10-Q 1 e10q2qf03i.txt FORM 10-Q, 2D QUARTER FISCAL 2003 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 November 30, 2002 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________to_____ Commission file number: 333-93711 ICON Health & Fitness, Inc. (Exact name of registrant as specified in its charter) Delaware 87-0531206 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 1500 South 1000 West, Logan, Utah 84321 (Address and zip code of principal executive offices) 435 750-5000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: ICON Health & Fitness, Inc. 1,000 shares. ICON Health & Fitness, Inc. INDEX Page No. -------- PART I - FINANCIAL INFORMATION 3 Item 1. Financial Statements 3-6 Condensed Consolidated Balance Sheets (unaudited) as of November 30, 2002 and May 31, 2002 3 Condensed Consolidated Statements of Operations (unaudited) for the three months ended November 30, 2002 and December 1, 2001 4 Condensed Consolidated Statements of Operations (unaudited) for the six months ended November 30, 2002 and December 1, 2001 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended November 30, 2002 and December 1, 2001 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21 Item 3 Quantitative and Qualitative Disclosures About Market Risk 21 Item 4 Controls and Procedures 22 PART II - OTHER INFORMATION 22 Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Securities Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 23 Certifications 24-26 Exhibit Index 27 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands)
November 30, 2002 May 31, 2002 ----------------- ------------ Assets Current assets Cash $ 4,372 $ 4,773 Accounts receivable, net 246,350 153,178 Inventories: Raw materials 94,312 60,136 Finished goods 106,229 73,617 -------- -------- Total inventories 200,541 133,753 Deferred income taxes 6,188 4,807 Other current assets 12,396 18,675 -------- -------- Total current assets 469,847 315,186 Property and equipment 103,135 95,950 Less accumulated depreciation (55,113) (50,965) -------- -------- Property and equipment, net 48,022 44,985 Intangible assets, net 30,877 30,201 Deferred income taxes 11,022 12,084 Other assets, net 19,070 20,768 -------- -------- Total assets $578,838 $423,224 ======== ======== Liabilities and Stockholder's Equity Current liabilities Current portion of long-term debt $ 5,004 $ 5,044 Accounts payable 166,249 113,927 Accrued expenses 25,452 23,751 Income taxes payable 3,631 5,421 Interest payable 7,626 3,045 -------- -------- Total current liabilities 207,962 151,188 Long term-debt 338,358 250,893 Other liabilities 6,842 4,934 -------- -------- Total liabilities 553,162 407,015 -------- -------- Stockholder's Equity Common stock and additional paid-in capital 204,155 204,155 Receivable from parent (2,200) (2,200) Accumulated deficit (173,681) (183,941) Accumulated other comprehensive loss (2,598) (1,805) -------- -------- Total stockholder's equity 25,676 16,209 -------- -------- Total liabilities and stockholder's equity $578,838 $423,224 ======== ========
See accompanying notes to condensed consolidated financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)
For the Three Months Ended November 30, 2002 December 1, 2001 ----------------- ---------------- Net sales $292,732 $264,631 Cost of goods sold 210,725 195,645 -------- -------- Gross profit 82,007 68,986 -------- -------- Operating expenses: Selling 30,632 22,919 Research and development 2,588 2,391 General and administrative 20,101 16,654 -------- -------- Total operating expenses 53,321 41,964 -------- -------- Income from operations 28,686 27,022 Interest expense 6,526 6,878 Amortization of deferred financing fees 184 888 -------- -------- Income before income taxes 21,976 19,256 Provision for income taxes 8,275 8,246 -------- -------- Net income 13,701 11,010 Other comprehensive loss, comprised of foreign currency translation adjustment, net of income tax benefit of $342 in 2002 and $169 in 2001. (567) (267) -------- -------- Comprehensive income $ 13,134 $ 10,743 ======== ========
See accompanying notes to condensed consolidated financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)
For the Six Months Ended November 30, 2002 December 1, 2001 ----------------- ---------------- Net sales $462,955 $398,794 Cost of goods sold 337,545 295,943 -------- -------- Gross profit 125,410 102,851 -------- -------- Operating expenses: Selling 53,102 43,840 Research and development 5,208 5,382 General and administrative 36,342 31,188 -------- -------- Total operating expenses 94,652 80,410 -------- -------- Income from operations 30,758 22,441 Interest expense 12,925 13,730 Amortization of deferred financing fees 486 1,752 -------- -------- Income before income taxes 17,347 6,959 Provision for income taxes 7,087 3,412 -------- -------- Net income 10,260 3,547 Other comprehensive loss, comprised of foreign currency translation adjustment, net of income tax benefit of $486 in 2002 and $24 in 2001. (793) (40) -------- -------- Comprehensive income $ 9,467 $ 3,507 ======== ========
See accompanying notes to condensed consolidated financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
