-----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, L8CutHzgmOHXF/RpUmYKa3z1VhyNuLl4zUuoI0dnGIJHVMTHcQg3Y0K/ykpqoXsZ 9Taqhc0uqsLtNp71JCMPqg== 0001029294-98-000005.txt : 19980415 0001029294-98-000005.hdr.sgml : 19980415 ACCESSION NUMBER: 0001029294-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980414 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON FITNESS CORP CENTRAL INDEX KEY: 0001029294 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 870566936 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-18475 FILM NUMBER: 98593064 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 801-750-7737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST STREET 2: ONE INTERNATIONAL PLACE 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: SEC FILE NUMBER: 033-87930 FILM NUMBER: 98593065 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: IHF HOLDINGS INC CENTRAL INDEX KEY: 0000934799 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 870531209 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-87930-01 FILM NUMBER: 98593066 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 ICON FITNESS, IHF HOLDINGS, ICON HEALTH FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 1998 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 Numbers: 333-18475, 33-87930-0, 33-87930 ICON Fitness Corporation IHF Holdings, Inc. ICON Health & Fitness, Inc. (Exact name of registrant as specified in its charter) Delaware 87-0566936, 87-0531209, 87-0531206 (State or other jurisdiction of (I.R.S. Employer Identification Nos.) incorporation or organization) 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 change since last report) Indicate by check mark 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 Fitness Corporation 100 shares, IHF Holdings, Inc. 1,000 shares, ICON Health & Fitness, Inc. 1,000 shares. ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health & Fitness, Inc. FORM 10-Q INDEX Page No. PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 3 Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 3-7 Consolidated Condensed Balance Sheets as of February 28, 1998 and May 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 3-4 Consolidated Condensed Statements of Operations for the three months and nine months ended February 28, 1998 and March 1, 1997. . . . . . . . . . 5-6 Consolidated Condensed Statements of Cash Flows for the nine months ended February 28, 1998 and March 1, 1997. . . . . . . . . . . . 7 Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8-13 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 13 Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 13 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 13 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Securities Holders . . . . 13 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 13 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health & Fitness, Inc. CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)(In Thousands)
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc. February 28, February 29, February 28, May 31, 1997 May 31,1997 May 31,1997 1998 1998 1998 ____________ ______________ _______________ ____________ ____________ ____________ Assets Current assets Cash $7,793 $7,793 $7,793 $5,560 $5,560 $5,560 Accounts receivable, net 224,917 224,917 224,917 192,825 192,825 192,825 Inventories: Raw materials 41,292 41,292 41,292 27,974 27,974 27,974 Finished goods 76,671 76,671 76,671 93,864 93,864 93,864 Deferred income taxes 10,451 10,222 9,710 8,401 8,301 8,006 Other current assets 7,537 7,537 7,537 12,895 12,895 12,895 Asset held for sale --- --- --- 17,080 17,080 17,080 Income tax receivable 7,391 7,391 7,391 7,429 7,429 7,429 _______ _______ _______ _______ _______ _______ Total current assets 376,052 375,823 375,311 366,028 365,928 365,633 Property and equipment Land 1,430 1,430 1,430 2,371 2,371 2,371 Building 17,391 17,391 17,391 17,391 17,391 17,391 Machinery and equipment 68,480 68,480 68,480 59,318 59,318 59,318 ______ ______ ______ ______ ______ ______ Total 87,301 87,301 87,301 79,080 79,080 79,080 Less:accum depreciation (37,410) (37,410) (37,410) (27,342) (27,342) (27,342) ________ ________ ________ ________ ________ ________ Property & equipment, net 49,891 49,891 49,891 51,738 51,738 51,738 Receivable from parent 2,365 2,221 2,221 2,307 2,307 2,307 Trademarks, net 17,507 17,507 17,507 18,236 18,236 18,236 Deferred income taxes 14,832 9,804 13 8,338 6,405 -- Other assets 28,609 25,173 21,193 28,157 24,066 19,029 ________ ________ ________ ________ ________ ________ Total assets $489,256 $480,419 $466,136 $474,804 $468,680 $456,943 ======== ======== ======== ======== ======== ========
