SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Act")
ICON HEALTH & FITNESS, INC.
IHF HOLDINGS, INC.
ICON FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
Commission File No.: 33-87930, 33-87930-01, 333-18475
For the fiscal year ended May 31, 1997
87-0531206
87-0531209
Delaware 87-0566936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 South, 1000 West, Logan, UT 84321
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 801-750-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K [x].
On May 31, 1997, all of the voting stock of ICON Health & Fitness, Inc. was held
by IHF Holdings, all of the voting stock of IHF Holdings, Inc. was held by ICON
Fitness Corporation, and all of the voting stock of ICON Fitness Corporation was
held by IHF Capital, Inc.
As of May 31, 1997, ICON Health & Fitness, Inc. had 1,000 shares of common stock
outstanding, IHF Holdings, Inc. had 1,000 shares of common stock outstanding,
and ICON Fitness Corporation had 100 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: NONE
ICON Fitness Corporation
and its wholly-owned subsidiaries, IHF Holdings, Inc.
And ICON Health & Fitness, Inc.
<PAGE>
FORM 10-K INDEX
PART I
Page
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 11
PART II
Item 5. Market for the Registrants' Common
Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Item 8. Financial Statements and Supplementary
Data 23
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 23
PART III
Item 10. Directors and Executive Officers of the
Registrants 24
Item 11. Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial
Owners and Management 30
Item 13. Certain Relationships and Related
Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 36
* * *
Reference in this Annual Report on Form 10-K is made to the following trademarks
and brand names: AccusmartTM, ConcorTM, CRANK-IT-UPTM, Cross TrainerTM,
CrossWalk(R), ImageTM, INSYNCTM, INTELEXTM, JumpKing(R), LegendTM, ProForm(R),
Pro-TechTM, Smart CardTM, Space SaverTM, Speed LinkTM, StowawayTM, Triple
PlayTM, WeiderCareTM, Cardioglide(R), HealthRider(R), aeROBICRiderTM,
SportRiderTM, and LifeRiderTM, which are owned by the Company; LifestylerTM,
which is owned by Sears Roebuck; Weider(R), which is owned by Weider Health and
Fitness and Weider Sporting Goods, Inc. in the United States and by Weider
Sports Equipment Co. Ltd. and Weider Europe B.V. in other countries.
* * *
PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
'Business' section contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the 'Business' section.
General
ICON Health & Fitness, Inc. ("ICON Health") is one of the largest
manufacturers and marketers of home fitness equipment in the United States. The
Company's focus is to address consumers' interest in a healthy, active lifestyle
with a broad range of high quality products at a variety of price/value
relationships specifically targeted to meet different consumers' health and
fitness needs. The Company's line of home fitness aerobic products includes
treadmills, upright rowers, exercise bikes, stair steppers and cross country
skiers, and its line of anaerobic fitness products include home gyms, weight
benches and recently introduced abdominal machines. The Company also offers
trampolines, recreational sports products, sports medicine products and fitness
accessories. The Company markets the majority of its products under the brand
names ProForm, Image, Weslo, WeiderCare, Legend, JumpKing, HealthRider, and
Lifestyler (a private label brand manufactured for Sears Roebuck ("Sears")).
IHF Holdings, Inc. ("IHF Holdings") is a holding company whose principal
asset is all of the capital stock of ICON Health. ICON Fitness Corporation
("ICON Fitness" or the "Company") is a holding company whose principal asset is
all of the capital stock of IHF Holdings. IHF Capital, Inc. ("IHF Capital")
which is not a registrant, is a holding company whose principal asset is all of
the common stock of ICON Fitness. Each Registrant was incorporated in Delaware
in August of 1994 except ICON Fitness which was incorporated in Delaware in
November of 1996. Each registrant has its principal executive offices at 1500
South 1000 West, Logan, Utah 84321, and their telephone number is 801- 750-5000.
Marketing and Distribution
The Company markets its products under multiple brands through multiple
distribution channels, including specialty dealers, sporting goods chains,
department stores, warehouse clubs, discount merchants, catalogue showrooms and,
to a limited extent, infomercials and direct response marketing. The Company
believes the marketing of its products through multiple distribution channels
provides it with several competitive advantages: (i) greater growth and
increased market access; (ii) the ability to maximize revenue throughout a
product's life cycle by repositioning products in different channels and under
different brand names as products mature; (iii) feedback on market trends and
changing consumer tastes; and (iv) reduced dependence on any single channel of
distribution.
To enhance its distribution strategy, the Company targets its brands to
specific distribution channels. By marketing specific brands tailored to appeal
to different demographic groups, the Company is able to market products with
varying designs, features and price ranges and target these products to a wide
variety of consumers with different fitness needs and disposable incomes. The
Company believes its brand positioning strategy enables it to: (i) achieve
greater appeal to each market segment; (ii) promote price stability across its
product lines as brand segmentation minimizes conflicts between different
distribution channels; and (iii) provide high-quality products with the price
ranges and features desired by different demographic groups. The Company's
various brands are supported by distinct marketing and product strategies and,
in some cases, separate sales forces. The Company's primary sales and marketing
group is based in Logan, Utah. For certain of its products, the Company
augments the efforts of this group with smaller sales forces based in Colorado,
Texas, Canada, the United Kingdom, France, Italy and Germany.
In keeping with its strategy of pursuing growth opportunities, in August
1996, the Company through HealthRider Acquisition Corp.: (i) purchased
substantially all the assets of HealthRider, Inc. for approximately $16.1
million and assumed (or refinanced) substantially all its liabilities; (ii)
purchased certain related manufacturing assets of Parkway Manufacturing, Inc.,
("Parkway"), including Parkway's contract to manufacture and supply upright
rowers to HealthRider, Inc., for approximately $10.1 million; and (iii)
purchased the minority interest of HealthRider, Inc.' s European subsidiary for
approximately $1.4 million (of which $1.3 million was paid in cash and $.1
million was paid in inventory). The liabilities assumed or refinanced included
capital lease obligations of approximately $19.4 million and revolving credit
borrowings and other long term debt of approximately $9.3 million. The Company
subsequently changed the name from HealthRider Acquisition Corp. to HealthRider
Corp. ("HealthRider").