November 30, 2002 December 1, 2001 ----------------- ---------------- OPERATING ACTIVITIES: Net income $ 10,260 $ 3,547 Adjustments to reconcile net income to net cash used in operating activities: Provision for deferred taxes 167 (83) Amortization of gain on extinguishment of debt - (650) Amortization of deferred financing fees 486 1,752 Amortization of discount on 11.25% Notes 46 - Depreciation 6,416 6,765 Amortization 1,800 1,963 Changes in operating assets and liabilities: Accounts receivable (93,172) (75,123) Inventories (66,788) (24,836) Income taxes receivable/payable (1,789) 5,542 Other assets, net 8,873 (4,456) Accounts payable and accrued expenses 59,666 45,246 -------- -------- Net cash used in operating activities (74,035) (40,333) -------- -------- INVESTING ACTIVITIES: Purchase of property and equipment (9,452) (7,144) Purchase of intangible assets (2,476) (3,299) Other assets - (226) Acquisitions, net of cash - (202) -------- -------- Net cash used in investing activities (11,928) (10,871) -------- -------- FINANCING ACTIVITIES: Proceeds from old credit facility, net of payments - 59,522 Proceed from new credit facility, net of payments 89,901 - Payments on term note (2,500) - Payments on old term notes - (5,659) Payments on other long-term debt (22) (15) Payment of fees-debt (538) (444) -------- -------- Net cash provided by financing activities 86,841 53,404 -------- -------- Effect of exchange rates on cash (1,279) (64) -------- -------- Net increase (decrease) in cash (401) 2,136 Cash, beginning of period 4,773 3,324 -------- -------- Cash, end of period $ 4,372 $ 5,460 ======== ========
See accompanying notes to condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ---------------------------------------------------------------- Note A - Basis of Presentation This report covers ICON Health & Fitness, Inc. and its subsidiaries (collectively, "the Company"). The Company's parent company, HF Holdings, Inc. ("HF Holdings"), is not a registrant. The accompanying unaudited condensed consolidated financial statements contain all adjustments which, in the Company's opinion, are necessary to present fairly its financial position at November 30, 2002 and the results of operations and cash flows for the periods ended November 30, 2002 and December 1, 2001. All adjustments in the periods presented herein are normal and recurring in nature. Certain reclassifications of previously reported financial information were made to conform to the current period's presentation. Note B - Accounting Changes In November of 2001, the Emerging Issues Task Force issued EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-09"), effective for annual or interim financial statements for periods beginning after December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. The Company adopted EITF 01-09 in fiscal 2003. Net sales for the three and six months ended December 1, 2001 are shown as if EITF 01-09 was adopted for those periods. Recently Issued Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), was issued by the Financial Accounting Standards Board in June 2001. The statement changes the accounting for goodwill from an amortization method to an impairment only approach, and the Company was required to adopt it for the fiscal year ended May 31, 2003. Prior to the adoption of SFAS 142, the Company amortized goodwill using the straight-line method over the estimated life of twenty years. Upon adoption of SFAS 142, the Company ceased amortization of goodwill (which totaled $6.3 million, net, at June 1, 2002) thereby eliminating approximately $98,000 and $196,000 in amortization expense for the three month period ended November 30, 2002 and six month period ended November 30, 2002 compared to the same periods in fiscal 2002, respectively. SFAS 142 requires that companies perform evaluations of potential impairment of goodwill at least annually. During the first quarter of fiscal 2003, the Company completed an impairment evaluation of its goodwill as of June 1, 2002. No impairment was identified. Note C - Commitments and Contingencies Due to the nature of the Company's products, the Company is subject to product liability claims involving personal injuries allegedly related to the Company's products. These claims include injuries sustained by individuals using the Company's products. The Company currently carries an occurrence-based product liability insurance policy. The current policy provides coverage for the period from October 1, 2002 to October 1, 2003 of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $1,000,000. The Company believes that its insurance is generally adequate to cover product liability claims. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation, and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to uncertainty with respect to the nature and extent of manufacturers' and distributors' liability for personal injuries, the Company cannot guarantee that its product liability insurance is or will be adequate to cover such claims. The Company vigorously defends any and all product liability claims brought against it and does not believe that any currently pending claim or series of claims will have a material adverse effect on its results of operations or financial position. The Company is a party to a variety of non-product liability commercial lawsuits involving contract claims, arising in the ordinary course of its business. The Company believes that adverse resolution of these lawsuits would not have a material adverse effect upon its results of operations or financial position. The Company is also involved in several intellectual property and patent infringement claims, arising in the ordinary course of its business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect upon its results of operations or financial position. The Company is involved in litigation with Service Merchandise in connection with its filing for bankruptcy protection. Service Merchandise filed three (3) separate