-----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, TBDHEwJ8tjk5XREtNw1hJz1pWl7MpuoIG0ywjMhX1goxYX9rT0cHO3zjdUfkZnPv 5krAUwk2teWfsoZhqs0q1w== 0000934798-03-000036.txt : 20031014 0000934798-03-000036.hdr.sgml : 20031013 20031014164402 ACCESSION NUMBER: 0000934798-03-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030830 FILED AS OF DATE: 20031014 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: 03940019 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: 03940017 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: 03940018 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: 03940016 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: 03940021 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: 03940020 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: 03940022 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: 03940015 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 e10q1qf03.txt FORM 10-Q 1Q OF 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 fiscal quarter ended August 30, 2003 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission file number: 333-93711 ICON Health & Fitness, Inc. (Exact name of registrant as specified in its charter) Delaware 87-0531206 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 1500 South 1000 West, Logan, Utah 84321 (Address and zip code of principal executive offices) 435 750-5000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [*] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by checkmark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: ICON Health & Fitness, Inc. 1,000 shares. ICON Health & Fitness, Inc. INDEX Page No. -------- PART I - FINANCIAL INFORMATION 3 Item 1. Financial Statements 3-5 Condensed Consolidating Balance Sheets (Unaudited) as of August 30, 2003, May 31, 2003 and August 31, 2002 3 Condensed Consolidating Statements of Operations (Unaudited) for the three months ended August 30, 2003 and August 31, 2002 4 Condensed Consolidating Statements of Cash Flows (Unaudited) for the three months ended August 30, 2003 and August 31, 2002 5 Notes to Condensed Consolidating Financial Statements (Unaudited) 6-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures 21 PART II - OTHER INFORMATION 22 Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 22 Certifications 23-25 Exhibit Index 26 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ICON Health & Fitness, Inc. CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited) (In Thousands)
August 30, 2003 May 31, 2003 August 31, 2002 --------------- ------------ --------------- ASSETS Current assets: Cash $ 4,442 $ 4,650 $ 6,460 Accounts receivable, net 182,064 175,164 155,679 Inventories, net: Raw materials 66,518 53,748 79,451 Finished goods 130,711 107,960 105,490 -------- -------- -------- Total inventories, net 197,229 161,708 184,941 Income taxes receivable 162 - - Deferred income taxes 7,206 7,323 4,990 Other current assets 9,067 9,830 17,369 -------- -------- -------- Total current assets 400,170 358,675 369,439 Property and equipment 103,708 98,266 100,638 Less accumulated depreciation (52,862) (49,489) (54,219) -------- -------- -------- Property and equipment, net 50,846 48,777 46,419 Intangible assets, net 27,897 29,069 29,962 Deferred income taxes 9,573 8,379 12,088 Other assets, net 20,969 20,214 21,839 -------- -------- -------- Total assets $509,455 $465,114 $479,747 ======== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt $ 5,000 $ 5,000 $ 5,011 Accounts payable 125,734 121,177 125,819 Accrued expenses 28,555 33,964 22,602 Income taxes payable - 4,228 1,805 Interest payable 3,165 7,484 3,616 -------- -------- -------- Total current liabilities 162,454 171,853 158,853 Long term-debt 292,478 239,232 302,191 Other liabilities 9,920 9,691 6,160 -------- -------- -------- Total liabilities 464,852 420,776 467,204 Minority interest 3,100 - - Stockholder's equity Common stock and additional paid-in capital 204,155 204,155 204,155 Receivable from Parent (2,200) (2,200) (2,200) Accumulated deficit (158,978) (157,252) (187,381) Accumulated other comprehensive loss (1,474) (365) (2,031) -------- -------- -------- Total stockholder's equity 41,503 44,338 12,543 -------- -------- -------- Total liabilities and stockholder's equity $509,455 $465,114 $479,747 ======== ======== ========
The accompanying notes are an integral part of the unaudited condensed consolidating financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)
For the Three Months Ended August 30, 2003 August 31, 2002 --------------- --------------- Net sales $197,823 $170,223 Cost of sales 134,248 126,820 -------- -------- Gross profit 63,575 43,403 -------- -------- Operating expenses: Selling 34,341 22,469 Research and development 3,251 2,620 General and administrative 21,212 16,241 -------- -------- Total operating expenses 58,804 41,330 -------- -------- Income from operations 4,771 2,073 Interest expense 5,993 6,399 Amortization of deferred financing fees 41 303 -------- --------- Loss before income taxes (1,263) (4,629) Provision for (benefit from) income taxes 463 (1,189) -------- --------- Net loss (1,726) (3,440) Other comprehensive loss: Foreign currency translation adjustment, net of tax benefit of $680 in fiscal 2004 and $144 in fiscal 2003. (1,109) (226) --------- --------- Comprehensive loss $ (2,835) $ (3,666) ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidating financial statements. ICON Health & Fitness, Inc. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
