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 30, 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; 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 No.)
incorporation or organization)
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 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 1,000 shares
.
ICON Fitness Corporation
and its wholly-owned subsidiary,
IHF Holdings, Inc.
and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
INDEX
Page No.
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-7
Consolidated Condensed Balance
Sheets as of November 30, 1996 and
May 31, 1996 3-4
Consolidated Condensed Statements
of Operations for the three months and six months
ended November 30, 1996 and December 2, 1995 5-6
Consolidated Condensed Statements
of Cash Flows for the six months
ended November 30, 1996 and December 2, 1995 7
Notes to Consolidated Condensed
Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-17
PART II - OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Securities Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
<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
(In Thousands)
<TABLE>
<CAPTION>
ICON Health IHF Holdings, ICON Fitness ICON Health ICON Fitness
& Fitness, Inc. Inc. Corporation, &Fitness,Inc Inc. Corporation
November 30, November 30, November 30, May 31, 1996 IHFMHoldings, May 31, 1996
1996 1996 1996 Audited 1996 Audited
Unaudited Unaudited Unaudited Audited
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets
Cash $11,565 $11,565 $11,565 $19,313 $19,313 $19,313
Accounts
receivable-net 226,614 226,614 226,614 126,869 126,869 126,869
Inventories
Raw materials 50,978 50,978 50,978 26,264 26,264 26,264
Finished goods 110,173 110,173 110,173 69,658 69,658 69,658
Deferred income taxes 5,240 5,240 5,240 5,240 5,240 5,240
Other assets 8,137 8,137 8,137 4,770 4,770 4,770
Prepaid income taxes 12,076 12,202 12,202 589 882 882
Total current assets 424,783 424,909 424,909 252,703 252,996 252,996
Property and equipment
Land 1,230 1,230 1,230 1,230 1,230 1,230
Building 30,233 30,233 30,233 13,632 13,632 13,632
Machinery and
equipment 67,286 67,286 67,286 37,191 37,191 37,191
Total 98,749 98,749 98,749 52,053 52,053 52,053
Less accumulated
depreciation (20,163) (20,163) (20,163) (19,741) (19,741) (19,741)
Property and
equipment - net 78,586 78,586 78,586 32,312 32,312 32,312
Deferred income taxes 1,871 7,085 7,085 1,770 5,489 5,489
Other assets 31,161 36,793 40,981 19,703 25,930 25,930
$536,401 $547,373 $551,561 $306,488 $316,727 $316,727
Liabilities and
Stockholders' Equity
Current liabilities
Current portion of
long-term debt $4,885 $4,885 $4,885 $3,065 $3,065 $3,065
Accounts payable 122,689 122,689 122,689 73,652 73,652 73,652
Accrued expenses 40,909 40,909 40,909 17,239 17,239 17,239
Total current
liabilities 168,483 168,483 168,483 93,956 93,956 93,956
Long term-debt 375,534 449,892 532,423 210,546 279,693 279,693
Cumulative Preferred
Stock including dividends
payable --- --- --- --- 47,904 47,904
Stockholders' Equity
Common Stock,
additional paid-in
capital 166,176 127,759 49,690 166,176 77,730 77,730
Less: Receivable from
officers (758) (758) (758) (758) (758) (758)
Cumulative translation
adjustment (106) (106) (106) 386 386 386
Retained earnings
(deficit) (172,928) (197,897) (198,171) (163,818) (182,184) (182,184)
Total Stockholders'
Equity (7,616) (71,002) (149,345) 1,986 (104,826) (104,826)
$536,401 $547,373 $551,561 $306,488 $316,727 $316,727
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
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
(In Thousands)
<TABLE>
<CAPTION>
For The Three Months Ended.
