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 August 31, 1996
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 - 33-87930; 33-87930-01
ICON Health & Fitness, Inc.
---------------------------
IHF Holdings, Inc.
-----------------
(Exact name of registrant as specified in its charter)
87-0531206
Delaware 87-0531209
-----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 South 1000 West Logan, Utah 84321
---------------------------------------
(Address and zip code of principal executive offices)
(801) 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 * 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.
<PAGE>
IHF HOLDINGS, INC.
and its wholly-owned subsidiary ICON Health & Fitness, Inc.
INDEX
Page No.
---------
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . 3-6
Consolidated Condensed Balance
Sheets as of August 31, 1996 and
May 31, 1996 . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements
of Operations for the three months
ended August 31, 1996 and September 2, 1995 . . . 4
Consolidated Condensed Statements
of Cash Flows for the three months
ended August 31, 1996 and September 2, 1995 . . 5
Notes to Consolidated Condensed
Financial Statements . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . 12
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 12
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 . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health &
Fitness, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
ICON Health & IHF Holdings, ICON Health &
Fitness, Inc. Inc. Fitness, Inc.
August 31, August 31, May 31, IFH Holdings,
1996 1996 1996 Inc.
ASSETS Unaudited Unaudited Unaudited May 31, 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $4,587 $4,587 $19,313 $19,313
Accounts receivable-net 129,685 129,685 126,869 126,869
Inventories
Raw materials 32,475 32,475 26,264 26,264
Finished goods 131,230 131,230 69,658 69,658
Deferred income taxes 5,240 5,240 5,240 5,240
Other assets 8,877 8,877 4,770 4,770
Prepaid income taxes 8,620 9,476 589 882
--------- --------- --------- ---------
Total Current Assets 320,714 321,570 252,703 252,996
PROPERTY AND EQUIPMENT
Land 1,230 1,230 1,230 1,230
Building 30,228 30,228 13,632 13,632
Machinery and equipment 58,161 58,161 37,191 37,191
--------- --------- --------- ---------
Total 89,619 89,619 52,053 52,053
Less accumulated depreciation (18,135) (18,135) (19,741) (19,741)
--------- --------- --------- ---------
Property and equipment - net 71,484 71,484 32,312 32,312
--------- --------- --------- ---------
DEFERRED INCOME TAXES 1,770 5,629 1,770 5,489
OTHER ASSETS 20,756 26,685 19,703 25,930
--------- --------- --------- ---------
$414,724 $425,368 $306,488 $316,727
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $4,581 $4,581 $3,065 $3,065
Accounts payable 98,954 98,954 73,652 73,652
Accrued expenses 23,296 23,296 17,239 17,239
--------- --------- --------- ---------
Total current liabilities 126,831 126,831 93,956 93,956
LONG-TERM DEBT 289,762 361,515 210,546 279,693
CUMULATIVE PREFERRED STOCK,
including dividends payable -- 49,179 -- 47,904
STOCKHOLDERS' EQUITY
Common Stock, additional paid-in
capital 166,176 77,730 166,176 77,730
Less: Receivable from officers (758) (758) (758) (758)
Cumulative translation adjustment 152 152 386 386
Retained earnings (deficit) (167,439) (189,281) (163,818) (182,184)
--------- --------- --------- ---------
Total Stockholders' Equity (1,869) (112,157) 1,986 (104,826)
--------- --------- --------- ---------
$414,724 $425,368 $306,488 $316,727
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE>
IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health &
Fitness, Inc.
CONSOLIDATED STATEMENTS OF OPERATION
(In Thousands)
<TABLE>
<CAPTION>
ICON Health IHF ICON Health
& Fitness, Holdings, & Fitness, IFH
Inc. Inc. Inc. Holdings,
August 31, August 31, September 2, Inc.