For the Three Months Ended August 30, 2003 August 31, 2002 --------------- --------------- OPERATING ACTIVITIES: Net loss $ (1,726) $ (3,440) Adjustments to reconcile net loss to net cash used in operating activities: Benefit from deferred taxes (397) (43) Amortization of deferred financing fees 41 303 Depreciation and amortization 5,477 4,177 Amortization of debt discount 91 32 Changes in operating assets and liabilities: Accounts receivable, net (6,900) (2,501) Inventories, net (35,521) (51,188) Other assets, net 389 (150) Accounts payable and accrued expenses (852) 10,969 Income taxes, net (4,390) (3,616) Interest payable (4,319) 571 Other liabilities (168) 1,226 --------- --------- Net cash used in operating activities (48,275) (43,660) --------- --------- INVESTING ACTIVITIES: Purchases of property and equipment (3,720) (4,612) Purchases of property and equipment - China (1,840) - Purchase of intangible assets (814) (760) Acquisition - (42) --------- --------- Net cash used in investing activities (6,374) (5,414) --------- --------- FINANCING ACTIVITIES: Borrowings on revolving credit facility, net of payments 53,155 52,483 Payments on term note - (1,250) Minority interest 3,100 - Payment of fees - debt portion (25) (102) --------- --------- Net cash provided by financing activities 56,230 51,131 --------- --------- Effect of exchange rates on cash (1,789) (370) --------- --------- Net increase (decrease) in cash (208) 1,687 Cash at beginning of period 4,650 4,773 --------- --------- Cash at end of period $ 4,442 $ 6,460 ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidating financial statements. NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Unaudited) ----------------------------------------------------------------- Note A - Basis of Presentation This report covers ICON Health & Fitness, Inc. & Subsidiaries (collectively, "the Company"). The Company's parent company, HF Holdings, Inc. ("HF Holdings"), is not a registrant. The Company is one of the world's leading manufacturers and marketers of fitness equipment. The Company is headquartered in Logan, Utah and has more than 4,500 employees worldwide. The Company develops, manufactures and markets fitness equipment under the following company-owned brand names: NordicTrack, ProForm, HealthRider, Weslo, Weider, IMAGE and Free Motion, as well as Reebok and Gold's Gym under license. The accompanying unaudited condensed consolidating financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. In addition, certain reclassifications of previously reported financial information were made to conform to the current period's presentation. The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three months ended August 30, 2003 and August 31, 2002. The condensed consolidating financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended May 31, 2003 included in the Company's annual report on Form 10-K/A as amended with the Securities and Exchange Commission on October 14, 2003. Interim results including comparative balance sheets are not necessarily indicative of results for the full fiscal year due to the inherent seasonality in the Company's business. See "Seasonality" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies The Company's discussion of results of operations and financial condition relies on its consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. The Company believes that investors need to be aware of these policies and how they impact its financial statements as a whole, as well as its related discussion and analysis presented herein. While the Company believes that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in the Company's annual report on Form 10-K/A as amended with the Securities and Exchange Commission on October 14, 2003 are those that depend most heavily on these judgments and estimates. As of August 30, 2003, there have been no material changes to any of the critical accounting policies contained therein other than the adoption of the new accounting standards as discussed herein. Note B - Accounting Changes See "Recent Accounting Standards" under Management's Discussion and Analysis of Financial Condition and Results of Operations. Note C - Commitments and Contingencies Due to the nature of the Company's products, the Company is subject to product liability claims involving personal injuries allegedly related to the Company's products. These claims include injuries sustained by individuals using the Company's products. The Company currently carries an occurrence-based product liability insurance policy. The current policy provides coverage for the period from October 1, 2003 to October 1, 2004 of up to $10.0 million per occurrence and $10.0 million in the aggregate. The policy has a deductible on each claim of up to $1.0 million. For occurrences prior to October 1, 2003, the policy provides coverage of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $1.0 million. For occurrences prior to October 1, 2002, the policy provides coverage of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $0.5 million. The Company believes that its insurance is generally adequate to cover product liability claims. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation, and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to uncertainty with respect to the nature and extent of manufacturers' and distributors' liability for personal injuries, the Company cannot guarantee that its product liability insurance is or will be adequate to cover such claims. The Company vigorously defends any and all product liability claims brought against it and does not believe that any currently pending claim or series of claims will have a material adverse effect on its results of operations, liquidity or financial position. The Company is party to a variety of non-product liability commercial lawsuits involving contract claims, arising in the ordinary course of its business. The Company believes that adverse resolution of these lawsuits would not have a material adverse effect upon its results of operations, liquidity or financial position. In December 2001, a claim was made against the Company alleging the Company received $1.7 million of preferential transfers in connection with the 1999 Service Merchandise bankruptcy proceedings. The proposed claim is currently being vigorously defended by the Company's counsel. At this time, the Company and its counsel are unable to determine the likelihood of an unfavorable outcome or the amount or range of potential recovery or loss. The Company was involved in litigation with Vectra Fitness, Inc. ("Vectra"). Vectra filed a civil action in the United States District Court, for the Western District of Washington in Seattle, Washington. In September 2003, the Company, in settlement of litigation, entered into a license agreement with Vectra for certain strength training equipment. The Company is also involved in several intellectual property and patent infringement claims, arising in the ordinary course of its business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect upon its results of operations, liquidity or financial position. In fiscal 2003, the Company formed a foreign subsidiary to build a manufacturing facility in Xiamen, China. The Company's equity interest in the foreign subsidiary is 70%. The total project cost is anticipated to be approximately $12.0 million, which will be funded in the form of equity and debt. The Company amended its credit agreement to provide for the debt portion. The Company is in the process of arranging for the debt portion of the financing, which is expected to be provided by the Bank of China. As of August 30, 2003, the Company has made contributions of $2.0 million and the minority interest contributions were $3.1 million. The minority interest shareholder is also a long-time vendor of the Company and has transacted approximately $23.5 million in sales with the Company during the three month period ended August 30, 2003. He also holds an equity interest in the Company. As a result of the Company's controlling interest in the foreign subsidiary, the investment has been reported on a consolidated basis beginning in the first quarter of fiscal 2004. Note D - Guarantor/Non-Guarantor Financial Information The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc., Free Motion Fitness, Inc. and ICON IP, Inc. ("Guarantor Subsidiaries") have fully and unconditionally guaranteed on a joint and several basis, the obligation to pay principal and interest with respect to the 11.25% Notes. A significant portion of the Company's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Company's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company's subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 11.25% Notes. Although holders of the 11.25% Notes will be direct creditors of the Company's principal direct subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the 11.25% Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Company, including the holders of the 11.25% Notes. The following supplemental condensed consolidating financial statements are presented (in thousands): 1. Condensed consolidating balance sheets as of August 30, 2003, May 31, 2003 and August 31, 2002 and condensed consolidating statements of operations and cash flows for the three months ended August 30, 2003 and August 31, 2002. 2. The Company's combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Company and all of its subsidiaries.
Supplemental Condensed Consolidating Balance Sheet August 30, 2003 ---------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness,Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ ASSETS Current assets: Cash $ 880 $ 2,978 $ 584 $ - $ 4,442 Accounts receivable, net 116,651 73,435 9,953 (17,975) 182,064 Inventories, net 129,861 57,524 10,471 (627) 197,229 Income taxes receivable 1,018 (313) (543) - 162 Deferred income taxes 6,743 238 225 - 7,206 Other current assets 493 4,786 3,788 - 9,067 -------- -------- ------- --------- -------- Total current assets 255,646 138,648 24,478 (18,602) 400,170 -------- -------- ------- --------- -------- Property and equipment, net 38,383 11,221 1,242 - 50,846 Intangible assets, net 19,363 7,316 1,218 - 27,897 Deferred income taxes 8,543 1,030 - - 9,573 Receivable from affiliates 113,303 23,229 - (136,532) - Investment in subsidiary 46,909 - - (46,909) - Other assets, net 13,316 7,632 21 - 20,969 -------- -------- ------- --------- -------- Total Assets $495,463 $189,076 $26,959 $(202,043) $509,455 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ - $ - $ - $ 5,000 Accounts payable 87,472 29,169 27,068 (17,975) 125,734 Accrued expenses 18,191 7,429 2,935 - 28,555 Interest payable 3,165 - - - 3,165 -------- -------- ------- --------- -------- Total current liabilities 113,828 36,598 30,003 (17,975) 162,454 -------- -------- ------- --------- -------- Long-term debt 292,464 14 - - 292,478 Other liabilities 4,412 5,508 - - 9,920 Payable to affiliates 23,229 91,574 21,729 (136,532) - Minority interest - - - 3,100 3,100 Stockholder's equity (deficit): Common stock and additional paid-in capital 206,324 42,359 5,481 (50,009) 204,155 Receivable from Parent (2,200) - - - (2,200) Retained earnings (accumulated deficit) (143,075) 11,390 (26,666) (627) (158,978) Accumulated other comprehensive income (loss) 481 1,633 (3,588) - (1,474) -------- -------- ------- --------- -------- Total stockholder's equity (deficit) 61,530 55,382 (24,773) (50,636) 41,503 -------- -------- ------- --------- -------- Total Liabilities and Stockholder's Equity (Deficit) $495,463 $189,076 $26,959 $(202,043) $509,455 ======== ======== ======= ========= ========