HealthRider markets physical fitness and exercise equipment and other
health-related products primarily through its own specialty retail stores and
kiosks, through direct response advertising in print and on television, and
through its mail order catalogs. At the end of fiscal 1997, HealthRider
operated 114 stores compared to approximately 230 at the time of the
Acquisition. This reduction in the number of stores is expected to significantly
reduce HealthRider's costs and establish it with an overhead structure that is
more efficient and flexible.
Products
The Company manufactures and distributes a broad line of treadmill, aerobic
and anaerobic fitness equipment. The Company also markets recreational sports
products, sports medicine products and fitness accessories. The Company offers
a range of technological features from manual equipment to sophisticated
programmable electronic products at a variety of price ranges. The Company's
strategy of offering a broad range of products enables it to: (i) offer
categories of fitness products that appeal to different demographic groups; (ii)
respond quickly to changes in consumer preferences and fitness trends; (iii)
reduce its dependence on any single product category; and (iv) participate in
growth opportunities across a wide variety of product categories.
Aerobic Products
The Company offers aerobic products, which are designed to promote
cardiovascular fitness, under the HealthRider, Image, ProForm, Weslo and
Lifestyler brand names.
Cardio Family of Upright Rowers. The Company introduced its Cardio family
of upright rowers under the Weslo brand in October 1994. The Cardio family of
upright rowers exercises both the arms and legs while providing both an aerobic
and anaerobic workout through variable resistance. Models retail at price
points ranging from $99-$299.
Motorized Treadmills. The Company is the leading domestic producer of
motorized treadmills. Motorized treadmills allow users to run at speeds of up to
12 mph. The features offered by the Company's motorized treadmills include
programmable speed and incline, electronic feedback on speed, elapsed time,
distance traveled and calories burned, and cross-training upper body exercise
functions. The Company recently introduced its line of Space Saver treadmills
which fold vertically for easy storage. The retail price points of the motorized
treadmills range from $199 to $2,000.
Manual Treadmills. The Company's manual treadmills allow the user to walk
or run slowly in place, and certain of the Company's manual treadmill models
include electronic feedback on speed, elapsed time and distance traveled. The
retail price points of the Company's manual treadmills range from $149 to $299.
Exercise Bikes. The Company offers exercise bikes featuring adjustable air
resistance or flywheel resistance, electronic monitors which display elapsed
time, speed, distance and calories burned, and dual or triple action design
which allows the user to exercise upper body, lower body or both simultaneously.
Some units add motivational electronics and programmable resistance which allow
users to design their own workouts. Some higher end units also contain an
electromagnetic drive mechanism which creates less noise, offers smoother action
and requires less maintenance than traditional motorized drives. Retail price
points of the Company's exercise bikes range from $79 to $799.
Stair Steppers. Various stair stepper machines sold by the Company offer
adjustable resistance, self-leveling pedals, motivational fitness monitors,
accessory stations to hold water bottles, books and towels, magnetic resistance
and total body conditioning, which combines upper and lower body workouts.
Other features offered by the Company's stair steppers include the Speed Link
adjustable resistance system, multi-window electronic monitors and programmable
electronics. Retail price points for the Company's stair steppers range from $99
to $499.
Cross-Country Skiing Machines. The Company's cross-country skiing machines
feature motivational fitness monitors, Stowaway design, the Company's patented
INSYNC Dual Action System, adjustable incline and adjustable resistance. Retail
price points for the Company's cross-country skiing machines range from $99 to
$199.
Anaerobic Products
Under the HealthRider, Image, ProForm, Weslo and Weider brand names, the
Company offers anaerobic products, which are designed to develop muscle tone
and strength.
Home Gyms. The Company's home gyms range from traditional cast iron or
vinyl plate weight stack units to programmable electronic units that use "smart
cards" to store a user's personalized fitness regimen in electronic memory. New
technology and innovation within this category include home gyms which integrate
aerobic functions such as stair steppers for crosstraining and electronic
adjustability allowing simple adjustment in one pound increments with digital
feedback. Selected units are designed to allow multiple users to use the
equipment simultaneously, allowing circuit training. The Company's home gyms
range in retail price from $99 to $1,499.
Weight Benches. The Company offers a range of weight benches to specialty
fitness dealers through the Image brand and markets a complete line of weights
and benches under the Weider brand name. Retail price points of these products
range from $79 to $299.
Abdominal Machines. The Company introduced its first abdominal machine in
April 1996. This product is designed for isolation of the abdominal muscle
groups. Retail prices of the Company's abdominal products range from $49 to $99.
Other Products
Recreational Sports Products. JumpKing, Inc. a subsidiary of the Company,
manufactures and markets a trampoline line that includes both mini-trampolines
for indoor home exercise use and full-sized trampolines for outdoor home
recreational use. The mini-trampoline retails at approximately $25; full-sized
trampolines have retail price points ranging from $239 to $399.
Sports Medicine Products. The Company markets a line of sports medicine
products under the WeiderCare brand name, including support wraps, neoprene
supports, back support belts and hot and cold packs. These products are sold
through channels of distribution that are not able to carry large exercise units
due to floor space limitations, such as drugstore chains, supermarkets and pro
shops. These products are also sold to corporate and industrial users.
Exercise Accessories. The Company offers a limited line of back support
belts and workout gloves and has introduced a line of exercise accessories,
including ankle and hand weights, grip devices and aerobic exercise step decks.
Leisure Products. In the spring of 1997, the Company introduced a line of
portable spas and rolling massage chairs.
Product Innovation and Development
Product and design innovation has contributed significantly to the
Company's growth. On an ongoing basis, the Company evaluates new product
concepts and seeks to respond to the desires and needs of consumers by
frequently introducing new products and repositioning existing products. The
Company has 110 full-time employees in the research and development area, holds
92 patents and has 21 patent applications pending. The Company also holds 77
trademarks registered in the United States and 102 trademarks registered in
foreign countries. The Company has pending 103 trademarks in the United States
and 259 in foreign countries. The Company had research and development expenses
of $5.2 million, $6.8 million and $7.6 million in fiscal 1995, 1996, and 1997,
respectively, and has budgeted $8.4 million for research and development in
fiscal 1998.
The Company conducts most of its research and development in 40,000 square
feet of space in Logan, Utah. This facility includes plastic, mechanical and
electrical engineering capabilities that are used in creating proprietary
designs and features. The Company also augments its internal research and
development effort by selectively evaluating new products with certain of its
key customers, who then provide feedback on acceptance by potential end-users.
This effort has the added benefit of enhancing the Company's relationships with
key customers.