1996 1996 1995 September 2,
Unaudited Unaudited Unaudited 1995
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $125,810 $125,810 $124,839 $124,839
COST OF GOODS SOLD 90,581 90,581 90,932 90,932
REVALUATION OF HEALTHRIDER INVENTORY 1,865 1,865 -- --
--------- --------- --------- ---------
TOTAL COST OF GOODS SOLD 92,446 92,446 90,932 90,932
GROSS PROFIT 33,364 33,364 33,907 33,907
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling 18,813 18,813 15,829 15,829
Research and development 1,639 1,639 1,546 1,546
General and administrative 10,887 10,887 10,091 10,091
--------- --------- --------- ---------
Total operating expenses 31,339 31,339 27,466 27,466
OPERATING INCOME 2,025 2,025 6,441 6,441
INTEREST EXPENSE 6,167 8,773 6,316 8,382
AMORTIZATION OF DEFERRED FINANCING FEES 652 949 625 861
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (4,794) (7,697) (500) (2,802)
PROVISION (BENEFIT) FOR INCOME TAXES (1,173) (1,875) 220 (687)
--------- --------- --------- ---------
NET INCOME (LOSS) ($3,621) ($5,822) ($720) ($2,115)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
IHF Holdings, Inc. and its wholly-owned subsidiary, ICON Health &
Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
ICON Health IHF ICON Health
& Fitness, Holdings, & Fitness, IFH
Inc. Inc. Inc. Holdings,
August 31, August 31, September 2, Inc.
1996 1996 1995 September 2,
Unaudited Unaudited Unaudited 1995
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) ($3,621) ($5,822) ($720) ($2,115)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debt & advertising
allowance 2,792 2,792 5,604 5,604
Provision/(benefit) for deferred taxes -- (140) 220 (687)
Amortization of financing fees 703 3,607 625 2,691
Depreciation & amortization 2,284 2,284 1,750 1,750
Changes in operating assets & liabilities:
Accounts receivable 9,360 9,360 (11,428) (11,428)
Inventory (37,004) (37,004) (25,884) (25,884)
Other assets 950 387 5,284 5,520
Accounts payable & accrued expenses (7,079) (7,079) (3,379) (3,379)
---------- ---------- ---------- ----------
Net cash received from/(used in)
operating activities (31,615) (31,615) (27,928) (27,928)
---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Healthrider Acquisition (28,203) (28,203) -- --
Purchases of property & equipment (6,598) (6,598) (3,831) (3,831)
---------- ---------- ---------- ----------
Net cash received from/(used in) investing
activities (34,801) (34,801) (3,831) (3,831)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Proceed from long-term debt, net of payments 51,924 51,924 32,756 32,756
---------- ---------- ---------- ----------
Net cash received from/(used in) financing
activities 51,924 51,924 32,756 32,756
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash (234) (234) -- --
---------- ---------- ---------- ----------
Net increase/(decrease) in cash (14,726) (14,726) 997 997
Cash at beginning of period 19,313 19,313 4,099 4,099
---------- ---------- ---------- ----------
Cash at end of period $4,587 $4,587 $5,096 $5,096
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest 9,073 9,073 9,325 9,325
Income taxes 35 35 -- --
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE>
IHF Holdings, Inc. and its wholly owned subsidiary ICON Health & Fitness, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- ----------------------------------------------------
Note 1. Basis of Presentation
The accompanying consolidated condensed financial statements for both IHF
Holdings, Inc. ("IHF Holdings") and its wholly owned subsidiary ICON Health &
Fitness, Inc. ("ICON") and its wholly-owned subsidiaries, including HealthRider
Corporation which was acquired on August 16, 1996 (See HealthRider Acquisition -
Note 2)(collectively, the Company"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-
X. Accordingly, they do not include all of the information required by
generally accepted accounting principles for complete financial statements. IHF
Holdings' parent company, IHF Capital, Inc., ("IHF Capital") is not a
registrant.
In management's opinion, the accompanying consolidated condensed financial
statements, for both ICON and IHF Holdings, contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
condition of ICON and IHF Holdings, as of August 31, 1996 and May 31, 1996, the
results of operations for the three months ended August 31, 1996 and September
2, 1995, and their cash flows for the three months ended August 31, 1996 and
September 2, 1995. There are two less days in the three month period ended
August 31, 1996 than the comparable period ended September 2, 1995.
All significant intercompany transactions and balances have been
eliminated. The financial statements included herein should be read in
conjunction with the financial statements and footnotes thereto and information
included in the Form 10-K filed with the Securities and Exchange Commission on
August 29, 1996. The results of operations for the three months ended August
31, 1996 are not necessarily indicative of the results to be expected for the
full year ended May 31, 1997.