Supplemental Condensed Consolidating Balance Sheet May 31, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash $ 941 $ 2,385 $ 1,324 $ - $ 4,650 Accounts receivable, net 103,461 74,425 12,376 (15,098) 175,164 Inventories, net 101,297 51,142 9,825 (556) 161,708 Deferred income taxes 6,838 241 244 - 7,323 Other current assets 1,611 4,397 3,822 - 9,830 -------- -------- ------- --------- -------- Total current assets 214,148 132,590 27,591 (15,654) 358,675 -------- -------- ------- --------- -------- Property and equipment, net 37,813 9,581 1,383 - 48,777 Receivable from affiliates 116,479 25,889 - (142,368) - Intangible assets, net 20,295 7,556 1,218 - 29,069 Deferred income taxes 8,154 225 - - 8,379 Investment in subsidiaries 57,793 - - (57,793) - Other assets, net 12,936 7,255 23 - 20,214 -------- -------- ------- --------- -------- Total Assets $467,618 $183,096 $30,215 $(215,815) $465,114 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ - $ - $ - $ 5,000 Accounts payable 86,192 25,876 24,207 (15,098) 121,177 Accrued expenses 21,772 6,802 5,390 - 33,964 Income taxes payable 3,969 (856) 1,115 - 4,228 Interest payable 7,484 - - - 7,484 -------- -------- ------- --------- -------- Total current liabilities 124,417 31,822 30,712 (15,098) 171,853 -------- -------- ------- --------- -------- Long-term debt 239,217 15 - - 239,232 Other liabilities 4,015 5,676 - - 9,691 Payable to affiliates 25,889 95,128 21,351 (142,368) - Stockholder's equity (deficit): Common stock and additional paid-in capital 206,324 37,259 5,481 (44,909) 204,155 Receivable from Parent (2,200) - - - (2,200) Retained earnings (accumulated deficit) (130,525) 11,191 (24,478) (13,440) (157,252) Accumulated other comprehensive income (loss) 481 2,005 (2,851) - (365) -------- -------- ------- --------- -------- Total stockholder's equity (deficit) 74,080 50,455 (21,848) (58,349) 44,338 -------- -------- ------- --------- -------- Total Liabilities and Stockholder's Equity (Deficit) $467,618 $183,096 $30,215 $(215,815) $465,114 ======== ======== ======= ========= ========
Supplemental Condensed Consolidating Balance Sheet August 31, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash $ 2,925 $ 1,813 $ 1,722 $ - $ 6,460 Accounts receivable, net 113,808 50,195 9,785 (18,109) 155,679 Inventories, net 120,121 56,999 8,238 (417) 184,941 Deferred income taxes 4,538 211 241 - 4,990 Other current assets 8,316 7,191 1,862 - 17,369 -------- -------- ------- --------- -------- Total current assets 249,708 116,409 21,848 (18,526) 369,439 -------- -------- ------- --------- -------- Property and equipment, net 35,590 9,939 890 - 46,419 Intangible assets, net 20,576 8,190 1,196 - 29,962 Deferred income taxes 10,548 1,540 - - 12,088 Receivable from affiliates 94,031 14,187 - (108,218) - Investment in subsidiary 44,909 - - (44,909) - Other assets, net 21,827 - 12 - 21,839 -------- -------- ------- --------- -------- Total Assets $477,189 $150,265 $23,946 $(171,653) $479,747 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 5,000 $ 11 $ - $ - $ 5,011 Accounts payable 98,649 24,964 20,315 (18,109) 125,819 Accrued expenses 14,082 5,941 2,579 - 22,602 Income taxes payable (373) 1,808 370 - 1,805 Interest payable 3,616 - - - 3,616 -------- -------- ------- --------- -------- Total current liabilities 120,974 32,724 23,264 (18,109) 158,853 -------- -------- ------- --------- -------- Long-term debt 302,169 22 - - 302,191 Other liabilities 2,463 3,697 - - 6,160 Payable to affiliates 14,186 72,872 21,160 (108,218) - Stockholder's equity (deficit): Common stock and additional paid-in capital 206,323 37,260 5,481 (44,909) 204,155 Receivable from Parent (2,200) - - - (2,200) Retained earnings (accumulated deficit) (166,726) 4,425 (24,663) (417) (187,381) Accumulated other comprehensive income (loss) - (735) (1,296) - (2,031) -------- -------- ------- --------- -------- Total stockholder's equity (deficit) 37,397 40,950 (20,478) (45,326) 12,543 -------- -------- ------- --------- -------- Total Liabilities and Stockholder's Equity (Deficit) $477,189 $150,265 $23,946 $(171,653) $479,747 ======== ======== ======= ========= ========
Supplemental Condensed Consolidating Statement of Operations Three Months Ended August 30, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ Net sales $112,576 $76,141 $ 9,106 $ - $197,823 Cost of sales 82,253 46,262 5,662 71 134,248 -------- ------- ------- ------- -------- Gross profit 30,323 29,879 3,444 (71) 63,575 Total operating expenses 24,430 28,821 5,553 - 58,804 -------- ------- ------- ------- -------- Income (loss) from operations 5,893 1,058 (2,109) (71) 4,771 Interest expense 5,517 1 475 - 5,993 Amortization of deferred financing fees 41 - - - 41 Equity in losses (earnings) of subsidiaries 2,061 - - (2,061) - -------- ------- ------- ------- -------- Income (loss) before income taxes (1,726) 1,057 (2,584) 1,990 (1,263) Provision for (benefit from) income taxes - 859 (396) - 463 -------- ------- ------- ------- -------- Net income (loss) $ (1,726) $ 198 $(2,188) $ 1,990 $ (1,726) ======== ======= ======= ======= ========
