr. Gay serves as a director of Nutraceutical, GS Technologies Corporation,
Anthony Crane and Alliance Laundry and Buhrmann.
Ronald P. Mika. Mr. Mika became one of our directors in November 1994. Mr.
Mika is a principal at Sorenson Capital Partners. Prior to joining Sorenson
Capital, Mr. Mika was a managing director at Bain Capital. In addition, Mr. Mika
serves as a director of Professional Services Industries.
Gregory Benson. Mr. Benson became one of our directors in September 1999.
Mr. Benson has been an executive vice president of Bain Capital since 1996.
Prior to joining Bain Capital, Mr. Benson was an executive vice president of
American Pad and Paper Company.
Stanley C. Tuttleman. Mr. Tuttleman became one of our directors in
September 1999. Mr. Tuttleman has been the Chief Executive Officer and President
of Tuttson Capital Corp., a financial services corporation, since 1983. Mr.
Tuttleman also serves as the Chief Executive Officer of Telepartners
International, a wireless program company. In addition, Mr. Tuttleman is a
director of Mothers Work, Inc., and a trustee of the Franklin Institute, the
Philadelphia Orchestra, the Philadelphia Museum of Art, Graduate Hospital,
Gratz College and the Harrison Foundation.
Alan H. Freudenstein. Mr. Freudenstein became one of our directors in
November 2002. Mr. Freudenstein is a Managing Director in the Private Equity
Group of Credit Suisse First Boston, LLC. He is also a Vice President of Credit
Suisse First Boston Management Corporation and Special Situations Holdings, Inc.
- - Westbridge. From 1992 through July 2000, Mr. Freudenstein was a Managing
Director at Bankers Trust Company, where he was responsible for incubation and
venture investments within the New World Ventures Group. Mr. Freudenstein is
also on the board of directors of Ascent Assurance, Inc. (OTCBB:AASR).
Dr. W. Steve Albrecht. Dr. Albrecht became one of our directors in November
2002. Dr. Albrecht serves as the Associate Dean of the Marriott School of
Management and Arthur Andersen Professor at Brigham Young University. Prior to
becoming Associate Dean, Dr. Albrecht served as director of the School of
Accountancy and Information Systems at Brigham Young University for eight years.
Dr. Albrecht is a certified public accountant, a certified internal auditor and
a certified fraud examiner. Dr. Albrecht is also on the board of directors of
Cypress Semiconductor Corp. (NYSE:CY), SkyWest, Inc. (NASDAQ:SKYW) and Red Hat,
Inc. (NASDAQ:RHAT).
Board Committees
Compensation Committee
We maintained a compensation committee during fiscal 2003. The Compensation
Committee consists of the following non-employee directors: Messrs. Gay, Benson
and Tuttleman. The Compensation Committee of the Board of Directors, composed
of Messrs. Gay, Benson and Tuttleman, has the authority to administer the
executive compensation for Scott R. Watterson, our Chief Executive Officer.
Messrs. Watterson and Stevenson participated in the deliberations concerning the
compensation of other officers other than their own, and Mr. Beck participated
in the deliberations concerning the compensation of officers other than himself
and Messrs. Watterson and Stevenson.
Audit Committee
The Audit Committee includes Messrs. Albrecht, Tuttleman, and Mika. This
committee reviews the professional services provided by the Company's
independent auditors and the independence of such firm from the management of
the Company. This committee also reviews the scope of the audit by the Company's
independent auditors, the annual and interim financial statements of the
Company, the Company's systems of internal accounting controls, and such other
matters with respect to the accounting, auditing, and financial reporting
practice and procedures of the Company as it may find appropriate.
Item 11. Executive Compensation
The following table sets forth information concerning the compensation for
fiscal 2003, 2002, and 2001 for Mr. Scott Watterson and our other four most
highly compensated executive officers (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Other Long-term All
------------------- Annual Compensation Other
Fiscal Salary Bonus Compensation Options Compensation
Name and Position Year ($) ($) ($) (#)(2) ($)(3)
- -----------------------------------------------------------------------------------------
Scott R. Watterson 2003 677,250 1,879,640 102,473(1)(5) - 71,539(4)
Chairman of the Board 2002 604,813 995,000 103,679(1)(5) - 580,527(4)
and Chief Executive 2001 551,250 448,905 116,808(1)(5) - 42,000(4)
Officer
Gary E. Stevenson 2003 624,000 1,656,320 71,967(1)(5) - 68,534(4)
President and Chief 2002 524,000 875,600 62,213(1)(5) - 368,969(4)
Operating Officer 2001 498,750 398,149 62,900(1)(5) - 42,000(4)
S. Fred Beck 2003 270,000 334,390 10,815(1) - 9,433
Chief Financial and 2002 249,000 165,910 - - 188,500
Accounting Officer 2001 235,000 145,059 - - 9,230
Vice President and
Treasurer
David J. Watterson 2003 323,000 340,390 25,302(1) - 10,972
President, 2002 300,000 520,910 - - 85,165
North America 2001 284,400 155,559 - - 8,500
Operations
Richard Hebert 2003 294,914 157,549 10,165(1) - -
General Manager, 2002 262,000 145,850 8,700(1) - -
ICON Du Canada, Inc. 2001 296,974 155,000 10,496(1) - -
(1) Includes the annual cost of providing the named person with the use of an
automobile during the year.
(2) Options to purchase shares of HF Holdings' common stock.
(3) Includes amounts contributed by the Company for the benefit of the Named
Executive Officers under the Company's 401 (K) Plan and the Company's
deferred compensation plan.
(4) Includes a management fee of $33,500 paid by the company.
(5) Includes amounts for personal use of the Company jet.
The following table sets forth information as of May 31, 2003, concerning
options of HF Holdings, Inc. exercised by each of the named executive officers
in 2003 and year-end option values:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Value of
Unexercised In-the-
Number of Unexercised Money Options at
Name Options at May 31, 2003($)(1)
Shares Acquired Value May 31, 2003(#) Exercisable/
On Exercise(#) Realized($) Exercisable/Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------
Name Common Stock Common Stock Common Stock Common Stock
Scott Watterson - - -/- -/-
Gary Stevenson - - -/- -/-
S. Fred Beck - - 49,995/49,995 -/-
David J. Watterson - - 59,979/59,979 -/-
Richard Hebert - - -/- -/-
- -----------
(1) As of May 31, 2003, there was no market for the common stock of HF Holdings,
Inc.; no value has been attributed to the equity underlying these options.
There have been no arm's length sales of HF Holding's common stock since the
closing of the recapitalization in September of 1999.
1999 Junior Management Stock Option Plan
In September 1999, HF Holdings adopted its 1999 Junior Management Stock
Option Plan (the "1999 Stock Option Plan") which provides for the grant of
nonstatutory options to eligible employees. A total of 333,300 shares of common
stock of HF Holdings were reserved and issued under the 1999 Stock Option Plan,
which is administered by the Board of Directors or a committee thereof.
Committee Interlocks and Insider Participation
We maintained a compensation committee during fiscal 2003. The Compensation
Committee consists of the following non-employee directors: Messrs. Gay, Benson
and Tuttleman.
Report of the Compensation Committee
The Compensation Committee of the Board of Directors, composed of Messrs.
Gay, Benson and Tuttleman, has the authority to administer the executive
compensation for Scott R. Watterson, our Chief Executive Officer. Messrs.
Watterson and Stevenson participated in the deliberations concerning the
compensation of other officers other than their own, and Mr. Beck participated
in the deliberations concerning the compensation of officers other than himself
and Messrs. Watterson and Stevenson.
Compensation of Directors
Our directors do not receive any compensation for serving on the Board of
Directors except for Mr. Tuttleman and Mr. Albrecht. Mr. Tuttleman is paid
$35,000 annually for his services as a director. Mr. Albrecht is paid $40,000
annually plus $1,000 for each meeting attended for his services as a director.
Directors are reimbursed for their out-of-pocket expenses incurred in connection
with their service as directors. We also maintain liability insurance policies
for our directors.
Performance Bonus
In fiscal 2003 and 2002, the Board of Directors approved the establishment
of a bonus pool of $1.0 million and $1.5 million, respectively. The Board gave
discretion to Gary Stevenson and Scott Watterson to determine eligible employees
and the amounts payable to each employee. These bonuses were paid in August of
each year and accrued in our May 31, 2003 and May 31, 2002 financial statements.
Employment Agreements
In May of 2003, we renegotiated the September 27, 1999 employment
agreements ("second amendment") with each of Mr. Watterson and Mr. Stevenson.
The second amendment extends these agreements to September 27, 2005. The
employment agreements provide for the continued employment of Mr. Watterson as
Chairman and Chief Executive Officer with an increase in base salary from
$525,000 to $625,000, and Mr. Stevenson as President and Chief Operating Officer
with an increase in base salary from $475,000 to $575,000. Except as set forth
below, in all other material respects the agreements are substantially identical
to the September 1999 agreement.
The second amendment provides for a one-time retention bonus for each of
Mr. Watterson and Mr. Stevenson of $300,000. Each executive is also entitled to
participate in a bonus program providing for a bonus equal to a percentage of
our consolidated EBITDA (as defined in our credit facility) and our subsidiaries
(our "EBITDA") which percentage shall equal 1.50% for Mr. Watterson and 1.32%
for Mr. Stevenson. The executives will not be entitled to a bonus, however,
unless our Profits exceed 5.5% of net sales.
We may terminate each executive's employment (1) for cause as provided in
each agreement, (2) upon six months' disability, or (3) without cause. Each
executive may similarly terminate his employment immediately for cause as
provided in his employment agreement, upon three months notice to perform
full-time church service or for any reason upon six months' notice. In the event
we terminate either executive's employment for cause, or such employment
terminates as a result of the death of the executive, as the case may be, the
executive will not be entitled to further salary, benefits or bonus. If we
terminate the executive's employment without cause, or the executive terminates
his employment with or without cause, we will be obligated to pay the executive
his salary and bonus for a period of three years from the date of termination.
If we terminate the executive's employment upon the executive's disability, we
are obligated to pay as severance an amount equal to one month's base salary
then in effect for each calendar year or part thereof elapsed since January 1,
1988, provided that such severance pay is reduced by payments under applicable
disability insurance.
The employment agreements prohibit the executives from engaging in outside
business activity during the term, subject to exceptions. The employment
agreements provide for customary confidentiality obligations and, in addition, a
non-competition obligation for a period of four years following termination (two
years if the executive quits with cause or without cause or is terminated
without cause, except that we may, at our option, extend such period for up to
two additional years by paying the executive his salary and bonus during the
extended period).
