FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 1, 1997
Commission file number - 33-87930; 33-87930-01; 333-18475
ICON HEALTH & FITNESS, INC.
IHF HOLDINGS, INC.
ICON FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
87-0531206
87-0531209
Delaware 87-0566936
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or organization) No.)
1500 South 1000 West Logan, Utah 84321
(Address and zip code of principal executive offices)
(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 x 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 1,000 shares
<PAGE>
ICON Fitness Corporation
and its wholly-owned subsidiary,
IHF Holdings, Inc.
and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
<PAGE>
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)
<TABLE>
CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Health Holdings, Fitness Health & Holdings, Fitness
& Inc. Corpora- Fitness,I Inc. Corpora-
Fitness, March tion, nc. May May 31, tion May
Inc. 1, March 1, 31, 1996 1996 31,
March 1, 1997 1997 1996
1997
Assets
Current assets
Cash $4,844 $4,844 $4,844 $19,313 $19,313 $19,313
Accounts
receivable-net 235,329 235,329 235,329 126,869 126,869 126,869
Inventories:
Raw materials 67,078 67,078 67,078 26,264 26,264 26,264
Finished 74,633 74,633 74,633 69,658 69,658 69,658
goods
Deferred income 5,240 5,240 5,240 5,240 5,240 5,240
taxes
Other current 11,035 11,035 11,035 4,770 4,770 4,770
assets
Prepaid income 15,100 17,130 19,344 589 882 882
taxes
Total current 413,259 415,289 417,503 252,703 252,996 252,996
assets
Property and
equipment
Land 1,230 1,230 1,230 1,230 1,230 1,230
Building 30,513 30,513 30,513 13,632 13,632 13,632
Machinery and
equipment 71,732 71,732 71,732 37,191 37,191 37,191
Total 103,475 103,475 103,475 52,053 52,053 52,053
Less
accumulated (23,705) (23,705) (23,705) (19,741) (19,741) (19,741)
depreciation
Property and
equipment - net 79,770 79,770 79,770 32,312 32,312 32,312
Deferred income 1,871 7,085 7,085 1,770 5,489 5,489
taxes
Other assets 30,210 35,545 39,934 19,703 25,930 25,930
Total assets $525,110 $537,689 $544,292 $306,488 $316,727 $316,727
Liabilities and
Stockholders'
Equity Current
liabilities
Current portion $5,448 $5,448 $5,448 $3,065 $3,065 $3,065
of long-term
debt
Accounts 126,376 126,376 127,504 73,652 73,652 73,652
payable
Accrued 28,734 28,734 28,734 17,239 17,239 17,239
expenses
Intercompany
payable 977 977 --- --- --- ---
(receivable)
Total current
liabilities 161,535 161,535 161,686 93,956 93,956 93,956
Long term-debt 371,916 448,881 535,203 210,546 279,693 279,693
Cumulative
Preferred
Stock, --- --- --- --- 47,904 ---
including
dividends
payable
Minority
Interest in
Cumulative
Redeemable
Preferred Stock --- --- --- --- --- 47,904
of Subsidiary
Stockholders'
Equity
Common Stock,
additional 166,176 127,759 49,690 166,176 77,730 77,730
paid-in capital
Less:
Receivable from (656) (656) (656) (758) (758) (758)
officers
Cumulative
translation (503) (503) (503) 386 386 386
adjustment
Retained
earnings (173,358) (199,327) (201,128) (163,818) (182,184) (182,184)
(deficit)
Total (8,341) (72,727) (152,597) 1,986 (104,826) (104,826)
Stockholders'
Equity
Total
liabilities and $525,110 $537,689 $544,292 $306,488 $316,727 $316,727
Stockholders'
equity
</TABLE>
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)
<TABLE>
<CAPTION>
For The Three Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Health & Holdings Fitness Health Holdings Fitness
Fitness , Inc. Corporat & , Inc. Corporat
Inc. March ion Fitness March 2, ion
March 1, 1997 March 1, Inc. 1996 March 2,
1, 1997 1997 March 1996
2, 1996
Net sales $248,670 $248,670 $248,670 $240,850 $240,850 $240,850