adversarial proceedings against the Company in the United States Bankruptcy Court, Middle District of Tennessee, Nashville Division, alleging preferential transfer in Adversarial Proceeding Nos. 301-0738A and 301-0770A, and Breach of Contract in Adversarial Proceeding No. 301-0586A. The bankruptcy trustee has filed suit in connection with the foregoing seeking to recapture an aggregate amount of $1.7 million in payments made to the Company as a voidable preference. The summons was issued on April 16, 2001. Note D - Guarantor/Non-Guarantor Financial Information The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc., Free Motion Fitness, Inc. and ICON IP, Inc. ("Subsidiary Guarantors") have fully and unconditionally guaranteed on a joint and several basis, the obligation to pay principal and interest with respect to the 11.25% Notes. A significant portion of the Company's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Company's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company's subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 11.25% Notes. Although holders of the 11.25% Notes will be direct creditors of the Company's principal direct subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the 11.25% Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Company, including the holders of the 11.25% Notes. The following supplemental condensed consolidating financial statements are presented (in thousands): 1. Condensed consolidating balance sheets as of November 30, 2002 and May 31, 2002, condensed consolidating statements of operations for the three months and six months ended November 30, 2002 and December 1, 2001, and condensed consolidating statements of cash flows for the six months ended November 30, 2002 and December 1, 2001. 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 November 30, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash $ 1,589 $ 1,438 $ 1,345 $ - $ 4,372 Accounts receivable, net 199,597 57,687 12,604 (23,538) 246,350 Inventories, net 125,992 65,573 9,484 (508) 200,541 Deferred income taxes 5,894 210 84 - 6,188 Other current assets 3,435 5,938 3,023 - 12,396 -------- -------- ------- --------- -------- Total current assets 336,507 130,846 26,540 (24,046) 469,847 -------- -------- ------- --------- -------- Property and equipment, net 37,110 10,053 859 - 48,022 Receivable from affiliates 99,439 15,155 - (114,594) - Intangible assets, net 21,622 8,037 1,218 - 30,877 Deferred income taxes 9,830 1,192 - - 11,022 Investment in subsidiaries 44,909 - - (44,909) - Other assets, net 19,052 - 18 - 19,070 -------- -------- ------- --------- -------- Total Assets $568,469 $165,283 $28,635 $(183,549) $578,838 ======== ======== ======= ========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ 4 $ - $ - $ 5,004 Accounts payable 131,980 34,094 23,713 (23,538) 166,249 Accrued expenses 14,419 7,798 3,235 - 25,452 Income taxes payable 3,010 501 120 - 3,631 Interest payable 7,626 - - - 7,626 -------- --------- ------- --------- -------- Total current liabilities 162,035 42,397 27,068 (23,538) 207,962 -------- --------- ------- --------- -------- Long-term debt 338,340 18 - - 338,358 Other long-term liabilities 3,146 3,696 - - 6,842 Payable to affiliates 15,155 78,109 21,330 (114,594) - Stockholder's Equity (deficit): Common stock and additional paid-in capital 206,324 37,259 5,481 (44,909) 204,155 Receivable from parent (2,200) - - - (2,200) Accumulated deficit (154,813) 5,215 (23,575) (508) (173,681) Accumulated other comprehensive income (loss) 482 (1,411) (1,669) - (2,598) -------- --------- ------- --------- -------- Total stockholder's equity (deficit) 49,793 41,063 (19,763) (45,417) 25,676 -------- --------- ------- --------- -------- Total Liabilities and Stockholder's Equity $568,469 $165,283 $28,635 $(183,549) $578,838 ======== ======== ======= ========== ========
Supplemental Condensed Consolidating Balance Sheet May 31, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash $ 327 $ 1,448 $ 2,998 $ - $ 4,773 Accounts receivable, net 104,553 54,071 11,249 (16,695) 153,178 Inventories, net 82,558 45,657 5,847 (309) 133,753 Deferred income taxes 4,591 214 2 - 4,807 Other current assets 8,472 8,457 1,746 - 18,675 -------- -------- ------- --------- -------- Total current assets 200,501 109,847 21,842 (17,004) 315,186 -------- -------- ------- --------- -------- Property and equipment, net 34,031 10,101 853 - 44,985 Receivable from affiliates 81,636 16,361 - (97,997) - Intangible assets, net 20,466 8,517 1,218 - 30,201 Deferred income taxes 11,402 377 305 - 12,084 Investment in subsidiaries 44,909 - - (44,909) - Other assets, net 20,756 - 12 - 20,768 -------- -------- ------- --------- -------- Total Assets $413,701 $145,203 $24,230 $(159,910) $423,224 ======== ======== ======= ========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ 44 $ - $ - $ 5,044 Accounts payable 81,909 28,586 20,127 (16,695) 113,927 Accrued expenses 16,280 4,998 2,473 - 23,751 Income taxes payable - 5,069 352 - 5,421 Interest payable 3,045 - - - 3,045 -------- -------- ------- --------- -------- Total current liabilities 106,234 38,697 22,952 (16,695) 151,188 -------- -------- ------- --------- -------- Long-term debt 247,197 3,696 - - 250,893 Other liabilities 4,934 - - - 4,934 Payable to affiliates 16,361 60,784 20,852 (97,997) - Stockholder's Equity (deficit): Common stock and additional paid-in capital 206,324 37,259 5,481 (44,909) 204,155 Receivable from parent (2,200) - - - (2,200) Accumulated deficit (165,149) 5,632 (24,115) (309) (183,941) Accumulated other comprehensive loss - (865) (940) - (1,805) -------- -------- ------- --------- -------- Total stockholder's equity (deficit) 38,975 42,026 (19,574) (45,218) 16,209 -------- -------- ------- --------- -------- Total Liabilities and Stockholder's Equity $413,701 $145,203 $24,230 $(159,910) $423,224 ======== ======== ======= ========== ========