Under the employment agreements, the executives (and their affiliates)
shall be entitled to indemnification to the fullest extent allowed by Delaware
law with respect to all losses, costs, expenses and other damages in connection
with any lawsuits or other claims brought against them in their capacity as
officers or directors or shareholders (or affiliates thereof) of HF Holdings or
any of its past or present parent or subsidiary or other affiliated companies.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
HF Holdings owns all of our outstanding common stock. The following table
and related notes set forth information with respect to the beneficial ownership
of HF Holdings' 7,771,613 outstanding shares of common stock as of May 31, 2003
by (i) each person known to HF Holdings to beneficially own more than 5.0% of
the outstanding shares of common stock of HF Holdings, and (ii) each director
and executive officer of HF Holdings individually and (iii) all directors and
executive officers of HF Holdings as a group.
Common Stock
Beneficially Owned(1)
----------------------------
Percent of
Number of Outstanding
Names Shares Shares
- ----- --------- -----------
Scott R. Watterson*(2) 376,000 4.86%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Gary E. Stevenson*(3) 292,700 3.78%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
The Bain Funds(4) 5,161,035 66.69%
c/o Bain Capital, Inc.
111 Huntington Avenue
Boston, Massachusetts 02199
Common Stock
Beneficially Owned(1)
----------------------------
Percent of
Number of Outstanding
Names Shares Shares
- ----- --------- -----------
Robert C. Gay*(5) 5,161,035 66.69%
c/o Bain Capital, Inc.
111 Huntington Avenue
Boston, Massachusetts 02199
Ronald P. Mika*(5) 5,161,035 66.69%
c/o Sorenson Capital Partners
10150 South Centennial Parkway
Suite 450
Sandy, UT 84070
Gregory Benson*(5) 5,161,035 66.69%
c/o Bain Capital, Inc.
Devonshire House
Mayfair Place
London WIJ 8AJ
Credit Suisse First Boston Corporation(6) 1,312,934 16.96%
c/o Credit Suisse First Boston
Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Alan H. Freudenstein*(7) 1,312,934 16.96%
c/o Credit Suisse First Boston Corp.
Eleven Madison Avenue
New York, New York 10010-3629
HF Investment Holdings, LLC 5,160,035 66.69%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Stanley C. Tuttleman* 172,002 1.72%
Tuttson's Inc.
349 Montgomery Avenue
P.O. Box 22405
Bala Cynwyd, Pennsylvania 19004
David Watterson(8) 18,173 -
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
S. Fred Beck(8) 15,149 -
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
All directors and executive officers
as a group (9 persons) 7,692,264 98.55%
- ----------
* - Director of HF Holdings
(1) Except as otherwise indicated, (a) each owner has sole voting and
investment power with respect to the shares set forth and (b) the figures in
this table are calculated in accordance with Rule 13d-3, under the Exchange Act
of 1934, as amended. The table includes the HF Holdings Warrants (which have an
exercise price, subject to adjustment, of $.01 per share) which are presently
exercisable. The shares reported in this table as owned by a stockholder do not
include the shares over which such stockholder has the right to direct the vote
pursuant to the Stockholders Agreement.
(2) Includes 1,000 shares of common stock owned by HF Investment Holdings, of
which Mr. Watterson is deemed the beneficial owner by virtue of being a
director. Mr. Watterson disclaims beneficial ownership of any such shares in
which he does not have a pecuniary interest.
(3) Includes 1,000 shares of common stock owned by HF Investment Holdings, of
which Mr. Stevenson is deemed the beneficial owner by virtue of being a
director. Mr. Stevenson disclaims beneficial ownership of any such shares in
which he does not have a pecuniary interest.
(4) Includes 5,160,035 shares of common stock beneficially owned by HF
Investment Holdings, of which the Bain Funds may be deemed the beneficial owners
by virtue of their control of HF Investment Holdings pursuant to its operating
agreement. Also includes 1,000 shares of common stock owned by HF Investment
Holdings, of which the Bain Funds may be deemed the beneficial owners by virtue
of the fact that one or more of their general partners or principals, or one or
more general partners or principals of one of their general partners, is a
director of HF Investment Holdings. The Bain Funds disclaim beneficial ownership
of any shares in which they do not have a pecuniary interest.
(5) Includes the shares beneficially owned by each of the Bain Funds, of which
each of Mr. Gay, Mr. Mika and Mr. Benson may be deemed the beneficial owner by
virtue of being a general partner or principal, or a general partner or a
principal of the general partner, of such Bain Fund. Also includes 1,000 shares
owned by HF Investment Holdings, of which each of Mr. Gay, Mr. Mika or Mr.
Benson may be deemed the beneficial owner by virtue of each being a director.
Each of Mr. Gay, Mr. Mika and Mr. Benson disclaims the beneficial ownership of
any such shares in which he does not have a pecuniary interest.
(6) Includes 669,179 shares of common stock subject to purchase upon exercise of
warrants that are presently exercisable.
(7) Includes 1,312,934 shares beneficially owned by Credit Suisse First Boston
Corporation, of which Mr. Freudenstein may be deemed the beneficial owner by
virtue of being an officer of Credit Suisse First Boston Corporation. Mr.
Freudenstein disclaims beneficial ownership of any such shares in which he does
not have a pecuniary interest.
(8) Represents shares of common stock issuable upon exercise of the vested
portion of options awarded pursuant to the 1999 HF Holdings Junior Management
Stock Option Plan.
Item 13. Certain Relationships and Related Party Transactions
Management Equity Grant. On September 27, 1999, HF Holdings issued to Scott
Watterson and Gary Stevenson, without cost, an aggregate of 666,700 shares of
the common stock of HF Holdings (or approximately 6.7% of its common stock
outstanding on a fully diluted basis upon the consummation of the September
recapitalization). Mr. Watterson received 375,000 of these shares, while Mr.
Stevenson received 291,700 shares.
Stockholders Agreement. On September 27, 1999, we entered into a
stockholders agreement (the "Stockholders Agreement") with HF Holdings, HF
Investment Holdings, Bain, Credit Suisse First Boston Corporation ("CFSB") and
Scott Watterson and Gary Stevenson.
Under the Stockholders Agreement, holders of HF Holdings' common stock, who
received such common stock in the exchange offer, are subject to transfer
restrictions with respect to their common stock. In addition, these holders
received customary tag along and drag along rights with respect to sales of
common stock of HF Holdings (including sales by any Bain Holder) and pre-emptive
rights with respect to any issuances of common stock by HF Holdings to HF
Investment Holdings. The tag along, drag along and registration rights of our
management are subject to the condition that our senior management own at least
25% of the common stock held by all management holders and the junior management
own at least 15% of the common stock of HF Holdings held by all management
holders, provided such person is still employed by us or has been employed
within the 12 preceding months and the purchaser of the common stock is a
financial buyer.
Holders of warrants to purchase common stock of HF Holdings issued in the
exchange offer received registration rights with respect to the common stock
issuable upon exercise of such warrants.
Pursuant to the Stockholders Agreement, HF Investment Holdings granted to
CSFB an option to purchase a certain percentage (based on the date of exercise
of such option) of the common stock of HF Holdings held by HF Investment
Holdings. HF Investment Holdings also granted to members of our junior
management an option to purchase 216,700 shares of common stock of HF Holdings
held by HF Investment Holdings. Each of these options is exercisable only upon
the occurrence of a Liquidity Event (as defined in the Stockholders Agreement).
In addition, HF Investment Holdings is entitled to appoint seven directors
and CSFB is entitled to appoint two directors to our Board of Directors. Upon a
liquidation of HF Investment Holdings, Bain will be entitled to appoint five
directors and Scott Watterson and Gary Stevenson shall have the right to be
directors, provided they remain employed by us.
Management Agreements. On September 27, 1999, our Company and HF Holdings
also entered into a new management agreement with Bain which provides an annual
management fee not to exceed $366,500 in exchange for management consulting
services including providing advice on strategic planning, development and
acquisitions. In addition, if we enter into any acquisition transactions
involving a gross purchase price of at least $10.0 million, Bain will receive a
fee in an amount which will approximate 1% of the gross purchase price of the
transaction (including assumed debt). In the event of a Liquidity Event (as
defined in the Stockholders Agreement), Bain will also receive a fee in an
amount which will approximate 1% of the gross purchase price of the transaction.
Additionally, HF Holdings entered into a management arrangement with CSFB
which provides for an annual management fee of $366,500 in exchange for
consulting services. In addition, if we enter into transactions which will
constitute a Liquidity Event (as defined in the Stockholders Agreement), CSFB
will receive a fee in an amount which will approximate 50% of the fee payable
under the management agreement with Bain in connection with such transaction.
On September 27, 1999, our Company and HF Holdings also entered into
management agreements with each of Mr. Watterson and Mr. Stevenson which
provide, so long as Bain is receiving a management fee under its management
agreement, an annual management fee of $67,000 in the aggregate shall be paid to
Mr. Watterson and Mr. Stevenson.
The respective management agreements include full indemnification and
expense reimbursement provisions in favor of Bain, CSFB, Mr. Watterson and Mr.
Stevenson, respectively.
Loans to Senior Management
On September 27, 1999 we made non-recourse loans to Scott Watterson and
Gary Stevenson in the principal amounts of $1,209,340 and $990,660 respectively.
The loans were made in connection with stock grants made to Messrs. Watterson
and Stevenson at the time of our September 1999 recapitalization. The notes bear
interest only to the extent that we have taxable net income less than zero in
any given fiscal year. The notes are secured by shares of ICON and shares of HF
Investment Holdings LCC held by Messrs. Watterson and Stevenson. The notes have
a maturity of 10 years and may be accelerated upon specified events of default
and liquidity events.
Aircraft Lease
In June 1996, we entered into an agreement with FG Aviation, Inc. ("FG"), a
company which is jointly owned by our officers, whereby we committed to lease an
airplane from FG. Minimum rentals under the lease, which expires in May 2005,
are $56,610 per month.
In February 2002, we entered into a new agreement with FG whereby we
terminated the original airplane lease and committed to lease a new airplane
from FG. Minimum lease rentals under the lease, which expires February 2009, are
$120,000 per month. We are responsible for scheduled maintenance and fuel costs;
however, these costs reduce the monthly rental. In addition, we are responsible
for payment of the aircraft crew and any unscheduled maintenance of the
aircraft. In connection with its airplane lease commitments, we recorded
$809,000, $695,000 and $903,000 of rental expense for the fiscal years ended May
31, 2003, 2002 and 2001, respectively. In addition, in February 2002, we
advanced $280,000 to FG as a security deposit on the aircraft lease.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our 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 May 31, 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 our
Company (including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.
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 IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
The following documents are filed as part of this report:
Consolidated Financial Statements (See Item 8)
Consolidated Balance Sheets at May 31, 2003 and 2002
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended May 31, 2003, 2002, and 2001
Consolidated Statement of Stockholder's Equity (Deficit) for the Years
Ended May 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended May 31, 2003,
2002 and 2001
Notes to Consolidated Financial Statements
Financial Statement Schedule (See Item 8)
Schedule II - Valuation and Qualifying Accounts for the three Years Ended
May 31, 2003
All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related notes, or can
be derived from information contained in the consolidated financial statements
and related notes.