Cost of goods 175,062 175,062 175,062 173,032 173,032 173,032
sold
Cost of goods
sold-revaluation
of HealthRider,
Weider Sports 2,060 2,060 2,060 --- --- ---
and CanCo
inventory
Total cost of 177,122 177,122 177,122 173,032 173,032 173,032
goods sold
Gross profit 71,548 71,548 71,548 67,818 67,818 67,818
Operating
expenses:
Selling-
including one
time
HealthRider 43,632 43,632 43,632 29,327 29,327 29,327
selling
expenses of
$3.2 million
Research and 1,978 1,978 1,978 1,802 1,802 1,802
development
General and 12,289 12,289 12,289 11,320 11,320 11,320
administrative
Weider Settlement 1,000 1,000 1,000 --- --- ---
(see Note 4)
HealthRider 3,949 3,949 3,949 --- --- ---
Consolidation
Total operating 62,848 62,848 62,848 42,449 42,449 42,449
expenses
Operating income 8,700 8,700 8,700 25,369 25,369 25,369
Interest expense 9,128 11,734 15,286 7,312 9,433 9,433
Dividend on
cumulative
redeemable 1,275
--- --- --- --- ---
Preferred stock
of Subsidiary
Amortization of
deferred 803 1,101 1,290 647 889 889
financing fees
Income (loss)
before income tax (1,231) (4,135) (7,876) 17,410 15,047 13,772
Provision
(benefit) for (801) (2,705) (4,919) 7,016 6,697 6,697
income taxes
Net income (loss) ($430) ($1,430) ($2,957) $10,394 $8,350 $7,075
</TABLE>
accompanying notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IFC Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
For The Nine Months Ended
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
IHF
ICON Holdings, Fitness ICON Holdings ICON
Inc. Health & , Inc. Fitness
Fitness, March 1, Corporati Fitness, March 2, Corporat
Inc. 1997 1, Inc. 1996 ionMarch
March 1, 1997 March 2, 2, 1996
1997 1996
Net sales $623,974 $623,974 $623,974 $594,213 $594,213 $594,213
Cost of goods 435,672 435,672 435,672 432,682 432,682 432,682
sold
Cost of goods
sold-revaluation
of HealthRider,
Weider Sports and 10,225 10,225 10,225 --- --- ---
CanCo inventories
Total cost of 445,897 445,897 445,897 432,682 432,682 432,682
goods sold
Gross profit 178,077 178,077 178,077 161,531 161,531 161,531
Operating
expenses:
Selling-including 100,001 100,001 100,001 69,806 69,806 69,806
one time
HealthRider
selling expenses
of $6.4 million
Research and 5,452 5,452 5,452 4,782 4,782 4,782
development
General and 39,290 39,290 39,290 35,179 35,179 35,179
administrative
Weider Settlement 17,465 17,465 17,465 --- --- ---
(see Note 4)
HealthRider 3,949 3,949 3,949 --- --- ---
Consolidation
Total operating 166,157 166,157 166,157 109,767 109,767 109,767
expenses
Operating income 11,920 11,920 11,920 51,764 51,764 51,764
Interest expense 24,284 32,102 35,915 21,124 27,434 27,434
Dividend on
cumulative
deemable 2,125 3,825
--- --- --- ---
Preferred stock
of Subsidiary
Amortization of
deferred 2,255 3,147 3,348 1,918 2,638 2,638
financing fees
Income (loss) (14,619) (23,329) (29,468) 28,722 21,692 17,867
before
Provision
(Benefit) for (5,079) (8,311) (10,524) 11,754 10,000 10,000
income taxes
Net income ($9,540) ($15,018) ($18,944) $16,968 $11,692 $7,867
(Loss)
</TABLE>
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)
For The Nine Months Ended
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Health & Holdings Fitness Health & Holdings Fitness,
Fitness , Inc. Corporat Fitness, , Inc. Corporat
OPERATING Inc. March ion,Marc Inc. March 2, ion
ACTIVITIES: March 1, 1, 1997 h 1, March 2, 1996 March 2,
1997 1997 1996 1996
Net income/(loss) ($9,540) ($15,018) ($18,944) $16,968 $11,692 $7,867
Adjustments to
reconcile net
income to net
cash provided by
operating
activity:
Provision for bad 9,292 9,292 9,292 19,254 19,254 19,254
debt and
advertising
