-----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, SidzYe5j+E611CelKFei+skPt13mzKMVz8MVCeeUyHRVadkRDaqYqMhp7p6OxwSb Td3P94JKLpal52y+XzaSUg== 0001029294-99-000004.txt : 19990120 0001029294-99-000004.hdr.sgml : 19990120 ACCESSION NUMBER: 0001029294-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981128 FILED AS OF DATE: 19990119 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: 99508156 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 801-750-77 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: 99508157 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: 99508158 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 November 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, 33-87930-01, 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 Health & Fitness, Inc. 1,000 shares, IHF Holdings, Inc. 1,000 shares, ICON Fitness Corporation 100 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 November 28, 1998 and May 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 3-4 Consolidated Condensed Statements of Operations for the three months and six months ended November 28, 1998 and November 29, 1997 . . . . . . . . 5-6 Consolidated Condensed Statements of Cash Flows for the six months ended November 28, 1998 and November 29, 1997 . . . . . . . . . 7 Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8-14 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 14 Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 14 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 15 Item 4. Submission of Matters to a Vote of Securities Holders . . . . 15 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 15 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 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 IHF ICON ICON IHF ICON Fitness Holdings, Health & Fitness Holdings, Health & Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc. November 28, November 28, November 28, May 31, May 31, May 31, 1998 1998 1998 1998 1998 1998 ------------ ---------- ------------- ------------ --------- ------------ Assets Current assets Cash $4,748 $4,748 $4,748 $3,892 $3,892 $3,892 Accounts receivable-net 204,273 204,273 204,373 124,301 124,301 124,301 Inventories: Raw materials 54,817 54,817 54,817 42,609 42,609 42,609 Finished goods 95,645 95,645 95,645 78,857 78,857 78,857 Deferred income taxes 11,262 11,262 11,262 11,177 11,177 11,177 Other current assets 9,464 9,464 9,464 6,202 6,202 6,202 Income tax receivable 687 687 687 781 781 781 ------- ------- ------- ------- ------- ------- Total current assets 380,896 380,896 380,896 267,819 267,819 267,819 Property and equipment Land 1,430 1,430 1,430 1,430 1,430 1,430 Building 16,258 16,258 16,258 16,675 16,675 16,675 Machinery and equipment 64,952 64,952 64,952 71,293 71,293 71,293 ------ ------ ------ ------ ------ ------ Total 82,640 82,640 82,640 89,398 89,398 89,398 Less: accum depreciation (34,378) (34,378) (34,378) (40,579) (40,579) (40,579) -------- -------- -------- ------- ------- ------- Property & equipment-net 48,262 48,262 48,262 48,819 48,819 48,819 Receivable from parent 2,362 2,362 2,362 2,362 2,362 2,362 Trademarks, net 16,720 16,720 16,720 17,244 17,244 17,244 Deferred income taxes 29,407 20,625 6,828 22,572 16,265 4,927 Other assets 25,592 22,511 19,719 29,057 25,585 21,958 -------- -------- -------- -------- -------- -------- Total assets $503,239 $491,376 $474,787 $387,873 $378,094 $363,129 ======== ======== ======== ======== ======== ========
See accompanying 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 IHF ICON ICON IHF ICON Fitness Holdings, Health & Fitness Holdings, Health & Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc. November 28, November 28, November 28, May 31, May 31, May 31, 1998 1998 1998 1998 1998 1998 ------------ ---------- ------------- ------------ --------- ------------ Liabilities and Stockholders' Equity (Deficit) Current liabilities Current portion of long-term debt $228,694 $228,694 $228,694 $6,051 $6,051 $6,051 Accounts payable 125,626 125,626 125,626 83,965 83,965 83,965 Interest payable 6,467 6,467 6,467 6,596 6,596 6,596 Accrued expenses 19,174 19,174 19,174 18,090 18,090 18,090 Income taxes payable 839 839 839 249 249 249 ------- ------- ------- ------- ------- ------- Total current liabilities 380,800 380,800 380,800 114,951 114,951 114,951 Long term-debt 323,149 215,892 116,660 460,707 360,413 268,495 Stockholders' equity (deficit) Common stock & additional paid-in capital 49,702 127,770 166,187 49,701 127,769 166,186 Receivable from officers for purchase of equity (656) (656) (656) (656) (656) (656) Cumulative translation adjustment (1,091) (1,091) (1,091) (547) (547) (547) Retained earnings(deficit) (248,665) (231,339) (187,113) (236,283) (223,836) (185,300) -------- -------- -------- -------- -------- -------- Total Stockholders' Equity (200,710) (105,316) (22,673) (187,785) (97,270) (20,317) -------- -------- -------- -------- -------- -------- Total liabilities and stockholders' equity $503,239 $491,376 $474,787 $387,873 $378,094 $363,129 ======== ======== ======== ======== ======== ========