Exhibits
The following designated exhibits have heretofore been filed with the
Securities and Exchange Commission under the Securities Act of 1933 and are
referred to and incorporated herein by reference to the correspondingly numbered
exhibit filed as part of the Registrants' Registration Statement on Form S-1 of
IHF Capital, as amended (No. 33- 87930/87930-1) and on Form S-4 of ICON Fitness,
as amended (No. 333-18475).
1.1 Purchase Agreement dated November 15, 1996 regarding the issuance and
sale of the Senior Discount Notes between ICON Fitness and Donaldson,
Lufkin & Jenrette Securities Corporation.
3.1 Certificate of Incorporation.
3.1A Amendment to Certificate of Incorporation.
3.2 By-laws.
4.2 Indenture dated as of November 20, 1996 between ICON Fitness as Issuer,
and Fleet National Bank as Trustee, with respect to the $162,000,000 in
aggregate principal amount at maturity of Senior Discount Notes due
2006, including the form of the Senior Discount Note.
4.2A Supplemental Indenture dated as of March 20, 1995 between IHF Holdings,
as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $123,700,000 in aggregate principal amount at maturity of
Discount Notes due 2004.
4.3 Registration Rights Agreement dated as of November 20, 1996 by and
between ICON Fitness and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.4 Registration rights Agreement dated November 14, 1994 between ICON
Health and Weider Health and Fitness with respect to the Senior
Subordinated Notes due 2004.
10.1 Amended and Restated Credit Agreement dated as of November 14, 1994
among ICON Health, the lenders named therein, and General Electric
Capital Corporation.
10.1A Agreement of IHF Holdings, Inc. and IHF Capital, dated November 14, 1994
in favor of General Electric Capital Corporation, as agent.
10.1B Amended and Restated Credit Agreement dated as of July 15, 1998 among
ICON Health & Fitness, Inc., the lenders named therein, and General
Electric Capital Corporation.
10.1C Amended and Restated Credit Agreement dated as of April 15, 1999 among
ICON Health & Fitness, Inc., the lenders named therein, and General
Electric Capital Corporation.
10.1D Amended and Restated Credit Agreement dated as of April 16, 1999 among
ICON Health & Fitness, Inc., the lenders named therein, and General
Electric Capital Corporation.
10.2 First Amended and Restated Master Transaction Agreement dated as of
October 12, 1994 among ICON Health and each of Weider Health and Fitness
and Weider Sporting Goods, Inc. and each of Hornchurch Investments
Limited, Bayonne Settlement, The Joe Weider Foundation, Ronald Corey,
Jon White, William Dalebout, David Watterson, S. Fred Beck, Gary
Stevenson and Scott Watterson.
10.3 Adjustment Agreement dated as of November 14, 1994 between Weider Health
and Fitness and Health & Fitness.
10.4 Stockholder Agreement dated as of November 14, 1994 by and among ICON
Health, IHF Holdings each of the Bain Funds named therein and certain
other persons named therein.
10.4A Registration Rights Agreement dated November 14, 1994 among ICON Health
and IHF Holdings and Donaldson, Lufkin & Jenrette Securities Corporation
and Bear, Stearns & Co.
10.5 Non-Competition Agreement dated as of November 14, 1994 among ICON
Health, Weider Health and Fitness, Gary E. Stevenson and Scott R.
Watterson.
10.6 Management and Advisory Agreement dated as of November 14, 1994 among
ICON Health, IHF Holdings, the Company, and Bain Capital Partners IV,
L.P.
10.7 Distribution Agreement dated as of September 26, 1994, as amended by
letter of Ben Weider dated October 12,1994 between ICON Health and
Weider Sports Equipment Co., Ltd.
10.8 Exclusive License Agreement dated as of November 14, 1994 among
Weider Health and Fitness, Weider Sporting Goods, Inc., Weider
Europe B.V., and Health & Fitness.
10.9 Canada Exclusive License Agreement dated as of November 14,
1994 between Weider Sports Equipment Co., Ltd. and Health &
Fitness.
10.10 Employment Agreement dated as of November 14, 1994 among the
Company, ICON Health, IHF Holdings and Gary E. Stevenson.
10.10B Second Amendment to Employment Agreement dated as of May 17, 2003 among
the Company, ICON Health, and HF Holdings and Gary E. Stevenson.
10.11 Employment Agreement dated as of November 14, 1994 among the
Company, ICON Health, IHF Holdings and Scott R. Watterson.
10.11B Second Amendment to Employment Agreement dated as of May 17, 2003 among
the Company, ICON Health, and HF Holdings and Scott R. Watterson.
10.12 Asset Option Agreement dated as of November 14, 1994 among
Health & Fitness, Weider Sporting Goods, Inc. and Weider Europe
B.V., including ICON Health's assignment of its rights
thereunder.
10.13 Asset Option Agreement dated as of November 14, 1994 between
ICON Health and each of Athletimonde Inc., Les Industries
Rickbend Inc. and Fitquip International Inc., including ICON
Health's assignment of its rights thereunder.
10.14 CanCo Management and Advisory Agreement dated as of November
14, by and among ICON Health, Scott Watterson, Gary E.
Stevenson and Les Industries Rickbend Inc., Althletimonde Inc.,
and Fitquip International Inc., including Health & Fitness'
assignment of rights thereunder.
10.15 Weider Europe Management Agreement dated as of November 14, 1994 among
ICON Health and Weider Europe B.V., including Health & Fitness'
assignment of its rights thereunder.
10.16 Amended and Restated WSG Management Agreement dated as of June 1, 1994
among ICON Health, Weider Health and Fitness and Weider Sporting Goods,
Inc.
10.17 Advertising Space Contract dated as of November 14, 1994 between ICON
Health and Weider Publications, Inc.
10.18 Trade Payables Agreement dated as of November 14, 1994 between ICON
Health and IHF Holdings.
10.19 Tax Agreement dated as of November 14, 1994 among the Company
and its subsidiaries.
10.20 The Company's Stock Subscription and Exchange Agreement dated as of
November 14, 1994 among the Company and each of the Existing
Stockholders named therein.
10.21 Warrant Agreement dated as of November 14, 1994 among IHF Capital,
Weider Health and Fitness, Scott Watterson and Gary Stevenson.
10.22 Bain Stock Subscription Agreement dated as of November 14, 1994
among the Company and each of the Bain Funds and other
subscribers named therein.
10.23 IHF Capital's Stock Subscription and Purchase Agreement dated as of
November 14, 1994 among IHF Capital and the Subscribers named therein.
10.24 IHF Holdings Stock Subscription and Exchange Agreement dated as of
November 14, 1994 among IHF Holdings and each of the persons named
therein.
10.25 IHF Capital's Option Exchange Agreement dated as of November 14, 1994,
among the Company, Scott Watterson and Gary Stevenson.
10.26 IHF Holdings Option Exchange Agreement dated as of November 14, 1994,
among IHF Holdings, Scott Watterson and Gary Stevenson.
10.27 IHF Capital's Employee Stock Option Plan dated as of November 14, 1994.
10.27.1 Form of Option Certificate for Management Options.
10.27.2 Form of Option Certificate for Performance Options.
10.28 Agreement and Plan of Merger dated as of November 14, 1994
among ICON Health, American Physical Therapy, Inc., Weslo, Inc.
and ProForm Fitness Products, Inc.
10.29 Promissory Note dated December 30, 1993 and a loan made by
David Watterson in favor of ProForm Fitness Products, Inc. in
the amount of $60,000.
10.30 Promissory Note dated December 30, 1993 and a loan, made by
William Dalebout in favor of ProForm Fitness Products, Inc. in
the amount of $57,000.
10.31 Promissory Note dated December 30, 1993 and a loan, made by
Fred Beck in favor of ProForm Fitness Products, Inc. in the
amount of $60,000.
10.32 Promissory Note dated December 30, 1993 and a loan, made by Jon
White in favor of ProForm Fitness Products, Inc. in the amount
of $57,000.
10.33 Sublease dated as of June 1, 1994 between Weider Health and Fitness and
ProForm Fitness Products, Inc.
10.34 Indenture dated as of November 14, 1994 between ICON Health, as Issuer,
and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the
$101,250,000 in aggregate principal amount of Senior Subordinated Notes
due 2002, including the form of Senior Subordinated Note.
10.34A Supplemental Indenture dated as of March 20, 1995 between ICON Health,
as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $101,250,000 in aggregate principal amount of Senior
Subordinated Notes due 2002.
10.35 Indenture dated as of November 14, 1994 between IHF Holdings, as Issuer,
and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the
$123,700,000 in aggregate principal amount at maturity of Discount Notes
due 2004, including the form of Discount Note.
10.35A Supplemental Indenture dated as of March 20, 1995 between IHF Holdings,
as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $123,700,000 in aggregate principal amount at maturity of
Discount Notes due 2004.
10.36 Registration Rights Agreement dated November 14, 1994 between ICON
Health and Weider Health and Fitness with respect to the Senior
Subordinated Notes due 2002.
10.37 Asset Purchase Agreement dated as of July 3, 1996 by and among
IHF Capital, Inc. HealthRider Acquisition Corp. and
HealthRider, Inc.
10.38 Asset Purchase Agreement for the purchase of certain assets of
Parkway Manufacturing, Inc. dated July 3, 1996.
10.39 Buy-Out Agreement between HealthRider Acquisition Corp. and
Parkway Manufacturing, Inc. dated August 26, 1996.
10.40 IHF Capital's 1996 Stock Option Plan.
10.41 WSE Asset Purchase Agreement dated September 6, 1996 between
Weider Sports Equipment Co. Ltd. and ICON Health.
10.42 CanCo Asset Purchase Agreement, dated September 6, 1996 among
ICON of Canada Inc., ICON Health, ALLFITNESS, Inc., Scott
Watterson and Gary Stevenson.
10.43 Stock and Warrants Purchase Agreement, dated September 6, 1996 among IHF
Capital, Inc., IHF Holdings, Inc., Weider Health & Fitness, Greyfriars
Limited, Bayonne Settlement, Hornchurch Investments Limited, Ronald
Corey, Bernard Cartoon, Ronald Novak, Eric Weider, Richard Bizarro,
Robert Reynolds, Michael Carr, Thomas Deters, Barbara Harries and
Zbigniew Kindella.
10.44 Amendment No. 1 to Stockholders Agreement, dated September 6, 1996 among
IHF Holdings, Inc., Weider Health & Fitness, Greyfriars Limited, Bayonne
Settlement, Hornchurch Investments Limited, the Fund Investors, DLJ
Capital Corporation, General Electric Capital Corporation, and certain
other signatories named therein.