This focus on new products and innovation enables the Company to begin
selling early in a product's lifecycle and, as sales growth moderates, to extend
product life cycles by introducing new features and repositioning products
within the Company's line of brands (i.e., selling the product, with
modifications, at a different price point). Recent examples of the Company's
product developments are the introduction of the Space Saver treadmill, which
folds vertically for easy storage, the development of the Cardio family of
upright rowers, which significantly improved on upright rower designs first
marketed by others, and the introduction of the Company's abdominal machines,
which improved upon existing products manufactured by others by adding a fold
for storage feature. The Company believes that its ability to take a product
from concept to delivery quickly gives the Company significant advantages over
its competitors.
The Company's research and development teams have helped develop many of
the innovative features that have encouraged consumers to purchase and use home
fitness equipment. Results of the Company's product development program include:
(i) various electronics systems, which provide motivational feedback and
personalized fitness routines; (ii) upright rowers with hydraulic shocks; (iii)
treadmills which fold for easy storage; and (iv) treadmills with upper body
resistance. In addition, the Company was the first to market successfully
cross-training home gyms equipped with aerobic stepping functions.
Customers
The Company's two largest customers for the past several years have been
Sears and Sam's. In 1997, these customers accounted for approximately 29% and
8%, respectively, of the Company's total net sales. In fiscal 1996 and 1997,
Sam's accounted for approximately 70% and 49%, respectively, of net sales at the
Company's JumpKing's subsidiary. Although sales to Sears still account for a
substantial portion of the Company's sales, the percentage of sales has
decreased substantially in the past several years from approximately 68% in
fiscal 1989. Nevertheless, the dollar amount of the Company's net sales to
Sears has increased during this time period. Sears has distinguished the
Company with several vendor awards for their commitment in providing quality
and value to the American consumer.
The Company has more than 2,500 customers, excluding sales to individual
consumers through direct response channels of distribution. Consistent with
industry practice, the Company generally does not have long-term purchase
agreements or other commitments from its customers as to levels of future sales.
The level of the Company's sales to its large customers depends in large part on
their continuing commitment to home fitness products and the success of their
efforts to market and promote the Company's products as well as the Company's
competitiveness in terms of price, quality, product innovation, customer service
and other factors. The Company is not the exclusive supplier of home fitness
equipment to any of its major customers. The loss of, or a substantial decrease
in the amount of purchases by, or a write-off of any significant receivables due
from, any of the Company's major customers would have a material adverse effect
on the Company's business.
Competition
The markets for the Company's products are highly competitive. They are
characterized by frequent introduction of new products, often accompanied by
major advertising and promotional programs. The Company believes that the
principal competitive factors affecting its business include price, quality,
brand name recognition, product innovation and customer service.
The Company competes in the U.S. with recreational and exercise activities
offered by health clubs, as well as a number of domestic manufacturers, domestic
direct importers, foreign companies exporting products to the U.S. and, in its
direct sales efforts, with major retailers and distributors. Competitors in
these areas include Precor Inc., CML Group Inc. (under the NordicTrack brand),
LifeFitness Inc. and DP and Roadmaster, which are commonly owned. In Europe,
the Company competes principally with Tunturi, Inc., and Kettler Int'l Inc., a
number of Asian importers and some of its domestic competitors. The Company's
products also indirectly compete with outdoor fitness, sporting goods and other
recreational products. Competitors in these product areas include Huffy
Corporation, Canstar Sports Inc. (a subsidiary of Nike Inc.), Reebok
International, Ltd. and Rollerblade, Inc. Certain competitors are better
capitalized than the Company and may have greater financial and other
resources than those available to the Company. In addition, there are no
significant technological, manufacturing or marketing barriers to entry into
the fitness equipment or the exercise accessory markets, although many
companies in the industry, including the Company, have sought and received
numerous patents in an effort to protect their competitive position.
Pursuing Growth Opportunities
The Company is seeking strategic acquisition opportunities which would
complement its existing business and provide an opportunity for growth. The
Company believes growth opportunities exist in its current domestic markets as
well as in selected international markets. The North American fitness equipment
market is significantly more developed than other markets around the world.
However, in the first quarter of 1996, the Company began to directly market its
products in the key European markets of the U.K., France, Italy and the Benelux
countries and is attempting to increase its market penetration in these and
other foreign countries. Prior to 1996, the Company had minimal foreign sales.
Net sales from European markets in 1997 and 1996 were $45.4 million and $33.3
million, respectively. In September of 1996, the Company reacquired
distribution rights granted to Weider Sports in connection with the
Recapitalization subject to certain rights granted by Weider Sports to third
parties. The Company also purchased certain assets of a Canadian manufacturing
business affiliated with WHF (''CanCo''). Net sales from Canada from September
6, 1996 until May 31, 1997 were $6.9 million.
In keeping with its strategy of pursuing growth opportunities, in August
1996, the Company through HealthRider Acquisition Corp.: (i) purchased
substantially all the assets of HealthRider, Inc. for approximately $16.1
million and assumed (or refinanced) substantially all its liabilities; (ii)
purchased certain related manufacturing assets of Parkway, including Parkway's
contract to manufacture and supply upright rowers to HealthRider, Inc., for
approximately $10.1 million; and (iii) purchased the minority interest of
HealthRider, Inc.' s European subsidiary for approximately $1.4 million (of
which $1.3 million was paid in cash and $.1 million was paid in inventory). The
liabilities assumed or refinanced included capital lease obligations of
approximately $19.4 million and revolving credit borrowings and other long term
debt of approximately $9.3 million. The Company subsequently changed the name
from HealthRider Acquisition Corp. to HealthRider Corp. ("HealthRider").
HealthRider markets physical fitness and exercise equipment and other health-
related products primarily through its own specialty retail stores and kiosks,
through direct response advertising in print and on television and select
retailers, e.g., Sears,, and through its mail order catalogs. At the end of
fiscal 1997, HealthRider operated 114 stores compared to approximately 230 at
the time of the Acquisition. This reduction in the number of stores is expected
to significantly reduce HealthRider's costs and establish it with an overhead
structure that is more efficient and flexible.