See notes to consolidated condensed financial statements. ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health & Fitness, Inc. CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)(Continued)(In Thousands)
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc. February 28, February 28, February 28, May 31, 1997 May 31,1997 May 31,1997 1998 1998 1998 ____________ ______________ _______________ ____________ ____________ _____________ Liabilities and Stockholders' Equity (Deficit) Current liabilities Current portion of long-term debt $5,672 $5,672 $5,672 $5,401 $5,401 $5,401 Accounts payable 116,656 116,656 116,656 112,079 112,079 112,079 Interest payable 4,555 4,555 4,555 6,220 6,220 6,220 Accrued expenses 19,315 19,315 19,315 20,696 20,696 20,696 Income taxes payable 3,372 3,372 3,372 1,165 1,165 1,165 _______ _______ _______ _______ _______ _______ Total current liabilities 149,570 149,570 149,570 145,561 145,561 145,561 Long term-debt 514,434 417,161 328,330 489,400 401,196 321,625 Deferred income taxes - - - -- -- 501 Other liabilities -- - -- -- -- -- Stockholders' equity (deficit) Common stock & additional paid-in capital 49,699 127,767 166,184 49,699 127,767 166,184 Receivable from officers for purchase of equity (656) (656) (656) (656) (656) (656) Cumulative translation adjustment (1,103) (1,103) (1,103) (506) (506) (506) Retained earnings(deficit) (222,688) (212,320) (176,189) (208,694) (204,682) (175,766) _________ _________ _________ _________ _________ _________ Total Stockholders' Equity (174,748) (86,312) (11,764) (160,157) (78,077) (10,744) Total liabilities and _________ _________ _________ _________ _________ _________ stockholders' equity $489,256 $480,419 $466,136 $474,804 $468,680 $456,943 ========= ========= ========= ========= ========= =========
See notes to consolidated condensed financial statements. ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health & Fitness, Inc. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)(In Thousands)
For The Three Months Ended ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc. February 28, February 28, February 28, March 1, March 1, March 1, 1998 1998 1998 1997 1997 1997 ____________ ______________ _______________ ____________ ____________ _____________ Net sales $252,027 $252,027 $252,027 $248,670 $248,670 $248,670 Cost of goods sold 176,519 176,519 176,519 175,062 175,062 175,062 Cost of goods sold- revaluation of HealthRider, Weider Sports and CanCo inventory - -- - 2,060 2,060 2,060 _______ ________ ________ _______ _______ _______ Total cost of goods sold 176,519 176,519 176,519 177,122 177,122 177,122 _______ ________ ________ _______ _______ _______ Gross profit 75,508 75,508 75,508 71,548 71,548 71,548 Operating expenses: Selling expenses 37,064 37,064 37,064 43,632 43,632 43,632 Research and development 1,984 1,984 1,984 1,978 1,978 1,978 General and administrative 14,981 14,981 14,981 12,289 12,289 12,289 Weider Settlement - - - 1,000 1,000 1,000 HealthRider consolidation - - - 3,949 3,949 3,949 ______ ______ ______ ______ ______ ______ Total operating expenses 54,029 54,029 54,029 62,848 62,848 62,848 _______ _______ _______ _______ _______ _______ Operating income (loss) 21,479 21,479 21,479 8,700 8,700 8,700 Interest expense 15,666 12,643 9,556 15,286 11,734 9,128 Amortization of deferred financing fees 1,827 1,657 1,305 1,290 1,101 803 ________ ________ ________ _______ _______ _______ Income(Loss) before income tax 3,986 7,179 10,618 (7,876) ( 4,135) (1,231) Provision(Benefit)from income taxes 1,851 2,925 3,956 (4,919) (2,705) (801) ________ _________ _________ ________ ________ ________ Net loss $2,135 $4,254 $6,662 ($2,957) ($1,430) ($430) ========= ========= ========= ======== ======== ========
See notes to consolidated condensed financial statements. ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health & Fitness, Inc. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)(In Thousands)