See accompanying 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 IHF ICON ICON IHF ICON Fitness Holdings, Health & Fitness Holdings, Health & Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc. November 28, November 28, November 28, November 29, November 29, November 29, 1998 1998 1998 1997 1997 1997 ------------ ----------- ------------- ------------ --------- ------------ Net sales $214,288 $214,288 $214,288 $236,312 $236,312 $236,312 Cost of goods sold 153,444 153,444 153,444 168,428 168,428 168,428 Cost of goods sold- revaluation of, HealthRider, Weider Sports and CanCo inventory -- -- -- 4 4 4 -------- ------- ------- ------- ------- ------- Gross profit 60,844 60,844 60,844 67,880 67,880 67,880 Operating expenses: Selling expenses 25,666 25,666 25,666 33,584 33,584 33,584 Research and development 1,885 1,885 1,885 2,074 2,074 2,074 General and administrative 13,544 13,544 13,544 16,485 16,483 16,483 -------- ------- ------- ------- ------- ------- Total operating expenses 41,095 41,095 41,095 52,143 52,141 52,141 -------- ------- ------- ------- ------- ------- Operating income 19,749 19,749 19,749 15,737 15,739 15,739 Interest expense 15,585 12,104 8,448 14,758 11,736 8,649 Amortization of deferred financing fees 2,160 1,965 1,547 1,480 1,310 957 -------- ------- ------- ------- ------- ------- Income (loss) before income tax 2,004 5,680 9,754 (501) 2,693 6,133 Provision (benefit) for income taxes 1,092 2,329 3,613 186 1,261 2,299 --------- -------- -------- -------- -------- -------- Net income (loss) $912 $3,351 $6,141 $(687) $1,432 $3,834 Other comprehensive income: Foreign currency translation adjustments (690) (690) (690) 381 381 381 --------- -------- -------- --------- --------- --------- Comprehensive income (loss) $222 $2,661 $5,451 $(306) $1,813 $4,215 ========= ======== ======== ========= ========= =========
See accompanying 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 Six Months Ended ICON IHF ICON ICON IHF ICON Fitness Holdings, Health & Fitness Holdings, Health & Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc. November 28, November 28, November 28, November 29, November 29, November 29, 1998 1998 1998 1997 1997 1997 ------------ ---------- ------------- ------------ --------- ------------ Net sales $331,495 $331,495 $331,495 $363,794 $363,794 $363,794 Cost of goods sold 238,969 238,969 238,969 260,762 260,762 260,762 Cost of goods sold- revaluation of, HealthRider, Weider Sports and CanCo inventory -- -- -- 330 330 330 -------- ------- ------- ------- ------- ------ Gross profit 92,526 92,526 92,526 102,702 102,702 102,702 Operating expenses: Selling expenses 46,204 46,204 46,204 60,229 60,229 60,229 Research and development 3,569 3,569 3,569 3,994 3,994 3,994 General and administrative 26,366 26,366 26,366 30,322 30,320 30,320 -------- ------- ------- ------- ------- ------- Total operating expenses 76,139 76,139 76,139 94,545 94,543 94,543 -------- ------- ------- ------- ------- ------- Operating income 16,387 16,387 16,387 8,157 8,159 8,159 Interest expense 30,257 23,294 15,981 29,349 23,305 17,131 Amortization of deferred financing fees 4,198 3,807 2,972 3,238 2,898 2,193 -------- ------- ------- ------- ------- ------ Loss before income tax (18,068) (10,714) (2,566) (24,430) (18,044) (11,165) Benefit for income taxes (5,686) (3,211) (753) (8,301) (6,152) (4,080) --------- -------- -------- -------- -------- -------- Net loss $(12,382) $(7,503) $(1,813) $(16,129) $(11,892) $(7,085) Other comprehensive income: Foreign currency translation adjustments (544) (544) (544) 498 498 498 --------- -------- -------- --------- --------- --------- Comprehensive income (loss) $(12,926) $(8,047) $(2,357) $(15,631) $(11,394) $(6,587) ========= ======== ======== ========= ========= =========