Note 2. HealthRider Acquisition
On August 16, 1996, the Company: (i) purchased substantially all the assets
of HealthRider for approximately $16.8 million and assumed (or refinanced)
substantially all of the liabilities of HealthRider: (ii) purchased certain
related manufacturing assets of Parkway Manufacturing, Inc., ("Parkway"),
including Parkway's contract to manufacture and supply upright rowers to
HealthRider, for approximately $10.1 million (includes the repayment of $1.0
million of trade payables owed to Parkway by HealthRider); and (iii) purchased
the minority interest of HealthRider's European subsidiary for approximately
$1.4 million; (of which $.7 million was paid by HealthRider, $.6 million was
paid by the Company in cash and $.1 million was paid by the Company in
inventory)(together, the "HealthRider Acquisition").
The HealthRider Acquisition was funded through additional borrowings under
the Credit Agreement with General Electric Capital Corporation .(the "Credit
Agreement").
The HealthRider Acquisition has been accounted for under the purchase
method of accounting. Accordingly, the purchase price plus direct costs of the
acquisition have been allocated to the assets acquired and liabilities assumed
based on their relative fair values as of the closing date. The final
allocation to each of the Company's assets acquired and liabilities assumed is
preliminary as the Company is in the process of determining the fair value of
significant assets acquired in the HealthRider Acquisition. Accordingly, the
final allocations may be different from those initially recorded.
The following unaudited pro forma summary presents the consolidated results
of operations assuming that the HealthRider Acquisition had occurred on May 31,
1996. Results for the historical ICON and IHF Holdings represent the results
for the first quarter of fiscal 1997 combined with the HealthRider results for
the quarter ending June 30, 1996. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what would
have occurred had the transaction been effected on the date indicated above or
of results which may occur in the future. The Company expects that HealthRider
revenues in the periods subsequent to the HealthRider Acquisition will decline
substantially. In addition, the pro formas exclude certain non-recurring charges
related to HealthRider Acquisition including a significant non-recurring , non-
cash charge resulting from the fact that the Company's purchase accounting will
include writing-up the book value of the HealthRider inventory to fair market
value less estimated sales costs.
Three Months ended August 31, 1996
(unaudited)
ICON HealthRider Total
-----------------------------------
Revenues $123.0 $38.1 $161.1
Net Income (Loss) ($2.5) $1.6 ($1.9)
IHF Holdings HealthRider Total
-----------------------------------
Revenue $123.0 $38.1 $161.1
Net Income (Loss) ($4.7) $1.6 ($3.1)
Three Months ended September 2, 1995
(unaudited)
ICON HealthRider Total
------------------------------------
Revenues $124.8 $59.1 $183.9
Net Income (Loss) ($0.7) $8.7 $8.0
IHF Holdings HealthRider Total
-----------------------------------
Revenues $124.8 $59.1 $183.9
Net Income (Loss) ($2.1) $8.7 $6.6
Note 3. 1996 Stock Option Plan
The Company's parent adopted the IHF Capital, Inc. 1996 Stock Option Plan
(the "1996 Stock Option Plan") which will provide for the grant to directors and
certain eligible employees of the Company either incentive stock options, non-
qualified options or both. The 1996 Stock Option Plan satisfies the
requirements of Rule 16b-3 under the 1934 Act. Subject to adjustment for stock
splits and similar events, a total of 2,500,000 shares of Common Stock has been
authorized for issuance under the 1996 Stock Option Plan, which is administered
by the Board of Directors.
Note 4. Subsequent Event--Settlement of WHF Litigation
On September 6, 1996, the Company and Weider Health and Fitness ("WHF") and
its affiliates settled the litigation between the WHF and certain of its
affiliates and the Company and certain of its officers and directors parties
through a number of agreements (the "WHF Settlement"). The WHF Settlement
includes releases of certain claims previously asserted by WHF and its
affiliates, amendments to certain of the agreements currently existing between
the Company and WHF and its affiliates and certain new agreement among the
Company and WHF and its affiliates. Other than the releases, the significant
terms of the WHF Settlement are outlined below.