Manufacturing and Purchasing
In fiscal 1997, the Company manufactured or assembled over 80% of its
products at its facilities in Utah, Texas, Canada and Colorado. The balance of
the Company's products were manufactured and assembled by third parties,
principally in the Far East. The Company has long-standing supply relationships
with a number of offshore Asian vendors, many of which have exclusive
relationships in the fitness industry with the Company. The combination of
internal manufacturing and assembly capacity and the Company's access to
third-party vendors has helped the Company meet customer demand on a competitive
basis. In addition, the third party vendors provides greater flexibility in
manufacturing capacity to satisfy seasonal demands.
The Company follows a dual sourcing strategy on many of its components to
minimize the impact of sourcing disruptions. For example, the Company obtains
steel tubing from two to three vendors. When practical, the Company chooses
vendors that will supply the Company exclusively in the home fitness category.
The Company's two primary sources of electronic components, for example, do not
supply any other home fitness equipment companies. To further control
manufacturing and delivery problems associated with sourcing delays, the Company
asks its electronics vendors to maintain specified inventory levels for some
long lead-time components, although sourcing delays have been occasionally
experienced in the past with new product introductions. In addition, the Company
has identified alternative sources for many key raw materials and components.
Despite these precautions, however, the Company's ability to deliver its
products on time is susceptible to disruptions in its supply of raw materials
and components, in part because it may take as long as approximately three
months to retool alternative component manufacturers to produce required
components. Since the Company purchases certain components and finished products
from foreign suppliers located in Canada, China, Taiwan and various other
countries, the Company is subject to the general risks of doing business abroad,
particularly with respect to its purchases from China, including delays in
shipment, work stoppages, adverse fluctuations in currency exchange rates,
increases in import duties and tariffs, changes in foreign regulations, changes
in most-favored-nation status and political instability. In particular, the
imposition of trade sanctions on China could have a material adverse effect on
the Company.
Sales to the Company's customers are highly price sensitive. The Company sets
many product prices on an annual basis but purchases raw materials and
components under purchase orders providing components for periods less than one
year. Accordingly, the Company sets prices for many products before it has
complete knowledge of the costs of raw materials and components and sometimes
before product development is complete and production costs have been firmly
established. After it has established prices, the Company may be unable to pass
cost increases along to its customers or to compete as effectively if it seeks
to pass such costs along.
The Company utilizes more than 1.4 million square feet for manufacturing,
including a 300,000 square foot facility in Logan where the majority of the
Company's treadmills are manufactured or assembled. In the past, the Logan
facility has also manufactured stair steppers, exercise bikes and home gyms. The
Company constructed its Logan plant in 1990 and equipped the facility with
modern manufacturing and assembly features, including fully integrated metal
fabrication, powder coat painting, robotic welding and injection molding
equipment. The facility, like the Company's other manufacturing facilities, was
designed to permit flexible and efficient changes in the products being
manufactured to match customer demand. The Company recently expanded its
manufacturing facility in Logan, Utah by approximately 40,000 square feet. In
1991, the Company began operating its Smithfield, Utah plant, which is smaller
than but very similar to the Logan facility. In 1994, the Company began
operating its Clearfield, Utah manufacturing facility. In addition to its
facilities in Utah, the Company has manufacturing facilities in Texas and
Colorado. The Company also had manufacturing facilities in Arizona as a result
of the HealthRider Acquisition; however, these facilities have subsequently been
closed.
The Company applies a management system to control and monitor freight,
labor, overhead and material cost components of its finished goods. The Company
emphasizes product quality by monitoring operations according to uniform quality
control standards. In fiscal 1994, the Company received ISO 9001 certification
for its Logan facility. ISO is a nonprofit association that monitors industrial
companies' manufacturing processes, quality assurance controls, personnel
management and customer service in order to improve plant efficiency, product
quality, customer satisfaction and company profitability.
Employees
The Company currently employs approximately 5,400 people, 205 of whom are
represented by a Canadian labor union. This increase from the 1996 average
of 4,300 is due to the acquisition of HealthRider and ICON du Canada.
Factory employees are compensated through a targeted incentive system.
Managerial employees receive bonuses tied to the achievement of performance
targets. Approximately 110 employees are engaged in research and development,
665 in sales and marketing, 3,525 in manufacturing, 35 in purchasing and
1,065 in other areas.
Environmental Matters
The Company's operations are subject to federal, state and local
environmental and health and safety laws and regulations that impose workplace
standards and limitations on the discharge of pollutants into the environment
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of certain materials, substances and
wastes. The nature of the Company's manufacturing and assembly operations
exposes it to the risk of claims with respect to environmental matters, and
although compliance with local, state and federal requirements relating to the
protection of the environment has not had a material adverse effect on the
Company's financial condition or results of operations, there can be no
assurance that material costs or liabilities will not be incurred in connection
with such environmental matters. Future events, such as changes in existing laws
and regulations or enforcement policies or the discovery of contamination on
sites owned or operated by the Company, may give rise to additional compliance
costs or operational interruptions which could have a material adverse effect on
the Company's financial condition.
Seasonality
Historically, the Company has sold the majority of its products to its
customers in its second and third fiscal quarters (i.e., from September through
February). Increased sales and distribution typically have occurred in the
Christmas retail season and the beginning of a new calendar year because of
increased customer promotions, increased consumer purchases and seasonal changes
that prompt people to exercise inside. The Company has in the past, from time to
time, incurred net losses in the first and fourth quarters of its fiscal year.