Supplemental Condensed Consolidating Statement of Operations Three Months Ended August 31, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ Net sales $106,399 $56,271 $ 7,553 $ - $170,223 Cost of sales 83,173 38,650 4,889 108 126,820 -------- ------- ------- ------- -------- Gross profit 23,226 17,621 2,664 (108) 43,403 Total operating expenses 19,755 18,802 2,773 - 41,330 -------- ------- ------- ------- -------- Income (loss) from operations 3,471 (1,181) (109) (108) 2,073 Interest expense 5,956 4 439 - 6,399 Amortization of deferred financing fees 303 - - - 303 Equity in losses (earnings) of subsidiaries 1,863 - - (1,863) - -------- ------- ------- ------- -------- Income (loss) before income taxes (4,651) (1,185) (548) 1,755 (4,629) Provision for (benefit from) income taxes (1,211) 22 - - (1,189) -------- ------- ------- ------- -------- Net income (loss) $ (3,440) $(1,207) $ (548) $ 1,755 $ (3,440) ======== ======= ======= ======= ========
Supplemental Condensed Consolidating Statement of Cash Flows Three Months Ended August 30, 2003 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ Operating activities: Net cash used in operating activities: $(46,967) $ (908) $ (400) $ - $(48,275) -------- ------- ------- ------ -------- Investing activities: Net cash provided by (used in) investing activities: (4,060) (2,333) 19 - (6,374) -------- ------- ------- ------ -------- Financing activities: Borrowings on revolving credit facility, net 53,155 - - - 53,155 Minority interest (2,000) 5,100 - - 3,100 Payment of fees- debt portion (25) - - - (25) Intercompany loan 515 (892) 377 - - -------- ------- ------- ------ -------- Net cash provided by financing activities: 51,645 4,208 377 - 56,230 -------- ------- ------- ------ -------- Effect of exchange rate changes on cash (680) (372) (737) - (1,789) -------- ------- ------- ------ -------- Net increase (decrease) in cash (62) 595 (741) - (208) Cash, beginning of period 941 2,385 1,324 - 4,650 -------- ------- ------- ------ -------- Cash, end of period $ 879 $ 2,980 $ 583 $ - $ 4,442 ======== ======= ======= ====== ========
Supplemental Condensed Consolidating Statement of Cash Flows Three Months Ended August 31, 2002 --------------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ Operating activities: Net cash used in operating activities: $(29,209) $(13,028) $(1,423) $ - $(43,660) -------- -------- ------- ----- -------- Investing activities: Net cash used in investing activities: (4,763) (541) (110) - (5,414) -------- -------- ------- ----- -------- Financing activities: Borrowings (payments) on revolving credit facility, net 52,494 (11) - - 52,483 Payments on term note (1,250) - - - (1,250) Payment of fees-debt portion (102) - - - (102) Other (14,572) 14,264 308 - - -------- -------- ------- ----- -------- Net cash provided by financing activities: 36,570 14,253 308 - 51,131 -------- -------- ------- ----- -------- Effect of exchange rate changes on cash - (319) (51) - (370) -------- -------- ------- ----- -------- Net increase (decrease) in cash 2,598 365 (1,276) - 1,687 Cash, beginning of period 327 1,448 2,998 - 4,773 -------- -------- ------- ----- -------- Cash, end of period $ 2,925 $ 1,813 $ 1,722 $ - $ 6,460 ======== ======== ======= ===== ========
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. Three Months Ended August 30, 2003 Compared to Three Months Ended August 31, 2002 - ----------------------------------------------------------------------- We are one of the world's leading manufacturers and marketers of fitness equipment. We are headquartered in Logan, Utah and have more than 4,500 employees worldwide. We develop, manufacture and market fitness equipment under the following company-owned brand names: NordicTrack, ProForm, HealthRider, Weslo, Weider, IMAGE and Free Motion, as well as Reebok and Gold's Gym under license. This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements contained in this report involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements. Forward-looking statements include, without limitation, statements containing the words "anticipates," "believes," "expects," "intends," "future," and words and terms of similar substance express management's belief, expectations or intentions regarding future performance. Our actual results could differ materially from our historical operating results and from those anticipated in these forward-looking statements as a result of certain factors, including without limitation, those set forth in our Annual Report on Form 10-K/A and other factors and uncertainties contained in our other filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date they were made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. Net sales for the first quarter of fiscal 2004 increased $27.6 million, or 16.2%, to $197.8 million from $170.2 million in the comparable period in 2003. The increase in sales was not attributable to a single customer, distributor or any other specific factor. The increase was across all product lines for which there was increased demand, particularly direct to consumer sales. Sales of our cardiovascular and other equipment in the first quarter fiscal 2004 increased $12.0 million, or 8.2%, to $158.7 million. Sales of our strength training equipment in the first quarter of fiscal 2004 increased $15.6 million, or 66.4%, to $39.1 million. Gross profit in the first quarter of fiscal 2004 was $63.6 million, or 32.2% of net sales, compared to $43.4 million, or 25.5% of net sales, in the first quarter of fiscal 2003. This increase was due to the increase in direct to consumer sales, changes in product mix and manufacturing efficiencies. Selling expenses increased $11.8 million, or 52.4%, to $34.3 million in the first quarter of fiscal 2004. This increase occurred primarily due to increased spending for advertising and freight charges. Expressed as a percentage of net sales, selling expenses were 17.3% in the first quarter of fiscal 2004 compared