Repurchase of Common Stock. The Company has the right and option to
purchase all of the Common Stock and certain warrants to purchase Common Stock
held by the WHF Stockholders (the "IHF Position") at an aggregate price of
approximately $39.4 million as of October 15, 1996.
Repurchase the Preferred Stock. The Company has the right and option to
purchase the IHF Holdings Preferred Stock held by WHF and certain other
stockholders for $32.0 million, which reflects a discount of $4.0 million and
the forgiveness of accrued dividends. The purchase price for the IHF Holdings
Preferred Stock held by WHF will be higher if the purchase is consummated on or
after February 1, 1997. In connection with the repurchase of IHF Holdings
Preferred Stock, if any, the Company will purchase the options to purchase IHF
Holdings Preferred Stock held by Messrs. Watterson and Stevenson for $3.6
million, which reflects a discount of $.4 million and the forgiveness of accrued
dividends. Upon the purchase of the WHF Preferred Stock, WHF's representation on
the Company's board of directors will cease.
Settlement Expenses and Intercompany Payables. The Company: (I) paid $12.1
million to terminate the lawsuits: (ii) paid $3.9 to WHF and its affiliates as
prepayment in full under its brand license agreements with them; and (iii)
received $1.2 million in full payment and settlement of the Company's
intercompany payable to WHF and its affiliates ($1.8 million) and amounts due
the Company under the amended WSG Management Agreement ($3.0). The Company also
received $.5 million in full payment and settlement of CanCo's Management fee
obligations to the Company under the CanCo Management and Advisory Agreement.
Ben Weider Payments. The WHF Settlement also provides that Ben Weider will
serve as a consultant to, and ambassador for, the Company for five years, with
an annual compensation of approximately $475,000, and that the Company will
provide office space and three assistants for Mr. Weider.
Payments to Messrs. Watterson and Stevenson. In connection with the WHF
Settlement, WHF and its affiliates (i) paid Messrs. Watterson and Stevenson an
aggregate amount of approximately $4.2 million in exchange for the surrender of
their options to purchase stock of WHF and its affiliates and (ii) paid Messrs.
Watterson and Stevenson an aggregate amount of $.5 million. Messrs. Watterson
and Stevenson also each received $.3 million in full payment and settlement of
CanCo's Management fee obligations to Messrs. Watterson and Stevenson under the
CanCo Management and Advisory Agreements.
The WHF Settlement also contains various miscellaneous provisions that the
Company does not believe are material.
Note 5. Subsequent Event--Weider Sports Acquisition and CanCo Acquisition.
In conjunction with the settlement of litigation described above, the
Company acquired certain assets, excluding cash and fixed assets, for $8.7
million and assumed certain liabilities of the sports equipment business lines
of Weider Sports. (the "CanCo Acquisition") In addition, the Company acquired
certain assets, excluding cash, cash equivalents and accounts receivable, for
$1.8 million Cdn and assumed certain liabilities of CanCo. As a result of the
Weider Sports Acquisition, the Company acquired distribution rights originally
granted to Weider Sports in connection with the Recapitalization on November 14,
1994, subject to certain rights granted by Weider Sports to third parties. The
Company also acquired two CanCo plants which were leased by other WHF affiliates
in exchange for the assumption of the existing $1.5 million Cdn. mortgage on the
properties and the payment of $.5 million. The Weider Sports and CanCo
Acquisitions will be accounted for under the purchase method of accounting.
Note 6. Amendment of Credit Agreement
The Credit Agreement was amended as of August 23, 1996 to permit total
borrowing of up to $310 million under the Company's revolving credit facility,
in order to fund the HealthRider Acquisition and to meet the Company's other
long term needs.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Seasonality
The Companies have historically sold the majority of their products to
customers in their second and third fiscal quarters (i.e., from September
through February). Increased sales and distribution typically have occured 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
net sales for the first quarter of fiscal 1997 and for each quarter in fiscal
1996, and 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------
Fiscal 1997 $125.8 -- -- --
Fiscal 1996 $124.8 $228.5 $240.9 $153.4
Fiscal 1995 $ 70.6 $163.0 $182.8 $114.4
Operating Results for the First Quarters of 1997 and 1996
Net sales were $125.8 million in the first quarter of fiscal 1997, compared
to $124.8 million in the first quarter of fiscal 1996. Sales of company's line
of abdominal machines, first introduced in April of 1996, totaled $14.4 million
with no comparable sales during the first quarter of fiscal 1996. Sales of the
company's home weight systems increased $5.1 million, while treadmill sales
increased $3.0 million in the first quarter of fiscal 1997 compared to first
quarter of fiscal 1996. Treadmill sales accounted for approximately 34.6% and
32.5% of total net sales during the first quarter of fiscal 1997 and 1996 .
