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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[*]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the quarterly period ended February 28, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the transition period from ________to_______
Commission file number: 333-93711
ICON Health & Fitness, Inc.
(Exact name of registrant as specified in its charter)
Delaware 87-0531206
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1500 South 1000 West, Logan, Utah 84321
(Address and zip code of principal executive offices)
435-750-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
ICON Health & Fitness, Inc. 1,000 shares.
ICON Health & Fitness, Inc.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-6
Condensed Consolidated Balance
Sheets as of February 28, 2004(unaudited),
May 31, 2003 and March 1, 2003(unaudited) 3
Condensed Consolidated Statements of
Operations (unaudited) for the three months
ended February 28, 2004 and March 1, 2003 4
Condensed Consolidated Statements of
Operations (unaudited) for the nine months
ended February 28, 2004 and March 1, 2003 5
Condensed Consolidated Statements
of Cash Flows (unaudited) for the nine months
ended February 28, 2004 and March 1, 2003 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17-24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of
Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-30
Exhibit Index 31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
February 28, 2004 May 31, 2003 March 1, 2003
----------------- ------------ -------------
(Unaudited) (Restated) (Restated)
(Unaudited)
Assets
Current assets:
Cash $ 12,076 $ 4,650 $ 4,508
Accounts receivable, net 263,695 175,164 271,099
Inventories, net:
Raw materials 81,910 53,748 62,906
Finished goods 117,835 107,960 87,589
-------- -------- --------
Total inventories, net 199,745 161,708 150,495
Deferred income taxes 7,062 7,323 5,942
Other current assets 9,852 9,830 9,562
-------- -------- --------
Total current assets 492,430 358,675 441,606
Property and equipment 114,567 98,266 107,074
Less accumulated depreciation (59,461) (49,489) (58,449)
-------- -------- --------
Property and equipment, net 55,106 48,777 48,625
Intangible assets, net 28,645 29,069 30,191
Deferred income taxes 5,949 8,379 10,189
Other assets, net 24,112 20,214 19,473
-------- -------- --------
Total assets $606,242 $465,114 $550,084
======== ======== ========
Liabilities and Stockholder's Equity
Current liabilities:
Current portion of
long-term debt $ 5,000 $ 91,328 $153,583
Accounts payable 163,406 121,177 138,112
Accrued liabilities 36,597 33,964 37,355
Income taxes payable 3,236 4,228 10,727
Interest payable 3,105 7,484 3,246
-------- -------- --------
Total current liabilities 211,344 258,181 343,023
Long term-debt 299,772 152,904 152,906
Other liabilities 12,688 9,691 7,170
-------- -------- --------
Total liabilities 523,804 420,776 503,099
-------- -------- --------
Minority Interest 3,500 - -
Stockholder's Equity
Common stock and additional
paid-in capital 204,155 204,155 204,155
Receivable from Parent (2,200) (2,200) (2,200)
Accumulated deficit (125,349) (157,252) (153,357)
Accumulated other
comprehensive income(loss) 2,332 (365) (1,613)
-------- -------- --------
Total stockholder's equity 78,938 44,338 46,985
-------- -------- --------
Total liabilities and
stockholder's equity $606,242 $465,114 $550,084
======== ======== ========
See accompanying notes to condensed consolidated financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For the Three Months Ended
February 28, 2004 March 1, 2003
----------------- -------------
Net sales $328,032 $343,983
Cost of sales 225,490 237,849
-------- --------
Gross profit 102,542 106,134
-------- --------
Operating expenses:
Selling 42,635 43,064
Research and development 3,612 3,210
General and administrative 26,166 22,284
-------- --------
Total operating expenses 72,413 68,558
-------- --------
Income from operations 30,129 37,576
Interest expense 6,430 6,340
Amortization of deferred
financing fees 277 184
-------- --------
Income before income taxes 23,422 31,052
Provision for income taxes 5,194 10,728
-------- --------
Net income 18,228 20,324
Other comprehensive income(loss),
comprised of foreign currency
translation adjustment, net of
income tax benefit of $1,123 in
2004 and net of income tax expense
of $375 in 2003. (1,832) 611
-------- --------
Comprehensive income $16,396 $20,935
======== ========
See accompanying notes to condensed consolidated financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For the Nine Months Ended
February 28, 2004 March 1, 2003
----------------- -------------
Net sales $857,677 $806,937
Cost of sales 595,543 575,393
-------- --------
Gross profit 262,134 231,544
-------- --------
Operating expenses:
Selling 112,797 96,166
Research and development 10,215 8,419
General and administrative 73,092 58,625
-------- --------
Total operating expenses 196,104 163,210
-------- --------
Income from operations 66,030 68,334
Interest expense 18,782 19,266
Amortization of deferred
financing fees 595 670
-------- --------
Income before income taxes 46,653 48,398
Provision for income taxes 14,750 17,814
-------- --------
Net income 31,903 30,584
Other comprehensive income(loss),
comprised of foreign currency
translation adjustment, net of
income tax expense of $1,653 in
2004 and net of income tax benefit
of $99 in 2003 2,697 (194)
-------- --------
Comprehensive income $ 34,600 $ 30,390
======== ========
See accompanying notes to condensed consolidated financial statements.
ICON Health & Fitness, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Nine Months Ended
February 28, 2004 March 1, 2003
----------------- -------------
OPERATING ACTIVITIES:
Net income $ 31,903 $ 30,584
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for deferred taxes 1,038 1,246
Amortization of deferred financing fees 595 670
Depreciation and amortization 17,349 13,167
Amortization of debt discount 163 59
Changes in operating assets and liabilities:
Accounts receivable, net (88,531) (117,921)
Inventories, net (38,037) (16,742)
Other assets, net (1,877) 11,502
Accounts payable and accrued liabilities 44,862 38,852
Income taxes, net (992) 5,306
Interest payable (4,379) 201
Other liabilities 384 -
-------- --------
Net cash used in operating activities (37,522) (33,076)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (12,423) (13,382)
Purchase of property and equipment-China (4,931) -
Purchase of intangible assets (5,900) (3,415)
Other - (53)
-------- --------
Net cash used in investing activities (23,254) (16,850)
-------- --------
FINANCING ACTIVITIES:
Borrowings on revolving credit facility,
net of payments 64,127 54,243
Payments on term note (3,750) (3,750)
Minority interest 3,500 -
Other (25) (539)
-------- --------
Net cash provided by financing
activities 63,852 49,954
-------- --------
Effect of exchange rates on cash 4,350 (293)
-------- --------
Net increase (decrease) in cash 7,426 (265)
Cash, beginning of period 4,650 4,773
-------- --------
Cash, end of period $ 12,076 $4,508
======== ========
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note A - Basis of Presentation
This report covers ICON Health & Fitness, Inc. & Subsidiaries
(collectively, "the Company"). The Company's parent company, HF Holdings, Inc.