allowance
Provision/(benefit) (101) (1,596) (1,596) 3,767 1,176 1,176
for deferred
taxes
Depreciation & 11,090 19,800 27,819 7,653 14,682 14,682
amortization
Inventory 10,225 10,225 10,225 --- --- ---
revaluation
Non-cash 234 234 234 --- --- ---
Compensation
Interest expense
attributable to --- --- 2,125 --- --- 3,825
dividends on
preferred stock
Changes in
operating assets
and liabilities:
Accounts (98,860) (98,860) (98,860) (120,367 (120,367 (120,367
receivable ) ) )
Inventory (19,542) (19,542) (19,542) (3,264) (3,264) (3,264)
Other assets (18,957) (20,694) (27,810) 4,982 4,982 4,982
Account payable 24,724 24,724 24,873 31,133 31,971 31,971
and accrued
expenses
Net cash
received (91,435) (91,435) (92,184) (39,874) (39,874) (39,874)
from/(used in)
operating
activities
INVESTING
ACTIVITIES:
Payments for (38,962) (38,962) (38,962) --- --- ---
acquisitions
Purchases of (16,840) (16,840) (16,840) (11,637) (11,637) (11,637)
property and
equipment
Net cash
received from (55,802) (55,802) (55,802) (11,637) (11,637) (11,637)
/(used in)
investing
activities
FINANCING
ACTIVITIES
Proceeds from 133,657 133,657 215,924 50,997 50,997 50,997
long-term debt,
net of payments
Return of --- --- (42,319) --- --- ---
capital to
parent
Retirement of --- (35,748) (35,748) --- --- ---
Preferred
stocks
Capital --- 35,748 --- --- --- ---
contribution
by parent
Payment of debt --- --- (3,451) --- --- ---
financing fees
Distribution to --- --- --- (389) (389) (389)
Stockholders
Net cash
received 133,657 133,657 134,406 50,608 50,608 50,608
from/(used in)
financing
activities
Effect of (889) (889) (889) (16) (16) (16)
exchange rate
change on cash
Net (14,469) (14,469) (14,469) (919) (919) (919)
increase/(decre
ase)in cash
Cash at 19,313 19,313 19,313 4,099 4,099 4,099
beginning of
period
Cash at end of $4,844 $4,844 $4,844 $3,180 $3,180 $3,180
period
SUPPLEMENTAL
DISCLOSURES:
Cash paid during
the year for:
Interest $18,200 $18,200 $18,200 $21,897 $21,897 $21,897
Income taxes $1,175 $1,175 $1,175 $3,799 $3,799 $3,799
</TABLE>
See notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IFC 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 ICON Fitness
Corporation ("ICON Fitness") and its wholly-owned subsidiary, 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) and
ICON of Canada which was acquired in September of 1996 (see Weider Sports
Acquisition and CanCo Acquisition-Note 5) (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. ICON Fitness' parent company, IHF Capital, Inc.,
("IHF Capital") is not a registrant.
In management's opinion, the accompanying consolidated condensed financial
statements, for ICON, IHF Holdings and ICON Fitness, contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial condition of ICON, IHF Holdings and ICON Fitness, as of March 1, 1997
and May 31, 1996, their results of operations for the three and nine months
ended March 1, 1997 and March 2, 1996, and their cash flows for the nine months
ended March 1, 1997 and March 2, 1996. There are two less days in the nine
month period ended March 1, 1997 than the comparable period ended March 2,
1996.
Prior to the incorporation of ICON Fitness on November 12, 1996 and the
concurrent contribution of IHF Capital, Inc.'s ("IHF Capital") investment in IHF
Holdings to ICON Fitness in exchange for all of the outstanding common stock of
ICON Fitness, IHF Holdings was a wholly-owned subsidiary of IHF Capital. ICON
Fitness' financial statements carry over the historical financial position and
results of operations of IHF Capital, adjusted to reflect the fact that ICON
Fitness is a wholly-owned subsidiary of IHF Capital.