ICON Health ICON Fitness ICON Health ICON
& Fitness, IHF Corporation & Fitness, IHF Holdings, Fitness
Inc. Holdings, November 30, Inc. Inc. Corporation
November 30, Inc. 1996 December 2, December 2, December 2,
1996 November 30, Unaudited 1995 1995 1995
Unaudited 1996 Unaudited Unaudited Unaudited
Unaudited
<S> <C> <C> <C> <C> <C> <C>
Net sales $249,495 $249,495 $249,495 $228,524 $228,524 $228,524
Cost of goods sold 170,029 170,029 170,029 168,718 168,718 168,718
Cost of goods sold-
revaluation of HealthRider,
Weider
Sports and CanCo inventory 6,300 6,300 6,300 --- --- ---
Total cost of goods sold 176,329 176,329 176,329 168,718 168,718 168,718
Gross profit 73,166 73,166 73,166 59,806 59,806 59,806
Operating expenses:
Selling-including one
time HealthRider
selling expenses
of $3.2 million 37,557 37,557 37,557 24,650 24,650 24,650
Research and development 1,835 1,835 1,835 1,434 1,434 1,434
General and administrative 16,115 16,115 16,115 13,768 13,768 13,768
Weider Settlement
(see Note 4) 16,465 16,465 16,465 --- --- ---
Total operating expenses 71,972 71,972 71,972 39,852 39,852 39,852
Operating income 1,194 1,194 1,194 19,954 19,954 19,954
Interest expense 8,988 11,594 11,856 7,497 9,619 9,619
Dividend on cumulative
redeemable Preferred stock 850 1,275
Amortization of deferred
financing fees 800 1,098 1,110 646 888 888
Income (loss) before income
tax (8,594) (11,498) (12,622) 11,811 9,447 8,172
Provision (benefit) for income
taxes (3,105) (3,731) (3,731) 4,518 3,990 3,990
Net income (loss) ($5,489) ($7,767) ($8,891) $7,293 $5,457 $4,182
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
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
(In Thousands)
For The Six Months Ended.
<TABLE>
<CAPTION>
ICON ICON
ICON Health & Fitness ICON Health & IHF Holdings, Fitness,
Fitness, Inc. IHF Holdings, Corporation, Fitness, Inc. Inc. Corporation
November 30, Inc. November November 30, December 2, December 2, December 2,
1996 30, 1996 1996 1995 1995 1995
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
<S> <C> <C> <C> <C> <C> <C>
Net sales $375,305 $375,305 $375,305 $353,363 $353,363 $353,363
Cost of goods sold 260,610 260,610 260,610 259,650 259,650 259,650
Cost of goods sold-revaluation
of HealthRider, Weider Sports
and CanCo inventories 8,165 8,165 8,165 --- --- ---
Total cost of goods sold 268,775 268,775 268,775 259,650 259,650 259,650
Gross profit 106,530 106,530 106,530 93,713 93,713 93,713
Operating expenses:
Selling-including one time
HealthRider selling
expenses of $3.2 million 56,370 56,370 56,370 40,479 40,479 40,479
Research and development 3,474 3,474 3,474 2,980 2,980 2,980
General and administrative 27,002 27,002 27,002 23,859 23,859 23,859
Weider Settlement
(see Note 4) 16,465 16,465 16,465 --- --- ---
Total operating expenses 103,311 103,311 103,311 67,318 67,318 67,318
Operating income 3,219 3,219 3,219 26,395 26,395 26,395
Interest expense 15,155 20,367 20,629 13,813 18,001 18,001
Dividend on cumulative
redeemable preferred stock 2,125 2,550
Amortization of deferred
financing fees 1,452 2,047 2,059 1,271 1,749 1,749
Income (loss) before (13,388) (19,195) (21,594) 11,311 6,645 4,095
Provision (Benefit) for
income taxes (4,278) (5,606) (5,606) 4,738 3,303 3,303
Net income (Loss) ($9,110) ($13,589) ($15,988) $6,573 $3,342 $792
</TABLE>
See accompanying notes to consolidated condensed financial statements.
.
<PAGE>
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
(In Thousands)
For The Six Months Ended.
