-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CMKSZKc1txMJEoGuqSbROoouztpgb4CwHzzUHyS525hsoBnLxDCLpbgxWzyhNRyh O6jDiDnoewUK0xhvUnMqkg== 0000934798-03-000015.txt : 20030414 0000934798-03-000015.hdr.sgml : 20030414 20030414173013 ACCESSION NUMBER: 0000934798-03-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030301 FILED AS OF DATE: 20030414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON INTERNATIONAL HOLDINGS INC CENTRAL INDEX KEY: 0000785312 IRS NUMBER: 841425493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-93711-01 FILM NUMBER: 03649263 BUSINESS ADDRESS: STREET 1: C/O ICON HEALTH & FITNESS INC STREET 2: 1500 SOUTH 100 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREE MOTION FITNESS INC CENTRAL INDEX KEY: 0001174469 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-89440-02 FILM NUMBER: 03649261 BUSINESS ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 MAIL ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORDICTRACK INC CENTRAL INDEX KEY: 0001174470 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-89440-01 FILM NUMBER: 03649262 BUSINESS ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 MAIL ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON IP INC CENTRAL INDEX KEY: 0001182076 IRS NUMBER: 870649577 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-89440-07 FILM NUMBER: 03649260 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357505000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 510152 N B LTD CENTRAL INDEX KEY: 0001101202 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-93711-04 FILM NUMBER: 03649259 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL TECHNICAL SERVICES INC CENTRAL INDEX KEY: 0001101200 IRS NUMBER: 870468754 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-93711-02 FILM NUMBER: 03649264 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JUMPKING INC CENTRAL INDEX KEY: 0001101201 IRS NUMBER: 870481821 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-93711-03 FILM NUMBER: 03649265 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON HEALTH & FITNESS INC CENTRAL INDEX KEY: 0000934798 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 870531206 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-87930 FILM NUMBER: 03649258 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 10-Q 1 e10q3qf03.txt FORM 10-Q 3Q F2003 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [*]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 1, 2003 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________to_____ Commission file number: 333-93711 ICON Health & Fitness, Inc. (Exact name of registrant as specified in its charter) Delaware 87-0531206 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 1500 South 1000 West, Logan, Utah 84321 (Address and zip code of principal executive offices) 435 750-5000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: ICON Health & Fitness, Inc. 1,000 shares. ICON Health & Fitness, Inc. INDEX Page No. -------- PART I - FINANCIAL INFORMATION 3 Item 1. Financial Statements 3-6 Condensed Consolidated Balance Sheets (unaudited) as of March 1, 2003 and May 31, 2002 3 Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 1, 2003 and March 2, 2002 4 Condensed Consolidated Statements of Operations (unaudited) for the nine months ended March 1, 2003 and March 2, 2002 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 1, 2003 and March 2, 2002 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 24 PART II - OTHER INFORMATION 24 Item 1. Legal Proceedings 24 Item 2. Changes in Securities 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Securities Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 25 Certifications 26-28 Exhibit Index 29 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands)
March 1, 2003 May 31, 2002 ------------- ------------ Assets Current assets Cash $ 4,508 $ 4,773 Accounts receivable, net 277,459 153,178 Inventories: Raw materials 62,906 60,136 Finished goods 87,589 73,617 -------- -------- Total inventories 150,495 133,753 Deferred income taxes 5,942 4,807 Other current assets 9,562 18,675 -------- -------- Total current assets 447,966 315,186 Property and equipment 107,074 95,950 Less accumulated depreciation (58,449) (50,965) -------- -------- Property and equipment, net 48,625 44,985 Intangible assets, net 30,191 30,201 Deferred income taxes 10,189 12,084 Other assets, net 13,113 20,768 -------- -------- Total assets $550,084 $423,224 ======== ======== Liabilities and Stockholder's Equity Current liabilities Current portion of long-term debt $ 5,000 $ 5,044 Accounts payable 138,112 113,927 Accrued expenses 37,355 23,751 Income taxes payable 10,727 5,421 Interest payable 3,246 3,045 -------- -------- Total current liabilities 194,440 151,188 Long-term debt 301,489 250,893 Other liabilities 7,170 4,934 -------- -------- Total liabilities 503,099 407,015 -------- -------- Stockholder's Equity Common stock and additional paid-in capital 204,155 204,155 Receivable from parent (2,200) (2,200) Accumulated deficit (153,357) (183,941) Accumulated other comprehensive loss (1,613) (1,805) -------- -------- Total stockholder's equity 46,985 16,209 -------- -------- Total liabilities and stockholder's equity $550,084 $423,224 ======== ========
See accompanying notes to condensed consolidated financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)
For the Three Months Ended March 1, 2003 March 2, 2002 ------------- ------------- Net sales $343,983 $295,976 Cost of sales 237,849 210,419 -------- -------- Gross profit 106,134 85,557 -------- -------- Operating expenses: Selling 43,064 29,532 Research and development 3,210 2,502 General and administrative 22,284 19,769 -------- -------- Total operating expenses 68,558 51,803 -------- -------- Income from operations 37,576 33,754 Interest expense 6,340 5,977 Amortization of deferred financing fees 184 900 -------- -------- Income before income taxes 31,052 26,877 Provision for income taxes 10,728 1,372 -------- -------- Net income 20,324 25,505 Other comprehensive income (loss), comprised of foreign currency translation adjustment, net of income tax provision of $375 in 2003 and net of income tax benefit of $353 in 2002. 611 (575) -------- -------- Comprehensive income $20,935 $24,930 ======== ========
See accompanying notes to condensed consolidated financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)