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 by ICON Fitness with the Securities and Exchange Commission on August
29, 1996 and with the Form S-4 filed with the Securities and Exchange Commission
on December 20, 1996 which was amended on February 14, March 21, and April 9,
1997. The results of operations for the nine months ended March 1, 1997 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 allocation to
each of the 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,
1995. Results for the historical ICON, IHF Holdings and ICON Fitness represent
the results for the third quarter of fiscal 1997 combined with the HealthRider
results for the periods then ended with comparative results from the same
periods in fiscal 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 forma summary excludes certain non-recurring
charges related to the 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.
(In millions)
THREE MONTHS ENDED
MARCH 1, 1997 NINE MONTHS ENDED MARCH 1,
(UNAUDITED) 1997
(UNAUDITED)
ICON Health- ICON Health- Total
Rider Rider
Revenues $ 248.7 -- $624.0 $ 16.4 $640.4
Net income (loss) $ (0.4) -- $ (9.6) $ (6.2) $(15.8)
IHF Health- IHF Health-
Holdings Rider Holdings Rider Total
Revenues $ 248.7 -- $624.0 $ 16.4 $640.4
Net Income (Loss) $ (1.5) -- $(15.1) $ (6.2) $(21.3)
ICON Health- ICON Health-
Fitness Rider Fitness Rider Total
Revenues $ 248.7 -- $624.0 $ 16.4 $640.4
Net Income (Loss) $ (3.0) -- $(19.0) $ (6.2) $(25.2)
[CAPTION]
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 2,
MARCH 2, 1996 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ICON Health- Total ICON Health- Total
Rider Rider
Revenues $ 240.9 $ 86.5 $327.4 $ 594.2 $200.0 $794.2
Net income (loss) $ 10.4 $ (0.8) $ 9.6 $ 17.0 $ 7.7 $ 24.7
IHF Health- IHF Health-
Holdings Rider Holdings Rider Total
Revenues $ 240.9 $ 86.5 $327.4 $ 594.2 $200.0 $794.2
Net Income (Loss) $ 8.4 $ (0.8) $ 7.6 $ 11.7 $ 7.7 $ 19.4
ICON Health- ICON Health-
Fitness Rider Fitness Rider Total
Revenues $ 240.9 $ 86.5 $327.4 $ 594.2 $200.0 $794.2
Net Income (Loss) $ 7.1 $ (0.8) $ 6.3 $ 7.9 $ 7.7 $ 14.6
</TABLE>
Note 3. 1996 Stock Option Plan
IHF Capital, Inc. adopted the 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 2,070,000 shares of Class A Common Stock of IHF Capital has been
authorized for issuance under the 1996 Stock Option Plan, which is administered
by the Board of Directors.
Note 4. Settlement of WHF Litigation
On September 6, 1996, the Company and Weider Health and Fitness ("WHF") and
its affiliates settled the litigation between WHF and certain of its affiliates
and the Company and certain of its officers and directors 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.
Option to Repurchase Common Stock. The Company obtained the right to
purchase all of the Common Stock of IHF Capital and certain warrants to purchase
Common Stock of IHF Capital held by the WHF Stockholders (the "IHF Position").
This right was exercised on November 20, 1996 at an aggregate price of
approximately $42.3 million. This transaction has been treated as a return of
IHF Capital's capital in ICON Fitness in which ICON Fitness recorded the amounts
paid to the WHF stockholders as a reduction in the additional paid-in capital of
ICON Fitness.
Option to Repurchase Preferred Stock. The Company obtained the right to
purchase the IHF Holdings Preferred Stock held by WHF and certain other
stockholders. On November 20, 1996 the Company exercised this right for $32.1
million, which reflects a discount of $3.9 million and the forgiveness of
accrued dividends. In connection with the repurchase of IHF Holdings Preferred
Stock, the Company purchased the options to purchase IHF Holdings Preferred
Stock held by Messrs. Watterson and Stevenson for $3.7 million, which reflects a
discount of $.3 million and the forgiveness of accrued dividends. Upon the
purchase of the IHF Holdings Preferred Stock, WHF's representation on the
Company's board of directors ceased. In connection with the above transaction,
the Company recorded an increase to the additional paid-in capital of IHF
Holdings of $50.1 million, which consists of (i) $35.8 million which ICON
Fitness contributed to IHF Holdings from its proceeds from the issuance of 14%
Series A Senior Discount Notes (see Note 7) for the repurchase of IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock; and (ii)
$14.3 million related to the discounts given on the repurchase of IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock and the
forgiveness of accrued dividends. Additionally, the Company recorded an increase
to the additional paid-in capital of ICON Fitness of $14.3 million to reflect
the gain recognized on the early extinguishment of and the forgiven dividends
related to the IHF Holdings Preferred Stock and options to purchase IHF Holdings
Preferred Stock.