to 13.2% in the first quarter of fiscal 2003. Research and development expenses increased $0.6 million, or 23.1%, to $3.2 million in the first quarter of fiscal 2004. Expressed as a percentage of net sales, research and development expenses were 1.6% in first quarter of fiscal 2004 and 1.5% in the first quarter of fiscal 2003. General and administrative expenses increased $5.0 million, or 30.9%, to $21.2 million in the first quarter of fiscal 2004. This increase for the period can be attributed to increases in depreciation expense, loss on currency translation and legal fees. Expressed as a percentage of net sales, general and administrative expenses were 10.7% in the first quarter of fiscal 2004 and 9.5% in the first quarter of fiscal 2003. As a result of the foregoing factors, income from operations increased $2.7 million, or 128.6%, to $4.8 million in the first quarter of fiscal 2004. Expressed as a percentage of net sales, income from operations was 2.4% in the first quarter of fiscal 2004 compared with 1.2% in the first quarter of fiscal 2003. As a result of the foregoing factors, EBITDA (as defined under "Seasonality") increased $3.9 million or 61.9% to $10.2 million in the first quarter of fiscal 2004. Expressed as a percentage of net sales, EBITDA was 5.2% in the first quarter of fiscal 2004 compared with 3.7% in the first quarter of fiscal 2003. Interest expense, including amortization of deferred financing fees, decreased $0.7 million, or 10.4%, to $6.0 million in the first quarter of fiscal 2004. This decrease is a result of lower interest rates on our borrowings during the period. The provision for income taxes was $0.4 million in the first quarter of fiscal 2004, compared with a benefit of $1.2 million in the first quarter of fiscal 2003. The increase in income taxes is due to the change in deferred tax assets. As a result of the foregoing factors, the net loss was $1.7 million in the first quarter of fiscal 2004, compared to a net loss in the first quarter of fiscal 2003 of $3.4 million. Seasonality The market for exercise equipment is highly seasonal, with peak periods occurring from late fall through February. As a result, the first and fourth quarters of every fiscal year are generally our weakest periods in terms of sales. During these periods, we build product inventory to prepare for the heavy demand anticipated during the upcoming peak season. This operating strategy helps us to realize the efficiencies of a steady pace of year-round production. The following are the net sales, net income (loss) and EBITDA by quarter for fiscal years 2004, 2003 and 2002:
First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- --------- ---------- (dollars in millions) Net Sales (5) 2004 $197.8 $ - $ - $ - 2003 170.2 292.7 344.0 204.6 2002 134.2 264.6 296.0 176.6 Net Income (Loss) 2004 (1.7) - - - 2003 (3.4) 13.7 20.3 (3.9) 2002 (7.5) 11.1 25.5 (9.7) The following is a reconciliation of net income (loss) to EBITDA by quarter (6): EBITDA 2004 Net loss $(1.7) $ - $ - $ - Add back: Depreciation and amortization 5.5 - - - Provision for income tax 0.4 - - - Interest expense 6.0 - - - Amortization of deferred financing fees - - - - ----- ----- ----- ----- EBITDA $10.2 $ - $ - $ - ===== ===== ===== ===== 2003 Net income (loss) $(3.4) $13.7 $20.3 $(3.9) Add back: Depreciation and amortization 4.2 4.0 5.0 6.0 Provision for (benefit from) income tax (1.2) 8.3 10.7 (0.2) Interest expense 6.4 6.5 6.3 5.9 Amortization of deferred financing fees 0.3 0.2 0.2 0.5 ----- ----- ----- ----- EBITDA $ 6.3 $32.7 $42.5 $ 8.3 ===== ===== ===== ===== 2002 Net income (loss) $(7.5) $11.1 $25.5 $(9.7) Add back: Depreciation and amortization 4.5 4.3 4.9 5.5 Provision for (benefit from) for income tax (4.8) 8.2 1.4 (4.4) Interest expense 6.8 6.8 6.0 6.6 Amortization of deferred financing fees 0.9 0.9 0.9 0.4 ----- ----- ----- ----- EBITDA $(0.1) $31.3 $38.7 $(1.6) ===== ===== ===== ===== - ----------- (1) Our first quarter ended August 30, August 31, and September 1 for fiscal years 2004, 2003 and 2002, respectively. (2) Our second quarter ended November 30 and December 1 for fiscal years 2003 and 2002, respectively. (3) Our third quarter ended March 1 and March 2 for fiscal years 2003 and 2002, respectively. (4) Our fourth quarter ended May 31 for fiscal years 2003 and 2002, respectively. (5) In November of 2001, the Emerging Issues Task Force issued EITF 01-09, "Accounting for Consideration Given by Vendor to a Customer" ("EITF 01-09") effective for annual or interim financial statements for periods beginning after December 15, 2001. EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. We adopted EITF 01-09 in fiscal 2003. Net sales are shown as if EITF 01-09 were adopted for all periods presented. Net sales without the adjustment for EITF 01-09 were as follows: First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- ---------- ---------- (dollars in millions) Net Sales 2004 $202.8 $ - $ - $ - 2003 175.8 301.5 354.8 210.9 2002 138.1 272.1 304.9 181.0 (6) EBITDA is a presentation of "earnings before interest, taxes, depreciation, and amortization." EBITDA data is included because management understands that such information is considered by bankers and certain investors as an additional basis on evaluating a company's ability to pay interest, repay debt and make capital expenditures. In addition, performance bonuses paid to management are based in part on EBITDA. EBITDA may not be comparable to similarly titled measures reported by other companies. In addition, EBITDA is a non-GAAP measure and should not be considered an alternative to operating or net income in measuring company results.