<TABLE>
<CAPTION>
ICON Health IHF ICON Fitness ICON Health & IHF Holdings, ICON Fitness,
& Fitness Holdings, Corporation, Fitness, Inc. Inc. Corporation
Inc. Inc. November 30, December 2, December 2, December
November 30, November 30, 1996 1995 1995 2, 1995
1996 1996 Unaudited Unaudited Unaudited Unaudited
Unaudited Unaudited
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) ($9,110) ($13,589) ($15,988) $6,573 $3,342 $792
Adjustments to reconcile net
income to net cash provided by
operating activity:
Provision for bad debt and
advertising allowance 5,284 5,284 5,284 10,793 10,793 10,793
Provision/(benefit) for deferred
taxes (101) (1,596) (1,596) 3,740 3,149 3,149
Depreciation & amortization 6,072 11,879 12,153 4,985 9,651 9,651
Interest expense attributable to
dividends on preferred stock --- --- 2,125 --- --- 2,550
Changes in operating assets and
liabilities:
Accounts receivable (86,137) (86,137) (86,137) (119,691) (119,691) (119,691)
Inventory (28,756) (28,756) (28,756) (13,840) (13,840) (13,840)
Other assets (9,785) (9,618) (10,756) 2,661 2,661 2,661
Account payable and accrued
expenses 31,098 31,098 31,098 36,041 35,197 35,197
Net cash received from/
(used in) operating
activities (91,435) (91,435) (92,573) (68,738) (68,738) (68,738)
INVESTING ACTIVITIES:
Payments for acquisitions (38,962) (38,962) (38,962) --- --- ---
Purchases of property and
equipment (13,622) (13,622) (13,622) (7,913) (7,913) (7,913)
Net cash received from/
(used in) investing
activities (52,584) (52,584) (52,584) (7,913) (7,913) (7,913)
FINANCING ACTIVITIES
Proceeds from long-term debt,
net of payments 136,763 136,763 219,030 76,709 76,709 76,709
Return of capital to parent --- --- (42,319) --- --- ---
Retirement of Preferred stocks --- (35,748) (35,748) --- --- ---
Capital contribution by parent --- 35,748 --- --- --- ---
Payment of debt financing fees --- --- (3,062) --- --- ---
Net cash received from/
(used in) financing activities 136,763 136,763 137,901 76,709 76,709 76,709
Effect of exchange rate change
on cash (492) (492) (492) 13 13 13
Net increase/(decrease)in cash (7,748) (7,748) (7,748) 71 71 71
Cash at beginning of period 19,313 19,313 19,313 4,099 4,099 4,099
Cash at end of period $11,565 $11,565 $11,565 $4,170 $4,170 $4,170
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $7,650 $7,650 $7,650 $12,777 $12,777 $12,777
Income taxes $1,159 $1,159 $1,159 $185 $185 $185
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly owned subsidiary,
ICON Health & Fitness, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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. IHF Holdings' parent company, ICON Fitness and
its parent company IHF Capital, Inc., ("IHF Capital") are not currently
registrants.
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 November 30,
1996 and May 31, 1996, their results of operations for the three and six months
ended November 30, 1996 and December 2, 1995, and their cash flows for the six
months ended November 30, 1996 and December 2, 1995. There are two less days
in the six month period ended November 30, 1996 than the comparable period ended
December 2, 1995.
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 has not yet been declared effective). The results
of operations for the six months ended November 30, 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 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 second quarter of fiscal 1997 and the first half 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 exclude 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.