For The Nine Months Ended ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc. February 28, February 28, February 28, March 1, March 1, March 1, 1998 1998 1998 1997 1997 1997 ____________ ______________ _______________ ____________ ____________ _____________ Net sales $615,821 $615,821 $615,821 $623,974 $623,974 $623,974 Cost of goods sold 437,281 437,281 437,281 435,672 435,672 435,672 Cost of goods sold- revaluation of HealthRider, Weider Sports and CanCo inventory 330 330 330 10,225 10,225 10,225 _______ ________ ________ _______ _______ _______ Total cost of goods sold 437,611 437,611 437,611 445,897 445,897 445,897 _______ ________ ________ _______ _______ _______ Gross profit 178,210 178,210 178,210 178,077 178,077 178,077 Operating expenses: Selling expenses 97,293 97,293 97,293 100,001 100,001 100,001 Research and development 5,978 5,978 5,978 5,452 5,452 5,452 General and administrative 45,303 45,301 45,301 39,290 39,290 39,290 Weider Settlement - - - 17,465 17,465 17,465 HealthRider consolidation - - - 3,949 3,949 3,949 _______ _______ _______ _______ _______ _______ Total operating expenses 148,574 148,572 148,572 166,157 166,157 166,157 _______ _______ _______ _______ _______ _______ Operating income (loss) 29,636 29,638 29,638 11,920 11,920 11,920 Interest expense 45,015 35,948 26,687 35,915 32,102 24,284 Amortization of deferred financing fees 5,065 4,555 3,498 3,348 3,147 2,255 Dividend on cumulative redeemable preferred stock of Subsidiary -- -- -- 2,125 -- -- ________ ________ ________ ________ ________ ________ Income(Loss) before income tax(20,444) (10,865) (547) (29,468) (23,329) (14,619) Provision(Benefit)from income taxes (6,450) (3,227) (127) (10,524) (8,311) (5,079) _________ _________ _________ _________ _________ ________ Net loss ($13,994) ($7,638) ($423) ($18,944) ($15,018) ($9,540) ========= ========= ========= ========= ========= ========
See notes to consolidated condensed financial statements. ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health & Fitness, Inc. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)(In Thousands)
For The Nine Months Ended ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc. February 28, February 28, February 28, March 1, March 1, March 1, 1998 1998 1998 1997 1997 1997 ____________ ______________ _______________ ____________ ____________ _____________ OPERATING ACTIVITIES: Net income/(loss) ($13,994) ($7,638) ($423) ($18,944) ($15,018) ($9,540) Adjustments to reconcile net income to net cash provided by operating activity: Provision for bad debt and advertising allowance 20,925 20,925 20,925 9,292 9,292 9,292 Provision/(benefit)for deferred taxes (8,544) (5,321) (2,218) (1,596) (1,596) (101) Amortization of debt discount and deferred financing fees 23,572 13,996 3,678 19,191 11,172 2,462 Depreciation & amortization 12,037 12,037 12,037 8,628 8,628 8,628 Inventory revaluation 330 330 330 10,225 10,225 10,225 Non-cash compensation - - - 234 234 234 Loss on sale of assets 333 333 333 - - - Interest expense attributable to dividends on preferred stock -- -- -- 2,125 -- -- Changes in operating assets and liabilities: Accounts receivable (52,939) (52,939) (52,939) (98,860) (98,860) (98,860) Inventory 3,543 3,543 3,543 (19,542) (19,542) (19,542) Other assets (1,611) (1,614) (1,614) (27,810) (20,694) (18,957) Account payable and accrued expenses 3,856 3,856 3,856 24,873 24,724 24,724 ______ ______ ______ _______ ______ ______ Net cash received from (used in) operating activities (12,492) (12,492) (12,492) (92,184) (91,435) (91,435) ________ ________ ________ ________ ________ ________ INVESTING ACTIVITIES: Proceeds from sale Of assets 18,250 18,250 18,250 - - - Purchases of property and equipment (9,724) (9,724) (9,724) (55,802) (55,802) (55,802) _______ _______ _______ ________ ________ ________ Net cash received from (used in) investing activities 8,526 8,526 8,526 (55,802) (55,802) (55,802) _______ _______ _______ ________ ________ ________ FINANCING ACTIVITIES: Proceeds from long-term debt, net of payments 6,796 6,796 6,796 215,924 133,657 133,657 Return of capital to parent - - - (42,319) - - Retirement of preferred stock - -- -- (35,748) (35,748) - Capital contribution by parent -- -- -- -- 35,748 -- Payment of debt financing fees -- -- -- (3,451) - - ______ _______ _______ ________ ________ ________ Net cash received from (used in) financing activities 6,796 6,796 6,796 134,406 133,657 133,657 Effect of exchange rate change on cash (597) (597) (597) (889) (889) (889) Net increase(decrease) _______ _______ _______ ________ ________ ________ in cash 2,233 2,233) 2,233 (14,469) (14,469) (14,469) Cash at beginning of period 5,560 5,560 5,560 19,313 19,313 19,313 _______ _______ _______ ________ _______ _______ Cash at end of period $7,793 $7,793 $7,793 $4,844 $4,844 $4,844 SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest $26,792 $26,792 $26,792 $18,200 $18,200 $18,200 Income taxes $144 $144 $144 $1,175 $1,175 $1,175