10.45 Amendment and Restatement of Stockholders Agreement, dated as of
September 6, 1996 among IHF Holdings, Inc., Weider Health & Fitness,
Greyfriars Limited, Bayonne Settlement, Hornchurch Investments Limited,
the Fund Investors, DLJ Capital Corporation, General Electric Capital
Corporation, and certain other signatories named therein.
10.46 Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and
Scott Watterson.
10.47 First Amendment to Stevenson Employment Agreement, dated
September 6, 1996 to the Employment Agreement dated November
14, 1994 among ICON Health & Fitness, IHF Capital, Inc., IHF
Holdings, Inc. and Gary Stevenson.
10.48 First Amendment to Watterson Employment Agreement, dated
September 6, 1996 to the Employment Agreement dated November
14, 1994 among ICON Health & Fitness, IHF Capital, Inc., IHF
Holdings, Inc. and Scott Watterson.
10.49 Weider Release, dated September 6, 1996 by Weider Health &
Fitness, Weider Sports Equipment Co., Ltd., Weider Sporting
Goods, Inc., Weider Europe, B.V., CANCO, Ben Weider, Eric
Weider, Richard Renaud and the Weider Releasors.
10.50 ICON Release, dated September 6, 1996 made by ICON Health, IHF
Capital, Inc., IHF Holdings, Inc., Scott Watterson, Gary
Stevenson and the ICON Releasors.
10.51 Settlement Agreement, dated September 6, 1996 among ICON
Health, IHF Capital, Inc., the Fund Investors, IHF Holdings,
Inc., Weider Health & Fitness, Weider Sports Equipment, CANCO,
Weider Sporting Goods, Inc., Weider Europe, B.V., and each of
Ben Weider, Eric Weider, Richard Renaud, Gary Stevenson and
Scott Watterson.
10.52 Escrow Agreement, dated September 6, 1996 among ICON Health,
ICON of Canada, Inc., CANCO, Lapointe Rosenstein and Goodman
Phillips of Vineberg.
10.53 Representation Agreement, dated September 6, 1996 between ICON
Health and Ben Weider.
10.54 Letter Agreement regarding advertising space, dated September 6, 1996
between Weider Publications, Inc., and ICON Health.
10.55 Letters of Credit issued by Royal Bank of Canada to ICON Health dated
September 5, 1996.
10.56 Letters of Credit issued by Royal Bank of Canada to ICON Health and ICON
of Canada, Inc., dated September 5, 1996.
10.57 Letter from Royal Bank of Canada to ICON of Canada, Inc., dated
September 5, 1996, outlining terms of financing by Royal Bank of Canada
in favor of ICON of Canada, Inc.
10.58 Letter Agreement dated September 6, 1996 among ICON Health, Ben Weider
and Eric Weider regarding charitable contributions.
10.59 Deed of Sale.
21 Subsidiaries of the Company.
24 Powers of Attorney (included on signature page).
25 Statement of Eligibility of Fleet National Bank, Trustee.
27 Financial Data Schedules.
99.1 Form of Letter of Transmittal used in connection with the
Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery used in connection with the
Exchange Offer.
Reports on Form 8-K
Report on Form 8-K dated April 14, 2003 containing ICON's press release
dated April 14, 2003 announcing earnings for the third quarter of fiscal 2003
which ended March 1, 2003.
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Pursuant to
Section 12 of the Act:
No annual report covering the Registrants' last fiscal year or any proxy
material with respect to a meeting of security holders has been sent to any of
the Registrants' security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ICON Health & Fitness, Inc. has duly caused this report to
be signed on its behalf by the undersigned, there unto duly authorized.
ICON HEALTH & FITNESS, INC.
By: /s/ Scott R. Watterson
----------------------------
Name: Scott R. Watterson
Title: Chairman of the Board and Chief
Executive Officer
Date: August 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signatures Capacity Date
- ---------- -------- ----
/s/ Scott R. Watterson
- -----------------------Chairman of the Board of August 29, 2003
Scott R. Watterson Directors and Chief Executive
Officer (principal Executive
Officer)
/s/ Gary E. Stevenson
- -----------------------President and Chief Operating August 29, 2003
Gary E. Stevenson Officer
/s/ S. Fred Beck
- -----------------------Vice President, Chief Financial August 29, 2003
S. Fred Beck and Accounting Officer, and
Treasurer
/s/ Robert C. Gay
- -----------------------Vice Chairman of the Board of August 29, 2003
Robert C. Gay Directors
/s/ W. Steve Albrecht
- -----------------------Director August 29, 2003
W. Steve Albrecht
/s/ Stan Tuttleman
- -----------------------Director August 29, 2003
Stan Tuttleman
Report of Independent Auditors
To the Board of Directors and Shareholder of
ICON Health & Fitness, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of stockholder's
equity (deficit) and of cash flows present fairly, in all material respects, the
financial position of ICON Health & Fitness, Inc. and its subsidiaries at May
31, 2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended May 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the accompanying financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective June
1, 2002, the Company adopted the provisions of EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer", Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", and
Statement of Financial Accounting Standards No. 145, "Rescission of FAS Nos. 4,
44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002".
Salt Lake City, Utah
July 17, 2003
ICON Health & Fitness, Inc.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
May 31, 2003 May 31, 2002
------------ ------------
ASSETS
Current assets:
Cash $ 4,650 $ 4,773
Accounts receivable, net 175,164 153,178
Inventories, net 161,708 133,753
Deferred income taxes 7,323 4,807
Other current assets 9,830 18,675
-------- --------
Total current assets 358,675 315,186
Property and equipment, net 48,777 44,985
Intangible assets, net 29,069 30,201
Deferred income taxes 8,379 12,084
Other assets, net 20,214 20,768
-------- --------
Total assets $465,114 $423,224
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 5,000 $ 5,044
Accounts payable 121,177 113,927
Accrued expenses 33,964 23,751
Income taxes payable 4,228 5,421
Interest payable 7,484 3,045
-------- --------
Total current liabilities 171,853 151,188
Long-term debt 239,232 250,893
Other liabilities 9,691 4,934
-------- --------
Total liabilities 420,776 407,015
-------- --------
Commitments and contingencies
(Notes 8 and 12)
Stockholder's Equity
Common stock and additional
paid-in capital 204,155 204,155
Receivable from Parent (2,200) (2,200)
Accumulated deficit (157,252) (183,941)
Accumulated other comprehensive loss (365) (1,805)
-------- --------
Total stockholder's equity 44,338 16,209
-------- --------
Total liabilities and
stockholder's equity $465,114 $423,224
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
ICON Health & Fitness, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands)
For the Year Ended May 31,
2003 2002 2001
---------- --------- ---------
Net sales $1,011,544 $ 871,399 $ 796,994
Cost of sales 713,415 635,046 580,484
---------- --------- ---------
Gross profit 298,129 236,353 216,510
---------- --------- ---------
Operating expenses:
Selling 134,047 101,355 86,279
Research and development 11,648 10,405 10,851
General and administrative 81,766 68,089 64,631
--------- --------- ---------
Total operating expenses 227,461 179,849 161,761
--------- --------- ---------
Income from operations 70,668 56,504 54,749
Interest expense (25,105) (26,149) (34,771)
Amortization of deferred
financing fees (1,267) (3,146) (3,189)
Loss on extinguishment of debt - (7,435) -
--------- --------- ---------
Income before income taxes 44,296 19,774 16,789
Provision for income taxes 17,607 380 3,483
--------- --------- ---------
Net income 26,689 19,394 13,306
Other comprehensive income
(loss), comprised of foreign
currency translation adjustment,
net of income tax expense of
$883 in 2003 and $129 in 2002
and net of tax benefit of $325
in 2001. 1,440 210 (532)
--------- --------- ---------
Comprehensive income $ 28,129 $ 19,604 $ 12,774
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
ICON Health & Fitness, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(In Thousands, except share amounts)
Common Stock and
additional
paid-in capital Accumulated Total
---------------- Receivable other stockholder's
from Accumulated comprehensive equity
Shares Amount Parent deficit Income (loss) (deficit)
-------------------------------------------------------------------------
Balance at
May 31, 2000 1,000 $204,155 $ (2,200) $ (216,641) $(1,483) $(16,169)
Other
comprehensive
loss - - - - (532) (532)
Net income - - - 13,306 - 13,306
-------------------------------------------------------------------------
Balance at
May 31, 2001 1,000 204,155 (2,200) (203,335) (2,015) (3,395)
Other
comprehensive
income - - - - 210 210
Net income - - - 19,394 - 19,394
-------------------------------------------------------------------------
Balance at
May 31, 2002 1,000 204,155 (2,200) (183,941) (1,805) 16,209
Other
comprehensive
income - - - - 1,440 1,440
Net income - - - 26,689 - 26,689
-------------------------------------------------------------------------
Balance at
May 31, 2003 1,000 $204,155 $ (2,200) $ (157,252) $ (365) $ 44,338
======================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
ICON Health & Fitness, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Year Ended May 31,
2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 26,689 $ 19,394 $ 13,306
Adjustments to reconcile net income to net
cash provided by operating activities:
Benefit for deferred taxes 306 (10,138) (588)
Gain on sale of property
and equipment (5) - -
Amortization of gain on
extinguishment of debt - (1,191) (1,300)
Amortization of deferred financing fees 1,267 3,146 3,189
Amortization of debt discount 73 18 -
Depreciation and amortization 19,170 19,162 17,372
Loss on extinguishment of debt - 7,435 -
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable, net (21,986) (19,968) (14,097)
Inventories, net (27,955) 12,231 (14,784)
Other assets, net 10,327 (4,162) (3,098)
Accounts payable and accrued expenses 18,526 (671) 10,040
Income taxes payable (1,193) 5,076 345
Interest payable 4,439 2,272 2,022
Other liabilities 1,980 4,934 -
--------- --------- ---------
Net cash provided by operating activities 31,638 37,538 12,407
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (16,952) (11,624) (16,095)
Purchase of intangible assets (4,892) (5,200) (2,693)
Acquisitions, net of cash acquired - (306) (3,997)
Proceeds from sale of property
and equipment 19 - -
--------- --------- ---------
Net cash used in investing activities (21,825) (17,130) (22,785)
--------- --------- ---------
FINANCING ACTIVITIES:
Borrowings (payments) on
revolving credit facility, net (6,749) 32,831 19,497
Payments on other long-term debt (29) (48) (376)
Proceeds from April 2002 term notes - 25,000 -
Payments on April 2002 term notes (5,000) (1,250) -
Payments on September 1999 term notes - (172,834) (9,273)
Proceeds from 11.25% notes - 152,813 -
Payments to 12% noteholders - (46,053) -
Payment of fees-debt portion (481) (9,757) (1,153)
--------- --------- ---------
Net cash provided by (used in)
financing activities (12,259) (19,298) 8,695
--------- --------- ---------
Effect of exchange rates on cash 2,323 339 (857)
--------- --------- ---------
Net increase (decrease) in cash (123) 1,449 (2,540)
Cash, beginning of period 4,773 3,324 5,864
--------- --------- ---------
Cash, end of period $ 4,650 $ 4,773 $ 3,324
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
ICON Health & Fitness, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
Basis of Presentation - The consolidated financial statements include the
accounts of ICON Health & Fitness, Inc., and its wholly owned subsidiaries ("the
Company"). At May 31, 2003 and 2002, the Company was a wholly owned subsidiary
of HF Holdings, Inc. ("HF Holdings" or the "Parent").