For the Nine Months Ended March 1, 2003 March 2, 2002 ------------- ------------- Net sales $806,937 $694,770 Cost of sales 575,393 506,361 -------- -------- Gross profit 231,544 188,409 -------- -------- Operating expenses: Selling 96,166 73,372 Research and development 8,419 7,884 General and administrative 58,625 50,957 -------- -------- Total operating expenses 163,210 132,213 -------- -------- Income from operations 68,334 56,196 Interest expense 19,266 19,707 Amortization of deferred financing fees 670 2,652 -------- -------- Income before income taxes 48,398 33,837 Provision for income taxes 17,814 4,784 -------- -------- Net income 30,584 29,053 Other comprehensive loss, comprised of foreign currency translation adjustment, net of income tax benefit of $99 in 2003 and $377 in 2002. (194) (615) -------- -------- Comprehensive income $ 30,390 $ 28,438 ======== ========
See accompanying notes to condensed consolidated financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
For the Nine Months Ended March 1, 2003 March 2, 2002 ------------- ------------- OPERATING ACTIVITIES: Net income $ 30,584 $ 29,053 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision (benefit) for deferred taxes 1,246 (11,697) Amortization of gain on extinguishment of debt - (975) Amortization of deferred financing fees 670 2,652 Amortization of discount on 11.25% Notes 59 - Depreciation 9,742 10,013 Amortization 3,425 3,658 Changes in operating assets and liabilities, net of acquisition: Accounts receivable (124,281) (38,596) Inventories (16,742) 24,075 Income taxes receivable/payable 5,306 12,630 Other assets, net 17,862 (9,757) Accounts payable and accrued expenses 38,852 5,444 Interest payable 201 61 -------- -------- Net cash provided by (used in) operating activities (33,076) 26,561 -------- -------- INVESTING ACTIVITIES: Purchase of property and equipment (13,382) (8,921) Purchase of intangible assets (3,415) (4,337) Increase in other assets (53) (663) Acquisitions, net of cash - (306) -------- -------- Net cash used in investing activities (16,850) (14,227) -------- -------- FINANCING ACTIVITIES: Proceeds from old credit facility, net of payments - 4,855 Proceed from new credit facility, net of payments 54,270 - Payments on term notes (3,750) (5,177) Payments on other long-term debt (27) (2,414) Payment of fees-debt (539) (503) -------- -------- Net cash provided by (used in) financing activities 49,954 (3,239) -------- -------- Effect of exchange rates on cash (293) (992) -------- -------- Net increase (decrease) in cash (265) 8,103 Cash, beginning of period 4,773 3,324 -------- -------- Cash, end of period $4,508 $11,427 ======== ========
See accompanying notes to condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - ---------------------------------------------------------------- Note A - Basis of Presentation This report covers ICON Health & Fitness, Inc. and its subsidiaries (collectively, "the Company"). The Company's parent company, HF Holdings, Inc. ("HF Holdings"), is not a registrant. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. In addition, certain reclassifications have been made to the fiscal 2002 consolidated financial statements to conform to the fiscal 2003 presentation. The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three months and nine months ended March 1, 2003 and March 2, 2002, respectively. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended May 31, 2002 included in the Company's registration statement on Form S-4 as filed with the Securities and Exchange Commission on October 4, 2002 and quarterly reports on Form 10-Q for the quarterly periods ended November 30, 2002 and August 31, 2002. Interim results including comparative balance sheets are not necessarily indicative of results for the full fiscal year due to the inherent seasonality in the Company's business. See "Seasonality" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies and Estimates The Company's discussion of results of operations and financial condition relies on its consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. The Company believes that investors need to be aware of these policies and how they impact its financial statements as a whole, as well as its related discussion and analysis presented herein. While the Company believes that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in the Company's registration statement on Form S-4 as filed with the Securities and Exchange Commission on October 4, 2002 are those that depend most heavily on these judgments and estimates. As of March 1, 2003, there have been no material changes to any of the critical accounting policies contained therein other than the adoption of the new accounting standards as discussed herein. Note B - Accounting Changes In November of 2001, the Emerging Issues Task Force issued EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-09"), effective for annual or interim financial statements for periods beginning after December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. The Company adopted EITF 01-09 in fiscal 2003. Net sales for the three and nine months ended March 2, 2002 are shown as if EITF 01-09 was adopted for those periods. Further detail can be found in footnote 5 under the heading "Seasonality" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Recently Issued Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), was issued by the Financial Accounting Standards Board in June 2001. The statement changes the accounting for goodwill from an amortization method to an impairment only approach, and the Company was required to adopt it for the fiscal year ended May 31, 2003. Prior to the adoption of SFAS 142, the Company amortized goodwill using the straight-line method over the estimated life of twenty years. Upon adoption of SFAS 142, the Company ceased amortization of goodwill (which totaled $6.3 million, net, at June 1, 2002) thereby eliminating approximately $100,000 and $296,000, respectively, in amortization expense for the three month and nine month period ended March 1, 2003 compared to the same periods in fiscal 2002. SFAS 142 requires that companies perform evaluations of potential impairment of goodwill upon adoption and at least annually. During the first quarter of fiscal 2003, the Company completed an impairment evaluation of its goodwill as of June 1, 2002. No impairment was identified. Note C - Commitments and Contingencies Due to the nature of the Company's products, the Company is subject to product liability claims involving personal injuries allegedly related to the Company's products. These claims include injuries sustained by individuals using the Company's products. The Company currently carries an occurrence-based product liability insurance policy. The current policy provides coverage for the period from October 1, 2002 to October 1, 2003 of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $1,000,000. For occurrences prior to October 1, 2002, the policy provides coverage of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $500,000. For occurrences prior to October 1, 2001, the policy provides coverage of up to $5.0 million per occurrence and $25.0 million in the aggregate. The policy has a deductible on each claim ranging from $100,000 to $250,000. The Company believes that its insurance is generally adequate to cover product liability claims. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation, and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to uncertainty with respect to the nature and extent of manufacturers' and distributors' liability for personal injuries, the Company cannot guarantee that its product liability insurance is or will be adequate to cover such claims. The Company vigorously defends any and all product liability claims brought against it and does not believe that any currently pending claim or series of claims will have a material adverse effect on its results of operations, liquidity or financial position. The Company is a party to a variety of non-product liability commercial lawsuits involving contract claims, arising in the ordinary course of its business. The Company believes that adverse resolution of these lawsuits would not have a material adverse effect upon its results of operations, liquidity or financial position. The Company is also involved in several intellectual property and patent infringement claims, arising in the ordinary course of its business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect upon its results of operations, liquidity or financial position. The Company is involved in litigation with Service Merchandise in connection with its filing for bankruptcy protection. Service Merchandise filed three (3) separate adversarial proceedings against the Company in the United States Bankruptcy Court, Middle District of Tennessee, Nashville Division, alleging preferential transfer in Adversarial Proceeding Nos. 301-0738A and 301-0770A, and Breach of Contract in Adversarial Proceeding No. 301-0586A. The bankruptcy trustee has filed suit in connection with the foregoing seeking to recapture an aggregate amount of $1.7 million in payments made to the Company as a voidable preference. The summons was issued on April 16, 2001. The Company believes that the ultimate outcome of these matters will not have a material adverse effect upon its results of operations, liquidity or financial position. Note D - Guarantor/Non-Guarantor Financial Information The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc., Free Motion Fitness, Inc. and ICON IP, Inc. ("Subsidiary Guarantors") have fully and unconditionally guaranteed on a joint and several basis, the obligation to pay principal and interest with respect to the 11.25% Notes. A significant portion of the Company's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Company's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company's subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 11.25% Notes. Although holders of the 11.25% Notes will be direct creditors of the Company's principal direct subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the 11.25% Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Company, including the holders of the 11.25% Notes. The following supplemental condensed consolidating financial statements are presented (in thousands): 1. Condensed consolidating balance sheets as of March 1, 2003 and May 31, 2002, condensed consolidating statements of operations for the three months and nine months ended March 1, 2003 and March, 2, 2002, and condensed consolidating statements of cash flows for the nine months ended March 1, 2003 and March 2, 2002. 2. The Company's combined Subsidiary Guarantors and combined Non-Guarantor subsidiaries with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Company and all of its subsidiaries.
Supplemental Condensed Consolidating Balance Sheet March 1, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash $ 2,699 $ 1,054 $ 755 $ - $ 4,508 Accounts receivable, net 221,143 63,457 13,374 (20,515) 277,459 Inventories, net 82,398 57,904 10,630 (437) 150,495 Deferred income taxes 5,629 222 91 - 5,942 Other current assets 1,711 4,573 3,278 - 9,562 -------- -------- ------- --------- -------- Total current assets 313,580 127,210 28,128 (20,952) 447,966 -------- -------- ------- --------- -------- Property and equipment, net 37,240 10,112 1,273 - 48,625 Receivable from affiliates 98,986 22,922 - (121,908) - Intangible assets, net 21,176 7,797 1,218 - 30,191 Deferred income taxes 9,444 745 - - 10,189 Investment in subsidiaries 44,909 - - (44,909) - Other assets, net 13,093 - 20 - 13,113 -------- -------- ------- --------- -------- Total Assets $538,428 $168,786 $30,639 $(187,769) $550,084 ======== ======== ======= ========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ - $ - $ - $ 5,000 Accounts payable 108,745 25,228 24,654 (20,515) 138,112 Accrued expenses 22,788 10,126 4,441 - 37,355 Income taxes payable 6,430 3,686 611 - 10,727 Interest payable 3,246 - - - 3,246 -------- --------- ------- --------- -------- Total current liabilities 146,209 39,040 29,706 (20,515) 194,440 -------- --------- ------- --------- -------- Long-term debt 301,473 16 - - 301,489 Other long-term liabilities 3,473 3,697 - - 7,170 Payable to affiliates 22,922 78,015 20,971 (121,908) - Stockholder's Equity (Deficit): Common stock and additional paid-in capital 206,324 37,259 5,481 (44,909) 204,155 Receivable from parent (2,200) - - - (2,200) Retained earnings (Accumulated deficit) (140,255) 10,858 (23,523) (437) (153,357) Accumulated other comprehensive income (loss) 482 (99) (1,996) - (1,613) -------- --------- ------- --------- -------- Total stockholder's equity (deficit) 64,351 48,018 (20,038) (45,346) 46,985 -------- --------- ------- --------- -------- Total Liabilities and Stockholder's Equity $538,428 $168,786 $30,639 $(187,769) $550,084 ======== ======== ======= ========== ========
Supplemental Condensed Consolidating Balance Sheet May 31, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash $ 327 $ 1,448 $ 2,998 $ - $ 4,773 Accounts receivable, net 104,553 54,071 11,249 (16,695) 153,178 Inventories, net 82,558 45,657 5,847 (309) 133,753 Deferred income taxes 4,591 214 2 - 4,807 Other current assets 8,472 8,457 1,746 - 18,675 -------- -------- ------- --------- -------- Total current assets 200,501 109,847 21,842 (17,004) 315,186 -------- -------- ------- --------- -------- Property and equipment, net 34,031 10,101 853 - 44,985 Receivable from affiliates 81,636 16,361 - (97,997) - Intangible assets, net 20,466 8,517 1,218 - 30,201 Deferred income taxes 11,402 377 305 - 12,084 Investment in subsidiaries 44,909 - - (44,909) - Other assets, net 20,756 - 12 - 20,768 -------- -------- ------- --------- -------- Total Assets $413,701 $145,203 $24,230 $(159,910) $423,224 ======== ======== ======= ========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ 44 $ - $ - $ 5,044 Accounts payable 