("HF Holdings"), is not a registrant.
The Company is one of the world's leading manufacturers and marketers of
fitness equipment. The Company is headquartered in Logan, Utah and has more than
5,000 employees worldwide. The Company develops, manufactures and markets
fitness equipment under the following company-owned brand names: NordicTrack,
ProForm, HealthRider, Weslo, Weider, IMAGE and Free Motion, as well as Reebok
and Gold's Gym under license agreements.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statement presentation. In addition, certain minor reclassifications
of previously reported financial information were made to conform to the current
period's presentation.
The Company, in its opinion, has included all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the results
of operations for the three months and nine months ended February 28, 2004 and
March 1, 2003. The condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
for the year ended May 31, 2003 included in the Company's annual report on Form
10-K/A as amended with the Securities and Exchange Commission on October 14,
2003. Interim results, including comparative balance sheets, are not necessarily
indicative of results for the full fiscal year due to the inherent seasonality
in the Company's business. See "Seasonality" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies
The Company's discussion of results of operations and financial condition
relies on its consolidated financial statements that are prepared based on
certain critical accounting policies that require management to make judgments
and estimates that are subject to varying degrees of uncertainty. The Company
believes that investors need to be aware of these policies and how they impact
its financial statements as a whole, as well as its related discussion and
analysis presented herein. While the Company believes that these accounting
policies are based on sound measurement criteria, actual future events can and
often do result in outcomes that can be materially different from these
estimates or forecasts. The accounting policies and related risks described in
the Company's annual report on Form 10-K/A as amended with the Securities and
Exchange Commission on October 14, 2003 are those that depend most heavily on
these judgments and estimates. As of February 28, 2004, there have been no
material changes to any of the critical accounting policies contained therein.
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.
There were no stock options granted in the nine months ended February 28,
2004 and March 1, 2003, respectively. All previously granted options were fully
vested as of November 30, 2002. 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):
Nine Months Ended
February 28, March 1,
2004 2003
------------ ------------
Net income, as reported $31,903 $30,584
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects - 28
------- -------
Pro forma net income $31,903 $30,556
======= =======
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):
Nine Months Ended
February 28, March 1,
2004 2003
------------ ------------
Warranty Reserve:
Balance at beginning of the year $2,693 $1,290
Additions:
Charged to costs and expenses - 1,232
Deductions:
Reduction in reserve (22) -
------ ------
Balance at end of year $2,671 $2,522
====== ======
Note B - Accounting Changes
See "Recent Accounting Standards" under Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Note C - Commitments and Contingencies
Due to the nature of the Company's products, the Company is subject to
product liability claims involving personal injuries allegedly related to the
Company's products. These claims include injuries sustained by individuals using
the Company's products. The Company currently carries an occurrence-based
product liability insurance policy. The current policy provides coverage for the
period from October 1, 2003 to October 1, 2004 of up to $10.0 million per
occurrence and $10.0 million in the aggregate. The policy has a deductible on
each claim of up to $1.0 million. For occurrences prior to October 1, 2003, the
policy provided coverage of up to $5.0 million per occurrence and $5.0 million
in the aggregate. The policy had a deductible on each claim of up to $1.0
million. For occurrences prior to October 1, 2002, the policy provided coverage
of up to $5.0 million per occurrence and $5.0 million in the aggregate. The
policy had a deductible on each claim of up to $0.5 million. The Company
believes that its insurance is generally adequate to cover product liability
claims. Nevertheless, currently pending claims and any future claims are subject
to the uncertainties related to litigation, and the ultimate outcome of any such
proceedings or claims cannot be predicted. Due to uncertainty with respect to
the nature and extent of manufacturers' and distributors' liability for personal
injuries, the Company cannot guarantee that its product liability insurance is
or will be adequate to cover such claims. The Company vigorously defends any and
all product liability claims brought against it and does not believe that any
current pending claims or series of claims will have a material adverse effect
on its results of operations, liquidity or financial position.
The Company is party to a variety of non-product liability commercial
lawsuits involving contract claims, arising in the ordinary course of its
business. The Company believes that adverse resolution of these lawsuits would
not have a material adverse effect upon its results of operations, liquidity or
financial position.
In December 2001, a claim was made against the Company alleging the Company
received $1.7 million of preferential transfers in connection with the 1999
Service Merchandise bankruptcy proceedings. The Company's counsel is currently
vigorously defending the proposed claim. 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 also involved in several intellectual property and patent
infringement claims, arising in the ordinary course of its business. The Company
believes that the ultimate outcome of these matters will not have a material
adverse effect upon its results of operations, liquidity or financial position.
In fiscal 2003, the Company formed a foreign subsidiary to build a
manufacturing facility in Xiamen, China. The Company's equity interest in the
foreign subsidiary is 70%, which will be funded in the form of equity and debt.
The Company is in the process of arranging for the debt portion of the
financing, which is expected to be provided by the Bank of China. As of February
28, 2004, the Company has made contributions of $5.0 million and the minority
interest contributions were $3.5 million. The minority interest shareholder is
also a long-time vendor of the Company. The Company has recorded purchases from
this vendor of approximately $67.5 million and $27.7 million during the
nine-month and three-month periods ended February 28, 2004, respectively. He
also holds an equity interest in the Company. As a result of the Company's
controlling interest in the foreign subsidiary, the investment has been reported
on a consolidated basis beginning in the first quarter of fiscal 2004.