If actual sales for a quarter do not meet or exceed projected sales for that
quarter, expenditures and inventory levels could be disproportionately high for
such quarter and the Company's cash flow and earnings for that quarter and
future quarters could be adversely affected. The timing of large orders from
customers and the mix of products sold may also contribute to quarterly or other
periodic fluctuations. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
ITEM 2. PROPERTIES
The location, square footage, status and primary use of the Company's
principal properties are set forth below:
<TABLE>
<CAPTION>
Location Footage Status Primary Uses
- ------------------------ ------- ---------------------- ---------------------------
<S> <C> <C> <C>
Logan, UT 300,000 Owned Manufacturing, Offices, R&D
Logan, UT 192,411 Leased (Month to Month) Offices, Manufacturing,
Warehousing
Smithfield, UT 86,075 Leased (Expires 9/98) Manufacturing
Clearfield, UT 220,000 Leased (Month to Month) Manufacturing, Warehousing
Clearfield, UT 329,075 Leased (Expires 6/99 Manufacturing, Warehousing
Clearfield, UT 331,196 Leased Expires 5/98, Warehouse
7/02,6/02)
Hyrum, UT 27,000 Leased (Month to Month) Warehouse
Garland, TX 232,352 Leased (Expires 2/01) Offices, Manufacturing,
Warehousing
Dallas, TX 40,000 Leased (Expires 9/97) Warehousing
Weatherford, TX 22,000 Leased (Expires 1/98) Offices, Manufacturing
Denver, CO 61,000 Leased (Expires 4/99) Manufacturing, Warehousing
South Brunswick, NJ 259,172 Leased (Expires 5/98) Warehouse
South Brunswick, NJ 25,000 Leased (Month to Month) Warehouse
Englewood, CO 10,000 Leased (Expires 6/99) Sales Office
St. Jerome, QC 134,000 Leased (Month to Month) Warehouse
St. Agathe 80,000 Leased (Month to Month) Warehouse
Logan, UT 68,750 Leased (Expires 5/00) Warehouse
Smithfield, UT 108,187 Leased (Expires 1/01) Warehouse
Anzin, France 8,097 Leased (Month to Month) Warehouse, Offices, Apartment
Carrieres Sur Seine, 2,966 Leased (Expires 12/98) Warehouse, Office
Neailly Sur Seine, France 262 Leased (Expires 9/98) Apartment
Leeds, UK 6,000 Leased (Expires 1/99) Offices
Perugia, Italy 3,360 Leased (Expires 6/01) Offices
Perugia, Italy 6,600 Leased (Month to Month) Warehouse
Salt Lake City, UT* 312,275 Owned Offices
Marabel, QC 46,000 Leased (Expires 6/00) Warehouse
San Luis Obispo, CA 4,125 Leased (Expires 11/97) Warehouse
Phoenix, AZ 88,280 Leased (Month to Month) Warehouse
Bois Braind, QC 12,000 Leased (Month to Month) Warehouse
St. Jerome, QC 65,835 Owned Manufacturing, Offices
St. Jerome, QC 76,000 Leased (Expires 7/97) Warehouse
St. Jerome, QC 61,852 Owned Manufacturing, Offices
Nibley, UT 10,500 Leased (Month to Month) Warehouse
</TABLE>
* The Company is currently in the process of selling this property and expects
to execute a sale in the near term.
The Company believes that its existing facilities are well maintained, in good
operating condition and adequate for its expected level of operations. Although
a number of the Company's facilities are rented on a month to month basis, the
Company does not anticipate difficulty in maintaining access to facilities
required for the conduct of its business.
ITEM 3. LEGAL PROCEEDINGS
Product Liability
Due to the nature of the Company's products, the Company is subject to product
liability claims involving personal injuries allegedly related to the Company's
products. The Company currently carries an occurrence-based product liability
insurance policy. The policy provides coverage for the period from November 1,
1996 to October 1, 1998 of up to $25 million per occurrence and $25 million in
the aggregate each for the period of November 1, 1996 through November 1, 1997
and November 1, 1997 through October 1, 1998. The current policy has a
deductible on each claim of $250,000 for claims related to trampolines and
$100,000 for claims related to all other products. The Company believes that its
insurance is generally adequate to cover product liability claims. Previously,
the Company maintained similar occurrence based policies with somewhat lower
coverage limits and higher deductibles. Nevertheless, currently pending claims
and any future claims are subject to the uncertainties related to litigation and
the ultimate outcome of any such proceedings or claims cannot be predicted. Due
to uncertainty with respect to the nature and extent of manufacturers' and
distributors' liability for personal injuries, there is also no assurance that
the product liability insurance of the Company is or will be adequate to cover
such claims. In addition, there can be no assurance that the Company's insurers
will be solvent when required to make payments on claims. Furthermore, there can
be no assurance that insurance will remain available, or if available, that it
will not be prohibitively expensive. The loss of insurance coverage or claims
exceeding that coverage could have a material adverse effect on the Company's
results of operations and financial condition.
Consumer Products Safety Commission Recall
In cooperation with the Consumer Products Safety Commission (the "CPSC"), the
Company recently recalled approximately 78,000 exercise machines sold under the
brand name ProForm R-930 Spacesaver Riders. The machine is designed to close
horizontally for easy storage. In several reported incidences, when the handle
bar was pulled against the seat during use, the machine unexpectedly closed into
the storage position. The unexpected closing into the storage position during
use could result in injuries. Consumers have been advised to stop using the
machine until the free repair kit has been installed. Resolution of this matter
is not expected to have a material adverse effect on the Company.
Other
The Company is party to a variety of non-product liability commercial suits
involving contract claims and intellectual property claims. The Company believes
that adverse resolution of these suits would not have a material adverse effect
on the Company.
The Company is also involved in several patent infringement claims, arising
in the ordinary course of its business. The Company believes that the ultimate
outcome of these matters will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ICON Health, IHF Holdings and ICON Fitness did not submit any matters during
the fourth quarter of the fiscal year covered by this report to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of August 29, 1997, ICON Health had 1,000 shares of common stock
outstanding all of which were held by IHF Holdings, and IHF Holdings had 1,000
shares of common stock outstanding all of which were held by ICON Fitness. ICON
Fitness had 100 shares of common stock outstanding all of which were held by IHF
Capital. There is no established trading market for the common stock of ICON
Health, IHF Holdings or ICON Fitness. ICON Health's ability to pay dividends is
limited under an indenture dated as of November 14, 1994 between ICON Health and
State Street Bank & Trust Co. ("State Street"), as trustee, and by ICON Health's
Credit Agreement. IHF Holding's ability to pay dividends is limited under an
indenture dated as of November 14, 1994 between IHF Holdings and State Street,
as trustee. ICON Fitness' ability to pay dividends is limited under an
indenture dated as of November 20, 1996 between ICON Fitness and State Street,
as trustee.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the years ended May 31, 1993 and 1994 have
been derived from the historical audited consolidated financial statements of
ICON (formerly known as Weslo, Inc., and its wholly-owned subsidiaries, ProForm
Fitness Products, Inc. and its wholly-owned subsidiaries, and American Physical
Therapy, Inc.) and subsidiaries. The selected financial data for the years
ended May 31, 1995, 1996 and 1997 have been derived from the historical audited
consolidated financial statements of ICON Health, IHF Holdings and ICON Fitness.
The selected financial data should be read in conjunction with Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the historical consolidated financial statements of ICON
Health, IHF Holdings and ICON Fitness and the notes thereto contained elsewhere
in this report.