81,909 28,586 20,127 (16,695) 113,927 Accrued expenses 16,280 4,998 2,473 - 23,751 Income taxes payable - 5,069 352 - 5,421 Interest payable 3,045 - - - 3,045 -------- -------- ------- --------- -------- Total current liabilities 106,234 38,697 22,952 (16,695) 151,188 -------- -------- ------- --------- -------- Long-term debt 247,197 3,696 - - 250,893 Other liabilities 4,934 - - - 4,934 Payable to affiliates 16,361 60,784 20,852 (97,997) - Stockholder's Equity (Deficit): Common stock and additional paid-in capital 206,324 37,259 5,481 (44,909) 204,155 Receivable from parent (2,200) - - - (2,200) Retained earnings (Accumulated deficit) (165,149) 5,632 (24,115) (309) (183,941) Accumulated other comprehensive loss - (865) (940) - (1,805) -------- -------- ------- --------- -------- Total stockholder's equity (deficit) 38,975 42,026 (19,574) (45,218) 16,209 -------- -------- ------- --------- -------- Total Liabilities and Stockholder's Equity $413,701 $145,203 $24,230 $(159,910) $423,224 ======== ======== ======= ========== ========
Supplemental Condensed Consolidating Statement of Operations Three Months Ended March 1, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $238,507 $90,180 $15,296 $ - $343,983 Cost of sales 180,461 48,599 8,860 (71) 237,849 -------- ------- ------- ---- -------- Gross profit 58,046 41,581 6,436 71 106,134 Total operating expenses 31,690 31,539 5,329 - 68,558 -------- ------- ------- ---- -------- Income from operations 26,356 10,042 1,107 71 37,576 Interest expense 5,916 2 422 - 6,340 Amortization of deferred financing fees 184 - - - 184 -------- ------- ------- ---- -------- Income before income taxes 20,256 10,040 685 71 31,052 Provision for income taxes 5,698 4,397 633 - 10,728 -------- ------- ------- ---- -------- Net income $ 14,558 $ 5,643 $ 52 $ 71 $ 20,324 ======== ======= ======= ===== ========
Supplemental Condensed Consolidating Statement of Operations Three Months Ended March 2, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $227,039 $55,183 $13,754 $ - $295,976 Cost of sales 165,984 35,559 9,000 (124) 210,419 -------- ------- ------- ----- -------- Gross profit 61,055 19,624 4,754 124 85,557 Total operating expenses 28,978 18,471 4,354 - 51,803 -------- ------- ------- ----- -------- Income from operations 32,077 1,153 400 124 33,754 Interest expense 5,555 (17) 439 - 5,977 Amortization of deferred financing fees 900 - - - 900 -------- ------- ------- ----- -------- Income (loss) before taxes 25,622 1,170 (39) 124 26,877 Provision for income taxes 178 992 202 - 1,372 -------- ------- ------- ----- -------- Net income (loss) $ 25,444 $ 178 $ (241) $ 124 $ 25,505 ======== ======= ======== ===== ========
Supplemental Condensed Consolidating Statement of Operations Nine Months Ended March 1, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $553,062 $214,765 $39,110 $ - $806,937 Cost of sales 421,282 131,088 22,895 128 575,393 -------- -------- ------- ----- -------- Gross profit 131,780 83,677 16,215 (128) 231,544 Total operating expenses 75,763 73,999 13,448 - 163,210 -------- -------- ------- ----- -------- Income (loss) from operations 56,017 9,678 2,767 (128) 68,334 Interest expense 17,953 7 1,306 - 19,266 Amortization of deferred financing fees 670 - - - 670 -------- -------- ------- ----- -------- Income (loss) before taxes 37,394 9,671 1,461 (128) 48,398 Provision for income taxes 12,500 4,445 869 - 17,814 -------- -------- ------- ----- -------- Net income (loss) $ 24,894 $ 5,226 $ 592 $(128) $ 30,584 ======== ======== ======= ====== ========
Supplemental Condensed Consolidating Statement of Operations Nine Months Ended March 2, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Net sales $515,824 $146,383 $32,563 $ - $694,770 Cost of sales 385,846 99,107 21,656 (248) 506,361 -------- -------- ------- ----- -------- Gross profit 129,978 47,276 10,907 248 188,409 Total operating expenses 71,262 50,455 10,496 - 132,213 -------- -------- ------- ----- -------- Income (loss) from operations 58,716 (3,179) 411 248 56,196 Interest expense 17,207 1,152 1,348 - 19,707 Amortization of deferred financing fees 2,652 - - - 2,652 -------- -------- ------- ----- -------- Income (loss) before income taxes 38,857 (4,331) (937) 248 33,837 Provision (benefit) for income taxes 5,467 (800) 117 - 4,784 -------- -------- ------- ----- -------- Net income (loss) $ 33,390 $(3,531) $(1,054) $ 248 $ 29,053 ======== ========= ======== ===== ========
Supplemental Condensed Consolidating Statement of Cash Flows Nine Months Ended March 1, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Operating activities: Net cash used in operating activities: $(22,295) $ (9,875) $ (906) $ - $(33,076) -------- -------- ------- ------ -------- Investing activities: Net cash used in investing activities: (14,040) (2,105) (705) - (16,850) -------- -------- ------- ------ -------- Financing activities: Proceeds from new credit facility, net 54,270 - - - 54,270 Payments on term note (3,750) - - - (3,750) Payments on other long-term debt, net - (27) - - (27) Payment of fees-debt (539) - - - (539) Other (10,789) 10,671 118 - - -------- -------- ------- ------ -------- Net cash provided by financing activities: 39,192 10,644 118 - 49,954 -------- -------- ------- ------ -------- Effect of exchange rate changes on cash (485) 942 (750) - (293) -------- -------- ------- ------ -------- Net increase (decrease) in cash 2,372 (394) (2,243) - (265) Cash, beginning of period 327 1,448 2,998 - 4,773 -------- -------- ------- ------ -------- Cash, end of period $ 2,699 $ 1,054 $ 755 $ - $ 4,508 ======== ======== ======= ====== ========
Supplemental Condensed Consolidating Statement of Cash Flows Nine Months Ended March 2, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ Operating activities: Net cash provided by (used in) operating activities: $ 28,105 $ (1,412) $ (132) $ - $ 26,561 -------- -------- ------ ---- -------- Investing activities: Net cash used in investing activities: (11,172) (2,672) (383) - (14,227) -------- -------- ------ ---- -------- Financing activities: Proceeds from old credit facility, net 4,855 - - - 4,855 Payments on old term notes (5,177) - - - (5,177) Payments on other long-term debt (2,389) (25) - - (2,414) Payment of fees-debt (503) - - - (503) Other (9,382) 8,479 903 - - -------- -------- ------ ---- -------- Net cash provided by (used in)financing activities: (12,596) 8,454 903 - (3,239) -------- -------- ------ ---- -------- Effect of exchange rate changes on cash - (1,104) 112 - (992) -------- -------- ------ ---- -------- Net increase in cash 4,337 3,266 500 - 8,103 Cash, beginning of period 1,036 1,192 1,096 - 3,324 -------- -------- ------ ---- -------- Cash, end of period $ 5,373 $ 4,458 $1,596 $ - $ 11,427 ======== ======== ====== ==== ========