Sales of trampolines increased $2.2 million in the first quarter of 1997 to
$17.4 million from $15.2 million in the first quarter of fiscal 1996. Sales of
the Company's line of upright rowers decreased $29.6 million to $18.2 million
from $47.8 million in the first quarter of 1996. Sales in Europe were $7.1
million compared to $6.0 million in the same period for fiscal 1996.
Gross profit for the first quarter of fiscal 1997 was $33.4 million, or
26.6% of net sales, compared to $33.9 million, or 27.2% of net sales, for the
first quarter of fiscal 1996. The step-up of HealthRider inventory increased
cost of sales by $1.9 million. Without this charge, the gross profit would
have increased .8% due to gross margin improvements in the Company's line of
treadmill products.
Selling expenses were $18.8 million, or 14.9% of net sales, in the first
quarter of fiscal 1997 compared to $15.8 million, or 12.7% of net sales, for the
first quarter of fiscal 1996. This increase is primarily attributed to a $1.9
million increase in warranty and customer service expenditures to handle
customer returns and inquires. In addition selling expenses of the European
subsidiaries totaled $2.1 million this year compared to $1.5 million in the same
period of the prior year.
Research and development expenses were $1.6 million or 1.3% of net sales,
for the first quarter of 1997 compared to $1.5 million, or 1.2% of net sales,
for the first quarter 1996.
General and administrative expenses totaled $10.9 million, or 8.7% of net
sales, for the first quarter of 1997 compared to $10.1 million, or 8.1% of net
sales, for the first quarter of 1996. Personnel costs increased $.3 million
over the same period in the prior year.
As a result of the foregoing factors, operating income was $2.0 million, or
1.6% of net sales in the first quarter of fiscal 1997, compared to a $6.4
million, or 5.1% of net sales, in the first quarter of fiscal 1996.
Interest expense was $6.2 million for ICON and $8.8 million for IHF
Holdings in the first quarter of fiscal 1997 compared to $6.3 million for ICON
and $8.4 million for IHF Holdings for the first quarter of fiscal 1996.
Interest expense remained consistent at ICON and increased $.4 million due to
the costs associated with the Senior Discount notes of IHF Holdings. The
increase in operating debt associated with the HealthRider Acquisition is
expected to result in increased interest expense in future periods.
The income tax benefit was $1.2 million for ICON and a tax benefit of $1.9
million for Holdings for the first quarter of 1997 compared with a tax provision
of $.2 million for ICON and a tax benefit of $.7 million for IHF Holdings during
the first quarter of fiscal 1996. This is a result of the increase in the loss
before income tax during the first quarter of 1997 compared to the same period
in the preceding year.
As a result of the foregoing factors, the net operating loss was $3.6
million for ICON and a net operating loss of $5.8 million for IHF Holdings for
the first quarter of 1997 compared to net operating loss of $.7 million for
ICON and a net operating loss of $2.1 million for IHF Holdings during the same
period for fiscal 1996.
Advertising allowances with retail customers have increased by $.6 million
to $5.3 million at August 31, 1996. 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.
Bad debt allowances total $2.4 million at August 31, 1996 compared to $1.3
at September 2, 1995. Terms with retail customers remained unchanged from
previous periods.
Prepaid income taxes are $8.6 million for ICON and $9.5 million for IHF
Holdings. A significant portion of these balances are attributable to the
HealthRider Acquisition, with the remaining $1.7 million and $2.6 million for
ICON and IHF Holdings, respectively, is the result of losses from current
operations.