See notes to consolidated condensed financial statements. ICON Fitness Corporation and its wholly-owned subsidiary, IHF Holdings, Inc. and its wholly owned subsidiary, ICON Health & Fitness, Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Basis of Presentation The consolidated condensed financial statements include the accounts of ICON Fitness Corporation ("ICON Fitness"), its wholly-owned subsidiary, IHF Holdings, Inc. ("IHF Holdings"), and its wholly-owned subsidiary, ICON Health & Fitness, Inc. ("ICON Health"), and its wholly-owned subsidiaries (collectively, the "Company"). ICON Fitness' parent company, IHF Capital, Inc. ("IHF Capital"), is not a registrant. The accompanying consolidated condensed financial statements and notes should be read in conjunction with the financial statements contained in the Company's 'Annual Report on Form 10-K. In management's opinion, the accompanying consolidated condensed financial statements include all adjustments necessary for a fair presentation of the results of the interim periods presented and all such adjustments are of a normal recurring nature. The home fitness industry is seasonal in nature and the results of operations for the interim periods presented may not be indicative of the results for the full year. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results could differ from those estimates. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. This quarterly Report on Form 10Q 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. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends" and similar expressions are intended to identify forward-looking statements. The Company's actual results could differ materially from those set forth in the forward-looking statements. Year 2000 Compliance The Company utilizes and is dependent upon data processing systems and software to conduct its business. The data processing systems and software include those developed and maintained by the Company's third-party data processing vendors and software which is run on in-house computer networks. During the third quarter of fiscal 1998, the Company initiated a review and assessment of all hardware and software to confirm that it will function properly in the year 2000. With respect to internal systems, the results of that evaluation to date have not revealed any year 2000 issues that, in the Company's opinion, create a material risk of disruption of operations. With respect to outside vendors, those vendors that have been contacted have indicated that their hardware or software is or will be Year 2000 compliant in time frames that meet regulatory requirements. Evaluation of these issues is continuing and there can be no assurance that additional issues, not presently known to the Company, will not be discovered which could present a material risk of disruption to the Company's operations. Seasonality The Company has historically sold the majority of its products to customers in its second and third fiscal quarters (i.e., from September through February). Increased sales and distribution typically have occurred in the Christmas retail season and the beginning of a new calendar year because of increased customer promotions and customer purchases. While this seasonality has been the trend, it may not be indicative of the results to be expected for this fiscal year or any future years. The following table reflects the Company's consolidated net sales for the first three quarters of fiscal 1998 and for each quarter in fiscal 1997, and 1996. First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 1998 $127.5 $236.3 $252.0 --- Fiscal 1997 $125.8 $249.5 $248.7 $212.2 Fiscal 1996 $124.8 $228.5 $240.9 $153.4 Operating Results for the Third Quarters of Fiscal 1998 and 1997 During the third quarter of fiscal year 1998, net sales increased 1.3% to $252.0 million from $248.7 million in the third quarter of fiscal 1997. Domestic treadmill sales for the third quarter of fiscal year 1998 accounted for approximately 