On January 6, 2004, the Company filed on Form 8-K a press release outlining
a pending management transition based on news that Scott Watterson, Chief
Executive Officer and Gary Stevenson, Chief Operating Officer intend to resign
from their respective positions sometime in the second or third quarter of
calendar 2004. The Company and Mr. Watterson and Mr. Stevenson are currently in
discussions regarding the modification of their existing employment contracts to
take into account the anticipated resignations. The modifications have not been
completed or agreed to as of the date of this filing.
Note D - Revolving Credit Line
The credit agreement, which includes the Company's $210 million revolving credit
line ("Revolver"), requires the Company to maintain a lockbox arrangement
whereby remittances from the Company's customers reduce the borrowings
outstanding under the Revolver. Recently, the Company determined that the credit
agreement also contains a Material Adverse Effect ("MAE") clause which grants
the agent and lenders having more than 66 and 2/3% of the commitment or
borrowings the right to block the Company's requests for future advances. EITF
Issue 95-22 "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lockbox Arrangement" requires borrowings under credit agreements with
these two provisions to be classified as current obligations. On April 12, 2004,
the Company obtained written waivers from the agent and lenders having more than
33 and 1/3% of the commitment or borrowings waiving their rights under the MAE
clause for the period from April 13, 2004 to April 17, 2005. Accordingly, the
Company has classified the outstanding borrowings under the credit agreement,
which totaled $151.7 million as of February 28, 2004 as a long-term liability.
In addition, the Company has restated the May 31, 2003 and March 1, 2003 balance
sheets to properly reflect the borrowings as current as of May 31, 2003 and
March 1, 2003. This reclassification had no impact on the Company's debt
covenants under the credit agreement, its ability to draw on existing facilities
or its previously reported net income.
Note E - Guarantor/Non-Guarantor Financial Information
The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal
Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc.,
Free Motion Fitness, Inc. and ICON IP, Inc. ("Subsidiary Guarantors") have fully
and unconditionally guaranteed on a joint and several basis, the obligation to
pay principal and interest with respect to the 11.25% Notes. A significant
portion of the Company's operating income and cash flow is generated by its
subsidiaries. As a result, funds necessary to meet the Company's debt service
obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Company's
subsidiaries, could limit the Company's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the 11.25% Notes. Although holders of
the 11.25% Notes will be direct creditors of the Company's principal direct
subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries
located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included
among the Guarantor Subsidiaries, and such subsidiaries will not be obligated
with respect to the 11.25% Notes. As a result, the claims of creditors of the
Non-Guarantor Subsidiaries will effectively have priority with respect to the
assets and earnings of such companies over the claims of creditors of the
Company, including the holders of the 11.25% Notes.
The following supplemental condensed consolidating financial statements are
presented (in thousands):
1. Condensed consolidating balance sheets as of February 28, 2004
(unaudited), May 31, 2003 (audited) and March 1, 2003 (unaudited), condensed
consolidating statements of operations for the three months and nine months
ended February 28, 2004 and March 1, 2003 (unaudited), and condensed
consolidating statements of cash flows for the nine months ended February 28,
2004 and March 1, 2003 (unaudited).
2. The Company's combined Subsidiary Guarantors and combined Non-Guarantor
subsidiaries with their investments in subsidiaries are accounted for using the
equity method.
3. Elimination entries necessary to consolidate the Company and all of its
subsidiaries.
Supplemental Condensed Consolidating Balance Sheet
February 28, 2004
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ 3,848 $ 6,456 $ 1,772 $ - $ 12,076
Accounts receivable,
net 198,472 74,452 19,318 (28,547) 263,695
Inventories, net 114,287 71,226 15,122 (890) 199,745
Deferred income taxes 6,688 246 128 - 7,062
Other current assets 1,326 3,241 5,285 - 9,852
-------- -------- ------- --------- --------
Total current assets 324,621 155,621 41,625 (29,437) 492,430
-------- -------- ------- --------- --------
Property and equipment,
net 39,114 14,734 1,258 - 55,106
Receivable from
affiliates 125,398 52,208 - (177,606) -
Intangible assets, net 20,562 6,835 1,248 - 28,645
Deferred income taxes 4,740 1,209 - - 5,949
Investment in
subsidiaries 49,909 - - (49,909) -
Other assets, net 15,809 7,312 991 - 24,112
-------- -------- ------- --------- --------
Total assets $580,153 $237,919 $45,122 $(256,952) $606,242
======== ======== ======= ========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 5,000 $ - $ - $ - $ 5,000
Accounts payable 125,328 29,235 37,390 (28,547) 163,406
Accrued liabilities 19,787 11,826 4,984 - 36,597
Income taxes payable (526) 3,156 606 3,236
Interest payable 3,105 - - - 3,105
-------- --------- ------- --------- --------
Total current
liabilities 152,694 44,217 42,980 (28,547) 211,344
-------- --------- ------- --------- --------
Long-term debt 299,762 10 - - 299,772
Other liabilities 6,629 6,059 - - 12,688
Payable to affiliates 38,490 116,582 22,534 (177,606) -
Minority interest - - - 3,500 3,500
Stockholder's equity(deficit):
Common stock and
additional paid-in
capital 206,323 45,759 5,481 (53,408) 204,155
Receivable from Parent (2,200) - - - (2,200)
Retained earnings
(accumulated deficit) (122,027) 22,791 (25,222) (891) (125,349)
Accumulated other
comprehensive
income (loss) 482 2,501 (651) - 2,332
-------- --------- ------- --------- --------
Total stockholder's
equity (deficit) 82,578 71,051 (20,392) (54,299) 78,938
-------- --------- ------- --------- --------
Total liabilities
and stockholder's
equity(deficit) $580,153 $237,919 $45,122 $(256,952) $606,242
======== ======== ======= ========== ========
Supplemental Consolidating Condensed Balance Sheet
May 31, 2003 (Restated)
---------------------------------------------------------------------