<TABLE>
<CAPTION>
(In million)
Three Months ended November 30, 1996 Six Months ended November 30, 1996
(unaudited) (Unaudited)
ICON HealthRider ICON HealthRider Total
<S> <C> <C> <C> <C>
Revenues $249.5 --- $375.3 $16.4 $391.7
Net Income (Loss) ($.2) --- ($2.7) ($6.2) ($8.9)
IHF Holdings HealthRider IHF Holdings HealthRider Total
Revenues $249.5 --- $375.3 $16.4 $391.7
Net Income (Loss) ($2.5) --- ($7.2) ($6.2) ($12.6)
ICON Fitness HealthRider ICON Fitness HealthRider Total
Revenues $249.5 --- $375.3 $16.4 $391.7
Net Income (Loss) ($3.6) --- ($9.6) ($6.2) ($15.8)
</TABLE>
<TABLE>
<CAPTION>
Three Months ended December 2, 1995 Six Months ended December 2, 1995
(unaudited) (Unaudited)
ICON HealthRider Total ICON HealthRider Total
<S> <C> <C> <C> <C> <C> <C>
Revenues $228.5 $54.4 $282.9 $353.3 $113.5 $466.8
Net Income (Loss) $7.3 ($.3) $7.0 $6.6 $8.5 $15.1
IHF Holdings HealthRider Total IHF Holdings HealthRider Total
Revenues $228.5 $54.4 $282.9 $353.3 $113.5 $466.8
Net Income (Loss) $5.5 ($.3) $5.2 $.8 $8.5 $11.8
ICON Fitness HealthRider Total ICON Fitness HealthRider Total
Revenues $228.5 $54.4 $282.9 $353.3 $113.5 $466.8
Net Income (Loss) $4.2 ($.3) $3.9 $.8 $8.5 $9.3
</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 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). 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 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 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 and has agreed to use its best efforts to cause this
registration to become effective within 150 days of the Offering.
.
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Operating Results for the Second Quarters of 1997 and 1996
Net sales were $249.5 million in the second quarter of fiscal 1997, compared
to $228.5 million in the second quarter of fiscal 1996. Sales of company's
line of abdominal machines, first introduced in April of 1996, totaled $22.5
million, net sales of HealthRider branded products total $19.2 million with no
comparable sales for these products during the second quarter of fiscal 1996.
Sales of the company's home weight systems increased $5.1 million, while
treadmill sales increased $13.0 million in the second quarter of fiscal 1997
compared to second quarter of fiscal 1996. Treadmill sales accounted for
approximately 45% and 44 % of total net sales during the second quarter of
fiscal 1997 and 1996, respectively. Sales of trampolines increased $2.1 million
in the second quarter of 1997 to $16.7 million from $14.6 million in the second
quarter of fiscal 1996. Sales by the European subsidiaries increased by $3.9
million. Sales of the Company's line of upright rowers decreased $49.0 million
to $29.1 million from $78.1 million in the second quarter of 1996 due to
decreased market demand.
Gross profit for the second quarter of fiscal 1997 was $73.2 million, or
29.3% of net sales, compared to $59.8 million, or 26.2% of net sales, for the
second quarter of fiscal 1996. The step-up of HealthRider and ICON of Canada
inventory increased cost of sales by $6.3 million. Without this charge, the
gross profit would have increased to 31.9% due to gross margin improvements in
the Company's line of treadmill products and higher gross margin on HealthRider
branded products.
Selling expenses were $37.6 million, or 15.1% of net sales, in the second
quarter of fiscal 1997 compared to $24.7 million, or 10.8% of net sales, for the
second quarter of fiscal 1996. This increase is primarily attributed to $12.1
million in expenditures at HealthRider during the second quarter of fiscal 1997.
One time selling expenses of HealthRider totaled $3.2 million during the second
quarter. These one time selling expenses will continue until discontinued
products purchased in the HealthRider acquisition are liquidated. The company
has no comparable expense during the comparable period of fiscal 1996.
Research and development expenses were $1.8 million or .7% of net sales, for
the second quarter of 1997 compared to $1.4 million, or .6% of net sales, for
the second quarter 1996.
General and administrative expenses totaled $ 16.1 million, or 6.5 % of net
sales, for the second quarter of 1997 compared to $13.8 million, or 6.0% of net
sales, for the second quarter of 1996. HealthRider general and administrative
expenses total $2.0 million for the current period without comparable expenses
in the prior year.
Weider settlement expenses totaled $16.5 million during the quarter. See
Note 4 to the consolidated condensed financial statements and Part II Item 1
Legal proceedings.
As a result of the foregoing factors, operating income was $1.2 million, or
.5% of net sales in the second quarter of fiscal 1997, compared to $20.0
million, or 8.8% of net sales, in the second quarter of fiscal 1996. Operating
income before one time expenses associated with the HealthRider and CanCo
Acquisitions and the expense of the Weider settlement would have been $27.2
million or 10.9% of net sales for the second quarter.