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. The war in Iraq, the terrorist attacks on the United States and other acts of violence have created immediate significant economic and political uncertainty. The long-term effects of the war and such other attacks on the world economy and the Company's business are unknown, but could be material. Further terrorists acts or acts of war, whether in the United States or abroad, including the war in Iraq, could cause damage or disruption to the Company, its suppliers, strategic partners or customers, or could create political or economic instability, any of which could have a material adverse effect on the Company's business. Three Months Ended March 1, 2003 Compared to Three Months Ended March 2, 2002 - ----------------------------------------------------------------------------- Net sales for the third quarter of fiscal 2003 increased $48.0 million, or 16.2%, to $344.0 million from $296.0 million in the comparable period in 2002. Sales increased primarily due to increased customer demand. Sales of the Company's cardiovascular and other equipment in the third quarter of fiscal 2003 increased $13.0 million, or 4.8%, to $283.4 million. Sales of the Company's strength training equipment in the third quarter of fiscal 2003 increased $19.5 million, or 47.4%, to $60.6 million. Gross profit in the third quarter of fiscal 2003 was $106.1 million, or 30.8% of net sales, compared to $85.6 million, or 28.9% of net sales, in the third quarter of fiscal 2002. This 23.9% increase was largely due to increased direct consumer sales, changes in product mix and manufacturing efficiencies. Selling expenses increased $13.6 million, or 46.1%, to $43.1 million in the third quarter of fiscal 2003. This increase reflected increased bad debt expense associated with the pre-bankruptcy receivables of Kmart of $5.4 million and increased direct consumer advertising and commissions. Expressed as a percentage of net sales, selling expenses were 12.5% in the third quarter of fiscal 2003 and 10.0% in the third quarter of fiscal 2002. Absent the Kmart bad debt expense, selling expenses were 11.0% in the third quarter of fiscal 2003. Research and development expenses increased $0.7 million, or 28%, to $3.2 million in the third quarter of fiscal 2003. Expressed as a percentage of net sales, research and development expenses were 0.9% in the third quarter of fiscal 2003 and 0.8% in the third quarter of fiscal 2002. General and administrative expenses increased $2.5 million, or 12.6%, to $22.3 million in the third quarter of fiscal 2003. This increase is a factor of normal salary increases, planned additions to staff, increased insurance costs and increases attributable to performance based bonus and incentive programs. Rent and lease expense also contributed to the increase. Expressed as a percentage of net sales, general and administrative expenses were 6.5% in the third quarter of fiscal 2003 and 6.7% in the third quarter of fiscal 2002. As a result of the foregoing factors, operating income increased $3.8 million, or 11.2%, to $37.6 million in the third quarter of fiscal 2003. Expressed as a percentage of net sales, operating income was 10.9% in the third quarter of fiscal 2003 compared with 11.4% in the third quarter of fiscal 2002. As a result of the foregoing factors, earnings before interest, taxes, depreciation and amortization ("EBITDA") was $42.5 million, or 12.4% of net sales, in the third quarter of fiscal 2003, compared to $38.7 million, or 13.1% of net sales, in the third quarter of fiscal 2002. A detailed computation of EBITDA can be found in footnote 6 under the heading "Seasonality" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest expense including amortization of deferred financing fees decreased $0.4 million, or 5.8%, to $6.5 million for the third quarter of fiscal 2003. This decrease reflects lower interest rates during the 2003 period. In addition, deferred financing fees decreased as a result of the April 2002 debt refinancing. Expressed as a percentage of net sales, interest expense including amortization of deferred financing fees was 1.9% in the third quarter of fiscal 2003 and 2.3% in the third quarter of fiscal 2002. The provision for income taxes was $10.7 million for the third quarter of fiscal 2003, compared to a provision of $1.4 million in the third quarter of fiscal 2002. Income tax expense, as a percentage of pre-tax income, was 34.4% in the third quarter of fiscal 2003, compared to 5.2% in the third quarter of fiscal 2002. The lower effective tax rate in the third quarter of fiscal 2002 resulted from adjustments pursuant to an Internal Revenue Service audit where previously deducted expenses were capitalized and are being amortized over a fifteen year period. These adjustments created a deferred tax asset of approximately $11.5 million which resulted in an income tax benefit. As a result of the foregoing factors, net income was $20.3 million for the third quarter of fiscal 2003, compared to net income in the third quarter of fiscal 2002 of $25.5 million, a decrease of 20.4% over the same period last year. Nine Months Ended March 1, 2003 Compared to Nine Months Ended March 2, 2002 - --------------------------------------------------------------------------- During the first nine months of fiscal 2003, net sales increased $112.1 million, or 16.1%, to $806.9 million from $694.8 million in the first nine months of fiscal 2002. Sales increased primarily due to customer demand. Sales of the Company's cardiovascular and other equipment in the first nine months of fiscal 2003 increased $69.2 million, or 11.4%, to $676.4 million. Sales of the Company's strength training equipment in the first nine months of fiscal 2003 increased $22.7 million, or 21.1%, to $130.5 million. Gross profit for the first nine months of fiscal 2003 was $231.5 million, or 28.7% of net sales, compared to $188.4 million, or 27.1% of net sales, for the first nine months of fiscal 2002. This 22.9% increase was largely due to increased direct consumer sales, changes in product mix and manufacturing efficiencies. Selling expenses increased $22.8 million, or 31.1%, to $96.2 million in the first nine months of fiscal 2003. This increase reflected increased bad debt expense related to pre-bankruptcy receivables of Kmart of $9.1 million. Increased direct consumer advertising and commissions also contributed to the increase. Expressed as a percentage of net sales, selling expenses were 11.9% in the first nine months of fiscal 2003 and 10.6% in the first nine months of fiscal 2002. Absent the Kmart bad debt expense, selling expenses were 10.8% in the first nine months of fiscal 2003. Research and development expenses increased $0.5 million, or 6.3%, to $8.4 million in the first nine months of fiscal 