69% of total net sales versus 66% in the third quarter of fiscal 1997. Third quarter fiscal year 1998 domestic treadmill sales were $174.7 million compared to $164.6 million which is a $10.1 million increase. Other increases include eliptical products of $11.4 million, home gyms of $4.4 million, stationary bike sales of $4.0 million, and relaxation chairs, home spas and trampolines increased approximately $4.5 million in aggregate over the same period of a year ago. However, the sale of ab shapers and upright rowers decreased approximately $28.2 million due to a general softening of demand for those particular product categories and airwalker sales decreased $2.9 million over a year ago. Gross profit for the third quarter of fiscal 1998 was $75.5 million, or 30.0% of net sales, compared to $71.5 million, or 28.8% of net sales, for the third quarter of fiscal 1997. Included in the third quarter of fiscal 1997 cost of goods sold, was a one time step-up expense for the purchase of HealthRider, Weider Sports and CanCo inventory in the amount of $2.1 million. Without the $2.1 million expense for the third quarter of fiscal 1997, the profit margin would have been $73.6 million, or 29.6% of net sales. The slight increase of 0.4% in profit margin is attributable to the changes in product mix. Margins on treadmills have increased to 29.6%, approximately 2.0% higher for the third quarter of 1998 as compared to the third quarter of 1997. Selling expenses were $37.1 million, or 14.7% of net sales, in the third quarter of fiscal 1998 compared to $43.6 million, or 17.5% of net sales, for the third quarter of fiscal 1997. This decrease is attributed primarily to one-time HealthRider selling expenses of $3.2 million included in the third quarter of fiscal 1997. In addition, the Company decreased advertising expenses by approximately $2.5 million for the third quarter of 1998 versus the third quarter of 1997. Research and development expenses were $2.0 million or 0.8% of net sales, for the third quarter of fiscal 1998 and 1997. General and administrative expenses totaled $15.0 million, or 5.9 % of net sales, for the third quarter of fiscal 1998 compared to $12.3 million, or 4.9% of net sales, for the third quarter of fiscal 1997. This 1.0% increase in general and administrative expenses for the third quarter of fiscal 1998 is attributable to an increase in depreciation expense of $0.8 million due to higher fixed assets in fiscal 1998, an increase in insurance expense of $1.5 million and a legal expense increase of $0.4 million. The increase in insurance and legal expense is primarily related to product liability costs. In the second quarter of fiscal 1997, the Company and Weider Health and Fitness ("WHF") and its affiliates settled litigation through a number of agreements. The settlement included the release of certain claims previously asserted by WHF and its affiliates, amendments to certain agreements existing between the Company and WHF and its affiliates and certain new agreements among the Company and WHF and its affiliates. Of the total expense incurred in connection with the WHF settlement, $1.0 million was incurred in the third quarter of fiscal 1997. HealthRider consolidation expenses totaled $4.0 million during the third quarter of fiscal 1997. These charges were incurred to eliminate the duplication in staff and facilities with those of ICON Health. As a result of the foregoing factors, operating income was $21.5 million, or 8.5% of net sales in the third quarter of fiscal 1998, compared to $8.7 million, or 3.5% of net sales in the third quarter of fiscal 1997. Operating income before the revaluation of acquired inventories, one-time selling expenses, the Weider settlement, and the HealthRider consolidation expenses would have been $19 million or 7.6% of net sales for the third quarter of fiscal 1997. Interest expense was $9.6 million for ICON Health, $12.6 million for IHF Holdings and $15.7 million for ICON Fitness in the third quarter of fiscal 1998 compared to $9.1 million for ICON Health, $11.7 million for IHF Holdings and $15.3 million for ICON Fitness for the third quarter of fiscal 1997. The increase in interest expense is due to a higher level of outstanding indebtedness in fiscal 1998 as a result of the additional level of borrowings under the Company's credit agreement and accretion of the principal balances of the Company's outstanding