Description of Business - The Company is principally involved in the
development, manufacturing and distribution of home fitness equipment. The
Company's revenues are derived from the sale of various aerobic and anaerobic
fitness product lines in domestic and foreign markets. Because product life
cycles can be short in the fitness industry, the Company emphasizes new product
innovation and product repositioning. The Company primarily sells its products
to retailers and, to a limited extent, to end-users through direct response
advertising efforts and retail outlets.
2. Significant Accounting Policies
Principles of Consolidation - All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Cash - At May 31, 2003, substantially all of the Company's cash is held by
two banks located in Illinois and Massachusetts. The Company does not believe
that as a result of this concentration it is subject to any unusual financial
risk beyond the normal risk associated with commercial banking relationships.
Inventories - Inventories consist primarily of raw materials (principally
parts and supplies) and finished goods, and are valued at the lower of cost or
market. Cost is determined using standard costs which approximate the first-in,
first-out (FIFO) method.
Property and Equipment - Property and equipment is stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the respective assets. Expenditures for renewals and improvements are
capitalized, and maintenance and repairs are charged to expense as incurred.
Intangible Assets - In July 2001, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations", and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 specifies criteria
that must be met in order for intangible assets acquired in a purchase method
business combination to be recognized and reported apart from goodwill. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized; but instead be tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Company adopted the provisions
of SFAS No. 141 immediately and SFAS No. 142 effective June 1, 2002. The Company
completed an impairment evaluation of its goodwill as of June 1, 2002 and
May 31, 2003. No impairment was identified.
At June 1, 2002, goodwill totaled $5,624,000, net of accumulated
amortization of $1,919,000. The following table presents what reported net
income would have been for the years ended May 31, 2002 and 2001 under SFAS No.
142:
Year Ended May 31,
2002 2001
--------------------------
Reported net income $ 19,394 $ 13,306
Add back: Goodwill amortization, net of
income tax of $143 and $143
respectively, for the years ended
May 31, 2002 and 2001 234 234
--------------------------
Adjusted net income $ 19,628 $ 13,540
==========================
Intangible assets other than goodwill are recorded at cost and are
amortized on a straight-line basis over the following estimated useful lives:
Trademarks 20 years
Other 5 years
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of long-lived assets
may not be recoverable. The carrying value of a long-lived asset is considered
impaired when the anticipated cumulative undiscounted cash flows from that asset
are less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset, which is generally based on discounted cash flows. As a result
of its review, the Company does not believe that as of May 31, 2003 and 2002,
any impairment exists related to its long-lived assets.
Deferred Financing Costs - The Company deferred certain debt issuance costs
relating to the establishment of the New 2002 Credit Facilities and the issuance
of the 11.25% Notes as part of the April 2002 Refinancing (see Note 8). These
costs are capitalized in other long-term assets and are being amortized using
the effective interest method. Deferred costs relating to the 12% Notes and
existing bank credit agreement were written off as part of the April 2002
Refinancing.
Advertising Costs - The Company expenses the costs of advertising as
incurred, except for the cost of direct response advertising, which is
capitalized and amortized over its expected period of future benefit, generally
twelve months. Direct response advertising costs consist primarily of costs to
produce infomercials for the Company's products. At May 31, 2003 and 2002,
$1,792,000 and $1,586,000, respectively, of capitalized advertising costs were
included in other current assets. For the fiscal years ended May 31, 2003, 2002
and 2001, total advertising expense was approximately $30,743,000, $17,169,000
and $13,011,000, respectively.
Revenue Recognition - The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs and warranty costs associated with these sales.
Concentration of Credit Risk - The primary financial instruments which
potentially expose the Company to concentration of credit risk include trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed and reserves are maintained;
however, collateral is not required. A significant portion of the Company's
sales are made to Sears Roebuck ("Sears"). Sears accounted for approximately
39%, 44% and 44% of the total net sales for the fiscal years ended May 31, 2003,
2002 and 2001, respectively. Accounts receivable from Sears accounted for
approximately 31% and 35% of gross accounts receivable at May 31, 2003 and 2002,
respectively. The Company is not the exclusive supplier of home fitness
equipment to any of its major customers. The loss of, or a substantial decrease
in the amount of purchases by, or a write-off of any significant receivable due
from, any of its major customers would have a material adverse effect on the
Company's business.
Research and Development Costs - Research and product development costs are
expensed as incurred. Research and development activities include the design of
new products and product enhancements, and are performed by both internal and
external sources.
Income Taxes - The Company accounts for income taxes utilizing the asset
and liability method as prescribed by SFAS No. 109, "Accounting for Income
Taxes". Deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax bases of assets and
liabilities at currently enacted tax rates. If appropriate, deferred tax assets
are reduced by a valuation allowance which reflects expectations of the extent
to which such assets will be realized.
As of May 31, 2003 and 2002, the Company was included as part of the
consolidated tax return filed by HF Holdings, Inc. The income tax provision for
the Company has been prepared on a separate company basis.
Foreign Operations - Assets and liabilities of the Company's European and
Canadian subsidiaries are translated into U.S. dollars at the applicable rates
of exchange at each period end. The Company's foreign transactions are primarily
denominated in Canadian dollars and the Euro and transactions with foreign
entities that result in income and expense for the Company are translated at the
weighted average rate of exchange during the period. Translation gains and
losses are reflected as a separate component of other comprehensive income
(loss). Transaction gains and losses are recorded in the consolidated statements
of operations and comprehensive income (loss) and were not material in the
fiscal years ended May 31, 2003, 2002 and 2001. For the fiscal years ended May
31, 2003, 2002 and 2001, the Company's foreign operations represented less than
10% of the Company's net sales and effects of exchange rate changes did not have
a material impact on the Company's earnings.
Warranty Reserves - The Company maintains a warranty accrual for estimated
future warranty obligations based upon the relationship between historical and
anticipated costs and sales volumes. If actual warranty expenses are greater
than those projected, additional reserves and other charges against earnings may
be required. If actual warranty expenses are less than projected, prior reserves
could be reduced providing a positive impact on the Company's reported results.
The following table provides a reconciliation of the changes in the Company's
product warranty reserve (table in thousands):
Year Ended May 31,
----------------------------------
2003 2002 2001
----------------------------------
Warranty Reserve:
Balance at beginning of year $ 1,290 $ 2,557 $ 2,570
Additions:
Charged to costs and expenses 1,349 - 30
Deductions:
Reduction in reserve - (1,267) (43)
----------------------------------
Balance at end of year $ 2,639 $ 1,290 $ 2,557
==================================
The reduction in the warranty reserve in the fiscal year ended May 31, 2002
resulted primarily from the reclassification of the accrued warranty reserve on
long-term maintenance contracts to deferred revenue. Revenue from these
contracts is recognized ratably over the term of the contract.
Fair Value of Financial Instruments - The following methods and assumptions
were used to estimate the fair value disclosures for financial instruments:
11.25% Notes - fair value equals quoted market price.
Other long-term debt - fair value approximates carrying value since such
debt is primarily variable rate debt.
The carrying amounts and fair values of long-term debt at May 31, 2003 and
2002 were as follows (table in thousands):
2003 2003 2002 2002
-------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------
11.25% Notes $152,903 $162,750 $152,831 $152,831
Other long-term debt 91,329 91,329 103,106 103,106
Stock-Based Compensation Plans - The Company accounts for employee
stock-based compensation arrangements in accordance with provisions of
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation cost has been recognized for options
granted to employees under its fixed stock option plan.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 requires more prominent
and frequent disclosures about the effects of stock-based compensation, which
the Company has adopted for the period ending May 31, 2003. As permitted by SFAS
No. 148, the Company will continue to account for its stock based compensation
according to the provisions of APB No. 25.
Had compensation cost for the Company's stock options been recognized based
upon the estimated fair value on the grant date under the fair value methodology
prescribed by SFAS No. 123, the Company's net earnings would have been as
follows (table in thousands):
Year Ended May 31,
2003 2002 2001
------ ------- -------
Net income, as reported $26,689 $19,394 $13,306
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 28 133 133
------- ------- -------
Pro forma net income $26,661 $19,261 $13,173
======= ======= =======
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the period presented. Actual results could differ from
those estimates.
New Accounting Standards - 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 the Company's 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 the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44
and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which
rescinds 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 resulted in the 2002 loss on
debt extinguishment being reclassified from an extraordinary item 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 report of costs associated with
exit or disposal activities initiated after December 31, 2002 and is not
expected to have a material effect on the Company's 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. The Company has adopted EITF 01-09 effective
June 1, 2002, which reduced net sales for the fiscal year ended May 31, 2003 by
approximately $31.5 million with a corresponding reduction of selling, general
and administrative expenses. This change has no effect on income from operations
or net income. For comparative purposes, net sales for fiscal years ended
May 31, 2002 and 2001 have been reduced by approximately $24,7 million and $23.5
million respectively, with a corresponding reduction of selling, general and
administrative expenses.
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, 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 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 Company does not expect FIN 45 to have a material effect on its
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 Company does not expect FIN 46 to have a material effect on its
consolidated financial statements.
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. The Company does not expect SFAS No. 150 to have a material effect on
its consolidated financial statements.
Reclassifications - Certain balances of the prior years have been
reclassified to conform to the current year's presentation. These
reclassifications had no effect on net income or total assets.
3. Accounts Receivable
Accounts receivable, net, consist of the following (table in thousands):
May 31,
2003 2002
---------------------
Trade accounts receivable $183,558 $161,117
Less allowance for doubtful
accounts, advertising
discounts and credit memos (8,394) (7,939)
---------------------
$175,164 $153,178
=====================
4. Inventories
Inventories, net, consist of the following (table in thousands):
May 31,
2003 2002
---------------------
Raw materials, principally
parts and supplies $ 53,748 $ 60,136
Finished goods 107,960 73,617
---------------------
$161,708 $133,753
=====================
Inventories are net of allowances (primarily for finished goods) of
$3,900,000 and $3,275,000 at May 31, 2003 and 2002, respectively. These
allowances are established based on management's estimates of inventory held at
fiscal year end that is potentially obsolete or for which its market value is
below cost.