Liquidity and Capital Resources
As a result of the Company's Recapitalization on November 14, 1994, the
Company's cash needs have changed significantly in the second half of fiscal
1995, 1996 and for the first quarter of fiscal 1997 and for future periods.
Management believes that cash flows from operations and ICON'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 the foreseeable future. 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.
In the first three months of fiscal 1997, the Company used $31.6 million of
cash in operating activities primarily as a result of increased inventory.
During the first three months of fiscal 1997, the Company had a net decrease in
cash of $14.7 million. The Company also used $6.6 million of cash in the first
three months of fiscal 1997 for capital expenditures primarily related to
tooling, manufacturing equipment and building expansion and $28.2 million to
fund the HealthRider Acquisition.
At August 31, 1996, ICON had $142.0 million of revolving credit borrowings
under the Credit Agreement. At the close of the quarter additional availability
under this Credit Agreement was $47.4 million. Management believes that
availability under this amended Credit Agreement is adequate to meet the
Company's obligations. The revolving credit borrowings have increased by $62.0
million from $80.0 million reported at the end of fiscal 1996. The Company
funded the HealthRider Acquisition with borrowings under the Credit Agreement.
Line of Credit borrowings have historically been used to fund increased
inventory levels, finance normal trade credit for customers, make interest
payment on debt issued in connection with the Company's Recapitalization and to
fund capital expenditures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Settlement of WHF Litigation
On September 6, 1996, the Company and WHF and its affiliates settled the
litigation between WHF and certain of its affiliates and the Company and certain
of its officers and directors parties through a number of agreements (the "WHF
Settlement"). The WHF Settlement includes releases of certain claims previously
asserted by WHF and its affiliates, amendments to certain of the agreements
currently existing between the Company and WHF and its affiliates and certain
new agreements among the Company and WHF and its affiliates. Other than the
releases, the significant terms of the WHF Settlement are outlined below.
Repurchase of Common Stock. The Company has the right and option to
purchase all of the Common Stock and certain warrants to purchase Common Stock
held by the WHF Stockholders (the "IHF Position") at an aggregate price of
approximately $39.4 million as of October 15, 1996.
Repurchase the Preferred Stock. The Company has the right and option to
purchase the IHF Holdings Preferred Stock held by WHF and certain other
stockholders for $32.0 million, which reflects a discount of $4.0 million and
the forgiveness of accrued dividends. The purchase price for the IHF Holdings
Preferred Stock held by WHF will be higher if the purchase is consummated on or
after February 1, 1997. In connection with the repurchase of IHF Holdings
Preferred Stock, if any, the Company will purchase the options to purchase IHF
Holdings Preferred Stock held by Messrs. Watterson and Stevenson for $3.6
million, which reflects a discount of $.4 million and the forgiveness of accrued
dividends. Upon the purchase of the WHF Preferred Stock, WHF's representation on
the Company's board of directors will cease.
Settlement Expenses and Intercompany Payables. The Company: (i) paid $12.1
million to terminate the lawsuits: (ii) paid $3.9 to WHF and its affiliates as
prepayment in full under its brand license agreements with them; and (iii)
received $1.2 million in full payment and settlement of the Company's
intercompany payable to WHF and its affiliates ($1.8 million) and amounts due
the Company under the amended WSG Management Agreement ($3.0). The Company also
received $.5 million in full payment and settlement of CanCo's Management fee
obligations to the Company under the CanCo Management and Advisory Agreement.
Ben Weider Payments. The WHF Settlement also provides that Ben Weider will
serve as a consultant to, and ambassador for, the Company for five years, with
an annual compensation of approximately $475,000, and that the Company will
provide office space and three assistants for Mr. Weider.
Payments to Messrs. Watterson and Stevenson. In connection with the WHF
Settlement, WHF and its affiliates (I) paid Messrs. Watterson and Stevenson an
aggregate amount of approximately $4.2 million in exchange for the surrender of
their options to purchase stock of WHF and its affiliates and (ii) paid Messrs.
Watterson and Stevenson an aggregate amount of $.5 million. Messrs. Watterson
and Stevenson also each received $.3 million in full payment and settlement of
CanCo's Management fee obligations to Messrs. Watterson and Stevenson under the
CanCo Management and Advisory Agreements.