Interest expense was $9.0 million for ICON, $11.6 million for IHF Holdings
and $11.9 million for ICON Fitness in the second quarter of fiscal 1997 compared
to $7.5 million for ICON, $9.6 million for IHF Holdings and $9.6 million for
ICON Fitness for the second quarter of fiscal 1996. Interest expense increased
with the increased operating debt associated with the HealthRider Acquisition,
the WHF settlement and the CanCo Acquisition, offset by the retirement of debt
in the second quarter of fiscal 1997.
Dividends on cumulative redeemable Preferred stock totaled $.9 million and
$1.3 million for ICON Fitness during the second quarter of 1997 and 1996,
respectively.
The income tax benefit was $3.1 million for ICON and a tax benefit of $3.7
million for Holdings and ICON Fitness for the second quarter of 1997 compared
with a tax provision of $4.5 million for ICON and a tax provision of $4.0
million for IHF Holdings and ICON Fitness during the second quarter of fiscal
1996. This is a result of the increase in the loss before income tax during the
second quarter of 1997 compared to the same period in the preceding year.
As a result of the foregoing factors, the net loss was $5.5 million for ICON,
$7.8 million for IHF Holdings and $8.9 million for ICON Fitness for the second
quarter of 1997 compared to net income of $7.3 million for ICON, $5.5 million
for IHF Holdings and $4.2 million for ICON Fitness during the same period of
fiscal 1996.
Operating Results for the First Halves of 1997 and 1996
Net sales were $375.3 million in the first half of fiscal 1997, compared to
$353.4 million in the first half of fiscal 1996. Sales of company's line of
abdominal machines, first introduced in April of 1996, totaled $36.9 million,
net sales of HealthRider branded products totaled $22.0 million with no
comparable sales of these products during the first half of fiscal 1996. Sales
of the company's home weight systems increased $10.2 million, while treadmill
sales increased $16.0 million in the first half of fiscal 1997 compared to first
half of fiscal 1996. Treadmill sales accounted for approximately 42% and 40% of
total net sales during the first half of fiscal 1997 and 1996, respectively.
Sales of trampolines increased $4.3 million in the first half of 1997 to $34.1
million from $29.8 million in the first half of fiscal 1996. Sales of the
Company's line of upright rowers decreased $78.6 million to $47.3 million from
$125.9 million in the first half of 1996 due to decreased market demand. Sales
in Europe increased $5.6 million over the same period for fiscal 1996.
Gross profit for the first half of fiscal 1997 was $106.5 million, or 28.3%
of net sales, compared to $93.7 million, or 26.5% of net sales, for the first
half of fiscal 1996. The step-up of HealthRider inventory and ICON of Canada
increased cost of sales by $8.2 million for the first half of fiscal 1997.
Without this charge, the gross profit would have increased to 30.6% due to gross
margin improvements in the Company's line of treadmill products and higher gross
margin on HealthRider branded products.
Selling expenses were $56.4 million, or 15.0% of net sales, in the first half
of fiscal 1997 compared to $40.5 million, or 11.5% of net sales for the first
half of fiscal 1996. This increase is primarily attributed to $14.0 million in
expenditures at HealthRider during the second quarter of fiscal 1997. One time
selling expenses of HealthRider totaled $3.2 million during the first half of
fiscal 1997. These one time selling expenses will continue until discontinued
products purchased in the HealthRider acquisition are liquidated. The company
has no comparable expenses during the comparable period of fiscal 1996.
Research and development expenses were $3.5 million or .9% of net sales, for
the first half of 1997 compared to $3.0 million, or .9% of net sales, for the
first half of 1996.
General and administrative expenses totaled $27.0 million, or 7.2% of net
sales, for the first half of 1997 compared to $23.9 million, or 6.8% of net
sales, for the first half of 1996. HealthRider general and administrative
expenses totaled $2.3 million with no comparable expenses in the prior year.
Weider settlement expenses totaled $16.5 million. See Note 4 to the
consolidated condensed financial statements and Part II Item 1, Legal
proceedings.