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 $ 91,328 $ - $ - $ - $ 91,328
Accounts payable 86,192 25,876 24,207 (15,098) 121,177
Accrued liabilities 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 210,745 31,822 30,712 (15,098) 258,181
-------- -------- ------- --------- --------
Long-term debt 152,889 15 - - 152,904
Other liabilities 4,015 5,676 - - 9,691
Payable to
affiliates 25,889 95,128 21,351 (142,368) -
Stockholder's equity(deficit):
Common stock and
additional
paid-in capital 206,324 37,259 5,481 (44,909) 204,155
Receivable from
Parent (2,200) - - - (2,200)
Retained earnings
(accumulated
deficit) (130,525) 11,191 (24,478) (13,440) (157,252)
Accumulated other
comprehensive
income (loss) 481 2,005 (2,851) - (365)
-------- -------- ------- --------- --------
Total stockholder's
equity (deficit) 74,080 50,455 (21,848) (58,349) 44,338
-------- -------- ------- --------- --------
Total liabilities
and stockholder's
equity (deficit) $467,618 $183,096 $30,215 $(215,815) $465,114
======== ======== ======= ========= ========
Supplemental Condensed Consolidating Balance Sheet
March 1, 2003 (Restated)
--------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash $ 2,699 $ 1,054 $ 755 $ - $ 4,508
Accounts receivable,
net 221,143 57,097 13,374 (20,515) 271,099
Inventories, net 82,398 57,904 10,630 (437) 150,495
Deferred income taxes 5,629 222 91 - 5,942
Other current assets 1,711 4,573 3,278 - 9,562
-------- -------- ------- --------- --------
Total current assets 313,580 120,850 28,128 (20,952) 441,606
-------- -------- ------- --------- --------
Property and equipment,
net 37,240 10,112 1,273 - 48,625
Receivable from
affiliates 98,986 22,922 - (121,908) -
Intangible assets, net 21,176 7,797 1,218 - 30,191
Deferred income taxes 9,444 745 - - 10,189
Investment in
subsidiaries 44,909 - - (44,909) -
Other assets, net 13,093 6,360 20 - 19,473
-------- -------- ------- --------- --------
Total Assets $538,428 $168,786 $30,639 $(187,769) $550,084
======== ======== ======= ========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $153,583 $ - $ - $ - $153,583
Accounts payable 108,745 25,228 24,654 (20,515) 138,112
Accrued expenses 22,788 10,126 4,441 - 37,355
Income taxes payable 6,430 3,686 611 - 10,727
Interest payable 3,246 - - - 3,246
-------- --------- ------- --------- --------
Total current
liabilities 294,792 39,040 29,706 (20,515) 343,023
-------- --------- ------- --------- --------
Long-term debt 152,890 16 - - 152,906
Other long-term
liabilities 3,473 3,697 - - 7,170
Payable to affiliates 22,922 78,015 20,971 (121,908) -
Stockholder's Equity (deficit):
Common stock and
additional paid-in
capital 206,324 37,259 5,481 (44,909) 204,155
Receivable from parent (2,200) - - - (2,200)
Retained earnings
(Accumulated deficit) (140,255) 10,858 (23,523) (437) (153,357)
Accumulated other
comprehensive
income (loss) 482 (99) (1,996) - (1,613)
-------- --------- ------- --------- --------
Total stockholder's
equity (deficit) 64,351 48,018 (20,038) (45,346) 46,985
-------- --------- ------- --------- --------
Total Liabilities
and Stockholder's
Equity $538,428 $168,786 $30,639 $(187,769) $550,084
======== ======== ======= ========== ========
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended February 28, 2004
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $210,528 $95,125 $22,379 $ - $328,032
Cost of sales 159,144 51,894 14,296 156 225,490
-------- ------- ------- ------ --------
Gross profit 51,384 43,231 8,083 (156) 102,542
Total operating
expenses 34,387 31,875 6,151 - 72,413
-------- ------- ------- ------ --------
Income from operations 16,997 11,356 1,932 (156) 30,129
Interest expense 5,846 83 501 - 6,430
Amortization of deferred
financing fees 277 - - - 277
Equity in earnings
of subsidiaries - - - - -
-------- ------- ------- ------ --------
Income before
income taxes 10,874 11,273 1,431 (156) 23,422
Provision for
income taxes 1,757 3,135 302 - 5,194
-------- ------- ------- ------ --------
Net income $ 9,117 $ 8,138 $ 1,129 $ (156) $ 18,228
======== ======= ======= ======== ========
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 1, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $238,507 $90,180 $15,296 $ - $343,983
Cost of sales 180,461 48,599 8,860 (71) 237,849
-------- ------- ------- ---- --------
Gross profit 58,046 41,581 6,436 71 106,134
Total operating
expenses 31,690 31,539 5,329 - 68,558
-------- ------- ------- ---- --------
Income from operations 26,356 10,042 1,107 71 37,576
Interest expense 5,916 2 422 - 6,340
Amortization of deferred
financing fees 184 - - - 184
-------- ------- ------- ---- --------
Income before
income taxes 20,256 10,040 685 71 31,052
Provision for
income taxes 5,698 4,397 633 - 10,728
-------- ------- ------- ---- --------
Net income $ 14,558 $ 5,643 $ 52 $ 71 $ 20,324
======== ======= ======= ==== ========
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended February 28, 2004
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $556,542 $249,334 $51,801 $ - $857,677
Cost of sales 416,607 145,248 33,355 333 595,543
-------- -------- ------- ----- --------
Gross profit 139,935 104,086 18,446 (333) 262,134
Total operating
expenses 90,177 88,917 17,010 - 196,104
-------- -------- ------- ----- --------
Income (loss)
from operations 49,758 15,169 1,436 (333) 66,030
Interest expense 17,222 85 1,475 - 18,782
Amortization of
deferred financing
fees 595 - - - 595
Equity in earnings
of subsidiaries - - - - -
-------- -------- ------- ------ --------
Income (loss)
before taxes 31,941 15,084 (39) (333) 46,653
Provision for
income taxes 10,559 3,485 706 - 14,750
-------- -------- ------- ------ --------
Net income (loss) $ 21,382 $ 11,599 $ (745) $ (333) $ 31,903
======== ======== ========= ======== ========
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 1, 2003
---------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $553,062 $214,765 $39,110 $ - $806,937
Cost of sales 421,282 131,088 22,895 128 575,393
-------- -------- ------- ----- --------
Gross profit 131,780 83,677 16,215 (128) 231,544
Total operating
expenses 75,763 73,999 13,448 - 163,210
-------- -------- ------- ----- --------
Income (loss)
from operations 56,017 9,678 2,767 (128) 68,334
Interest expense 17,953 7 1,306 - 19,266
Amortization of
deferred financing
fees 670 - - - 670
-------- -------- ------- ----- --------
Income (loss)
before taxes 37,394 9,671 1,461 (128) 48,398
Provision for