Supplemental Condensed Consolidating Statement of Operations Three Months Ended November 30, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $208,156 $68,315 $16,261 $ - $292,732 Cost of sales 157,648 43,840 9,146 91 210,725 -------- ------- ------- ---- -------- Gross profit 50,508 24,475 7,115 (91) 82,007 Total operating expenses 24,319 23,657 5,345 - 53,321 -------- ------- ------- ---- -------- Income from operations 26,189 818 1,770 (91) 28,686 Interest expense 6,080 1 445 - 6,526 Amortization of deferred financing fees 184 - - - 184 -------- ------- ------- ---- -------- Income before income taxes 19,925 817 1,325 (91) 21,976 Provision for income taxes 8,012 26 237 - 8,275 -------- ------- ------- ---- -------- Net income $ 11,913 $ 791 $ 1,088 $(91) $ 13,701 ======== ======= ======= ===== ========
Supplemental Condensed Consolidating Statement of Operations Three Months Ended December 1, 2001 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $192,656 $58,889 $13,086 $ - $264,631 Cost of sales 148,279 38,906 8,639 (179) 195,645 -------- ------- ------- ----- -------- Gross profit 44,377 19,983 4,447 179 68,986 Total operating expenses 16,642 21,514 3,808 - 41,964 -------- ------- ------- ----- -------- Income (loss) from operations 27,735 (1,531) 639 179 27,022 Interest expense 5,692 642 544 - 6,878 Amortization of deferred financing fees 888 - - - 888 -------- ------- ------- ----- -------- Income (loss) before taxes 21,155 (2,173) 95 179 19,256 Provision (benefit) for income taxes 9,311 (960) (105) - 8,246 -------- -------- ------- ----- -------- Net income (loss) $ 11,844 $(1,213) $ 200 $ 179 $ 11,010 ======== ======== ======= ===== ========
Supplemental Condensed Consolidating Statement of Operations Six Months Ended November 30, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $314,555 $124,585 $23,815 $ - $462,955 Cost of sales 240,821 82,489 14,036 199 337,545 -------- -------- ------- ----- -------- Gross profit 73,734 42,096 9,779 (199) 125,410 Total operating expenses 44,074 42,459 8,119 - 94,652 -------- -------- ------- ----- -------- Income (loss) from operations 29,660 (363) 1,660 (199) 30,758 Interest expense 12,036 5 884 - 12,925 Amortization of deferred financing fees 486 - - - 486 -------- -------- ------- ----- -------- Income (loss) before taxes 17,138 (368) 776 (199) 17,347 Provision for income taxes 6,802 48 237 - 7,087 -------- -------- ------- ----- -------- Net income (loss) $ 10,336 $ (416) $ 539 $(199) $ 10,260 ======== ========= ======= ====== ========
Supplemental Condensed Consolidating Statement of Operations Six Months Ended December 1, 2001 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $288,785 $91,215 $18,794 $ - $398,794 Cost of sales 219,862 63,548 12,656 (123) 295,943 -------- ------- ------- ----- -------- Gross profit 68,923 27,667 6,138 123 102,851 Total operating expenses 42,285 31,998 6,127 - 80,410 -------- ------- ------- ----- -------- Income (loss) from operations 26,638 (4,331) 11 123 22,441 Interest expense 11,652 1,170 908 - 13,730 Amortization of deferred financing fees 1,752 - - - 1,752 -------- ------- ------- ----- -------- Income (loss) before income taxes 13,234 (5,501) (897) 123 6,959 Provision (benefit) for income taxes 5,289 (1,793) (84) - 3,412 -------- ------- ------- ----- -------- Net income (loss) $ 7,945 $(3,708) $ (813) $ 123 $ 3,547 ======== ======== ======== ===== ========
Supplemental Condensed Consolidating Statement of Cash Flows Six Months Ended November 30, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Operating activities: Net cash used in operating activities: $(55,717) $(16,787) $(1,531) $ - $(74,035) -------- -------- ------- ------ -------- Investing activities: Net cash used in investing activities: (10,391) (1,361) (176) - (11,928) -------- -------- ------- ------ -------- Financing activities: Proceeds from new credit facility, net 89,901 - - - 89,901 Payments on term note (2,500) - - - (2,500) Payments on other long-term debt, net - (22) - - (22) Payment of fees-debt (538) - - - (538) Other (19,009) 18,531 478 - - -------- -------- ------- ------ -------- Net cash provided by financing activities: 67,854 18,509 478 - 86,841 -------- -------- ------- ------ -------- Effect of exchange rate changes on cash (484) (371) (424) - (1,279) -------- -------- ------- ------ -------- Net increase (decrease) in cash 1,262 (10) (1,653) - (401) Cash, beginning of period 327 1,448 2,998 - 4,773 -------- -------- ------- ------ -------- Cash, end of period $ 1,589 $ 1,438 $ 1,345 $ - $ 4,372 ======== ======== ======= ====== ========
Supplemental Condensed Consolidating Statement of Cash Flows Six Months Ended December 1, 2001 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Operating activities: Net cash used in operating activities: $(22,025) $(17,582) $ (726) $ - $(40,333) -------- -------- ------ ---- -------- Investing activities: Net cash used in investing activities: (8,255) (2,298) (318) - (10,871) -------- -------- ------ ---- -------- Financing activities: Proceeds from old credit facility, net 59,522 - - - 59,522 Payments on old term notes (5,659) - - - (5,659) Payments on other long-term debt - (15) - - (15) Payment of fees-debt (444) - - - (444) Other (22,525) 21,694 831 - - -------- -------- ------ ---- -------- Net cash provided by financing activities: 30,894 21,679 831 - 53,404 -------- -------- ------ ---- -------- Effect of exchange rate changes on cash - (242) 178 - (64) -------- -------- ------ ---- -------- Net increase (decrease) in cash 614 1,557 (35) - 2,136 Cash, beginning of period 1,036 1,192 1,096 - 3,324 -------- -------- ------ ---- -------- Cash, end of period $ 1,650 $ 2,749 $1,061 $ - $ 5,460 ======== ======== ====== ==== ========