Weider Sports Acquisition and CanCo Acquisition. In conjunction with the
settlement of litigation described above, the Company acquired certain assets,
excluding cash and fixed assets, for $8.7 million and assumed certain
liabilities of the sports equipment business lines of Weider Sports. In
addition, the Company acquired certain assets, excluding cash, cash equivalents
and accounts receivable, for $1.8 million Cdn and assumed certain liabilities of
CanCo. As a result of the Weider Sports Acquisition, the Company acquired
distribution rights originally granted to Weider Sports in connection with the
Recapitalization on November 14, 1994, subject to certain rights granted by
Weider Sports to third parties. The Company also acquired two CanCo plants which
were leased by other WHF affiliates in exchange for the assumption of the
existing $1.5 million Cdn. mortgage on the properties and the payment of $.5
million.
The WHF Settlement also contains various miscellaneous provisions that the
Company does not believe are material.
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.
Exhibits.
Unless otherwise noted, the following exhibits were previously filed with the
Securities and Exchange Commission under the Securities Act and are referred to
and incorporated herein by reference to such filings. Except as otherwise
indicated, all exhibits are incorporated herein by reference to the
correspondingly numbered exhibit filed as part of the Registration Statement on
Form S-1 of IHF Capital, Inc., the parent of Health & Fitness and IHF Holdings,
as amended, (Registration Statement No. 333-04279)
10.37 Asset Purchase Agreement dated as of July 3, 1996 by and among IHF
Capital, Inc. HealthRider Acquisition Corp. and HealthRider, Inc.
10.38 Asset Purchase Agreement for the purchase of certain assets of Parkway
Manufacturing, Inc. dated July 3, 1996.
10.39 Buy-Out Agreement between HealthRider Acquisition Corp. and Parkway
Manufacturing, Inc. dated August 26, 1996.
10.40 The IHF Capital, Inc. 1996 Stock Option Plan.
10.41 WSE Asset Purchase Agreement, dated September 6, 1996 between Weider
Sports Equipment Co. Ltd. and ICON Health & Fitness Inc.
10.42 Canco Asset Purchase Agreement, dated September 6, 1996 among ICON of
Canada Inc., ICON Health & Fitness Inc., ALLFITNESS, Inc, Scott Watterson and
Gary Stevenson.
10.43 Stock and Warrants Purchase Agreement, dated September 6, 1996 among
IHF Capital, Inc., IHF Holdings, Inc., Weider Health & Fitness, Greyfriars
Limited, Bayonne Settlement, Hornchurch Investments Limited, Ronald Corey,
Bernard Cartoon, Ronald Novak, Eric Weider, Richard Bizarro, Robert Reynolds,
Michael Carr, Thomas Deters, Barbara Harris and Zbigniew Kindella.
10.44 Amendment No. 1 to Stockholders Agreement, dated September 6, 1996
among IHF Holdings, Inc., Weider Health & Fitness, Greyfriars Limited, Bayonne
Settlement, Hornchurch Investments Limited, the Fund Investors, DLJ Capital
Corporation, General Electric Capital Corporation, and certain other signatories
named therein.
10.45 Amendment and Restatement of Stockholders Agreement, dated as of
September 6, 1996 among IHF Holdings, Inc., Weider Health & Fitness, Greyfriars
Limited, Bayonne Settlement, Hornchurch Investments Limited, the Fund Investors,
DLJ Capital Corporation, General Electric Capital Corporation, and certain other
signatories named therein.
10.46 Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and Scott Watterson.
10.47 First Amendment to Stevenson Employment Agreement, dated September 6,
to the Employment Agreement dated November 14, 1994 among ICON Health & Fitness,
IHF Capital, Inc., IHF Holdings, Inc. and Gary Stevenson.
10.48 First Amendment to Watterson Employment Agreement, dated September 6,
to the Employment Agreement dated November 14, 1994 among ICON Health & Fitness,
IHF Capital, Inc., IHF Holdings, Inc. and Scott Watterson.
10.49 Weider Release, dated September 6, 1996 by Weider Health & Fitness,
Weider Sports Equipment Co., Ltd., Weider Sporting Goods, Inc., Weider Europe,
B.V., CANCO, Ben Weider, Eric Weider, Richard Renaud and the Weider Releasors.