income taxes 12,500 4,445 869 - 17,814
-------- -------- ------- ----- --------
Net income (loss) $ 24,894 $ 5,226 $ 592 $(128) $ 30,584
======== ========= ======= ====== ========
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended February 28, 2004
-------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ----------
Operating activities:
Net cash provided by
(used in) operating
activities: $(42,277) $ 7,390 $(2,635) $ - $(37,522)
-------- -------- ------- ------ --------
Investing activities:
Net cash used in
investing activities: (15,509) (7,445) (300) - (23,254)
-------- -------- ------- ------ --------
Financing activities:
Borrowings on
revolving credit
facility, net
of payments 64,127 - - - 64,127
Payments on term note (3,750) - - - (3,750)
Minority interest (5,000) 8,500 - - 3,500
Payment of fees-debt (25) - - - (25)
Other 3,682 (4,864) 1,182 - -
-------- -------- ------- ------ --------
Net cash provided by
financing activities: 59,034 3,636 1,182 - 63,852
-------- -------- ------- ------ --------
Effect of exchange
rates on cash 1,653 496 2,201 - 4,350
-------- -------- ------- ------ --------
Net increase (decrease)
in cash 2,901 4,077 448 - 7,426
Cash, beginning of
period 941 2,385 1,324 - 4,650
-------- -------- ------- ------ --------
Cash, end of period $ 3,842 $ 6,462 $ 1,772 $ - $ 12,076
======== ======== ======= ====== ========
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 1, 2003
-------------------------------------------------------------------
ICON Combined Combined
Health & Guarantor Non-Guarantor
Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Operating activities:
Net cash used in
Operating activities: (22,295) $ (9,875) $ (906) $ - $(33,076)
-------- -------- ------- ------ --------
Investing activities:
Net cash used in
investing activities: (14,040) (2,105) (705) - (16,850)
-------- -------- ------- ------ --------
Financing activities:
Borrowings on
revolving credit
facility, net 54,243 - - - 54,243
Payments on term note (3,750) - - - (3,750)
Payment of fees-debt (539) - - - (539)
Other (10,789) 10,671 118 - -
-------- -------- ------- ------ --------
Net cash provided by
financing activities: 39,165 10,671 118 - 49,954
-------- -------- ------- ------ --------
Effect of exchange rate
changes on cash (485) 942 (750) - (293)
-------- -------- ------- ------ --------
Net increase (decrease)
in cash 2,345 (367) (2,243) - (265)
Cash, beginning of
period 327 1,448 2,998 - 4,773
-------- -------- ------- ------ --------
Cash, end of period $ 2,672 $ 1,081 $ 755 $ - $ 4,508
======== ======== ======= ====== ========
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We are one of the world's leading manufacturers and marketers of fitness
equipment. We are headquartered in Logan, Utah and have more than 5,000
employees worldwide. We develop, manufacture and market fitness equipment under
the following company-owned brand names: NordicTrack, ProForm, HealthRider,
Weslo, Weider, IMAGE and Free Motion, as well as Reebok and Gold's Gym under
license agreements.
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements contained in this report
involve risks and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements. Forward-looking
statements include, without limitation, statements containing the words
"anticipates," "believes," "expects," "intends," "future," and words and terms
of similar substance express management's belief, expectations or intentions
regarding future performance. Our actual results could differ materially from
our historical operating results and from those anticipated in these
forward-looking statements as a result of certain factors, including without
limitation, those set forth in our Annual Report on Form 10-K/A and other
factors and uncertainties contained in our other filings with the Securities and
Exchange Commission. You are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date they were made. We
disclaim any obligation or undertaking to provide any updates or revisions to
any forward-looking statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which the forward-looking
statement is based.
Three Months Ended February 28, 2004 Compared to Three Months
Ended March 1, 2003
-------------------------------------------------------------
Net sales for the third quarter of fiscal 2004 decreased $16.0 million, or
4.7%, to $328.0 million from $344.0 million in the comparable period in 2003.
The decrease in sales was not attributable to a single customer, distributor or
any other specific factor. The decrease was across several product lines. Sales
of our cardiovascular and other equipment in the third quarter of fiscal 2004
decreased $24.3 million, or 8.6%, to $259.1 million. Sales of our strength
training equipment in the third quarter of fiscal 2004 increased $8.4 million,
or 13.9%, to $68.9 million.
Gross profit in the third quarter of fiscal 2004 was $102.5 million, or
31.3% of net sales, compared to $106.1 million, or 30.8% of net sales, in the
third quarter of fiscal 2003. This increase in margin was largely due to changes
in product mix and manufacturing efficiencies.
Selling expenses decreased $0.5 million, or 1.2%, to $42.6 million in the
third quarter of fiscal 2004. This decrease was a result of decreased bad debt
expenses of $5.0 million offset by increased freight of $3.4 million and an
increase in personnel costs of $1.3 million relating in part to expanding
product lines and distribution channels. Expressed as a percentage of net sales,
selling expenses were 13.0% in the third quarter of fiscal 2004 and 12.5% in the
third quarter of fiscal 2003.
Research and development expenses increased $0.4 million, or 12.5%, to $3.6
million in the third quarter of fiscal 2004. Expressed as a percentage of net
sales, research and development expenses were 1.1% in the third quarter of
fiscal 2004 and 0.9% in the third quarter of fiscal 2003. This increase is
attributable to management's efforts to continue to develop both current and
future products.
General and administrative expenses increased $3.9 million, or 17.5%, to
$26.2 million in the third quarter of fiscal 2004. This increase was
attributable to increased professional services of $2.7 million which include
legal fees and insurance, depreciation of $1.3 million and rent and lease
expense of $1.4 million. Expressed as a percentage of net sales, general and
administrative expenses were 8.0% in the third quarter of fiscal 2004 and 6.5%
in third quarter of fiscal 2003.