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. Three Months Ended November 30, 2002 Compared to Three Months Ended December 1, 2001 -------------------------------------------------------------------- Net sales for the second quarter of fiscal 2003 increased $28.1 million, or 10.6%, to $292.7 million from $264.6 million in the comparable period in 2002. Sales increased primarily due to increased customer demand. Sales of the Company's cardiovascular and other equipment in the second quarter of fiscal 2003 increased $26.6 million, or 12.1%, to $246.3 million. Sales of the Company's strength training equipment in the second quarter of fiscal 2003 increased $1.5 million, or 3.3%, to $46.5 million. Gross profit in the second quarter of fiscal 2003 was $82.0 million, or 28.0% of net sales, compared to $69.0 million, or 26.1% of net sales, in the second quarter of fiscal 2002. This 18.8% increase was largely due to increased direct to consumer sales, changes in product mix and manufacturing efficiencies. Selling expenses increased $7.7 million, or 33.6%, to $30.6 million in the second quarter of fiscal 2003. This increase reflected increased bad debt expense associated with the Kmart Corporation bankruptcy filing and increased direct consumer advertising. Expressed as a percentage of net sales, selling expenses were 10.5% in the second quarter of fiscal 2003 and 8.7% in the second quarter of fiscal 2002. Research and development expenses increased $0.2 million, or 8.3%, to $2.6 million in the second quarter of fiscal 2003. Expressed as a percentage of net sales, research and development expenses were 0.9% in the second quarter of fiscal 2003 and fiscal 2002. General and administrative expenses increased $3.4 million, or 20.4%, to $20.1 million in the second quarter of fiscal 2003. This increase was attributable to significant increases in insurance costs, higher salaries and wages, supplies, and rent and lease expense. Expressed as a percentage of net sales, general and administrative expenses were 6.9% in the second quarter of fiscal 2003 and 6.3% in the second quarter of fiscal 2002. As a result of the foregoing factors, operating income increased $1.7 million, or 6.3%, to $28.7 million in the second quarter of fiscal 2003. Expressed as a percentage of net sales, operating income was 9.8% in the second quarter of fiscal 2003 compared with 10.2% in the second quarter of fiscal 2002. As a result of the foregoing factors, EBITDA was $32.7 million, or 11.2% of net sales, in the second quarter of fiscal 2003, compared to $31.3 million, or 11.8% of net sales, in the second quarter of fiscal 2002. Interest expense including amortization of deferred financing fees decreased $1.1 million, or 14.1%, to $6.7 million for the second quarter of fiscal 2003. This decrease reflects lower interest rates during the 2003 period. Expressed as a percentage of net sales, interest expense including amortization of deferred financing fees was 2.3% in the second quarter of fiscal 2003 and 2.9% in the second quarter of fiscal 2002. The provision for income taxes was $8.3 million for the second quarter of fiscal 2003, compared to a provision of $8.2 million in the second quarter of fiscal 2002. Income tax expense, as a percentage of pre-tax income, was 37.7% in the second quarter of fiscal 2003, compared to 42.5% in the second quarter of fiscal 2002. The change in the effective tax rate was primarily the result of adjustments from an Internal Revenue Service audit where previously deducted expenses were capitalized and are being amortized over a fifteen year period. As a result of the foregoing factors, net income was $13.7 million for the second quarter of fiscal 2003, compared to net income in the second quarter of fiscal 2002 of $11.0 million, an increase of 24.5% over the same period last year. Six Months Ended November 30, 2002 Compared to Six Months Ended December 1, 2001 -------------------------------------------------------------------------------- During the first six months of fiscal 2003, net sales increased $64.2 million, or 16.1%, to $463.0 million from $398.8 million in the first six months of fiscal 2002. Sales increased primarily due to customer demand. Sales of the Company's cardiovascular and other equipment in the first six months of fiscal 2003 increased $64.9 million or 19.8%, to $393.0 million. Sales of the Company's strength training equipment in the first six months of fiscal 2003 decreased $0.8 million, or 1.2%, to $69.9 million. Gross profit for the first six months of fiscal 2003 was $125.4 million, or 27.1% of net sales, compared to $102.9 million, or 25.8% of net sales, for the first six months of fiscal 2002. This 21.9% increase was largely due to increased direct to consumer sales, changes in product mix and manufacturing efficiencies. Selling expenses increased $9.3 million, or 21.2%, to $53.1 million in the first six months of fiscal 2003. This increase reflected increased bad debt expense associated with the Kmart Corporation bankruptcy filing and increased direct consumer advertising. Expressed as a percentage of net