indentures. The income tax provision is $4.0 million for ICON Health, $2.9 million for IHF Holdings and $1.9 million for ICON Fitness for the third quarter of fiscal 1998, compared with a tax benefit of $0.8 million for ICON Health, $2.7 million for IHF Holdings and $4.9 for ICON Fitness during the third quarter of fiscal 1997. This is a result of the increase in income before income tax during the third quarter of fiscal 1998 compared to the same period in the preceding year. As a result of the foregoing factors, net income was $6.7 million for ICON, $4.3 million for IHF Holdings and $2.1 million for ICON Fitness for the third quarter of fiscal 1998 compared to net losses for all three companies in the third quarter of fiscal 1997 of $0.4 million for ICON Health, $1.4 million for IHF Holdings and $3.0 million for ICON Fitness. Operating Results for the First Nine Months of fiscal 1998 and 1997 Net sales were $615.8 million in the first nine months of fiscal 1998, compared to $624.0 million in the first nine months of fiscal 1997. This represents a 1.3% decline in sales for the first nine months of the current fiscal year. Domestic treadmill sales totaled $385.0 million in the first nine months of fiscal 1998 compared to $321.4 for the first nine months of the preceding year. This is an increase of $63.6 million. Other increases include elliptical product sales of $17.0 million, stationary bike sales of $9.2 million, airwalker sales of $5.4 million and relaxation chairs, home spas, home gyms and steppers increased sales of approximately $3.5 million in aggregate over the same period of a year ago. Ab shapers and upright rowers decreased by $92.8 million during the first nine months of fiscal 1998, due to a general softening of demand for those particular product categories. Also, the sale of trampolines decreased by $9.1 million, and rowers and skiers decreased by $5.0 million. Gross profit for the first nine months of fiscal 1998 was $178.2 million, or 28.9% of net sales, compared to $178.1 million, or 28.5% of net sales, for the first nine months of fiscal 1997. The step-up of the HealthRider, Weider Sports and ICON of Canada inventory increased the cost of sales by $10.2 million for the first nine months of fiscal 1997. Without this charge, gross profit would have been 30.2% for the first nine months of fiscal 1997. The profit margin decrease of 1.3% relates directly with the product mix sold as treadmills have a lower margin than ab shapers and upright rowers. Margins on treadmills have increased to 29.6%, approximately 2.0% higher through the third quarter of 1998 as compared to 1997. Weighted average margins received in the prior year on ab shapers and upright rowers was approximately 40.0%. Selling expenses were $97.3 million, or 15.8% of net sales, in the first nine months of fiscal 1998 compared to $100.0 million, or 16.0% of net sales for the first nine months of fiscal 1997. This decrease is attributable to one-time HealthRider selling expenses of $6.4 million incurred in the first nine months of fiscal 1997, offset by higher costs of shipping treadmills versus ab shapers and upright rowers and increased advertising and bad debts during the first nine months of fiscal 1998. Freight costs were $9.8 million in the first nine months of fiscal 1998 compared to $8.2 million for the first nine months of fiscal 1997 and bad debt expense increased $2.1 million for the first nine months of fiscal 1998 over 1997. Research and development expenses were $6.0 million or 1.0% of net sales, for the first nine months of fiscal 1998, compared to $5.5 million, or 0.9% of net sales, for the first nine months of fiscal 1997. General and administrative expenses totaled $45.3 million, or 7.4% of net sales, for the first nine months of fiscal 1998 compared to $39.3 million, or 6.3% of net sales, for the first nine months of fiscal 1997. The largest single increase in fiscal 1998 over 1997 is depreciation of $3.4 million, which increased due to the recent acquisition of assets from HealthRider and CanCo. Insurance expense has increased $1.8 million in the first nine months of fiscal 1998 over 1997. Legal expenses and distribution expenses have increased approximately $0.7 million and $0.6 million, respectively, in the first nine months of fiscal 1998 over 1997. Other increases which are not significant account for the remaining $0.7 million in