As a result of the foregoing factors, income from operations decreased $7.5
million, or 19.9%, to $30.1 million in the third quarter of fiscal 2004.
Expressed as a percentage of net sales, income from operations was 9.2% in the
third quarter of fiscal 2004 compared with 10.9% in the third quarter of fiscal
2003.
As a result of the foregoing factors, EBITDA (as defined under
"Seasonality") decreased $6.2 million or 14.6% to $36.3 million in the third
quarter of fiscal 2004. Expressed as a percentage of net sales, EBITDA was 11.1%
in the third quarter of fiscal 2004 compared with 12.4% in the third quarter of
fiscal 2003.
Interest expense, including amortization of deferred financing fees,
increased $0.2 million, or 3.1%, to 6.7 million for the third quarter of fiscal
2004. Expressed as a percentage of net sales, interest expense, including
amortization of deferred financing fees, was 2.0% in the third quarter of fiscal
2004 and 1.9% in the third quarter of fiscal 2003.
The provision for income taxes was $5.2 million for the third quarter of
fiscal 2004, compared with a provision of $10.7 million in the third quarter of
fiscal 2003. Income tax expense, as a percentage of pre-tax income, was 22.2% in
the third quarter of fiscal 2004, compared to 34.5% in the third quarter of
fiscal 2003. The change in the effective tax rate was primarily the result of an
Internal Revenue Service adjustment, the use of foreign tax credits and the
prepayment of Canadian taxes in fiscal 2003.
As a result of the foregoing factors, net income was $18.2 million for the
third quarter of fiscal 2004, compared to net income in the third quarter of
fiscal 2003 of $20.3 million, a decrease of 10.3% over the same period last
year.
Nine Months Ended February 28, 2004, Compared to Nine Months
Ended March 1, 2003
------------------------------------------------------------
During the first nine months of fiscal 2004, net sales increased $50.8
million, or 6.3%, to $857.7 million from $806.9 million in the first nine months
of fiscal 2003. The increase in sales was not attributable to a single customer,
distributor or any other specific factor. The increase was across all product
lines for which there was increased demand, particularly direct to consumer
sales. Sales of our cardiovascular and other equipment in the first nine months
of fiscal 2004 increased $14.8 million or 2.2%, to $691.2 million. Sales of our
strength training equipment in the first nine months of fiscal 2004 increased
$36.0 million, or 27.6%, to $166.5 million.
Gross profit for the first nine months of fiscal 2004 was $262.1 million,
or 30.6% of net sales, compared to $231.5 million, or 28.7% of net sales, for
the first nine months of fiscal 2003. This 13.2% increase in margin dollars was
largely due to increased direct to consumer sales, changes in product mix and
manufacturing efficiencies.
Selling expenses increased $16.6 million, or 17.3% to $112.8 million in the
first nine months of fiscal 2004. This increase can be attributed in part to
increased advertising expenses of $10.3 million, freight of $5.6 million,
personnel costs of $3.2 million relating in part to expanding product lines and
distribution channels, commissions of $1.0 and other increases of $3.5 million.
These increases were offset by decreased bad debt expenses of $7.0 million over
the same period last year. Expressed as a percentage of net sales, selling
expenses were 13.2% in the first nine months of fiscal 2004 and 11.9% in the
first nine months of fiscal 2003.
Research and development expenses increased $1.8 million, or 21.4%, to
$10.2 million in the first nine months of fiscal 2004. Expressed as a percentage
of net sales, research and development expenses were 1.2% in the first nine
months of fiscal 2004 and 1.0% in the first nine months of fiscal 2003. This
increase is attributable to management's efforts to continue to develop both
current and future products.
General and administrative expenses increased $14.5 million, or 24.7%, to
$73.1 million in the first nine months of fiscal 2004. This increase was
attributable to increased professional services of $6.9 million which include
legal fees and insurance, depreciation of $4.2 million and rent and lease
expense of $3.2 million. Expressed as a percentage of net sales, general and
administrative expenses were 8.5% in the first nine months of fiscal 2004 and
7.3% in the first nine months of fiscal 2003.
As a result of the foregoing factors, income from operations decreased $2.3
million, or 3.4%, to $66.0 million in the first nine months of fiscal 2004.
Expressed as a percentage of net sales, income from operations was 7.7% in the
first nine months of fiscal 2004 compared with 8.5% in the first nine months of
fiscal 2003.
As a result of the foregoing factors, EBITDA (as defined under
"Seasonality") increased $1.8 million to $83.3 million in the third quarter of
fiscal 2004. Expressed as a percentage of net sales, EBITDA was 9.7% in the
third quarter of fiscal 2004 compared with 10.1% in the third quarter of fiscal
2003.
Interest expense, including amortization of deferred financing fees,
decreased $0.5 million, or 2.5%, to $19.4 million in the first nine months of
fiscal 2004. This decrease reflects the continued lower interest rates on our
borrowings during the period. Expressed as a percentage of net sales, interest
expense including amortization of deferred financing fees was 2.3% in the first
nine months of fiscal 2004 and 2.5% in the first nine months of fiscal 2003.
The provision for income taxes was $14.7 million for the first nine months
of fiscal 2004, compared with a provision of $17.8 million for the first nine
months of fiscal 2003. Income tax expense, as a percentage of pre-tax income,
for the first nine months of fiscal 2004 was 31.5%, compared to 36.8% in the
first nine months of fiscal 2003. The change in the effective tax rate was
primarily the result of an Internal Revenue Service adjustment, the use of
foreign tax credits and the prepayment of Canadian taxes in fiscal 2003.
As a result of the foregoing factors, net income was $31.9 million for the
first nine months of fiscal 2004, compared to net income in the first nine
months of fiscal 2003 of $30.6 million, an increase of 4.2% over the same period
last year.
Seasonality
The market for exercise equipment is highly seasonal, with peak periods
occurring from late fall through February. As a result, the first and fourth
quarters of every fiscal year are generally our weakest periods in terms of
sales. During these periods, we build product inventory to prepare for the heavy
demand anticipated during the upcoming peak season. This operating strategy
helps us to realize the efficiencies of a steady pace of year-round production.