See accompanying 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 Six Months Ended ICON IHF ICON ICON IHF ICON Fitness Holdings, Health & Fitness Holdings, Health & Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc. November 28, November 28, November 28, November 29, November 29, November 29, 1998 1998 1998 1997 1997 1997 ------------ ---------- ------------- ------------ --------- ------------ OPERATING ACTIVITIES: Net loss (12,382) (7,503) (1,813) (16,129) (11,892) (7,085) Adjustments to reconcile net income to net cash provided by operating activity: Benefit for deferred taxes (6,920) (4,445) (1,986) (9,983) (7,834) (5,762) Amortization of debt discount and deferred financing fees 18,615 11,261 3,112 15,576 9,192 2,313 Depreciation & amortization 8,791 8,791 8,791 7,874 7,874 7,874 Inventory revaluation -- -- -- 330 330 330 Changes in operating assets and liabilities: Accounts receivable (79,972) (79,972) (79,972) (31,147) (31,147) (31,147) Inventory (28,996) (28,996) (28,996) (19,120) (19,120) (19,120) Other assets (4,798) (4,798) (4,798) (2,073) (2,252) (2,252) Account payable and accrued expenses 43,206 43,206 43,206 32,264 32,441 32,441 ------- ------- ------- -------- -------- -------- Net cash received from/(used in) operating activities (62,456) (62,456) (62,456) (22,408) (22,408) (22,408) INVESTING ACTIVITIES: Purchases of property and equipment (6,812) (6,812) (6,812) (6,748) (6,748) (6,748) ------- ------- ------- -------- -------- -------- Net cash received from /(used in) investing activities (6,812) (6,812) (6,812) (6,748) (6,748) (6,748) FINANCING ACTIVITIES: Proceeds from long-term debt, net of payments 70,668 70,668 70,668 27,799 27,799 27,799 ------ ------ ------ ------ ------ ------ Net cash received from financing activities 70,668 70,668 70,668 27,799 27,799 27,799 Effect of exchange rate change on cash (544) (544) (544) 497 497 497 ------- ------- ------- -------- -------- ------- Net increase in cash 856 856 856 (860) (860) (860) Cash at beginning of period 3,892 3,892 3,892 5,560 5,560 5,560 ------- ------- ------- -------- -------- -------- Cash at end of period $4,748 $4,748 $4,748 $4,700 $4,700 $4,700 ======= ======= ======= ====== ====== ====== SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest $15,601 $15,601 $15,601 $17,773 $17,773 $17,773 Income taxes $21 $21 $21 $58 $58 $58
See accompanying notes to consolidated condensed financial statements. ICON Fitness Corp. 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. In June 1997, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SAS 131). The Company adopted SFAS 130 and 131 on June 1, 1998. SFAS 130 establishes standards for reporting comprehensive income and its components in the consolidated condensed financial statements. SFAS 131 establishes standards for reporting information on operating segments and will first be applicable to the May 31, 1999-year end consolidated financial statements. 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 and are subject to a number of risks, including risks identified in this quarterly report and the Company's annual report on Form 10-K. See "Recent Developments" and "Liquidity and Capital Resources." Recent Developments Possible Debt Restructuring The Company has discussed restructuring approaches with certain holders of its notes. While these discussions are continuing, to date the Company has not been able to reach agreement on a viable plan. The Company's ability to meet its obligations as they become due will in a large measure be dependent upon its entering into such a restructuring. There can be no assurance that any such restructuring will be entered into or consummated. NordicTrack Transaction On December 23, 1998, the Company purchased inventory, trademarks and certain other assets of NordicTrack, Inc., a debtor under Chapter 11 of the Bankruptcy Code. The terms of the purchase provided for payment of (i) $6,050,000 in cash at and after closing, subject to adjustment based on the quantity and quality of inventory delivered, (ii)$3,500,000 payable 60 days after closing, and (iii) up to $3,000,000 payable over time as royalties based upon the sale of goods bearing trademarks of NordicTrack, Inc. and other trademark related revenues, as follows: 2% of the first $50,000,000 of revenues, 1% of the next $100,000,000 of revenues, and .5% of the next $200,000,000 of revenues. The Company must pay the $3,500,000 deferred portion of the purchase price in order to obtain the release of NordicTrack related trademarks from escrow. In a related transaction, the Company obtained leases of 18 NordicTrack retail store locations for no additional consideration. In connection with the NordicTrack transactions, the Company and Sears Roebuck & Co. executed a letter of intent that provides for the Company and Sears to negotiate the terms of an agreement that would provide that Sears be the exclusive retailer of NordicTrack branded fitness equipment outside of the Company's own retail and direct marketing channels of distribution. In addition, under the agreement as contemplated, the Company would also grant Sears a royalty-bearing exclusive license to market fitness apparel and certain categories of sporting goods under the NordicTrack brand. The agreement would run for a term of twelve (12) years subject to certain early termination provisions in 2005. Upon execution of the agreement, the Company would receive a one-time fee for the rights granted to Sears under the agreement. At this time, the Company and Sears are continuing to negotiate the terms of the definitive agreement. However, there can be no assurance that the definitive agreement will be executed on the terms described above or at all. 