As a result of the foregoing factors, operating income was $3.2 million, or
.9% of net sales in the first half of fiscal 1997, compared to a $26.4 million,
or 7.5% of net sales, in the first half of fiscal 1996. Operating income before
one time HealthRider selling expenses and the expense of the Weider settlement
would have been $22.9 million or 6.1% of net sales for the first half of fiscal
1997.
Interest expense was $15.2 million for ICON, $20.4 million for IHF Holdings
and $20.6 million for ICON Fitness in the first half of fiscal 1997 compared to
$13.8 million for ICON, $18.0 million for IHF Holdings and $18.0 million for
ICON Fitness for the first half of fiscal 1996. Interest expense increased with
increased operating debt associated with the HealthRider Acquisition, the WHF
settlement and the CanCo Acquisition offset by the retirement of debt during the
first half of fiscal 1997.
Dividends on cumulative redeemable Preferred stock totaled $2.1 million and
$2.6 million for ICON Fitness for the first half of fiscal 1997 and 1996,
respectively.
The income tax benefit was $4.3 million for ICON and a tax benefit of $5.6
million for IHF Holdings and ICON Fitness for the first half of 1997 compared
with a tax provision of $4.7 million for ICON and a tax provision of $3.3
million for IHF Holdings and ICON Fitness during the first half of fiscal 1996.
This is a result of the loss before income tax during the first half of 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 $9.1 million for ICON,
$13.6 million for IHF Holdings and $16.0 million for ICON Fitness for the first
half of 1997 compared to net income of $6.6 million for ICON, $3.3 million for
IHF Holdings and $.8 million for ICON Fitness during the same period for fiscal
1996.
Advertising allowances with retail customers have increased by $6.7 million
to $11.1 million at November 30, 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 totaled $2.0 million at November 30, 1996 compared to
$1.4 million at May 31, 1996. Terms with retail customers remained unchanged
from previous periods.
Prepaid income taxes are $12.1 million for ICON and $12.2 million for IHF
Holdings and ICON Fitness. $5.2 million of these balances are attributable to
the HealthRider Acquisition, with the remaining $6.9 million and $7.0 million
for ICON and IHF Holdings, respectively, 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 which includes the results of the HealthRider Acquisition
from August 16, 1996 for the first half of fiscal 1997 and for each quarter in
fiscal 1996, and 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1997 $125.8 $249.5 --- ---
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 have changed significantly in the second half of fiscal
1995, 1996 and for the first half 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 six months of fiscal 1997, ICON and IHF Holdings used $91.4
million and ICON Fitness used $92 million of cash in operating activities
primarily as a result of increased accounts receivable and inventory. During
the first six months of fiscal 1997, the Company had a net decrease in cash of
$7.7 million. The Company also used $13.6 million of cash in the first six
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 November 30, 1996, ICON had $228.5 million of revolving credit borrowings
under the Credit Agreement. At the close of the quarter additional availability
under this Credit Agreement was $29.3 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 $148.5
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, 2007.
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 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. On November 20, 1996, the Company exercised its
option to purchase all of the Common Stock and certain warrants to purchase
Common Stock of IHF Capital held by the WHF Stockholders (the "IHF Position") at
a price of approximately $42.3 million.
Repurchase the Preferred Stock. On November 20, 1996 the Company exercised
its option to purchase the IHF Holdings Preferred Stock held by WHF at a price
of $32.1 million. In connection with the repurchase of IHF Holdings Preferred
Stock, if any, the Company purchased the options to purchase IHF Holdings
Preferred Stock held by Messrs. Watterson and Stevenson at a price of $3.7
million.
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. 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 reacquired 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 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 WHF Settlement also contains various miscellaneous provisions that the
Company does not believe are material.
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.
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 & Jeanette
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.
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 Health & Fitness, Inc.
IHF Holdings, Inc.
ICON Fitness Corporation
(Registrants)
Date: 1/14/97 By /S/Gary Stevenson, President
By /S/S. Fred Beck, Chief Accounting Officer
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