2003. Expressed as a percentage of net sales, research and development expenses were 1.0% in the first nine months of fiscal 2003 and 1.1% in the first nine months of fiscal 2002. General and administrative expenses increased $7.6 million, or 14.9%, to $58.6 million in the first nine months of fiscal 2003. This increase is a factor of normal salary increases, planned additions to staff, increased insurance costs and increases attributable to performance based bonus and incentive programs. Rent and lease expenses also contributed to the increase. Expressed as a percentage of net sales, general and administrative expenses were 7.3% in the first nine months of fiscal 2003 and fiscal 2002. As a result of the foregoing factors, operating income increased $12.1 million, or 21.5%, to $68.3 million in the first nine months of fiscal 2003. Expressed as a percentage of net sales, operating income was 8.5% in the first nine months of fiscal 2003 compared with 8.1% in the first nine months of fiscal 2002. As a result of the foregoing factors, EBITDA was $81.5 million compared to $69.9 million, or 10.1% of net sales, in the first nine months of fiscal 2003 and fiscal 2002. A detailed computation of EBITDA can be found in footnote 6 under the heading "Seasonality" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest expense including amortization of deferred financing fees decreased $2.4 million, or 10.8%, to $19.9 million in the first nine months of fiscal 2003. This decrease reflects lower interest rates during the 2003 period. In addition, deferred financing fees decreased as a result of the April 2002 debt refinancing. Expressed as a percentage of net sales, interest expense including amortization of deferred financing fees was 2.5% in the first nine months of fiscal 2003 and 3.2% in the first nine months of fiscal 2002. The provision for income taxes was $17.8 million for the first nine months of fiscal 2003, compared to a provision of $4.8 million for the first nine months of fiscal 2002. Income tax expense, as a percentage of pre-tax income, for the nine month period ended March 1, 2003, was 36.8%, compared to 14.2% in the nine month period ended March 2, 2002. The lower effective tax rate in the nine month period ended March 2, 2002 resulted from adjustments from an Internal Revenue Service audit where previously deducted expenses were capitalized and are being amortized over a fifteen year period. These adjustments created a deferred tax asset of approximately $11.5 million which resulted in an income tax benefit. As a result of the foregoing factors, net income was $30.6 million for the first nine months of fiscal 2003, compared to net income in the first nine months of fiscal 2002 of $29.1 million, an increase of 5.2% over the same period last year. Seasonality The Company sells a majority of its products to customers in its second and third fiscal quarters (i.e., from September through February). Increased sales and distribution typically occur in the Christmas retail season and the beginning of a new calendar year because of increased promotions by the Company's retail customers, increased consumer purchases and seasonal changes that prompt people to exercise inside. If actual sales for a quarter do not meet or exceed projected sales for that quarter, expenditures and inventory levels could be disproportionately high for such quarter and the Company's cash flow for that quarter and future quarters could be adversely affected. The timing of large orders from customers and the mix of products sold may also contribute to periodic fluctuations. The following are the net sales, net income (loss) and EBITDA by quarter for fiscal years 2003, 2002 and 2001:
First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- ---------- ---------- (dollars in millions) Net Sales (5) 2003 $170.2 $292.7 $344.0 $ - 2002 134.2 264.6 296.0 176.6 2001 125.9 267.6 247.6 155.9 Net Income (Loss) 2003 (3.4) 13.7 20.3 - 2002 (7.5) 11.1 25.5 (9.7) 2001 (8.2) 11.7 10.8 (1.0)
The following is a reconciliation of net income (loss) as reflected in the condensed consolidated statement of operations to EBITDA (6):
EBITDA 2003 Net Income (loss) (3.4) 13.7 20.3 - Add back: Depreciation and Amortization 4.2 4.0 5.0 - Provision (Benefit) for income tax (1.2) 8.3 10.7 - Interest expense 6.4 6.5 6.3 - Amortization of deferred financing fees 0.3 0.2 0.2 - ---- ---- ---- ---- EBITDA 6.3 32.7 42.5 - ==== ==== ==== ==== 2002 Net income (loss) (7.5) 11.1 25.5 (9.7) Add back: Depreciation and Amortization 4.5 4.3 4.9 5.5 Provision (Benefit)for income tax (4.8) 8.2 1.4 (1.6) Interest expense 6.8 6.8 6.0 6.6 Amortization of deferred financing fees 0.9 0.9 0.9 0.4 Loss on extinguishments of debt - - - 4.6 ---- ---- ---- ---- EBITDA (0.1) 31.3 38.7 5.8 ===== ==== ==== ==== 2001 Net income (loss) (8.2) 11.7 10.8 (1.0) Add back: Depreciation and Amortization 4.0 4.0 4.3 5.1 Provision (Benefit) for income tax (3.2) 8.0 7.0 (8.4) Interest expense 8.2 9.7 9.3 7.6 Amortization of deferred financing fees 0.8 0.8 0.8 0.8 --- ---- ---- --- EBITDA 1.6 34.2 32.2 4.1 === ==== ==== === - ----------- (1) The Company's first quarter ended August 31, September 1, and September 2 for fiscal years 2003, 2002 and 2001, respectively. (2) The Company's second quarter ended November 30, December 1, and December 2 for fiscal years 2003, 2002 and 2001, respectively. (3) The Company's third quarter ended March 1, March 2, and March 3 for fiscal years 2003, 2002 and 2001, respectively. (4) The Company's fourth quarter ended May 31 for the fiscal years 2002 and 2001, respectively. (5) In November of 2001, the Emerging Issues Task Force issued EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-09") effective for annual or interim financial statements for periods beginning after December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. The Company adopted EITF 01-09 in fiscal 2003. Net sales are shown as if EITF 01-09 were adopted for all periods presented. Net sales without the adjustment for EITF 01-09 were as follows: First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- --------- ---------- (dollars in millions) Net Sales 2003 $175.8 $301.5 $354.8 $ - 2002 138.1 272.1 304.9 181.0 2001 129.5 276.0 254.6 160.4 (6) EBITDA is a presentation of "earnings before interest, taxes, depreciation, and amortization." EBITDA data is included because management understands that such information is considered by bankers and certain investors as an additional basis on evaluating a company's ability to pay interest, repay debt and make capital expenditures. EBITDA may not be comparable to similarly titled measures reported by other companies. In addition, EBITDA is a non-GAAP measure and should not be considered an alternative to operating or net income in measuring company results.