The following are the net sales, net income (loss) and EBITDA by quarter
for fiscal years 2004, 2003 and 2002:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- --------- ----------
(dollars in millions)
Net Sales (5)
2004 $197.8 $331.8 $328.0 $ -
2003 170.2 292.7 344.0 204.6
2002 134.2 264.6 296.0 176.6
Net Income (Loss)
2004 (1.7) 15.4 18.2 -
2003 (3.4) 13.7 20.3 (3.9)
2002 (7.5) 11.1 25.5 (9.7)
The following is a reconciliation of net income (loss) to EBITDA by quarter (6):
EBITDA
2004
Net income (loss) $(1.7) $15.4 $18.2 $ -
Add back:
Depreciation and amortization 5.5 5.6 6.2 -
Provision for income tax 0.4 9.1 5.2 -
Interest expense 6.0 6.4 6.4 -
Amortization of deferred
financing fees - .3 .3 -
----- ----- ----- -----
EBITDA $10.2 $36.8 $36.3 $ -
===== ===== ===== =====
2003
Net income (loss) $(3.4) $13.7 $20.3 $(3.9)
Add back:
Depreciation and amortization 4.2 4.0 5.0 6.0
Provision for (benefit from)
income tax (1.2) 8.3 10.7 (0.2)
Interest expense 6.4 6.5 6.3 5.9
Amortization of deferred
financing fees 0.3 0.2 0.2 0.5
----- ----- ----- -----
EBITDA $ 6.3 $32.7 $42.5 $ 8.3
===== ===== ===== =====
2002
Net income (loss) $(7.5) $11.1 $25.5 $(9.7)
Add back:
Depreciation and amortization 4.5 4.3 4.9 5.5
Provision for (benefit from)
income tax (4.8) 8.2 1.4 (4.4)
Interest expense 6.8 6.8 6.0 6.6
Amortization of deferred
financing fees 0.9 0.9 0.9 0.4
----- ----- ----- -----
EBITDA $(0.1) $31.3 $38.7 $(1.6)
===== ===== ===== =====
- -----------
(1) Our first quarter ended August 30, August 31, and September 1 for fiscal
years 2004, 2003 and 2002, respectively.
(2) Our second quarter ended November 29, November 30 and December 1 for fiscal
years 2004, 2003 and 2002, respectively.
(3) Our third quarter ended February 28, March 1 and March 2 for fiscal years
2004, 2003 and 2002,respectively.
(4) Our fourth quarter ended May 31 for fiscal years 2003 and 2002,
respectively.
(5) In November of 2001, the Emerging Issues Task Force issued EITF 01-09,
"Accounting for Consideration Given by Vendor to a Customer" ("EITF 01-09")
effective for annual or interim financial statements for periods beginning after
December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of
various types of consideration given by a vendor to a customer. We adopted EITF
01-09 in fiscal 2003. Net sales are shown as if EITF 01-09 were adopted for all
periods presented. Net sales without the adjustment for EITF 01-09 were as
follows:
First Second Third Fourth
Quarter(1) Quarter(2) Quarter(3) Quarter(4)
---------- ---------- ---------- ----------
(dollars in millions)
Net Sales
2004 $202.8 $339.2 $335.7 $ -
2003 175.8 301.5 354.8 210.9
2002 138.1 272.1 304.9 181.0
(6) EBITDA is a presentation of "earnings before interest, taxes, depreciation,
and amortization." EBITDA data is included because management understands that
such information is considered by bankers and certain investors as an additional
basis on evaluating a company's ability to pay interest, repay debt and make
capital expenditures. In addition, performance bonuses paid to management are
based in part on EBITDA. EBITDA may not be comparable to similarly titled
measures reported by other companies. In addition, EBITDA is a non-GAAP measure
and should not be considered an alternative to operating or net income in
measuring company results.
Liquidity and Capital Resources
Net cash used in operating activities was $37.5 million in the first nine
months of fiscal 2004, compared to $33.1 million of cash used in operating
activities in the first nine months of fiscal 2003. In the first nine months of
fiscal 2004, major sources of funds were non-cash provisions of $17.3 million
for depreciation and amortization and an increase in accounts payable and
accrued liabilities of $44.9 million. These changes were offset by increases in
inventories of $38.0 million and accounts receivable of $88.5 million. These
changes are due to our increase in sales during the period. In the first nine
months of fiscal 2003, major sources of funds were non-cash provisions of $13.2
million for depreciation and amortization, and an increase in accounts payable
and accrued liabilities of $38.9 million. These increases were offset by
increases in inventories of $16.7 million and accounts receivable of $117.9
million. Such increases were due to the aforementioned factors relating to sales
increases.
Net cash used in investing activities was $23.3 million in the first nine
months of fiscal 2004, compared to $16.9 million in the first nine months of
fiscal 2003. Investing activities in the first nine months of fiscal 2004
consisted primarily of capital expenditures of $12.4 million related to
purchases of additional manufacturing equipment and upgrades in plant and
tooling, excluding $4.9 million of capital expenditures for the manufacturing
facility in China. Other uses included purchases of intangibles of $5.9 million.
Cash used in investing activities in the first nine months of fiscal 2003 was
primarily for capital expenditures of $13.4 million and purchases of intangibles
of $3.4 million.
Net cash provided by financing activities was $63.9 million in the first
nine months of fiscal 2004, compared to $50.0 million of cash provided by
financing activities in the first nine months of fiscal 2003. Cash provided by
financing activities resulted from net borrowings on our existing credit
facilities and the minority contribution of $3.5 million from our recent
expansion to China.
Our primary short-term liquidity needs consist of financing seasonal
merchandise inventory buildups and paying cash interest expense under our
existing credit facilities and on the 11.25% subordinated notes due in April of
2012. Our principal source of financing for our seasonal merchandise inventory
buildup and increased accounts receivable is revolving credit borrowings under
the existing credit facilities. At February 28, 2004, we had $73.3 million of
availability under these facilities. Our working capital borrowing needs are
typically at their lowest level from April through June, increase somewhat
through the summer and sharply increase from September through November to
finance accounts receivable and purchases of inventory in advance of the holiday
and post-holiday selling season. Generally, in the period from November through
February, our working capital borrowings remain at their highest level and then
are paid down to their lowest annual levels from April through August.