Settlement Expenses and Intercompany Payables. The Company: (i) paid $12.1
million to terminate the lawsuits; (ii) paid $3.9 million to WHF and its
affiliates as payment 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 million). 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. As a result of the above, the Company recorded Weider
Settlement expenses of $16.5 million, which includes the expenses noted in (i)
and (ii) and other individually insignificant settlement expenses totaling $1.0
million, offset by the $.5 million of CanCo Management fees. The Company also
recorded the intercompany balance reductions noted in (iii) in its consolidated
condensed balance sheet.
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. 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 $1.7 million 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 Canadian mortgage on the properties and
the payment of $.5 million. The Weider Sports and CanCo Acquisitions are being
accounted for under the purchase method of accounting. Accordingly, the
purchase price plus direct costs of the acquisitions 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 the 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 Weider Sports
and CanCo Acquisitions. Accordingly, the final allocations may be different
from those initially recorded. However, such allocations are not expected to
differ materially from those initially recorded. The Weider Sports and CanCo
Acquisitions do not represent acquisitions of significant businesses by the
Company.
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, the WHF Settlement, the Weider
Sports Acquisition and CanCo Acquisitions and to meet the Company's other long
term needs.
Note 7. Issuance of 14% Series A Senior Discount Notes
On November 20, 1996, ICON Fitness Corporation issued $162,000,000 face
amount of 14% Series A Senior Discount Notes pursuant to Rule 144A and certain
other exemptions under the Securities Act of 1933, as amended, for resale to
certain Qualified Institutional Buyers and Institutional Accredited Investors.
The Senior Discount Notes generated gross proceeds of approximately $82.5
million. The net proceeds from the Offering were used to finance the purchase
of some of the outstanding shares of common stock of ICON Fitness Corporation's
parent, IHF Capital, Inc., and warrants to purchase shares of such stock held by
certain stockholders and the purchase of all of the outstanding shares of
preferred stock of its subsidiary, IHF Holdings, Inc., and options to purchase
shares of such stock held by certain stockholders. ICON Fitness Corporation
filed a Form S-4 registration statement under the Securities Act of 1933 on
December 20, 1996 which was amended on February 14, March 21, and April 9, 1997.
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Operating Results for the Third Quarters of Fiscal 1997 and 1996
During the third quarter of fiscal year 1997, net sales increased 3.2% to
$248.7 million from $240.9 million in the third quarter of fiscal 1996. Sales
of the Company's line of abdominal machines, first introduced in April of 1996,
totaled $4.5 million. HealthRider products totaled $17.5 million with no
comparable sales for these products during the third quarter of fiscal year
1996. Sales of the Company's home weight systems increased $3.9 million, while
treadmill sales increased $63.1 million to $164.6 million in the third quarter
of fiscal 1997 compared to $101.5 in third quarter of fiscal 1996. Treadmill
sales accounted for approximately 66% and 42 % of total net sales during the
third quarter of fiscal 1997 and 1996, respectively. Sales of trampolines
decreased $1.1 million in the third quarter of fiscal 1997 to $6.9 million from
$8.0 million in the third quarter of fiscal year 1996. Sales of the Company's
line of upright rowers decreased $93.5 million to $9.4 million from $102.9
million in the third quarter of 1996 due to decreased market demand.
Gross profit for the third quarter of fiscal 1997 was $71.6 million, or 28.8%
of net sales, compared to $67.8 million, or 28.1% of net sales, for the third
quarter of fiscal 1996. The step-up of HealthRider and ICON of Canada
inventory increased cost of sales by $2.1 million. Without this charge, the
gross profit would have increased to 29.6% due to gross margin improvements in
the Company's line of treadmill products and a higher gross margin on
HealthRider products.