Liquidity and Capital Resources Net cash used in operating activities was $33.1 million in the first nine months of fiscal 2003, compared to $26.6 million of cash provided by operating activities in the first nine months of fiscal 2002. In the first nine months of fiscal 2003, major sources of funds were non-cash provisions of $13.2 million for depreciation and amortization, and an increase in accounts payable and accrued expenses of $38.9 million. The increase in accounts payable and accrued expenses is due to timing of trade payments. These changes were offset by increases in inventories of $16.7 million and accounts receivable of $124.3 million. Accounts receivable increased as a result of increased sales and the discontinuance of certain discounts taken by customers prior to May 31, 2002 on payments of receivables owed to the Company on thirty day terms, instead of the customary sixty day terms. Inventories increased as a result of anticipated future sales which are expected to be sold off in the normal course of business over the next two quarters. These changes are also due to the Company's increasing sales during the course of the first several months of the fiscal year leading up to its peak selling season, which occurs between the months of October and February. In the first nine months of fiscal 2002, major sources of funds were non-cash provisions of $13.7 million for depreciation and amortization, an increase in accounts payable and accrued expenses of $5.4 million, a decrease in income taxes receivable of $12.6 million, and a decrease in inventories of $24.1 million. These increases were offset by an increase in other assets of $9.8 million and accounts receivable of $38.6 million. Such increase in accounts receivable was due to the aforementioned factors relating to sales increases. Net cash used in investing activities was $16.9 million in the first nine months of fiscal 2003, compared to $14.2 million in the first nine months of fiscal 2002. Investing activities in the first nine months of fiscal 2003 consisted primarily of capital expenditures of $13.4 million related to upgrades in plant and tooling, purchases of additional manufacturing equipment and purchases of intangibles of $3.4 million. Cash used in investing activities in the first nine months of fiscal 2002 was primarily for capital expenditures of $8.9 million and purchases of intangibles of $4.3 million. Net cash provided by financing activities was $50.0 million in the first nine months of fiscal 2003, compared to $3.2 million of cash used in financing activities in the first nine months of fiscal 2002. Cash provided by financing activities resulted from the Company's net borrowings on its existing credit facilities offset by payments on term notes and other long-term debt. On January 22, 2002, Kmart, a customer for over a decade, filed for bankruptcy protection. At the time of the bankruptcy filing, the Company had $12.1 million of unsecured accounts receivable outstanding with Kmart. As of March 1, 2003, the Company had disposed of 100 percent of the pre-bankruptcy receivables. For the nine month period ending March 1, 2003, the Company had net sales to Kmart of $26.8 million, representing approximately 3.3% of total net sales for that nine month period. In the first nine months of fiscal 2002, the Company had net sales to Kmart of approximately $31.2 million, representing approximately 4.5% of total net sales for that period. Kmart has secured debtor in possession financing and continues to operate in bankruptcy. The Company resumed shipments to Kmart as of February 5, 2002 with payment terms of 30 days, reduced from 60 days. The Company's primary short-term liquidity needs consist of financing seasonal merchandise inventory buildups and paying cash interest expense under its existing credit facilities and on the 11.25% subordinated notes due in April 2012. The Company's principal source of financing for its seasonal merchandise inventory buildup and increased accounts receivable is revolving credit borrowings under its existing credit facilities. At March 1, 2003, the Company had $76.4 million of availability under these facilities. The Company's working capital borrowing needs are typically at its lowest level from April through June, increase somewhat through the summer and sharply increase from September through November to finance accounts receivable and purchases of inventory in advance of the Christmas and post-holiday selling season. Generally, in the period from November through February, working capital borrowings remain at its highest level and then are paid down to its lowest annual levels from April through August. In connection with the Company's debt refinancing in April 2002, the Company entered into its existing credit facility totaling $235.0 million of revolving and term loans with a syndicate of banks and financial services companies. Proceeds of the Company's existing credit facility were used to refinance their then existing senior credit facilities and 12% senior subordinated notes due 2005, to fund transaction fees and expenses, and to provide general working capital. The Company has a significant amount of indebtedness. The Company's consolidated indebtedness consists of the following (table in thousands): March 1, 2003 May 31, 2002 ------------- ------------ Revolver $133.6 $ 79.3 Term Loan 20.0 23.8 11.25% Senior Subordinated Notes 152.9 152.8 ------ ------ $306.5 $255.9 ====== ====== The Company's ability to make scheduled payments of principal, or to pay the interest, or to refinance its indebtedness, including the 11.25% Notes, or to fund planned capital expenditures will depend on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company's control. Based on the Company's current level of operations, management believes that cash flow from operations and available cash, together with available borrowings under the Company's existing credit facility, will be adequate to meet future liquidity needs for at least the next few years. The Company may, however, need to refinance all or a portion of the principal amount of the notes on or prior to maturity. The Company cannot assure you that its business will generate sufficient cash flow from operations, or that future borrowings will be available under its existing credit facility in an amount sufficient to enable the Company to service its indebtedness, including the 11.25% Notes, or to fund its other liquidity needs. In addition, the Company cannot assure you that it will be able refinance any of its indebtedness, including the existing credit facility and the 11.25% Notes, on commercially reasonable terms or at all. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 is effective for fiscal years beginning after June 15, 2002. In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritative pronouncements to make various technical corrections, clarify meaning, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 and will require the modification of prior financial statements to reclassify any gains or losses on debt extinguishment from extraordinary to income from continuing operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - an amendment of FASB 123". This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, this statement amends disclosure requirements of Statement 123 to ensure that fair value disclosures are prominent in both annual and interim financial statements. The adoption of the provisions of SFAS 148 will not have a material effect on the Company's financial position, operations or cash flows. In November 2002, the FASB approved FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the Company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the impact of the application of this interpretation, but does not expect a material impact from the application of FIN 45 on its consolidated financial statements. FIN 46, "Consolidation of Variable Interest Entities", clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. The Company does not expect this Interpretation to have a material effect on the consolidated financial statements. Based on current circumstances, except for SFAS 145, the Company believes that the application of the new accounting rules described above will not have a material impact on its financial statements. Item 3 Quantitative and Qualitative Disclosures about Market Risk Fluctuations in the general level of interest rates on the Company's current and future fixed and variable rate debt obligations expose it to market risk. The Company is vulnerable to significant fluctuations in interest rates on its variable rate debt and on any future repricing or refinancing of its fixed rate debt and on future debt. The Company uses long-term and medium-term debt as a source of capital. At March 1, 2003, the Company had approximately $152.9 million in outstanding fixed rate debt, consisting of 11.25% subordinated notes maturing in April 2012. When debt instruments of this type mature, the Company typically refinances such debt at the then-existing market interest rates, which may be more or less than the interest rates on the maturing debt. The Company's credit facility has variable interest rates and any fluctuation in interest rates could increase or decrease its interest expense. At March 1, 2003, the Company had approximately $153.6 million in outstanding variable rate debt. The Company imports certain finished products and components from Canada and Asia. All purchases from Asia have been fixed in United States dollars and, therefore, the Company is not subject to foreign currency fluctuations on such purchases, although the Company's vendors may respond to foreign currency fluctuations by seeking to raise their prices. U.S. purchases of inventory from Canada are settled in Canadian dollars and therefore the Company is subject to fluctuations in the value of the Canadian dollar, which could have an impact on the Company's operating results. In addition, European purchases of inventory from Canada and the U.S. are settled in U.S. and Canadian dollars and, therefore, are subject to fluctuations in the value of the U.S. and Canadian dollars, which also could have an impact on the Company's operating results. In connection with the importation of products and components from Canada, the Company from time to time engages in hedging transactions by entering into forward contracts for the purchase of Canadian dollars, which are designed to protect against such fluctuations. The Company's hedging transactions do not subject it to exchange rate risk because gains and losses on these contracts offset losses and gains on the transaction being hedged. As of March 1, 2003, the Company had no open forward exchange contracts to sell Canadian dollars. During the first nine months of fiscal years 2002 and 2003, the Company recognized no significant gains or losses upon settlement of foreign currency transactions denominated in Canadian dollars. Item 4 Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them, on a timely basis, to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART II - OTHER INFORMATION Item 1. Legal Proceedings. See note C. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.01. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.02. Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.03. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized. ICON Health & Fitness, Inc. (Registrant) By /s/ Gary E. Stevenson Date: April 14, 2003 ----------------------------- Gary E. Stevenson Chief Operating Officer By /s/ S. Fred Beck Date: April 14, 2003 ---------------------------- S. Fred Beck Chief Financial Officer CERTIFICATION -------------- I, Scott R. Watterson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ Scott R. Watterson Date: April 14, 2003 - ------------------------- Scott R. Watterson Chief Executive Officer CERTIFICATION -------------- I, Gary E. Stevenson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ Gary E. Stevenson Date: April 14, 2003 - ----------------------- Gary E. Stevenson Chief Operating Officer CERTIFICATION -------------- I, S. Fred Beck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ S. Fred Beck Date: April 14, 2003 - ----------------------- S. Fred Beck Chief Financial Officer EXHIBIT INDEX Exhibit No. Name - ----------- ---- 99.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.02 Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.03 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99 3 ex9901-3q.txt SECTION 906 CERTIFICATION OF CEO EXHIBIT 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 In connection with the Quarterly Report on Form 10-Q of ICON Health & Fitness, Inc. (the "Company") for the quarterly period ended March 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Scott R. Watterson, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Scott R. Watterson - ------------------------ Name: Scott R. Watterson Title: Chief Executive Officer Date: April 14, 2003 This certification accompanies the Report pursuant to 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to ICON Health & Fitness, Inc. and will be retained by ICON Health & Fitness, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 4 ex9902-3q.txt SECTION 906 CERTIFICATION FOR COO EXHIBIT 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 In connection with the Quarterly Report on Form 10-Q of ICON Health & Fitness, Inc. (the "Company") for the quarterly period ended March 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Gary E. Stevenson, as Chief Operating Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gary E. Stevenson - ----------------------- Name: Gary E. Stevenson Title: Chief Operating Officer Date: April 14, 2003 This certification accompanies the Report pursuant to 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to ICON Health & Fitness, Inc. and will be retained by ICON Health & Fitness, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 5 ex9903-3q.txt SECTION 906 CERTIFICATION FOR CFO EXHIBIT 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 In connection with the Quarterly Report on Form 10-Q of ICON Health & Fitness, Inc. (the "Company") for the quarterly period ended March 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), S. Fred Beck, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ S. Fred Beck - -------------------- Name: S. Fred Beck Title: Chief Financial Officer Date: April 14, 2003 This certification accompanies the Report pursuant to 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to ICON Health & Fitness, Inc. and will be retained by ICON Health & Fitness, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----