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 are run on in-house computer systems. The Company has reviewed and assessed all hardware and software to confirm that it will function properly in the Year 2000. With respect to internal systems, the results of the evaluation to date have not revealed any Year 2000 issues that, in the Company's opinion, create a material risk of disruption of operations. The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The estimated total cost of the Year 2000 Project is $2.5 million. The total amount expended on the Project through November 28, 1998, was $1.8 million, which leaves the estimated future cost of completing the Year 2000 Project at approximately $0.7 million. The entire project is expected to be complete by the Company's fiscal fourth quarter of 1999. With respect to outside vendors, shippers and customers that have responded to our request for information, 24.8% have indicated that their hardware or software is Year 2000 compliant. 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. The Company's assessment of the risks associated with Year 2000 issues is forward-looking. Actual results may vary for a variety of reasons including those described above. Seasonality Financial results for the fitness industry are generally seasonal. Based on the Company's historical experience, the Company would expect greater sales in the second and third quarters than in the fourth and first quarters. The actual results could differ materially depending upon consumer preferences, availability of product, competition, and the Company's customers continuing to carry and promote its various product lines, among other risks and uncertainties. The following table reflects the Company's consolidated net sales for the first and second quarters of fiscal 1999 and for each quarter in fiscal 1998 and fiscal 1997: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Fiscal 1999 $117.2 $214.3 -- -- Fiscal 1998 $127.5 $236.3 $252.0 $133.5 Fiscal 1997 $125.8 $249.5 $248.7 $212.2 The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net sales or profitability. Three Months Ended November 28, 1998 Compared to Three Months Ended November 29, 1997 Net sales decreased by $22.0 million, or 9.3%, between the three months ended November 28, 1998 and November 29, 1997. Domestic sales of treadmills decreased to $127.7 million for the three months ended November 28, 1998 from $143.0 million for the three months ended November 29, 1997, a 10.7% decrease. Sales of treadmills represented 59.6% and 60.5% of net sales in the three months ended November 28, 1998 and 1997, respectively. Other decreases include decreases in airwalkers of $4.3 million, benches of $2.1 million, elliptical products of $1.9 million, upright rowers of $1.7 million, steppers of $1.1 million, and a decline in international sales of $2.3 million. The sale of stationary bikes increased $5.4 million and home spas and other relaxation product sales increased $1.3 million during the second quarter of fiscal 1999. Gross profit decreased by $7.1 million, or 10.5%, to $60.8 million for the three months ended November 28, 1998 from $67.9 million for the three months ended November 29, 1997 and decreased as a percentage of net sales to 28.4% from 28.7%. This decrease was largely due to the changes in product mix. Selling expenses totaled $25.7 million, or 12.0% of net sales in the second quarter of fiscal 1999, compared to $33.6 million, or 14.2% of net sales for the second quarter of fiscal 1998. This decrease is attributable primarily to a reduction in advertising expenses that have decreased by approximately $4.6 million for the second quarter of fiscal 1999, versus the second quarter of fiscal 1998. Other selling expense decreases included reductions in salaries and wages of approximately $1.0 million, freight expense of approximately $0.8 million, commission expense of $0.5 million, and approximately a $1.0 million reduction in trade show and other related expenses. Research and development expenses totaled $1.9 million, or 0.9% of net sales for the second quarter of fiscal 1999, compared to $2.1 