Selling expenses were $43.7 million, or 17.6% of net sales, in the third
quarter of fiscal 1997 compared to $29.3 million, or 12.2% of net sales, for the
third quarter of fiscal 1996. This increase is primarily attributed to the $17.2
million in expenditures at HealthRider during the third quarter of fiscal year
1997. This increase also includes one time selling expenses of $3.2 million.
These one time expenses will continue until discontinued products purchased in
the HealthRider acquisition are liquidated. The Company had no comparable
expense during the comparable period of fiscal year 1996.
Research and development expenses were $2.0 million or .8% of net sales, for
the third quarter of fiscal 1997 compared to $1.8 million, or .7% of net sales,
for the third quarter of fiscal 1996.
General and administrative expenses totaled $ 12.3 million, or 5.0 % of net
sales, for the third quarter of fiscal 1997 compared to $11.3 million, or 4.7%
of net sales, for the third quarter of fiscal 1996. HealthRider's general and
administrative expenses total $.4 million for the current period with no
comparable expenses in the prior year.
The Weider settlement expenses totaled $1.0 million during the third quarter
of fiscal 1997. See Note 4 to the consolidated condensed financial statements.
HealthRider's integration 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.
As a result of the foregoing factors, operating income was $8.7 million, or
3.5% of net sales in the third quarter of fiscal 1997, compared to $25.4
million, or 10.5% of net sales, in the third quarter of fiscal 1996. Operating
income before the revaluation of acquired inventories, one time selling expenses
and the integration expenses associated with the HealthRider and CanCo
Acquisitions and the expense of the Weider settlement would have been $19.0
million or 7.6% of net sales for the third quarter of fiscal 1997.
Interest expense was $9.1 million for ICON, $11.7 million for IHF Holdings
and $15.3 million for ICON Fitness in the third quarter of fiscal year 1997
compared to $7.3 million for ICON, $9.4 million for IHF Holdings and $9.4
million for ICON Fitness for the third quarter of fiscal year 1996. The
increase in interest expense is attributed to the operating debt associated with
the HealthRider Acquisition, the WHF Settlement, the CanCo Acquisition and the
interest associated with the 14% Series A Senior Discount notes of ICON Fitness.
Dividends on cumulative redeemable Preferred stock were $1.3 million for ICON
Fitness during the third quarter of fiscal 1996. The Preferred Stock was
redeemed in the second quarter of 1997; accordingly, there were no dividends in
the same period of 1997.
The income tax benefit was $.8 million for ICON and a tax benefit of $2.7
million for Holdings and $4.9 million for ICON Fitness for the third quarter of
fiscal 1997 compared with a tax provision of $7.0 million for ICON and a tax
provision of $6.7 million for IHF Holdings and ICON Fitness during the third
quarter of fiscal 1996. This is a result of the increase in the loss before
income tax during the third quarter of fiscal 1997 compared to the same period
in the preceding year.
As a result of the foregoing factors, the net loss was $.4 million for ICON,
$1.4 million for IHF Holdings and $3.0 million for ICON Fitness for the third
quarter of fiscal 1997 compared to net income of $10.4 million for ICON, $8.3
million for IHF Holdings and $7.1 million for ICON Fitness during the same
period of fiscal 1996.
Operating Results for the First Nine Months of fiscal 1997 and 1996
Net sales were $624.0 million in the first nine months of fiscal 1997,
compared to $594.2 million in the first nine months of fiscal 1996. Sales of
the Company's line of abdominal machines, first introduced in April of 1996,
totaled $41.3 million. HealthRider products totaled $46.4 million with no
comparable sales of these products during fiscal year 1996. Sales of the
Company's home weight systems increased $14.2 million, while treadmill sales
increased $79.1 million to $321.4 million in the first nine months of fiscal
1997 compared to first nine months of fiscal 1996 sales of $242.3 million.
Treadmill sales accounted for approximately 52% and 41% of total net sales
during the first nine months of fiscal 1997 and 1996, respectively. Sales of
trampolines increased $3.0 million in the first nine months of fiscal 1997 to
$41.0 million from $38.0 million in the first nine months of fiscal 1996. Sales
of the Company's line of upright rowers decreased $172.1 million to $56.7
million from $228.8 million in the first nine months of 1996 due to decreased
market demand. Sales in Europe increased $11.4 million over the same period
for fiscal 1996.