Liquidity and Capital Resources Net cash used in operating activities was $48.3 million in the first quarter of fiscal 2004, as compared to $43.7 million of cash used in operating activities in the first quarter of fiscal 2003. In the first quarter of fiscal 2004, major sources of funds were non-cash provisions of $5.5 million for depreciation and amortization, and an increase in accounts payable of $4.6 million. These changes were offset by increases in inventory of $35.5 million, accounts receivable of $6.9 million and a decrease in accrued expenses of $5.5 million. These changes are due to increasing sales during the course of the first several months of the fiscal year leading up to our peak selling season, which occurs between the months of October and December. We sell the majority of our products to customers in the second and third fiscal quarters (i.e., from September through February). In the first quarter of fiscal 2003, major sources of funds were non-cash provisions of $4.2 million for depreciation and amortization, and an increase in accounts payable and accrued expenses of $11.0 million. These changes were offset by increases in inventory of $51.2 million and accounts receivable of $2.5 million. Such increases were due to the aforementioned factors relating to sales increases. Net cash used in investing activities was $6.4 million in the first quarter of fiscal 2004, compared to $5.4 million in the first quarter of fiscal 2003. Investing activities in the first quarter of fiscal 2004 consisted primarily of capital expenditures of $5.6 million related to upgrades in plant and tooling and purchases of additional manufacturing equipment of which $1.8 million related to China and purchases of intangible assets of $0.8 million. Cash used in investing activities in the first quarter of fiscal 2003, was primarily for capital expenditures of $4.6 million and purchases of intangible assets of $0.8 million. Net cash provided by financing activities was $56.2 million in the first quarter of fiscal 2004, compared to $51.1 million of cash provided by financing activities in the first quarter of fiscal 2003. Cash provided by financing activities resulted from borrowings on our new credit facility and the minority contribution of $3.1 million from our recent expansion to China. Our primary short-term liquidity needs consist of financing seasonal merchandise inventory buildups and paying cash interest expense under our existing credit facilities and on the 11.25% subordinated notes due in April of 2012. Our principal source of financing for our seasonal merchandise inventory buildup and increased accounts receivable is revolving credit borrowings under the existing credit facilities. At August 30, 2003, we had $84.3 million of availability under these facilities. Our working capital borrowing needs are typically at their lowest level from April through June, increase somewhat through the summer and sharply increase from September through November to finance accounts receivable and purchases of inventory in advance of the holiday and post-holiday selling season. Generally, in the period from November through February, our working capital borrowings remain at their highest level and then are paid down to their lowest annual levels from April through August. The balance outstanding under the existing credit facility consisted of (in millions): August 30, 2003 August 31, 2002 May 31, 2003 --------------- --------------- ------------ Revolver $125.7 $131.8 $ 72.6 Term Loan 18.7 22.6 18.7 ------ ------ ------ $144.4 $154.4 $ 91.3 ====== ====== ====== As of August 30, 2003, our consolidated indebtedness was approximately $297.5 million, of which approximately $144.4 million was senior indebtedness. With the exception of the increases in the revolver noted above, our contractual cash obligations and commercial commitments remained consistent with those at the end of fiscal 2003. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our existing credit facility, will be adequate to meet future liquidity needs for at least the next few years. We may, however, need to refinance all or a portion of the principal amount of the notes on or prior to maturity. In May of 2003, we amended our credit agreement to provide for the debt financing in China. Critical Accounting Policies Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in our annual report on Form 10-K/A as amended with the Securities and Exchange Commission on October 14, 2003 are those that depend most heavily on these judgments and estimates. As of August 30, 2003, there have been no material changes to any of the critical accounting policies contained therein other than the adoption of the new accounting standards as discussed herein. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143, effective June 1, 2003, did not have a material effect on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 also broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses significant issues relating to the recognition, measurement and report of costs associated with exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on our financial position or results of operations. In November 2001, the Emerging Issues Task Force issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer". EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. We have adopted EITF 01-09 effective June 1, 2002, which reduces net sales with a corresponding reduction of selling, general and administrative expenses. This change had no effect on income from operations or net income. In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, we must recognize an initial liability for the fair value, or market value, and of the obligations we assume under that guarantee and must disclose that information in our interim and annual financial statements. FIN 45 is effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material effect on our consolidated financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities", which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. The adoption of FIN 46 did not have a material effect on our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - an amendment of FASB 123". This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, this statement amends disclosure requirements of Statement 123 to ensure that fair value disclosures are prominent in both annual and interim financial statements. The adoption of the provisions of SFAS No. 148 did not have a material effect on our financial position, operations or cash flows. In April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. We do not participate in such transactions, however, we are evaluating the effects of this new pronouncement, and, if any, will adopt FASB 149 within the prescribed time. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. We do not expect SFAS No. 150 to have a material effect on our consolidated financial statements. Item 3 Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations expose us to market risk. We are vulnerable to significant fluctuations in interest rates on our variable rate debt and on any future repricing or refinancing of our fixed rate debt and on future debt. We use long-term and medium-term debt as a source of capital. At August 30, 2003, we had approximately $153.0 million in outstanding fixed rate debt, consisting of 11.25% subordinated notes maturing in April 2012. When debt instruments of this type mature, we typically refinance such debt at the then-existing market interest rates, which may be more or less than the interest rates on the maturing debt. Our credit facility has variable interest rates and any fluctuation in interest rates could increase or decrease our interest expense. At August 30, 2003, we had approximately $144.5 million in outstanding variable rate debt. Foreign Currency Risk In addition to the United States, we have operations or transact business in Canada, United Kingdom, France, Italy, Germany, and Asia. The operations in these foreign countries conduct business in their local currencies as well as other regional currencies. To mitigate our exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into forward exchange contracts from time to time to protect our margin on a portion of our forecasted foreign currency sales. As of August 30, 2003, no forecast sales were hedged by forward exchange contracts. Because of the variety of currencies in which purchases and sales are transacted, it is not possible to predict the impact of a movement in foreign currency exchange rates on future operating results. However, we intend to continue to mitigate our exposure to foreign exchange gains or losses. Assessment of the Euro On January 1, 1999, eleven of the member countries of the European Union established fixed conversion rates between their existing currencies (called "LEGACY CURRENCIES") and one common currency called the euro. The euro trades on currency exchanges and may be used in business transactions. In January 2002, the legacy currencies began being withdrawn from circulation. Our subsidiaries affected by the conversion have established plans to address issues raised by the conversion. We believe that, under current conditions, the conversion of legacy currencies to the euro will not have a material adverse effect on our results of operations or financial position. Item 4 Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of August 30, 2003 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them, on a timely basis, to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls. PART II - OTHER INFORMATION Item 1. Legal Proceedings. See Note B in Item 1 of Part I. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.01. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.02. Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.03. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K Report on Form 8-K dated August 29, 2003 containing the Company's press release dated August 29, 2003 announcing earnings for the fourth quarter and fiscal 2003 which ended May 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized. ICON Health & Fitness, Inc. (Registrant) By /s/ Gary Stevensen Date: October 14, 2003 ----------------------------- Gary Stevenson, President By /s/ S. Fred Beck Date: October 14, 2003 -------------------------------------- S. Fred Beck, Chief Financial Officer CERTIFICATION ------------- I, Scott R. Watterson, certify that: 1. I have reviewed this quarterly report of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2003 /s/ Scott R. Watterson - ---------------------- Scott R. Watterson Chief Executive Officer CERTIFICATION -------------- I, Gary E. Stevenson, certify that: 1. I have reviewed this quarterly report of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2003 /s/ Gary E. Stevenson - --------------------- Gary E. Stevenson Chief Operating Officer CERTIFICATION -------------- I, S. Fred Beck, certify that: 1. I have reviewed this quarterly report of ICON Health & Fitness, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2003 /s/ S. Fred Beck - ---------------- S. Fred Beck Chief Financial Officer EXHIBIT INDEX Exhibit No. Name - ----------- ---- 99.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.02 Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.03 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99 3 ex9901-1q.txt SECTION 906 CERTIFICATION, SRW EXHIBIT 99.01 Certification 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 of ICON Health & Fitness, Inc. (the "Company") on Form 10-Q for the period ended August 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott R. Watterson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (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 result of operations of the Company. Scott R. Watterson Chief Executive Officer October 14, 2003 A signed original of this written statement is required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 4 ex9902-1q.txt SECTION 906 CERTIFICATION, GES EXHIBIT 99.02 Certification 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 of ICON Health & Fitness, Inc. (the "Company") on Form 10-Q for the period ended August 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary E. Stevenson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (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 result of operations of the Company. Gary E. Stevenson Chief Executive Officer October 14, 2003 A signed original of this written statement is required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 5 ex9903-1q.txt SECTION 906 CERTIFICATION, SFB EXHIBIT 99.03 Certification 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 of ICON Health & Fitness, Inc. (the "Company") on Form 10-Q for the period ended August 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, S. Fred Beck, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (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 result of operations of the Company. S. Fred Beck Chief Executive Officer October 14, 2003 A signed original of this written statement is required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----