million, or 0.9% of net sales for the second quarter of fiscal 1998. This $0.2 million decrease is attributable to management's efforts to reduce costs in the current year. General and administrative expenses totaled $13.5 million, or 6.3% of net sales for the second quarter of fiscal 1999, compared to $16.5 million, or 7.0% of net sales for the second quarter of fiscal 1998. This decrease of approximately $3.0 million in general and administrative expenses for the second quarter of fiscal 1999, was attributable to a decrease in insurance claims of $1.3 million, distribution expenses of $0.7 million, legal expense of $0.7 million and aggregate other expenses of approximately $1.0 million. These decreased expenses were offset by an increase in depreciation expense of $0.7 million. As a result of the foregoing factors, operating income is $19.7 million in the second quarter of fiscal 1999, compared to operating income of $15.7 million in the second quarter of fiscal 1998. The Company has initiated cost reduction programs in the current fiscal year. These cost reduction efforts have resulted in increased second quarter profits reported by the Company. Interest expense was $8.4 million for ICON Health, $12.1 million for IHF Holdings and $15.6 million for ICON Fitness for the three months ended November 28, 1998, compared with interest expense of $8.6 million for ICON Health, $11.7 million for IHF Holdings and $14.8 million for ICON Fitness for the three months ended November 29, 1997. The decrease in interest expense for ICON Health is the result of decreased borrowings under the amended Credit Agreement. The increased level of interest expense for IHF Holdings and ICON Fitness is due to the accretion of the principal balances from their respective outstanding indentures. The income tax expense was $3.6 million for ICON Health, $2.3 million for IHF Holdings and $1.1 million for ICON Fitness for the second quarter of fiscal 1999, compared with a tax expense of $2.3 million for ICON Health, $1.3 million for IHF Holdings and $0.2 for ICON Fitness during the second quarter of fiscal 1998. The increase in tax expense for the second quarter of fiscal 1999, compared to the second quarter of fiscal 1998, was a result of increased earnings for the Company. As a result of the foregoing factors, net income was $6.1 million for ICON Health, $3.4 million for IHF Holdings and $0.9 million for ICON Fitness for the second quarter of fiscal 1999, compared to net income in the second quarter of fiscal 1998 of $3.8 million for ICON Health, $1.4 million for IHF Holdings and a net loss of $0.7 million for ICON Fitness. Operating Results for the Six Months Ended November 28, 1998 and November 29, 1997 During the first six months of fiscal 1999, net sales decreased $32.3 million, or 8.9%, to $331.5 million from $363.8 million in the first six months of fiscal 1998. Domestic treadmill sales for the first six months of fiscal 1999 accounted for approximately 57.9% of total net sales, versus 57.8% in the first six months of fiscal 1998. For the first six months of fiscal 1999, domestic treadmill sales were $191.9 million compared to $210.3 million for the same period a year ago, which represents a $18.4 million decrease. Other decreases include a decrease in the sale of airwalkers of $9.7 million, upright rowers of $3.0 million, benches of $2.8 million, steppers of $1.8 million, elliptical products of $1.3 million, ab shapers and miscellaneous products of $1.3 million, gyms and systems of $0.3 million and international sales declines of $4.8 million. Sale of stationary bikes increased $6.5 million, home spas and other relaxation product sales increased $2.6 million, soft good sales increased $1.2 million and trampoline sales increased $0.8 million during the first six months of fiscal 1999. Gross profit for the first six months of fiscal 1999 was $92.5 million, or 27.9% of net sales, compared to $102.7 million, or 28.2% of net sales for the first six months of fiscal 1998. The decrease of 0.3% in profit margin was attributable to the changes in product mix. Selling expenses totaled $46.2 million, or 13.9% of net sales, in the first six months of fiscal 1999, compared to $60.2 million, or 16.5% of net sales for the first six months of fiscal 1998. This decrease, both in dollars and as a percentage of sales, was attributable primarily to a reduction in advertising expenses that decreased by approximately $7.7 million for the first six months of fiscal 1999, versus the first six months of fiscal 1998. Other selling expense decreases included reductions in salaries and wages of approximately $1.7 million, freight expense of approximately $1.4 