5. Property and Equipment
Property and equipment, net, consist of the following (table in thousands):
Estimated May 31,
Useful lives 2003 2002
----------------------------------
(Years)
Land - $ 2,160 $ 1,472
Building and
improvements up to 31 21,053 21,174
Equipment and
tooling 3-7 75,053 73,304
--------------------
98,266 95,950
Less accumulated
depreciation (49,489) (50,965)
--------------------
$ 48,777 $ 44,985
====================
For the fiscal years ended May 31, 2003, 2002 and 2001, the Company
recorded depreciation expense of $13,166,000, $13,398,000 and $13,619,000,
respectively.
6. Intangible Assets
Intangible assets, net, consist of the following (table in thousands):
May 31, 2003 May 31, 2002
-------------------------------- ------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
-------------------------------- -------------------------------
Goodwill $ 7,543 $ (1,919) $ 5,624 $ 7,543 $ (1,919) $ 5,624
Trademarks 27,607 (10,247) 17,360 27,963 (8,495) 19,468
Other 13,944 (7,859) 6,085 10,813 (5,704) 5,109
-------------------------------- -------------------------------
$49,094 $(20,025) $29,069 $46,319 $(16,118) $30,201
================================ ===============================
Amortization expense related to intangible assets for the fiscal years
ended May 31, 2003, 2002 and 2001 was $6,004,000, $5,764,000 and $3,753,000,
respectively. Approximately $5,624,000 of the net goodwill at May 31, 2003 is
tax deductible in future periods. Estimated amortization expense for years
ending after May 31, 2003 is as follows (table in thousands):
Year Ending May 31,
---------------------------
2004 $ 4,428
2005 3,813
2006 2,930
2007 1,930
2008 1,171
Thereafter 9,173
--------
$ 23,445
========
7. Other Assets
Other assets, net, consist of the following (table in thousands):
May 31,
2003 2002
---------------------
Deferred financing costs, net $ 8,356 $ 9,142
Long-term receivables, net 556 10,362
Long-term portion of trade
receivables 7,255 -
Other 4,047 1,264
---------------------
$ 20,214 $ 20,768
=====================
At May 31, 2003 and 2002, deferred financing costs are net of accumulated
amortization of $1,438,000 and $171,000, respectively.
Long-term receivables consist of receivables whose collection is not
considered to be current because the customer is in bankruptcy and whose
carrying values have been written down to net realizable value. At May 31, 2003
and 2002, long-term receivables are net of an allowance for doubtful accounts of
$70,000 and $2,434,000, respectively.
As of May 31, 2003, long-term portion of trade receivables consists of the
long-term portion of receivables from direct response sales. The allowance for
doubtful accounts related to the long-term portion of these receivables is not
significant.
8. Long-Term Debt
Long-term debt consists of the following (table in thousands):
May 31,
2003 2002
---------------------
2002 Revolver $ 72,563 $ 79,312
2002 Term Loan 18,750 23,750
11.25% Senior Subordinated
Notes, face amount
$155,000, net of
unamortized discount of
$2,096 and $2,169 at
May 31, 2003 and
2002, respectively. 152,903 152,831
Other 16 44
---------------------
244,232 255,937
Less current portion (5,000) (5,044)
--------------------
$239,232 $250,893
=====================
April 2002 Refinancing
In April 2002, the Company entered into new credit facilities and issued
new 11.25% senior subordinated notes ("11.25% notes") (the "April 2002
Refinancing"). The Company used the net proceeds of the 11.25% Notes and the New
2002 Credit Facilities to repay all outstanding indebtedness under the existing
credit agreement, to redeem in full all of the outstanding 12% subordinated
notes due 2005, to pay accrued interest and premiums thereon, and pay certain
transaction fees and expenses.
New Credit Facilities
In connection with the April 2002 Refinancing, the Company entered into new
credit facilities (the "New 2002 Credit Facilities") of $235 million with a
syndicate of banks and financial services companies.
The New 2002 Credit Facilities include a $210 million revolving credit line
(the "2002 Revolver"), which includes a letter of credit sub-facility of up to
$10 million and a swing line sub-facility of up to $10 million. The term is five
years. Borrowing availability is limited to certain percentages of qualified
assets as specified in the agreement. The letter of credit margin of 2% and an
unused facility fee of .50% per annum of the average unused daily balance of the
2002 Revolver are due monthly.
In addition, the New 2002 Credit Facilities include a $25 million Term Loan
("2002 Term Loan") with a 58-month term. The 2002 Term Loan amortizes quarterly
at a rate of $1,250,000. At the Company's option, the 2002 Revolver and 2002
Term Loan bear interest at either (a) a floating rate equal to the Index Rate
plus the applicable margin of 1.25% and 1.75%, respectively, or (b) a floating
rate equal to the LIBOR rate plus the applicable margin of 2.625% and 3.125%,
respectively. If the 2002 Revolver is terminated or if the 2002 Term Loan is
prepaid, certain prepayment premiums will apply.
All loans under the New 2002 Credit Facilities are collateralized by a
first priority security interest in all of the existing and subsequently
acquired assets of the Company and its domestic and Canadian subsidiaries,
subject to specified exceptions, and a pledge of 65% of the stock of the
Company's first-tier foreign subsidiaries. All loans are cross-collateralized
and contain cross default provisions.
All of the outstanding common stock of the Company, owned by HF Holdings,
has been pledged to the lenders under the New 2002 Credit Facilities. If the
Company were to default under these New 2002 Credit Facilities, the lenders
would foreclose on the pledge and take control of the Company.
The new credit agreement contains a number of restrictive covenants that,
among other things, limit or restrict the Company's and its subsidiaries'
ability to dispose of assets, incur additional indebtedness, incur guarantee
obligations, prepay other indebtedness, make restricted payments, create liens,
make equity or debt investments, make certain acquisitions, modify terms of the
indenture, engage in mergers or consolidations, enter into operating leases or
engage in transactions with affiliates. In addition, the Company is expected to
comply with various financial ratios and tests, including a maximum capital
expenditures test, minimum debt service coverage ratio, minimum EBITDA, maximum
senior leverage ratio and minimum revenue. At May 31, 2003, the Company was in
compliance with all of its debt covenants.
11.25% Senior Subordinated Notes
The new 11.25% Notes are due April 2012. The 11.25% Notes were issued with
a face principal amount of $155 million at a price of 98.589%. Interest is due
January 1 and July 1 of each year, beginning on July 1, 2003. The 11.25% Notes
are redeemable for a premium of between 1% and 5.625% anytime after April 2007,
as outlined in the indenture. Up to 35% of the 11.25% Notes can be redeemed
prior to April 1, 2005 at an 11.25% premium. The 11.25% Notes are guaranteed on
an unsecured, senior subordinated basis by the Company's existing and future
domestic subsidiaries.
The 11.25% Notes contain certain restrictive covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
additional debt, pay dividends or make other distributions, make investments,
dispose of assets, issue capital stock of subsidiaries, enter into mergers or
consolidations or sell all, or substantially all, of their assets.
The table below reflects the scheduled principal payment terms of the
Company's long-term debt (table in thousands):
Year ending May 31,
-------------------
2004 $ 5,000
2005 5,000
2006 5,000
2007 76,328
2008 -
Thereafter 155,000
--------
246,328
Unamortized debt discount (2,096)
--------
$244,232
========
For the fiscal year ended May 31, 2002, a loss of approximately $7.4
million was recorded on the extinguishment of the Company's Old 1999 Credit
Facilities and the 12% Notes.
9. Stockholder's Equity
The Company has 3,000 shares of $.01 par value common stock authorized and
1,000 shares issued and outstanding.
During the fiscal year ended May 31, 2000, the Company established a new
Junior Management stock option plan (the "Plan") and issued 333,300 options to
purchase common stock of HF Holdings with an exercise price of $5.83 to members
of the Plan. These options have a ten-year life, 25% vested immediately and the
balance vests in 25% increments on each anniversary of the grant date. The
following table summarizes activity under the Plan for the fiscal years ended
May 31, 2003, 2002 and 2001:
Year Ended May 31,
2003 2002 2001
--------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------
Outstanding at beginning
of year 333,330 $ 5.83 333,300 $ 5.83 333,330 $ 5.83
Granted - - - - -
Expired - - - - -
Exercised - - - - -
Forfeited - - - - -
--------------------------------------------------------
Outstanding at end of year 333,330 $ 5.83 333,300 % 5.83 333,330 $ 5.83
========================================================
Options exercisable at
end of year 333,330 249,975 166,650
========================================================
Weighted average fair market
value of options granted
during year - - -
========================================================
The following table summarizes information about stock options outstanding
at May 31, 2003:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life(in years) Price Exercisable Price
- -----------------------------------------------------------------------------------------
$5.83 333,300 6.3 $5.83 333,330 $5.83
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1) risk-free
interest rate of 6.00%; (2) expected life of five years; (3) dividend yield of
zero; and (4) a volatility of zero.
10. Income Taxes
The provision for income taxes consists of the following (table in
thousands):
Year Ended May 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Current:
Federal $ 12,453 $ 10,178 $ 2,720
State 1,067 872 233
Foreign 3,781 2,293 1,118
---------------------------------------------------
Total current 17,301 13,343 4,071
---------------------------------------------------
Deferred:
Federal 346 (12,323) (1,041)
State 30 (1,055) (90)
Foreign (70) 415 543
---------------------------------------------------
Total deferred 306 (12,963) (588)
---------------------------------------------------
Total provision for
income taxes $ 17,607 $ 380 $ 3,483
===================================================
The components of the Company's income before income taxes are as follows
(table in thousands):
Year Ended May 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Domestic $ 39,944 $ 17,017 $ 14,964
Foreign 4,352 2,757 1,825
---------------------------------------------------
$ 44,296 $ 19,774 $ 16,789
===================================================
The provision for income tax differs from the amount computed by applying
the statutory federal income tax rate to income before taxes as follows:
Year Ended May 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
Statutory federal
income tax rate 35% 35% 35%
State tax provision 3 3 3
Benefit from net
operating loss
related to
September 1999
Restructuring - - (17)
Provision for (Benefit
from) Internal Revenue
Service adjustment 2 (59) -
Foreign income taxes 3 25 9
Foreign tax credit (3) (9) (1)
Other - 7 (8)
---------------------------------------------------
Provision for
Income taxes 40% 2% 21%
===================================================
At May 31, 2003 and 2002, the net deferred tax asset consists of the
following (table in thousands):
May 31,
-------------------
2003 2002
-------------------
Deferred tax assets:
Foreign net operating loss carryforwards $ 8,037 $ 8,244
Expenses capitalized for income tax purposes 11,208 12,276
Reserves and allowances 5,999 4,478
Deferred compensation plan 1,525 470
Uniform capitalization of inventory 1,069 728
Other 2,029 2,763
-------------------
Total deferred tax assets: $29,867 $28,959
===================
Deferred tax liabilities:
Property and equipment $ 4,389 $ 2,044
Other 1,739 1,780
-------------------
Total deferred tax liabilities: $ 6,128 $ 3,824
===================
Valuation allowance (8,037) (8,244)
-------------------
Net deferred tax asset $15,702 $16,891
===================
In February 2002, the Internal Revenue Service ("IRS") completed an
examination of the Company's taxable years ended May 31, 1997, 1996 and 1995. In
May 2003, the examination report was approved by the Congressional Joint
Committee. As a result of this examination, approximately $35.0 million of
previously deducted expenses for tax purposes were capitalized during the fiscal
year ended May 31, 2002 and are currently being amortized over fifteen years.