fiscal 1998 over 1997. Bonuses decreased by $1.2 million in the first nine months of fiscal 1998 compared to the same period in fiscal 1997. In the second quarter of fiscal 1997, the Company and WHF and its affiliates settled litigation through a number of agreements. The settlement included the release of certain claims previously asserted by WHF and its affiliates, amendments to certain agreements existing between the Company and WHF and its affiliates and certain new agreements among the Company and WHF and its affiliates. Expenses related to the WHF settlement amounted to $17.5 million through the third quarter of fiscal 1997. HealthRider consolidation expenses totaled $4.0 million through the third quarter of fiscal 1997. These charges were incurred to eliminate the duplication in staff and facilities with those of ICON Health. As a result of the foregoing factors, operating income was $29.6 million, or 4.8% of net sales in the first nine months of fiscal 1998, compared to $11.9 million, or 1.9% of net sales in the first nine months of fiscal 1997. Operating income before the revaluation of acquired inventories, one time HealthRider selling expenses, consolidation expenses associated with the HealthRider and CanCo Acquisitions and the expense of the Weider settlement would have been $50.0 million or 8.0% of net sales for the first nine months of fiscal 1997. Interest expense was $26.7 million for ICON Health, $35.9 million for IHF Holdings and $45.0 million for ICON Fitness in the first nine months of fiscal 1998 compared to $24.3 million for ICON Health, $32.1 million for IHF Holdings and $35.9 million for ICON Fitness for the first nine months of fiscal 1997. The increase in interest expense is due to a higher level of outstanding indebtedness in fiscal 1998 as a result of the additional level of borrowings under the Company's credit agreement and accretion of the principal balances of the Company's outstanding indentures. Dividends on cumulative redeemable preferred stock totaled $2.1 million for ICON Fitness for the first nine months of fiscal 1997. This Preferred Stock was redeemed in the second quarter of fiscal 1997. The income tax benefit was $0.1 million for ICON Health, $3.2 million for IHF Holdings and $6.5 million for ICON Fitness for the first nine months of fiscal 1998, compared with a tax benefit of $5.1 million for ICON Health, $8.3 million for IHF Holdings and $10.5 million for ICON Fitness during the first nine months of fiscal 1997. This is a result of the loss before income tax during the first nine months of both years. As of February 28, 1998, ICON Fitness has a net deferred tax asset of $25.3 million. No valuation allowance has been recorded against this asset because the Company believes that it will generate sufficient future taxable income through operations to realize the net deferred assets prior to expiration of any net operating losses (NOL). NOL's can be carried forward up to 15 taxable years. There can be no assurance however, that the Company will generate any specific level of earnings or that it will be able to realize any of the deferred tax asset in future periods. If the Company is unable to generate sufficient taxable income in the future through operating results, a valuation allowance against this deferred tax asset would result in a charge to earnings. As a result of the foregoing factors, the net loss was $0.4 million for ICON Health, $7.6 million for IHF Holdings and $14.0 million for ICON Fitness for the first nine months of fiscal 1998, compared to net losses of $9.5 million for ICON Health, $15.0 million for IHF Holdings and $18.9 million for ICON Fitness during the same period of fiscal 1997. Advertising allowances with retail customers totaled $3.0 million at February 28, 1998. Advertising allowances are generally a fixed percentage of sales to customers. Fluctuations in the balance of this allowance are attributable to changes in customer sales mix and the timing of when allowances are taken. Liquidity and Capital Resources In the first nine months of fiscal 1998, the Company used $12.5 million of cash in operating activities compared to $92.1 for the same period in 1997. The majority of this use of cash relates to an increase in account receivables. The Company received $8.5 million of cash for investing activities in the first nine months of fiscal 1998. This cash inflow was created by