million, bad debt expense of $1.0 million, commission expense of $0.7 million, and trade show and other related expenses of approximately $1.5 million. Research and development expenses totaled $3.6 million, or 1.1% of net sales, for the first six months of fiscal 1999, compared to $4.0 million, or 1.1% of net sales for the first six months of fiscal 1998. This $0.4 million decrease is attributable to management's efforts to reduce costs in the current year, consisting mainly of contract labor and supplies associated with research and development. General and administrative expenses totaled $26.4 million, or 8.0% of net sales, for the first six months of fiscal 1999, compared to $30.3 million, or 8.3% of net sales for the first six months of fiscal 1998. This decrease of approximately $3.9 million in general and administrative expenses for the first six months of fiscal 1999, was attributable to a decrease in insurance claims of $1.6 million, distribution expenses of $1.1 million, legal expense of $1.1 million and aggregate other expenses of approximately $1.0 million. These decreased expenses were offset by an increase in depreciation expense of $0.9 million. As a result of the foregoing factors, operating income was $16.4 million in the first six months of fiscal 1999, compared to operating income of $8.2 million in the first six months of fiscal 1998. The higher operating income was the result of reduced costs and expenses, primarily advertising, provision for doubtful accounts, freight and insurance claims. Interest expense was $16.0 million for ICON Health, $23.3 million for IHF Holdings and $30.3 million for ICON Fitness in the first six months of fiscal 1999, compared to $17.1 million for ICON Health, $23.3 million for IHF Holdings and $29.3 million for ICON Fitness for the first six months of fiscal 1998. The decrease in interest expense for the operating company was due to a lower level of outstanding indebtedness in fiscal 1999 as a result of decreased borrowings under the amended Credit Agreement. However, in IHF Holdings and ICON Fitness, there is an additional level of borrowings with respect to accretion of the principal balances of the Company's outstanding indentures. The income tax benefit was $0.8 million for ICON Health, $3.2 million for IHF Holdings and $5.7 million for ICON Fitness for the first six months of fiscal 1999, compared with a tax benefit of $4.1 million for ICON Health, $6.2 million for IHF Holdings and $8.3 for ICON Fitness during the first six months of fiscal 1998. The decrease in tax benefit for the first six months of fiscal 1999, compared to the first six months of fiscal 1998, was a result of decreased losses before taxes incurred by the Company. As a result of the foregoing factors, net losses were $1.8 million for ICON Health, $7.5 million for IHF Holdings and $12.4 million for ICON Fitness for the first six months of fiscal 1999, compared to net losses in the first six months of fiscal 1998 of $7.1 million for ICON Health, $11.9 million for IHF Holdings and $16.1 million for ICON Fitness. Liquidity and Capital Resources The Company's liquidity consists of cash, trade accounts receivable, inventories and a revolving credit facility. At November 28, 1998, working capital was $0.1 million, including $4.7 million of cash. Cash used by operating activities aggregated $62.5 million for the six months ended November 28, 1998. Trade accounts receivable increased 64.3% from May 31, 1998 to November 28, 1998, and inventory levels increased 23.9% from May 31, 1998 to November 28, 1998, largely due to the normal seasonality of the business. There can be no assurance that the Company will have the liquidity to meet its obligations as they become due. ICON Health had $221.9 million of revolving credit borrowings under the amended Credit Agreement at November 28, 1998 compared to $233.4 million at November 29, 1997. The revolving credit borrowings have increased by $73.4 million from $148.5 million reported at the end of fiscal 1998. 