The credit agreement which includes the Company's $210 million revolving
credit line ("Revolver") requires the Company to maintain a lockbox arrangement
whereby remittances from the Company's customers reduce the borrowings
outstanding under the Revolver. Recently, the Company determined that the credit
agreement also contains a Material Adverse Effect ("MAE") clause which grants
the agent and lenders having more than 66 and 2/3% of the commitment or
borrowings the right to block the Company's requests for future advances. EITF
Issue 95-22 "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lockbox Arrangement" requires borrowings under credit agreements with
these two provisions to be classified as current obligations. On April 12, 2004,
the Company obtained written waivers from the agent and lenders having more than
33 and 1/3% of the commitment or borrowings waiving their rights under the MAE
clause for the period from April 13, 2004 to April 17, 2005. Accordingly, the
Company has classified the outstanding borrowings under the credit agreement,
which totaled $151.7 million as of February 28, 2004 as a long-term liability.
In addition, the Company has restated the May 31, 2003 and March 1, 2003
balance sheets to properly reflect the borrowings as current as of May 31, 2003
and March 1, 2003. This reclassification had no impact on the Company's debt
covenants under the credit agreement, its ability to draw on existing facilities
or its previously reported net income.
We do not believe that any of these MAEs have occurred or can reasonably be
expected to occur based upon our history and our relationship with the Revolver
lenders. We intend to manage the Credit Facility as long-term debt with a final
maturity date in 2007, as provided for in the credit agreement that we signed.
The balance outstanding under the existing credit facility consisted of (in
millions):
February 28, 2004 May 31, 2003 March 1, 2003
----------------- ------------ -------------
Revolver $136.7 $72.6 $133.6
Term Loan 15.0 18.7 20.0
------ ----- ------
$151.7 $91.3 $153.6
====== ===== ======
As of February 28, 2004, our consolidated indebtedness was approximately
$304.8 million, of which approximately $151.7 million was senior indebtedness.
With the exception of the increases in the revolver noted above, our contractual
cash obligations and commercial commitments remained consistent with those at
the end of fiscal 2003.
Based on our current level of operations, we believe that cash flow from
operations and available cash, together with available borrowings under our
existing credit facility, will be adequate to meet future liquidity needs for at
least the next few years. We may, however, need to refinance all or a portion of
the principal amount of the notes on or prior to maturity. In May of 2003, we
amended our credit agreement to provide for the debt financing in China.
Critical Accounting Policies
Our discussion of results of operations and financial condition relies on
our consolidated financial statements that are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. We believe that
investors need to be aware of these policies and how they impact our financial
statements as a whole, as well as our related discussion and analysis presented
herein. While we believe that these accounting policies are based on sound
measurement criteria, actual future events can and often do result in outcomes
that can be materially different from these estimates or forecasts. The
accounting policies and related risks described in our annual report on Form
10-K/A as amended with the Securities and Exchange Commission on October 14,
2003 are those that depend most heavily on these judgments and estimates. As of
February 28, 2004, there have been no material changes to any of the critical
accounting policies contained therein.
Recent Accounting Pronouncements
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, as amended, are applicable no later
than December 31, 2003. The adoption of FIN 46 did not 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 do not expect SFAS No. 150 to have a material effect on our
consolidated financial statements.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Fluctuations in the general level of interest rates on our current and
future fixed and variable rate debt obligations expose us to market risk. We are
vulnerable to significant fluctuations in interest rates on our variable rate
debt and on any future re-pricing 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 February
28, 2004, we had approximately $153.1 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 February 28,
2004 we had approximately $151.7 million in outstanding variable rate debt.
Foreign Currency Risk
In addition to the United States, we have operations or transact business
in Canada, the 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 manage foreign currency risk
related to the procurement of merchandise from foreign sources. As of February
28, 2004, the Company had foreign currency contracts in the form of forward
exchange contracts in the amount of approximately $2.4 million in U.S. dollars
and $1.9 in Canadian dollars. Unrealized gains and losses associated with these
contracts include a $25,000 loss on U.S. dollars and a $75,000 gain on Canadian
dollars. These unrealized gains and losses are included in the statement of
operations. The market risk inherent in these instruments was not material to
the Company's consolidated financial condition, results of operations, or cash
flow during the third quarter of fiscal 2004. 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.
Item 4 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of February 28, 2004 (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective in
alerting them, on a timely basis, to material information relating to us
(including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in our internal controls or in other factors that
could significantly affect such controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note C in Item 1 in Part I.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.01. Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.02. Certification of Chief Operating Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.03. Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
Report on Form 8-K dated January 6, 2004 outlining a pending management
transition based on news that Scott Watterson, Chief Executive Officer and Gary
Stevenson, Chief Operating Officer intend to resign from their respective
positions sometime in the second or third quarter of calendar 2004.
Report on Form 8-K dated January 13, 2004 containing the Company's press
release dated January 13, 2004 announcing earnings for the second quarter and
fiscal 2004, which ended November 29, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
ICON Health & Fitness, Inc.
(Registrant)
By /s/ Gary Stevensen Date: April 13, 2004
-----------------------------
Gary Stevenson, President
By /s/ S. Fred Beck Date: April 13, 2004
--------------------------------------
S. Fred Beck, Chief Financial Officer
CERTIFICATION
-------------
I, Scott R. Watterson, certify that:
1. I have reviewed this quarterly report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 13, 2004
/s/ Scott R. Watterson
- ----------------------
Scott R. Watterson
Chief Executive Officer
CERTIFICATION
--------------
I, Gary E. Stevenson, certify that:
1. I have reviewed this quarterly report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 13, 2004
/s/ Gary E. Stevenson
- ---------------------
Gary E. Stevenson
Chief Operating Officer
CERTIFICATION
--------------
I, S. Fred Beck, certify that:
1. I have reviewed this quarterly report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 13, 2004
/s/ S. Fred Beck
- ----------------
S. Fred Beck
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Name
- ----------- ----
99.01 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.02 Certification of Chief Operating Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.03 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002