the sale of the HealthRider building in February 1998 for $18.25 million, offset by capital expenditures of $9.7 million, the majority of which is related to tooling and other manufacturing equipment. During the first nine months of fiscal 1998, the Company had a net increase in cash of $2.2 million compared to a net decrease of $14.5 million in the same period in 1997. The Company is in compliance with all financial covenants associated with the amended Credit Agreement. ICON Health had $206.6 million of revolving credit borrowings under the Credit Agreement at February 28, 1998 compared to $227.0 million at March 1, 1997. The revolving credit borrowings have increased by $27.8 million from $178.8 million reported at the end of fiscal 1997. Line of Credit borrowings have been used to fund inventory levels, finance normal trade credit for customers, make interest payments on debt obligations and to fund capital expenditures. The term loans have decreased from $31.0 million reported at the end of fiscal 1997 to $21.1 million at February 28, 1998. This decrease is a result of scheduled debt payments as well as an additional loan payment made with the proceeds of the sale of the HealthRider building. Management believes that cash flows from operations and the Company's ability to make revolving credit borrowings under the amended Credit Agreement will provide adequate funds for working capital, planned capital expenditures and debt service obligations for a period of at least one year. Nevertheless, the Company is highly leveraged, and the ability to fund operations, make planned capital expenditures, make scheduled debt payments and refinance indebtedness depends on future operating performance and cash flows, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control. PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Company is party to a variety of non-product liability commercial suits involving contract claims and intellectual property claims. The Company believes that potential adverse resolution of these suits will not have a material adverse effect on the Company. The Company is also involved in several 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 affect on the Company. 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 27.1 Financial Data Schedule for ICON Fitness Corporation. 27.2 Financial Data Schedule for IHF Holdings, Inc. 27.3 Financial Data Schedule for ICON Health & Fitness, Inc. (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 Fitness Corporation IHF Holdings, Inc. ICON Health & Fitness, Inc. (Registrants) /s/ Gary Stevenson April 14, 1998 By_______________________________ Date: _______________ Gary Stevenson, President /s/ S. Fred Beck By_______________________________________ April 14, 1998 S. Fred Beck, Chief Financial Officer Date: _______________ EX-27 2
5 SCHEDULE 27.1 This schedule contains summary financial information extracted from the February 28, 1998 Financial Statements included in the Company's Form 10-Q and is qualified in its entirety by reference to such Form 10-Q. 0001029294 ICON Fitness Corporation 1000 9-MOS MAY-31-1998 JUN-01-1997 FEB-28-1998 7793 0 233056 8139 117964 376052 87301 37410 489256 149570 514434 0 0 0 (174748) 489256 615821 615821 437611 148574 0 0 45015 (20444) (6450) (13994) 0 0 0 (13994) 0 0
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5 SCHEDULE 27.2 This schedule contains summary financial information extracted from the February 28, 1998 Financial Statements included in the Company's Form 10-Q and is qualified in its entirety by reference to such Form 10-Q. 0000934799 IHF Holdings Inc 1000 9-MOS MAY-31-1998 JUN-01-1997 FEB-28-1998 7793 0 233056 8139 117964 375823 87301 37410 480419 149570 417161 0 0 0 (86312) 480419 615821 615821 437611 148572 0 0 35948 (10865) (3227) (7638) 0 0 0 (7638) 0 0
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5 SCHEDULE 27.3 This schedule contains summary financial information extracted from the February 28, 1998 Financial Statements included in the Company's Form 10-Q and is qualified in its entirety by reference to such Form 10-Q. 0000934798 ICON Health & Fitness Inc 1000 9-MOS MAY-31-1998 JUN-01-1997 FEB-28-1998 7793 0 233056 8139 117964 375311 87301 37410 466136 149570 328330 0 0 0 (11764) 466136 615821 615821 437611 148572 0 0 26687 (547) (124) (423) 0 0 0 (423) 0 0
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