sales, selling expenses were 11.5% in the first six months of fiscal 2003 and 11.0% in the first six months of fiscal 2002. Research and development expenses decreased $0.2 million, or 3.7%, to $5.2 million in the first six months of fiscal 2003. Expressed as a percentage of net sales, research and development expenses were 1.1% in the first six months of fiscal 2003 and 1.4% in the first six months of fiscal 2002. General and administrative expenses increased $5.1 million, or 16.3%, to $36.3 million in the first six months of fiscal 2003. This increase was attributable to significant increases in insurance costs, higher salaries and wages, supplies, and rent and lease expense. Expressed as a percentage of net sales, general and administrative expenses were 7.8% in the first six months of fiscal 2003 and fiscal 2002. As a result of the foregoing factors, operating income increased $8.4 million, or 37.5%, to $30.8 million in the first six months of fiscal 2003. Expressed as a percentage of net sales, operating income was 6.7% in the first six months of fiscal 2003 compared with 5.6% in the second quarter of fiscal 2002. As a result of the foregoing factors, EBITDA was $39.0 million, or 8.4% of net sales, in the first six months of fiscal 2003, compared to $31.2 million, or 7.8% of net sales, in the first six months of fiscal 2002. Interest expense including amortization of deferred financing fees decreased $2.1 million, or 13.5%, to $13.4 million in the first six months of fiscal 2003. This decrease reflects lower interest rates during the 2003 period. Expressed as a percentage of net sales, interest expense including amortization of deferred financing fees was 2.9% in the first six months of fiscal 2003 and 3.9% in the first six months of fiscal 2002. The provision for income taxes was $7.1 million for the first six months of fiscal 2003, compared to a provision of $3.4 million for the first six months of fiscal 2002. Income tax expense, as a percentage of pre-tax income, for the six month period ended November 30, 2002, was 41.0%, compared to 48.6% in the six month period ended December 1, 2001. The change in the effective tax rate was primarily the result of adjustments from an Internal Revenue Service audit where previously deducted expenses were capitalized and are being amortized over a fifteen year period. As a result of the foregoing factors, net income was $10.3 million for the first six months of fiscal 2003, compared to net income in the first six months of fiscal 2002 of $3.5 million, an increase of 194.3% over the same period last year. Seasonality The following are the net sales, net income (loss) and EBITDA by quarter for fiscal years 2003, 2002 and 2001:
First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- ---------- ---------- (dollars in millions) Net Sales (5) $170.2 $292.7 $ - $ - 2002 134.2 264.6 296.0 176.6 2001 125.9 267.6 247.6 155.9 Net Income (Loss) (3.4) 13.7 - - 2002 (7.5) 11.1 25.5 (9.7) 2001 (8.2) 11.7 10.8 (1.0) EBITDA 2003 6.3 32.7 - - 2002 (0.1) 31.3 38.7 5.8 2001 1.6 34.2 32.2 4.1 ----------- (1) The Company's first quarter ended August 31, September 1, and September 2 for fiscal years 2003, 2002 and 2001, respectively. (2) The Company's second quarter ended November 30, December 1, and December 2 for fiscal years 2003, 2002 and 2001, respectively. (3) The Company's third quarter ended March 2 and March 3 for fiscal years 2002 and 2001, respectively. (4) The Company's fourth quarter ended May 31 for the fiscal years 2002 and 2001, respectively. (5) In November of 2001, the Emerging Issues Task Force issued EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-09") effective for annual or interim financial statements for periods beginning after December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. The Company adopted EITF 01-09 in fiscal 2003. Net sales are shown as if EITF 01-09 were adopted for all periods presented. Net sales without the adjustment for EITF 01-09 were as follows: First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- --------- ---------- (dollars in millions) Net Sales (5) 2003 $175.8 $301.5 $ - $ - 2002 138.1 272.1 304.9 181.0 2001 129.5 276.0 254.6 160.4
The Company sells a majority of its products to customers in its second and third fiscal quarters (i.e., from September through February). Increased sales and distribution typically occur in the Christmas retail season and the beginning of a new calendar year because of increased promotions by the Company's retail customers, increased consumer purchases and seasonal changes that prompt people to exercise inside. If actual sales for a quarter do not meet or exceed projected sales for that quarter, expenditures and inventory levels could be disproportionately high for such quarter and the Company's cash flow for that quarter and future quarters could be adversely affected. The timing of large orders from customers and the mix of products sold may also contribute to periodic fluctuations. Liquidity and Capital Resources Net cash used in operating activities was $74.0 million in the first six months of fiscal 2003, compared to $40.3 million of cash used in operating activities in the first six months of fiscal 2002. In the first six months of fiscal 2003, major sources of funds were non-cash provisions of $8.2 million for depreciation and amortization, and an increase in accounts payable and accrued expenses of $59.7 million. These changes were offset by increases in inventories of $66.8 million and accounts receivable of $93.2 million. These changes are due to the Company's increasing sales