10.50 Icon Release, dated September 6, 1996 made by ICON Health & Fitness,
IHF Capital, Inc., IHF Holdings, Inc., Scott Watterson, Gary Stevenson and the
ICON Releasors.
10.51 Settlement Agreement, dated September 6, 1996 among ICON Health &
Fitness, IHF Capital, Inc., the Fund Investors, IHF Holdings, Inc., Weider
Health & Fitness, Weider Sports Equipment, CANCO, Weider Sporting Goods, Inc.,
Weider Europe, B.V., and each of Ben Weider, Eric Weider, Richard Renaud, Gary
Stevenson and Scott Watterson.
10.52 Escrow Agreement, dated September 6, 1996 among ICON Health & Fitness,
ICON of Canada, Inc., CANCO, Lapointe Rosenstein and Goodman Phillips of
Vineberg.
10.53 Representation Agreement, dated September 6, 1996 between ICON Health
& Fitness, Inc. and Ben Weider.
10.54 Letter Agreement regarding advertising space, dated September 6, 1996
between Weider Publications, Inc. and ICON Health & Fitness, Inc.
10.55 Letters of Credit issued by Royal Bank of Canada to ICON Health &
Fitness, Inc. dated September 5, 1996.
10.56 Letters of Credit issued by Royal Bank of Canada to ICON Health &
Fitness, Inc. and ICON of Canada, Inc., dated September 5, 1996.
10.57 Letter from Royal Bank of Canada to ICON of Canada, Inc., dated
September 5, 1996, outlining terms of financing by Royal Bank of Canada in favor
of ICON of Canada, Inc.
10.58 Letter Agreement dated September 6, 1996 among ICON Health & Fitness,
Inc., Ben Weider and Eric Weider regarding charitable contributions.
10.59 Deed of Sale.
27.1* Financial Data Schedule of ICON
27.2* Financial Data Schedule of IHF Holding
*Filed herewith.
Reports on Form 8-K.
--------------------
The Company filed a form 8-K dated 8/16/96 reporting an acquisition of
assets pursuant to Item 2, and including financial statements, pro forma
financial information, and exhibits pursuant to Item 7.
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)
Date:October 15, 1996 By /s/
Gary Stevenson, President
By /s/
S. Fred Beck, Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ICON FOR THE PERIOD ENDED
AUGUST 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000934798
<NAME> ICON
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 4,587
<SECURITIES> 0
<RECEIVABLES> 129,685
<ALLOWANCES> 0
<INVENTORY> 163,705
<CURRENT-ASSETS> 320,714
<PP&E> 89,619
<DEPRECIATION> 18,135
<TOTAL-ASSETS> 414,724
<CURRENT-LIABILITIES> 126,831
<BONDS> 289,762
<COMMON> 0
0
0
<OTHER-SE> (1,869)
<TOTAL-LIABILITY-AND-EQUITY> 414,724
<SALES> 125,810
<TOTAL-REVENUES> 125,810
<CGS> 92,446
<TOTAL-COSTS> 92,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,167
<INCOME-PRETAX> (4,794)
<INCOME-TAX> (1,173)
<INCOME-CONTINUING> (1,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,621)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF IHF HOLDINGS FOR THE PERIOD ENDED
AUGUST 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000934799
<NAME> IHF HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 4,587
<SECURITIES> 0
<RECEIVABLES> 129,685
<ALLOWANCES> 0
<INVENTORY> 163,705
<CURRENT-ASSETS> 321,570
<PP&E> 89,619
<DEPRECIATION> 18,135
<TOTAL-ASSETS> 425,368
<CURRENT-LIABILITIES> 126,831
<BONDS> 361,515
<COMMON> 0
0
49,179
<OTHER-SE> (112,157)
<TOTAL-LIABILITY-AND-EQUITY> 425,368
<SALES> 125,810
<TOTAL-REVENUES> 125,810
<CGS> 92,446
<TOTAL-COSTS> 92,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,773
<INCOME-PRETAX> (7,697)
<INCOME-TAX> (1,875)
<INCOME-CONTINUING> (1,875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,822)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