<TABLE>
<CAPTION>
For the Year Ended May 31,
--------------------------------------------------------------------
(dollars in millions)
ICON IHF ICON ICON IHF
Health Holdings Fitness Health Holdings
1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales ........................... $314.9 $403.0 $530.8 $530.8 $530.8 $747.6 $747.6
Cost of sales ....................... 228.6 288.2 378.4 378.4 378.4 541.5 541.5
------ ------ ------ ------ ------ ------ ------
Gross profit ........................ 86.3 114.8 152.4 152.4 152.4 206.1 206.1
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling ............................. 38.5 52.1 68.7 68.7 68.7 93.9 93.9
Research and development ............ 1.6 2.8 5.2 5.2 5.2 6.8 6.8
General and administrative .......... 24.5 28.6 31.1 31.1 31.1 47.8 47.8
Compensation expense
attributable to options (2) ......... -- -- 39.0 39.0 39.0 2.8 2.8
Total operating expenses ............ 64.6 83.5 144.0 144.0 144.0 151.3 151.3
------ ------ ------ ------ ------ ------ ------
Income from operations .............. 21.7 31.3 8.4 8.4 8.4 54.8 54.8
Interest expense .................... 5.5 6.2 17.3 21.5 21.5 27.9 36.7
Dividends on cumulative redeemable
preferred stock of subsidiary held by
minority interest .................. -- -- -- -- 2.8 -- --
Amortization of deferred
financing fees ..................... -- -- 1.2 1.7 1.7 2.5 3.5
------ ------ ------ ------ ------ ------ ------
Income before income taxes .......... 16.2 25.1 (10.1) (14.8) (17.6) 24.4 14.6
Provision for (benefit from) income
taxes .............................. 6.2 9.8 (3.6) (4.7) (4.7) 10.8 7.9
------ ------ ------ ------ ------ ------ ------
Net income (loss) ................... $ 10.0 $ 15.3 (6.5) (10.1) (12.9) 13.6 6.7
====== ====== ====== ====== ====== ====== ======
Balance Sheet Data (at end of period):
Cash ................................ $ 0.2 $ 0.1 $ 4.1 $ 4.1 $4.1 $19.3 $19.3
Working capital ..................... 24.8 97.8 137.7 137.7 137.7 157.3 157.6
Total assets ........................ 151.7 184.7 281.9 290.2 290.2 306.5 316.7
Total indebtedness(1) ............... 72.4 65.4 207.8 268.1 268.1 213.6 282.8
Preferred stock of subsidiary (including
accrued dividends) ................. -- -- -- -- 42.8 -- --
Cumulative redeemable preferred stock
(including accrued dividends) ....... -- -- -- 42.8 -- -- 47.9
Stockholders' equity ................ 39.8 54.5 (14.8) (109.6) (109.6) 2.0 (104.8)
Other Data:
Depreciation and amortization ....... 3.4 4.0 6.9 11.6 11.6 9.9 19.7
Capital expenditures ................ 4.0 6.9 8.0 8.0 8.0 15.4 15.4
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended May 31,
-------------------------------------
(dollars in millions)
ICON ICON IHF ICON
Fitness Health Holdings Fitness
1996 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Data:
Net sales.......................... $747.6 $836.2 $836.2 $836.2
Cost of sales ..................... 541.5 583.8 583.8 583.8
Amortization of step-up HealthRider
and ICON of Canada inventory ..... -- 14.0 14.0 14.0
------ ------ ------ ------
Gross profit....................... 206.1 238.4 238.4 238.4
------ ------ ------ ------
Operating expenses:
Selling ............................. 93.9 132.4 132.4 132.4
Research and development ............ 6.8 7.6 7.6 7.6
General and administrative .......... 47.8 56.7 56.7 56.7
Weider settlement ................... -- 16.6 16.6 16.6
HealthRider integration costs ....... -- 4.9 4.9 4.9
Compensation expense
attributable to options (2) ......... 2.8 -- -- --
Total operating expenses ............ 151.3 218.2 218.2 218.2
------ ------ ------ ------
Income from operations .............. 54.8 20.2 20.2 20.2
Interest expense .................... 36.7 33.6 44.1 49.7
Dividends on cumulative
redeemable preferred stock of a
subsidiary held by minority interest 5.1 -- -- 2.1
Amortization of deferred
financing fees ..................... 3.5 3.0 4.2 4.6
Other (income)/expense .............. -- (.5) (.5) (.5)
Income before income taxes .......... 9.5 (15.9) (27.6) (35.7)
Provision for income taxes .......... 7.9 (4.0) (7.2) (9.2)
------ ------ ------ ------
Net income (loss) ................... $ 1.6 $(11.9) $(20.4) $(26.5)
====== ====== ====== ======
Balance Sheet Data (at end of period):
Cash ................................ $ 19.3 $ 5.6 $ 5.6 $ 5.6
Working capital ..................... 157.6 220.1 220.4 220.5
Total assets ........................ 316.7 456.9 468.7 474.8
Total indebtedness(1) ............... 282.8 327.0 406.6 494.8
Preferred stock of subsidiary
(including accrued dividends) ...... 47.9 -- -- --
Cumulative redeemable preferred stock
(including accrued dividends) ....... -- -- -- --
Stockholders' equity ................ (104.8) (10.7) (78.1) (160.2)
Other Data:
Depreciation and amortization 19.7 16.6 28.2 34.3
Capital expenditures ................ 15.4 16.0 16.0 16.0
</TABLE>
[FN]
(1) Total indebtedness is defined as current portion of long term debt plus
long term debt.
(2) Consists of compensation expense attributable to the difference between the
fair value of the underlying stock and the exercise price of related
options granted to certain members of management.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the historical audited
combined financial statements and the related notes thereto appearing elsewhere
in this report. The Company's fiscal year ends on May 31 of the corresponding
calendar year. For example, fiscal 1997 ended on May 31, 1997.
Overview
The Company, is one of the largest manufacturers and marketers of fitness
equipment in the United States and in the first quarter of 1996, commenced
direct marketing of its products in Europe. The Company's fitness products are
targeted to home use. The Company's sales grew from $202.4 million in 1991 to
$836.2 million in 1997. The Company believes that during that period its growth
rate exceeded the industry growth rate due to the Company's emphasis on product
innovation through research and development, its broad distribution strategy and
its flexible manufacturing capacity. While the Company's growth rate to date has
been high, its annual percentage increase in domestic sales cannot be expected
to continue at historical levels.