Gross profit for the first nine months of fiscal 1997 was $178.1 million, or
28.5% of net sales, compared to $161.5 million, or 27.2% of net sales, for the
first nine months of fiscal 1996. The step-up of the HealthRider and ICON of
Canada inventory increased the cost of sales by $10.2 million for the first nine
months of fiscal year 1997. Without this charge, gross profit would have
increased to 30.2% due to gross margin improvements in the Company's line of
treadmill products and the higher gross margin on HealthRider products.
Selling expenses were $100.0 million, or 16.0% of net sales, in the first
nine months of fiscal 1997 compared to $69.8 million, or 11.8% of net sales for
the first nine months of fiscal year 1996. This increase is primarily
attributed to the $34.3 million in expenditures at HealthRider during the first
three quarters of fiscal 1997. This increase also includes one time selling
expenses totaling $6.4 million attributed to HealthRider. These one time
expenses will continue until the discontinued products purchased in the
HealthRider acquisition are liquidated. The Company had no comparable expenses
during the same period for fiscal year 1996.
Research and development expenses were $5.5 million or .9% of net sales, for
the first nine months of fiscal 1997 compared to $4.8 million, or .8% of net
sales, for the first nine months of fiscal 1996.
General and administrative expenses totaled $39.3 million, or 6.3% of net
sales, for the first nine months of fiscal 1997 compared to $35.2 million, or
5.9% of net sales, for the first nine months of 1996. HealthRider's general and
administrative expenses totaled $2.7 million with no comparable expenses in the
prior year.
The Weider settlement expenses, including related legal fees, totaled $17.5
million during the first nine months of fiscal 1997. See Note 4 to the
consolidated condensed financial statements.
HealthRider's integration expenses totaled $4.0 million during the first nine
months of fiscal 1997. These charges were incurred to eliminate the duplication
in staff and facilities with those of ICON.
As a result of the foregoing factors, operating income was $11.9 million, or
1.9% of net sales in the first nine months of fiscal 1997, compared to a $51.8
million, or 8.7% of net sales, in the first nine months of fiscal 1996.
Operating income before the revaluation of acquired inventories, one time
HealthRider selling expenses and the integration 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 year 1997.
Interest expense was $24.3 million for ICON, $32.1 million for IHF Holdings
and $35.9 million for ICON Fitness in the first nine months of fiscal 1997
compared to $21.1 million for ICON, $27.4 million for IHF Holdings and $27.4
million for ICON Fitness for the first nine months of fiscal 1996. The increase
in interest expense is attributed to operating debt associated with the
HealthRider Acquisition, the WHF Settlement, the CanCo Acquisition and the
interest associated with the 14% Series A Senior Discount notes of ICON Fitness.
Dividends on cumulative redeemable Preferred Stock totaled $2.1 million and
$3.8 million for ICON Fitness for the first nine months of fiscal 1997 and
1996, respectively. The Preferred Stock was redeemed in the second quarter of
1997; accordingly, there will be no additional dividends associated with this
Preferred Stock.
The income tax benefit was $5.1 million for ICON, $8.3 million for IHF
Holdings and $10.5 million for ICON Fitness for the first nine months of fiscal
1997 compared with a tax provision of $11.8 million for ICON and a tax provision
of $10.0 million for IHF Holdings and ICON Fitness during the first nine months
of fiscal 1996. This is a result of the loss before income tax during the first
nine months of fiscal 1997 compared to the income before income tax for same
period in the preceding year.
As a result of the foregoing factors, the net loss was $9.6 million for ICON,
$15.0 million for IHF Holdings and $18.9 million for ICON Fitness for the first
nine months of fiscal 1997 compared to net income of $17.0 million for ICON,
$11.7 million for IHF Holdings and $7.9 million for ICON Fitness during the same
period for fiscal 1996.
Advertising allowances with retail customers total $3.3 million at March 1,
1997. 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.