These adjustments created a long-term deferred tax asset of approximately $11.5
million.
During the fiscal year ended May 31, 2002, the valuation allowance
increased by $624,000 due to additional foreign net operating loss carryforwards
that may not be utilized in future years. During the fiscal year ended May 31,
2001, the valuation allowance decreased by $16,466,000 due to the elimination of
net operating loss carryforwards that would provide no future benefit to the
Company.
Management believes that it is more likely than not that the Company will
generate sufficient future taxable income to realize the balance of the net
deferred tax asset as of May 31, 2003. However, there can be no assurance that
the Company will generate any specific level of taxable income or that it will
be able to realize any of the remaining deferred tax assets in future periods.
If the Company were unable to generate sufficient taxable income in the future,
an additional valuation allowance against this deferred tax asset would result
in a charge to earnings.
During the fiscal year ended May 31, 2001, the Company utilized
approximately $9.5 million in net operating loss carryforwards generated during
the period from September 1999 to May 2000.
At May 31, 2003, the Company had approximately $21.2 million of foreign net
operating loss carryforwards which may be carried forward indefinitely. The
Company has provided a full valuation allowance against the deferred tax asset
related to these carryforwards.
11. Supplemental Disclosures of Cash Flow
Information
Year Ended May 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
Cash paid during the period for (in thousands):
Interest $20,665 $27,222 $34,063
Income taxes, net 9,813 8,221 6,131
Non-cash investing and financing activities:
During the fiscal year ended May 31, 2001, the Company added interest of
$2.9 million to long-term debt principal.
12. Commitments and Contingencies
Leases - The Company has noncancellable operating leases, primarily for
warehouse and production facilities and computer and production equipment, that
expire over the next five years. These leases generally contain renewal options
for periods ranging from three to five years and require the Company to pay all
executory costs such as maintenance and insurance. Future minimum payments under
noncancellable operating leases consist of the following (table in thousands):
Year ending May 31:
------------------
2004 $ 9,131
2005 10,917
2006 7,818
2007 4,715
2008 1,456
Thereafter 2,324
------------------
$ 36,361
==================
Rental expense under noncancellable operating leases was approximately
$14,650,000, $15,060,000 and $15,282,000 for the fiscal years ended May 31,
2003, 2002 and 2001, respectively.
Environmental Issues - The Company's operations are subject to federal,
state and local health, safety and environmental laws and regulations that
impose workplace standards and limitations on the discharge of pollutants into
the environment and establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of materials, substances and
wastes. As of July 17, 2003, the Company was unaware of any environmental,
health or safety violations.
Product Liability - Due to the nature of the Company's products, the
Company is subject to product liability claims involving personal injuries
allegedly related to the Company's products. 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.
Other Litigation - The Company is party to a variety of non-product
liability commercial suits involving contract claims. The Company believes that
adverse resolution of these lawsuits would not have a material adverse effect on
its results of operations 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 is 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. Vectra is alleging one claim of
patent infringement by the Company on one of its patents. The complaint seeks
monetary damages and other relief. This case is currently being vigorously
defended by the Company's counsel; however, it is not possible for the Company
to quantify with any certainty the extent of any potential liability.
The Company is also involved in several intellectual property and patent
infringement claims, arising in the ordinary course of its business. The Company
believes that the ultimate outcome of these matters will not have a material
adverse effect upon its results of operations or financial position.
Retirement Plans - All employees who have met minimum age and service
requirements are eligible to participate in the 401(k) savings plan. Company
contributions to the plan for the fiscal years ended May 31, 2003, 2002 and 2001
were $630,000, $610,000 and $540,000, respectively.
In September 2001, the Company established a nonqualified deferred
compensation plan that permits certain employees to annually elect to defer a
portion of their compensation for their retirement. The amount of compensation
deferred and related investment earnings have been placed in an irrevocable
rabbi trust and recorded within other assets in the Company's consolidated
balance sheet, as this trust will be available to the Company's general
creditors in the event of insolvency. An offsetting deferred compensation
liability, which equals the total value of the trust at May 31, 2003 and 2002 of
$4,015,000 and $1,238,000, respectively, and which is recorded within other
liabilities in the Company's consolidated balance sheet, reflects amounts due to
employees who contributed to the plan. The Company's contributions to the
deferred compensation plan for the fiscal years ended May 31, 2003 and 2002 were
$1,293,000 and $120,000, respectively.
Employment Agreements - In May of 2003, the Company renegotiated the
September 27, 1999 employment agreements ("second amendment") with each of the
Chairman and Chief Executive Officer and the President and Chief Operating
Officer. The second amendment extends these agreements to September 27, 2005.
The employment agreements provide for the continued employment of Chairman and
Chief Executive Officer with an increase in base salary from $525,000 to
$625,000, and President and Chief Operating Officer with an increase in base
salary from $475,000 to $575,000. Except as set forth below, in all other
material respects the agreements are substantially identical to the September
1999 agreement.
The second amendment provides for a one-time retention bonus for each of
Chairman and Chief Executive Officer and President and Chief Operating Officer
of $300,000. Each executive is also entitled to participate in a bonus program
providing for a bonus equal to a percentage of the Company's consolidated EBITDA
(as defined in the Company's credit facility) and the Company's subsidiaries
(the Company's "EBITDA") which percentage shall equal 1.50% for Chairman and
Chief Executive Officer and 1.32% for President and Chief Operating Officer. The
executives will not be entitled to a bonus, however, unless the Company's
Profits exceed 5.5% of net sales.
The Company may terminate each executive's employment (1) for cause as
provided in each agreement, (2) upon six months' disability, or (3) without
cause. Each executive may similarly terminate his employment immediately for
cause as provided in his employment agreement, upon three months notice to
perform full-time church service or for any reason upon six months' notice.
The employment agreements prohibit the executives from engaging in outside
business activity during the term, subject to certain exceptions. The employment
agreements provide for customary confidentiality obligations and, in addition, a
non-competition obligation for a period of four years following termination (two
years if the executive quits with cause or without cause or is terminated
without cause, except that the Company may, at the Company's option, extend such
period for up to two additional years by paying the executive his salary and
bonus during the extended period).
In fiscal 2003, the Company formed a foreign subsidiary to build a
manufacturing facility in Xiamen, China. The total project cost is anticipated
to be approximately $12.0 million, with $7.0 million to be funded in the form of
equity by the subsidiary, and approximately $5.0 million in the form of debt.
The Company's share of the equity investment is expected to be approximately
$5.0 million. 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.
13. Related Party Transactions
Management Fees
The Company has an agreement with major stockholders of HF Holdings who
provide management and advisory services to the Company. Total annual fees due
under this agreement are $800,000, for the fiscal years ended May 31, 2003, 2002
and 2001. The Company recorded management fee expense of $800,000 each year. If
the Company enters into any acquisition transaction involving at least $10
million, the Company must pay a fee of approximately 1% of the gross purchase
price, including liabilities assumed, of the transaction to these stockholders.
In addition, in the event of a Liquidity Event (as defined in the Stockholder's
Agreement), the Company will pay a fee in an amount which will approximate 1% of
the purchase price of the transaction to another major stockholder.
Airplane Lease
In June 1996, the Company entered into an agreement with FG
Aviation, Inc. ("FG"), a company which is jointly owned by officers of the
Company, whereby the Company committed to lease an airplane from FG. Minimum
rentals under the lease, which expires in May 2005, are $56,610 per month.
In February 2002, the Company entered into a new agreement with FG whereby
the Company terminated the original airplane lease and committed to lease a new
airplane from FG. Minimum lease rentals under the lease, which expires February
2009, are $120,000 per month. The Company is responsible for scheduled
maintenance and fuel costs; however, these costs reduce the monthly rental. In
addition, the Company is responsible for payment of the aircraft crew and any
unscheduled maintenance of the aircraft. In connection with its airplane lease
commitments, the Company recorded $809,000, $695,000 and $903,000 of rental
expense for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. In
addition, in February 2002, the Company advanced $280,000 to FG as a security
deposit on the aircraft lease.
Receivable from Parent
As part of the September 1999 Restructuring, HF Holdings loaned to senior
management an aggregate of $2.2 million against non-recourse notes with a
maturity of 10 years. HF Holdings used funds advanced from the Company to make
the loans. The notes bear interest at a rate equal to that of the New Credit
Facilities, payable in cash until the first date as of which the cumulative net
taxable income of the Company arising on or after the date of consummation of
the September 1999 Restructuring exceeds zero. As of May 31, 2003 and 2002,
these notes are non-interest bearing. The notes may be accelerated upon
specified defaults and liquidity events, and are collateralized by shares of HF
Holdings common stock.
14. Acquisition of Business
On December 20, 2000, the Company acquired certain assets of a corporation.
The aggregate purchase price was $3,997,000, net of cash acquired of $3,438. The
acquisition was accounted for under the purchase method of accounting.
The costs of the acquisition have been allocated on the basis of the
estimated fair market value of the assets acquired and the liabilities assumed
as reflected in the following table (in thousands). The results of the
operations of the acquired business have been included in the accompanying
consolidated financial statements since the date of acquisition. The acquired
corporation's historical revenue and net income for the period preceding the
acquisition date was not significant to the Company.
Fair value of assets acquired:
Trade accounts receivable $ 756
Inventories 835
Property and equipment 429
Goodwill 4,430
Other 32
-------
Total assets acquired 6,482
Liabilities assumed:
Accounts payable (2,320)
Other (100)
Note payable (65)
-------
Total liabilities assumed (2,485)
-------
Cash paid for acquisition $ 3,997
=======
As a result of a contingent purchase price agreement, the Company paid
$306,000 of additional consideration during the fiscal year ended May 31, 2002,
which was classified as goodwill.
15. Geographic Segment Information
Based on the Company's method of internal reporting, the Company operates
and reports as a single industry segment, which is, development, manufacturing
and distribution of home fitness equipment.
Revenue and long-lived asset information by geographic area as of and for
the fiscal years ended May 31 is as follows (table in thousands):
Revenues Long-lived
for the years ended May 31 assets (net) as of May 31,
----------------------------- ----------------------------
2003 2002 2001 2003 2002
----------------------------- ----------------------------
United States $924,047 $794,319 $728,221 $44,961 $41,650
Foreign 87,497 77,080 68,773 3,816 3,335
----------------------------- ----------------------------
Total $1,011,544 $871,399 $796,994 $48,777 $44,985
============================= ============================
Foreign revenue is based on the country in which the sales originate (i.e.
where the legal subsidiary is domiciled). Revenue from no single foreign country
was material to the consolidated revenues of the Company.