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 long-term portion of the term loans have decreased from $19.5 million reported at the end of fiscal 1998 to $16.2 million at November 28, 1998. This decrease is a result of scheduled debt payments. Anticipated Reduction in Liquidity As of January 15, 1999, the Company had outstanding revolving credit borrowings of $224.5 million and unused availability under its amended Credit Agreement of $11.8 million. The amount of availability under the Company's amended Credit Agreement is determined under a borrowing base formula which was amended as of July 31, 1998 to increase temporarily the amount that could be borrowed by the Company. After January 31, 1999, the Company will be able to borrow under the amended Credit Agreement only the amounts that could be borrowed under the borrowing base formula that was in effect prior to the July 31, 1998 amendment plus $5 million. Had this reduced formula been in place on January 15, 1999, the Company would have had unused availability under its amended Credit Agreement of $5.1 million. The Company is highly leveraged. The Company's need for advances under the amended Credit Agreement is affected by a number of factors, including the Company's operating performance, the Company's level of capital expenditures, scheduled debt payments, and the willingness of the Company's suppliers to extend credit to the Company. Many of these factors are beyond the Company's control. The revolving credit portion of the Company's amended Credit Agreement will be due and payable on November 14, 1999. As a result, the revolving credit portion of the amended Credit Agreement is now classified as a current liability, which has resulted in a significant decrease in working capital when compared to the May 31, 1998 balance sheet. There can be no assurance that the Company will be able to enter into arrangements to replace that borrowing facility. The Company is required to pay $6.5 million of interest on ICON Health's 13% Senior Subordinated Notes semiannually each January 15 and July 15, and will be required to repay $101.25 million of principal on those notes on July 15, 2002. In fiscal 1999, the Company will be required to repay $1.65 million of principal under the term loan portion of its amended Credit Agreement each quarter on the last day of March, June, September and December. The amount of such quarterly principal payments will decrease to $1.56 million in 2000 and will continue at that rate until a final payment of $5.6 million is due in December 2002. Once repaid, borrowings under the Company's term loan cannot be borrowed again. The first payment of cash interest on IHF Holdings' 15% Senior Secured Discount Notes will be due May 15, 2000. Commencing on that date, the Company will be required to pay $9.3 million of interest on those notes semiannually each May 15 and November 15. The Company will be required to repay $132.2 million of accreted principal on those notes on November 14, 2004. The first payment of cash interest on ICON Fitness' 14% Senior Discount Notes will be due May 15, 2002. Commencing on that date, the Company will be required to pay $11.3 million of interest on those notes semiannually each May 15 and November 15. The Company will be required to repay $162.0 million of accreted principal on those notes on November 15, 2007. The Company will require substantial additional cash flow to meet all of these obligations. See "Recent Developments-Possible Debt Restructuring." PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Company is party to a variety of non product liability commercial suits involving contract 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 business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on the financial position or results of operations of the Company. Item two. 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) By: /s/ Gary Stevenson Date: January 19,1999 ------------------------- --------------------- Gary Stevenson President By: /s/ S. Fred Beck Date: January 19, 1999 ------------------------- --------------------- S. Fred Beck Chief Financial Officer EX-27 2 SCHEDULE 27.1
5 SCHEDULE 27.1 This schedule contains summary financial information extracted from the November 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 6-MOS MAY-31-1999 JUN-01-1998 NOV-28-1998 4748 0 217356 (13083) 150462 380896 82640 34378 503239 380800 323149 0 0 49702 (250412) 503239 331495 331495 238969 76139 0 0 30257 (18068) (5686) (12382) 0 0 0 (12382) 0 0
EX-27 3 SCHEDULE 27.2
5 SCHEDULE 27.2 This schedule contains summary financial information extracted from the November 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 6-MOS MAY-31-1999 JUN-01-1998 NOV-28-1998 4748 0 217356 (13083) 150462 380896 82640 34378 491376 380800 215892 0 0 127770 (233086) (491376) 331495 331495 238969 76139 0 0 23294 (10714) (3211) (7503) 0 0 0 (7503) 0 0
EX-27 4 SCHEDULE 27.3
5 SCHEDULE 27.3 This schedule contains summary financial information extracted from the November 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 6-MOS MAY-31-1998 JUN-01-1998 NOV-28-1998 4748 0 217356 (13083) 150462 380896 82640 34378 474787 380800 116660 0 0 166187 (188860) 474787 331495 331495 238969 76139 0 0 15981 (2566) (753) (1813) 0 0 0 (1813) 0 0
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