Prepaid income taxes are $15.1 million for ICON, $17.1 million for IHF
Holdings and $19.3 million for ICON Fitness at March 1, 1997. $5.2 million of
these balances are attributable to the HealthRider Acquisition, with the
remaining balance being the result of losses from current 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 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 1997, which
includes the results of the HealthRider Acquisition from August 16, 1996, and
for each quarter in fiscal 1996, and 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1997 $125.8 $249.5 $248.7 ---
Fiscal 1996 $124.8 $228.5 $240.9 $153.4
Fiscal 1995 $ 70.6 $163.0 $182.8 $114.4
Liquidity and Capital Resources
As a result of the Company's Recapitalization on November 14, 1994, the
Company's cash needs changed significantly. 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 nine months of fiscal 1997, ICON and IHF Holdings used $91.4
million and ICON Fitness used $92.2 million of cash in operating activities.
This use of cash includes $17.5 million of Weider settlement expenses and one
time selling and integration expenses of $10.4 million. The other primary uses
of cash are increased accounts receivable and inventory. During the first nine
months of fiscal 1997, the Company had a net decrease in cash of $14.5 million.
The Company also used $16.8 million of cash in the first nine months of fiscal
1997 for capital expenditures primarily related to tooling, manufacturing
equipment and building expansion, $28.2 million to fund the HealthRider
Acquisition, and $10.8 million to fund the Weider Sports and CanCo Acquisitions.
At March 1, 1997, ICON had $227.0 million of revolving credit borrowings
under the Credit Agreement. At the close of the quarter additional availability
under this Credit Agreement was $23.4 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 $147.0
million from $80.0 million reported at the end of fiscal 1996. The Company
funded the HealthRider and Weider Sports and CanCo Acquisitions and the Weider
Settlement 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 payments on debt issued
in connection with the Company's Recapitalization and to fund capital
expenditures.
On November 20, 1996, ICON Fitness issued 14% Series A Senior Discount Notes
with a face value of $162,000,000. These Senior Discount Notes generated gross
proceeds of $82.5 million. The Company used the net proceeds from the Senior
Discount Notes to finance the purchase of some of the outstanding shares of
common stock of IHF Capital, Inc. and warrants to purchase shares of such stock
held by certain stockholders and the purchase of all of the outstanding shares
of preferred stock of IHF Holdings, and options to purchase shares of such stock
held by certain stockholders. Interest on the Notes will begin accruing on
November 15, 2001 and will be payable semi-annually on each May 15 and November
15, commencing May 15, 2002. The principle and accrued interest on the Senior
Discount Notes will be due on November 15, 2006.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings or claims which
are pending or known to be threatened will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Item 2. Changes in Securities.
See Note 4 to the consolidated condensed financial statements.
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.
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.
1.1(1) Purchase Agreement dated November 15, 1996 regarding the issuance and
sale of the Senior Discount Notes between ICON and Donaldson, Lufkin &
Jennrette Securities Corporation.
3.1(1) Certificate of Incorporation of ICON Fitness Corporation.
3.1A(1)Amendment to Certificate of Incorporation of ICON Fitness Corporation.
3.2(1) By-laws of ICON Fitness Corporation.
4.2(1) Indenture dated as of November 20, 1996 between ICON Fitness Corporation
as Issuer, and Fleet National Bank as Trustee, with respect to
the $162,000,000 in aggregate principle amount at maturity of
Senior Discount Notes Due 2006, including the form of the Senior Discount
Note.
4.3(1) Registration Rights Agreement dated as of November 20, 1996 by and
between ICON Fitness Corporation and Donaldson, Lufkin & Jennrette
Securities Corporation.
10.1(1)Amended and Restate Credit Agreement dated as of November 14, 1994
amount ICON Health & Fitness, Inc., the lenders named therein, and
General Electric Capital Corporation.
27.1* Financial Data Schedule for ICON Health & Fitness, Inc.
27.2* Financial Data Schedule for IHF Holdings, Inc.
27.3* Financial Data Schedule for ICON Fitness Corporation.
*Filed herewith.
(1) Filed as Exhibits to the Registration Statement on Form S-4 of ICON
Fitness Corporation (Registration No 333-18475) and is incorporated herein by
reference.
(b) No reports on Form 8-K were filed during the quarter ended March 1, 1997.
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.
IHF Holdings, Inc.
ICON Fitness Corporation
(Registrants)
Date:April 15, 1997 By: /s/ Gary Stevenson, President
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