Margins. The Company's sales and gross margins depend upon its success in
innovating, developing and marketing new products. Products tend to generate
higher gross margins earlier in the product life cycle (after production
efficiencies have been realized following an initial start-up period), when
there are fewer companies offering similar products, and tend to generate lower
gross margins over time as competition increases.
Direct Sales; European Operations. In 1992, the Company began selling
products directly to the public through television infomercials and print media
campaigns (i.e., direct marketing). Products sold through direct marketing are
sold at retail prices, and therefore, at higher gross margins than products sold
through the Company's other distribution channels. However, direct marketing
sales have higher associated selling, advertising, distribution and other roll-
out expenses. The Company is currently focusing principally on 30 and 60 second
television advertisements designed to enhance both retail and direct response
sales of its products as opposed to 30 minute infomercials. Notwithstanding the
foregoing, the Company will continue to utilize direct response marketing with
respect to HealthRider products.
During the first quarter of 1996, the Company established its own sales
operations in Europe. Prior to that, the Company's products were distributed in
Europe primarily by third parties. In connection with the Weider Sports and
CanCo Acquisitions, the Company began to directly market its products in Canada
in September 1996. The Company's European and Canadian operations have been
consolidated in the statement of operations for 1997 and the balance sheet at
May 31, 1997. Certain of the Company's European operations are not currently
profitable. There can be no assurance that the Company will be successful
in selling its products in non-U.S. markets.
Non-Recurring Items and Other One-Time Expenses. In 1997, the Company
incurred (i) approximately $4.9 million of integration expenses in connection
with the HealthRider Acquisition; (ii) one-time selling expenses related to the
liquidation of certain HealthRider inventory at the time of acquisition of $6.4
million; (iii) a significant, non-recurring, non-cash increase in cost of goods
sold of approximately $14.0 million (due to the fact that the Company's purchase
accounting for the HealthRider Acquisition and the Weider Sports and CanCo
Acquisitions included writing-up the book value of the acquired inventory to
fair market value less estimated sales costs); (iv) approximately $16.6 million
in settlement expenses related to the WHF Settlement; and (v) the tax benefit
related to items (i) through (iv) of $15.9 million.
In 1995, the Company incurred a $39.0 million compensation expense with
respect to the exchange of management stock options in connection with the
Recapitalization, including the redemption of the Redeemable Options at a price
of $26.4 million and related tax payments of $.3 million. Such redemption
resulted in a $26.7 million cash compensation expense for the period in which
the redemption occurred. In 1995, the Company also recorded a $12.3 million
non-cash compensation expense at the Recapitalization Closing as a result of the
exchange of options to purchase capital stock of the Recapitalized Companies for
$4.0 million of options to buy IHF Holdings Preferred Stock and $8.3 million of
options to buy common stock of IHF Capital and the Company also recorded an
offsetting tax benefit to account for the future tax benefit when options are
exercised. In connection with the 1997 redemption of the options to buy IHF
Holdings Preferred Stock, the Company realized a tax benefit related to the
redemption price of such options of $3.7 million.
Results of Operations
The following table sets forth certain financial data of the Company
expressed as a percentage of net sales for fiscal 1995, 1996 and 1997.
<TABLE>
<CAPTION>
For the Year Ended May 31,
1995 1995 1995 1996
ICON IHF ICON ICON
Health Holdings Fitness Health
<S> <C> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................ 71.3 71.3 71.3 72.4
----- ----- ----- -----
Gross profit............................ 28.7 28.7 28.7 27.6
----- ----- ----- -----
Operating expenses:
Selling .................................. 12.9 12.9 12.9 12.6
Research and development ................. 1.0 1.0 1.0 .9
General and administrative ............... 5.9 5.9 5.9 6.4
Stock option compensation expense ........ 7.3 7.3 7.3 .4
----- ----- ----- -----
Total operating expenses .............. 27.1 27.1 27.1 20.3
----- ----- ----- -----
Income from operations...................... 1.6 1.6 1.6 7.3
Interest expense and amortization
of deferred financing fees........... 3.5 4.4 4.4 4.0
Dividends on cumulative
redeemable preferred stock of a
subsidiary held by minority interest ..... -- -- 0.5 --
Income (loss) before income taxes........... (1.9) (2.8) (3.3) 3.3
Provision (benefit) for income taxes...... ( .7) ( .9) (0.9) 1.5
----- ----- ----- -----
Net income (loss).......................... (1.2%) (1.9%) (2.4%) 1.8%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended May 31,
-------------------------------------------------
1996 1996 1997 1997 1997
IHF ICON ICON IHF ICON
Holdings Fitness Health Holdings Fitness
<S> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 72.4 72.4 69.8 69.8 69.8
Amortization of step-up of HealthRider
and ICON of Canada Inventory......... -- -- 1.7 1.7 1.7
Gross profit.......................... 27.6 27.6 28.5 28.5 28.5
----- ----- ----- ----- -----
Operating expenses:
Selling ............................ 12.6 12.6 15.8 15.8 15.8
Research and development ........... 0.9 0.9 0.9 0.9 0.9
General and administrative ......... 6.4 6.4 6.8 6.8 6.8
Weider settlement .................. -- -- 2.0 2.0 2.0
HealthRider integration costs ...... -- -- 0.6 0.6 0.6
Stock option compensation expense .. 0.4 0.4 -- -- --
----- ----- ----- ----- -----
Total operating expenses ......... 20.3 20.3 26.1 26.1 26.1
----- ----- ----- ----- -----
Income from operations................ 7.3 7.3 2.4 2.4 2.4
Interest expense and amortization
of deferred financing fees.......... 5.3 5.3 4.4 5.8 6.5
Dividends on cumulative
redeemable preferred stock of a
subsidiary held by minority interest -- 0.7 -- -- .3
Other (income) expense................ -- -- (.1) (.1) (.1)
Income (loss) before income taxes..... 2.0 1.3 (1.9) (3.3) (4.3)
Provision (benefit) for income taxes.. 1.1 1.1 (0.5) (0.9) (1.1)
----- ----- ----- ----- -----
Net income (loss)..................... 0.9% .2% (1.4%) (2.4%) (3.2%)
===== ===== ===== ===== =====
</TABLE>
Year Ended May 31, 1997 Compared to the Year Ended May 31, 1996
Net sales increased by $88.6 million, or 11.8%, from $747.6 million in 1996
to $836.2 million in 1997. The increase was primarily attributable to sales
increases of $140.5 million of the Company's treadmill products and the
sales from the HealthRider Acquisition. Treadmill sales were $452.9 million,
or 54.2% of net sales in 1997 compared to $312.4 million, or 41.8% of net
sales in 1996. During 1997, upright rower sales were $85.2 million or
10.2% of net sales compared to $259.1 million or 34.7% during 1996. The
decline in upright rowers is due to a general softening of demand for that
particular product category. European sales totaled $45.4 million in 1997
compared to $33.3 million in 1996.