during the course of the first several months of the fiscal year leading up to its peak selling season, which occurs between the months of October and December. In the first six months of fiscal 2002, major sources of funds were non-cash provisions of $8.7 million for depreciation and amortization, an increase in accounts payable and accrued expenses of $45.2 million. These increases were offset by increases in inventories of $24.8 million and accounts receivable of $75.1 million. Such increases were due to the aforementioned factors relating to sales increases. Net cash used in investing activities was $11.9 million in the first six months of fiscal 2003, compared to $10.9 million in the first six months of fiscal 2002. Investing activities in the first six months of fiscal 2003 consisted primarily of capital expenditures of $9.5 million related to upgrades in plant and tooling, purchases of additional manufacturing equipment and purchases of intangibles of $2.5 million. Cash used in investing activities in the first six months of fiscal 2002 was primarily for capital expenditures of $7.1 million and purchases of intangibles of $3.3 million. Net cash provided by financing activities was $86.8 million in the first six months of fiscal 2003, compared to $53.4 million of cash provided by financing activities in the first six months of fiscal 2002. Cash provided by financing activities resulted from the Company's net borrowings on its existing credit facilities. On January 22, 2002, Kmart, a customer for over a decade, filed for bankruptcy protection. At the time of the filing, the Company had $12.1 million of unsecured accounts receivable outstanding with Kmart. As of November 30, 2002, the Company had a dedicated reserve of $6.1 million against these receivables. The Company recognizes that a considerable amount of judgment is required to assess the ultimate realization of accounts receivable, and therefore, re-evaluates the collectibility of these pre-petition receivables from Kmart on a continuous basis. Additional adjustments for Kmart and other potentially uncollectible accounts receivable may be appropriate in future periods. For the six month period ending November 30, 2002, the Company had net sales to Kmart of $21.5 million, representing approximately 4.6% of total net sales for that six month period. In the first six months of fiscal 2002, the Company had net sales to Kmart of approximately $30.6 million, representing approximately 7.7% of total net sales for that period. Kmart has secured debtor in possession financing and continues to operate in bankruptcy. The Company resumed shipments to Kmart as of February 5, 2002 with payment terms of 30 days, reduced from 60 days. The Company's primary short-term liquidity needs consist of financing seasonal merchandise inventory buildups and paying cash interest expense under its existing credit facilities and on the 11.25% subordinated notes due in April 2012. The Company's principal source of financing for its seasonal merchandise inventory buildup and increased accounts receivable is revolving credit borrowings under its existing credit facilities. At November 30, 2002, the Company had $40.8 million of availability under these facilities. The Company's working capital borrowing needs are typically at its lowest level from April through June, increase somewhat through the summer and sharply increase from September through November to finance accounts receivable and purchases of inventory in advance of the Christmas and post-holiday selling season. Generally, in the period from November through February, working capital borrowings remain at its highest level and then are paid down to its lowest annual levels from April through August. In connection with the Company's debt refinancing in April 2002, the Company entered into its existing credit facility totaling $235.0 million of revolving and term loans with a syndicate of banks and financial services companies. Proceeds of the Company's existing credit facility were used to refinance the Company's then existing senior credit facilities and 12% senior subordinated notes due 2005, to fund transaction fees and expenses, and to provide general working capital. The Company has a significant amount of indebtedness. The Company's consolidated indebtedness consists of the following (table in thousands): November 30, 2002 May 31, 2002 ----------------- ------------ Revolver $169.2 $ 79.3 Term Loan 21.3 23.8 11.25% Senior Subordinated Notes 152.9 152.8 ------ ------ $343.4 $255.9 ====== ====== The Company's ability to make scheduled payments of principal, or to pay the interest, or to refinance its indebtedness, including the 11.25% Notes, or to fund planned capital expenditures will depend on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company's control. Based on the Company's current level of operations, management believes that cash flow from operations and available cash, together with available borrowings under the Company's new credit facility, will be adequate to meet future liquidity needs for at least the next few years. The Company may, however, need to refinance all or a portion of the principal amount of the notes on or prior to maturity. The Company cannot assure you that its business will generate sufficient cash flow from operations, or that future borrowings will be available under its new credit facility in an amount sufficient to enable the Company to service its indebtedness, including the 11.25% Notes, or to fund its other liquidity needs. In addition, the Company cannot assure you that it will be able refinance any of its indebtedness, including the new credit facility and the 11.25% Notes, on commercially reasonable terms or at all. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which provides a comprehensive standard of accounting for business combinations. SFAS 141 is effective for all business combinations after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which requires a change in accounting for goodwill and certain other intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritative pronouncements to make various technical corrections, clarify meaning, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 and will require the modification of prior financial statements to reclassify the 2002 loss on debt extinguishment from extraordinary to income from continuing operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Based on current circumstances, except for SFAS 145, the Company believes that the application of the new accounting rules described above will not have a material impact on its financial statements. Item 3 Quantitative and Qualitative Disclosures about Market Risk Fluctuations in the general level of interest rates on the Company's current and future fixed and variable rate debt obligations expose it to market risk. The Company is vulnerable to significant fluctuations in interest rates on its variable rate debt and on any future repricing or refinancing of its fixed rate debt and on future debt. The Company uses long-term and medium-term debt as a source of capital. At November 30, 2002, the Company had approximately $152.9 million in outstanding fixed rate debt, consisting of 11.25% subordinated notes maturing in April 2012. When debt instruments of this type mature, the Company typically refinances such debt at the then-existing market interest rates, which may be more or less than the interest rates on the maturing debt. The Company's credit facility has variable interest rates and any fluctuation in interest rates could increase or decrease its interest expense. At November 30, 2002, the Company had approximately $190.5 million in outstanding variable rate debt. Due to the uncertainty of fluctuations in interest rates and the specific actions that might be taken by the Company to mitigate the impact of such fluctuations and their possible effects, the Company assumes no changes in its financial structure. The Company imports certain finished products and components from Canada and Asia. All purchases from Asia have been fixed in United States dollars and, therefore, the Company is not subject to foreign currency fluctuations on such purchases, although the Company's vendors may respond to foreign currency fluctuations by seeking to raise their prices. U.S. purchases of inventory from Canada are settled in Canadian dollars and therefore the Company is subject to fluctuations in the value of the Canadian dollar, which could have an impact on the Company's operating results. In addition, European purchases of inventory from Canada and the U.S. are settled in U.S. and Canadian dollars and, therefore, are subject to fluctuations in the value of the U.S. and Canadian dollars, which also could have an impact on the Company's operating results. In connection with the importation of products and components from Canada, the Company from time to time engages in hedging transactions by entering into forward contracts for the purchase of Canadian dollars, which are designed to protect against such fluctuations. The Company's hedging transactions do not subject it to exchange rate risk because gains and losses on these contracts offset losses and gains on the transaction being hedged. As of November 30, 2002, the Company had no open forward exchange contracts to sell Canadian dollars. During the first six months of fiscal years 2001 and 2002, the Company recognized no significant gains or losses upon settlement of foreign currency transactions denominated in Canadian dollars. Item 4 Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive officer, Chief Operating Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them, on a timely basis, to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART II - OTHER INFORMATION Item 1. Legal Proceedings. See note B Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.01. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.02. Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.03. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized. ICON Health & Fitness, Inc. (Registrant) By /s/ Gary E. Stevenson Date: January 14, 2003 ----------------------- Gary E. Stevenson Chief Operating Officer By /s/ S. Fred Beck Date: January 14, 2003 ----------------------- S. Fred Beck Chief Financial Officer CERTIFICATION -------------- I, Scott R. Watterson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ Scott R. Watterson Date: January 14, 2003 ------------------------- Scott R. Watterson Chief Executive Officer CERTIFICATION -------------- I, Gary E. Stevenson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ Gary E. Stevenson Date: January 14, 2003 ------------------------ Gary E. Stevenson Chief Operating Officer CERTIFICATION -------------- I, S. Fred Beck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ S. Fred Beck Date: January 14, 2003 ----------------------- S. Fred Beck Chief Financial Officer EXHIBIT INDEX Exhibit No. Name ----------- ---- 99.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.02 Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.03 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002