16. Condensed Consolidating Financial Statements
The Company's subsidiaries JumpKing, Inc., 510152 N.B. Ltd., Universal
Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc.
and Free Motion Fitness, Inc. ("Subsidiary Guarantors") have fully and
unconditionally guaranteed on a joint and several basis, the obligation to pay
principal and interest with respect to the 11.25% Notes. A significant portion
of the Company's operating income and cash flow is generated by its
subsidiaries. As a result, funds necessary to meet the Company's debt service
obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Company's
subsidiaries, could limit the Company's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the 11.25% Notes. Although holders of
the 11.25% Notes will be direct creditors of the Company's principal direct
subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries
located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included
among the Guarantor Subsidiaries, and such subsidiaries will not be obligated
with respect to the 11.25% Notes. As a result, the claims of creditors of the
Non-Guarantor Subsidiaries will effectively have priority with respect to the
assets and earnings of such companies over the claims of creditors of the
Company, including the holders of the 11.25% Notes.
The following supplemental consolidating condensed financial statements are
presented (in thousands):
1. Consolidating condensed balance sheets as of May 31, 2003 and 2002 and
consolidating condensed statements of operations and cash flows for
each of the years in the three year period ended May 31, 2003.
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
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 $467,618 $183,096 $30,215 $(215,815) $465,114
======== ======== ======= ========== ========
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 $ 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 31,104 - - (31,104) -
Other assets, net 20,756 - 12 - 20,768
-------- -------- ------- --------- --------
Total Assets $399,896 $145,203 $24,230 $(146,105) $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) (178,954) 5,632 (24,115) 13,496 (183,941)
Accumulated other
comprehensive loss - (865) (940) - (1,805)
-------- -------- ------- --------- --------
Total stockholder's
equity (deficit) 25,170 42,026 (19,574) (31,413) 16,209
-------- -------- ------- --------- --------
Total Liabilities
and Stockholder's
Equity $399,896 $145,203 $24,230 $(146,105) $423,224
======== ======== ======= ========== ========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $659,357 $300,539 $51,648 $ - $1,011,544
Cost of sales 499,796 183,755 29,617 247 713,415
-------- -------- ------- ------- ----------
Gross profit 159,561 116,784 22,031 (247) 298,129
Total operating
expenses 103,988 103,883 19,590 - 227,461
-------- -------- ------- ------- ----------
Income (loss)
from operations 55,573 12,901 2,441 (247) 70,668
Interest expense (23,299) (32) (1,774) - (25,105)
Amortization of
deferred financing
fees (1,267) - - - (1,267)
Equity in earnings
of subsidiaries 4,949 - - (4,949) -
-------- -------- ------- ------- ----------
Income (loss)
before income taxes 35,956 12,869 667 (5,196) 44,296
Provision for
income taxes 9,267 7,310 1,030 - 17,607
-------- -------- ------- ------- ----------
Net income (loss) $ 26,689 $ 5,559 $ (363) $(5,196) $ 26,689
======== ======== ======= ======= ==========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $623,012 $206,193 $42,194 $ - $871,399
Cost of sales 464,431 141,733 29,025 (143) 635,046
-------- -------- ------- ------ --------
Gross profit 158,581 64,460 13,169 143 236,353
Total operating
expenses 98,244 68,127 13,478 - 179,849
-------- -------- ------- ------ --------
Income (loss)
from operations 60,337 (3,667) (309) 143 56,504
Interest expense (23,200) (1,177) (1,772) - (26,149)
Amortization of
deferred financing
fees (3,146) - - - (3,146)
Loss on
extinguishment of
debt (7,435) - - - (7,435)
Equity in earnings
of subsidiaries (6,629) - - 6,629 -
-------- -------- ------- ------ --------
Income (loss)
before income taxes 19,927 (4,844) (2,081) 6,772 19,774
Provision (benefit)
for income taxes 533 (404) 251 - 380
-------- -------- ------- ------ --------
Net income (loss) $ 19,394 $ (4,440) $(2,332) $6,772 $ 19,394
======== ======== ======= ====== ========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $652,445 $106,685 $37,864 $ - $796,994
Cost of sales 474,343 81,163 25,055 (77) 580,484
-------- -------- ------- ------ --------
Gross profit 178,102 25,522 12,809 77 216,510
Total operating
expenses 122,140 25,870 13,751 - 161,761
-------- -------- ------- ------ --------
Income (loss)
from operations 55,962 (348) (942) 77 54,749
Interest expense (31,875) (1,408) (1,488) - (34,771)
Amortization of
deferred financing
fees (3,189) - - - (3,189)
Equity in earnings
of subsidiaries (4,503) - - 4,503 -
-------- -------- ------- ------ --------
Income (loss)
before income taxes 16,395 (1,756) (2,430) 4,580 16,789
Provision for
income taxes 3,089 60 334 - 3,483
-------- -------- ------- ------ --------
Net income (loss) $ 13,306 $ (1,816) $(2,764) $4,580 $ 13,306
======== ========= ======== ====== ========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash provided by
(used in) operating
activities: $ 55,844 $(24,595) $ 389 $ - $ 31,638
-------- -------- ------- ------ --------
Investing activities:
Net cash used in
investing activities: (18,568) (2,301) (956) - (21,825)
-------- -------- ------- ------ --------
Financing activities:
Borrowings on
revolving credit
facility, net (6,749) - - - (6,749)
Payments on other
long-term debt - (29) - - (29)
Payments on April
2002 term notes (5,000) - - - (5,000)
Payment of fees-debt (481) - - - (481)
Other (25,315) 24,816 499 - -
-------- -------- ------- ------ --------
Net cash provided by
(used in) financing
activities: (37,545) 24,787 499 - (12,259)
-------- -------- ------- ------ --------
Effect of exchange
rates on cash 883 3,046 (1,606) - 2,323
-------- -------- ------- ------ --------
Net increase (decrease)
in cash 614 937 (1,674) - (123)
Cash, beginning of period 327 1,448 2,998 - 4,773
-------- -------- ------- ------ --------
Cash, end of period $ 941 $ 2,385 $ 1,324 $ - $ 4,650
======== ======== ======= ====== ========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash provided by
operating
activities: $ 30,169 $ 6,133 $ 1,236 $ - $ 37,538
-------- -------- ------- ------ --------
Investing activities:
Net cash used in
investing activities: (13,747) (2,834) (549) - (17,130)
-------- -------- ------- ------ --------
Financing activities:
Borrowings on
revolving credit
facility, net 32,831 - - - 32,831
Payments on other
long-term debt, net - (48) - - (48)
Proceeds from April
2002 term notes 25,000 - - - 25,000
Payments on April
2002 term notes (1,250) - - - (1,250)
Payments on September
1999 term notes (172,834) - - - (172,834)
Proceeds from
11.25% notes 152,813 - - - 152,813
Payments to 12%
noteholders (46,053) - - - (46,053)
Payment of fees-debt (9,757) - - - (9,757)
Other 1,540 (2,689) 1,149 - -
-------- -------- ------- ------ --------
Net cash provided by
(used in) financing
activities: (17,710) (2,737) 1,149 - (19,298)
-------- -------- ------- ------ --------
Effect of exchange
rates on cash - 273 66 - 339
-------- -------- ------- ------ --------
Net increase (decrease)
in cash (1,288) 835 1,902 - 1,449
Cash, beginning of period 1,615 613 1,096 - 3,324
-------- -------- ------- ------ --------
Cash, end of period $ 327 $ 1,448 $ 2,998 $ - $ 4,773
======== ======== ======= ====== ========
Supplemental Condensed Consolidating Balance Sheet
May 31, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash provided by
(used in) operating
activities: $ 28,025 $(14,425) $ (330) $ (863) $ 12,407
-------- -------- ------- ------ --------
Investing activities:
Net cash provided by
(used in) investing
activities: (16,526) (7,271) 149 863 (22,785)
-------- -------- ------- ------ --------
Financing activities:
Borrowings on
revolving credit
facility, net 19,497 - - - 19,497
Payments on other
long-term debt, net (393) 17 - - (376)
Payments on September
1999 term notes (9,273) - - - (9,273)
Payment of fees-debt (1,153) - - - (1,153)
Other (22,195) 22,381 (186) - -
-------- -------- ------- ------ --------
Net cash provided by
(used in) financing
activities: (13,517) 22,398 (186) - 8,695
-------- -------- ------- ------ --------
Effect of exchange
rates on cash - (622) (235) - (857)
-------- -------- ------- ------ --------
Net increase (decrease)
in cash (2,018) 80 (602) - (2,540)
Cash, beginning of period 3,633 533 1,698 - 5,864
-------- -------- ------- ------ --------
Cash, end of period $ 1,615 $ 613 $ 1,096 $ - $ 3,324
======== ======== ======= ====== ========
Valuation and Qualifying Accounts
Financial Statement Schedule II
(in thousands)
Year Ended May 31,
----------------------------------
2003 2002 2001
----------------------------------
Trade accounts receivable-allowance
for doubtful accounts,
advertising discounts and
and credit memos:
Balance at beginning of year $ 7,939 $ 6,752 $ 7,004
Additions:
Charged to costs and expenses
(allowance for doubtful accounts
and credit memos) 14,528 4,658 3,582
Charged to costs and expenses
(discounts and advertising) 52,461 45,998 41,668
Deductions:
Accounts charged off (allowance
for doubtful accounts and
credit memos) (12,460) (3,906) (5,044)
Accounts charged off (advertising) (54,074) (45,563) (40,458)
----------------------------------
Balance at end of year $ 8,394 $ 7,939 $ 6,752
==================================
Year Ended May 31,
----------------------------------
2003 2002 2001
----------------------------------
Inventory reserve:
Balance at beginning of year $ 3,275 $ 3,185 $ 2,829
Additions:
Charged to costs and expenses 625 679 506
Deductions:
Reduction in reserve - (589) (150)
----------------------------------
Balance at end of year $ 3,900 $ 3,275 $ 3,185
==================================
CERTIFICATION
--------------
I, Scott R. Watterson, certify that:
1. I have reviewed this annual report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this annual 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: August 29, 2003
/s/ Scott R. Watterson
- ----------------------
Scott R. Watterson
Chief Executive Officer
CERTIFICATION
--------------
I, Gary E. Stevenson, certify that:
1. I have reviewed this annual report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this annual 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: August 29, 2003
/s/ Gary E. Stevenson
- ---------------------
Gary E. Stevenson
Chief Operating Officer
CERTIFICATION
--------------
I, S. Fred Beck, certify that:
1. I have reviewed this annual report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this annual 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: August 29, 2003
/s/ S. Fred Beck
- ----------------
S. Fred Beck
Chief Financial Officer