Gross profit for 1997 was $238.4 million, or 28.5% of net sales, compared to
$206.1 million, or 27.6% of net sales, for 1996. The step-up of HealthRider
and ICON of Canada inventory increased cost of sales by $14.0 million in 1997.
Without this charge, the gross profit would have increased to 30.2% due to gross
margin improvements in the Company's line of treadmill products and higher gross
margin on HealthRider brand products.
Selling expenses were $132.4 million, or 15.8% of net sales, in 1997 compared
to $93.9 million, or 12.6% of net sales, in 1996. The dollar increase in selling
expenses resulted primarily from the initial inclusion of selling expenses at
HealthRider of $42.9 million which includes $6.4 million of one-time expenses to
dispose of upright rowers acquired in connection with the Acquisition. These
one-time selling expenses will continue until discontinued products purchased
in the HealthRider Acquisition are liquidated. The Company had no comparable
expenses during fiscal 1996.
Research and development expense was $7.6 million, or .9% of net sales, for
1997 compared to $6.8 million, or .9% of net sales, for 1996. This dollar
increase is related to on-going development of both current and future product
offerings.
General and administrative expense totaled $56.7 million, or 6.8% of net
sales, for 1997 compared to $47.9 million, or 6.4% of net sales, for 1996.
HealthRider's general and administrative expenses totaled $4.9 million with no
comparable expense during 1996. The increase in general and administrative
expenses as a percentage of sales was primarily due to expansion and the higher
costs associated with operating the Company's business.
The Company recorded no compensation expense related to management stock
options in 1997 compared to $2.8 million of such compensation expense in 1996.
As a result of the foregoing factors, operating income decreased to $20.2
million, or 2.4% of net sales, in 1997, from operating income of $54.8 million,
or 7.3% of net sales, in 1996. Operating income before inventory step-up, one
time HealthRider selling expenses, HealthRider integration expenses and the
expense of the Weider Settlement would have been $62.1 million, or 7.4% of net
sales.
Interest expense, including amortization of deferred financing fees,
increased to $36.7 million for ICON Health, $48.3 million for IHF Holdings and
$54.3 million for ICON Fitness in 1997 compared to $30.4 million for ICON
Health, and $40.2 million for IHF Holdings and ICON Fitness for 1996. Interest
expense has increased due to the Company'sgrowth and the high level of
borrowing incurred in connection with the HealthRider Acquisition, the
WHF Settlement, the Weider Sports and CanCo Acquisitions and the interest
associated with the 14% Series A Senior Discount Notes of ICON Fitness issued
in November 1996. In 1997, ICON Fitness recorded interest expense of
$2.1 million, compared to $5.1 million in 1996, related to dividends
accruing on the preferred stock of IHF Holdings which was issued in
connection with the Recapitalization and which was held by affiliates of
the Company. The IHF Holdings preferred stock was redeemed with the proceeds
of the 14% Series A Senior Secured Discount Notes.
The income tax benefit was $4.0 for ICON Health, $7.2 million for IHF
Holding and $9.2 million for ICON Fitness for 1997 compared with a tax provision
of $10.8 million for ICON Health and $7.9 million for IHF Holdings and ICON
Fitness for 1996. The effective tax rates for 1997 differ from those for 1996 as
a result of the non-deductibility of the dividends on IHF Holdings preferred
stock (ICON Fitness) and the fact that no income tax benefits were recognized in
1997 or 1996 for losses incurred in connection with the Company's European
subsidiaries due to uncertainty regarding the subsidiaries' ability to generate
future taxable income against which such losses can be applied.
As a result of the foregoing factors, net losses were $12.0 million for ICON
Health, $20.4 million for IHF Holdings and $26.5 million for ICON Fitness in
1997 compared to net income of $13.6 million for ICON Health, $6.7 million for
IHF Holdings and $1.6 million for ICON Fitness in 1996.
Year Ended May 31, 1996 Compared to the Year Ended May 31, 1995
Net sales increased by $216.8 million, or 40.8%, from $530.8 million in 1995
to $747.6 million in 1996. The increase was primarily attributable to sales
increases of $121.0 million of the Company's Cardio family of upright rowers and
increases of $56.8 million in treadmill sales. During 1996, upright rower sales
were $259.1 million or 34.7% of net sales, and treadmill sales were $312.4
million, or 41.8% of net sales. Upright rower sales during the fourth quarter of
1996 declined to $30.3 million, compared to $67.7 million during the fourth
quarter of 1995. European sales, which began during the first quarter of 1996,
totaled $33.3 million.
Gross profit for 1996 was $206.1 million, or 27.6% of net sales, compared to
$152.5 million, or 28.7% of net sales, for 1995. Gross profit as a percentage of
net sales declined due to an increased proportion of sales to retailers which
generate a lower gross profit percentage than direct sales. Direct response
sales decreased from 9% of total sales in 1995 to 3% of total sales in 1996.
Selling expenses were $93.9 million, or 12.6% of net sales, in 1996 compared
to $68.7 million, or 12.9% of net sales, in 1995. The dollar increase in selling
expenses resulted primarily from increased variable selling expenses directly
related to increased sales volume and from selling expenses of the European
subsidiaries (which were not operating in 1995). In total, cooperative
advertising and discount allowances increased from $14.1 million to $34.6
million, with promotional activity (i.e., cooperative advertising) with
retailers increasing by $11.6 million and sales discounts to retailers, which
are charged against sales, increasing by $8.9 million as a result of increased
sales in the retail channel. In addition, warranty expenditures increased by
$5.6 million in 1996 compared to 1995 and sales commissions also increased by
$.7 million due to the increase in sales volume. Bad debt expense increased by
$1.1 million to provide for potential write-offs associated with increased trade
receivable balances.
Research and development expense was $6.8 million, or .9% of net sales, for
1996 compared to $5.2 million, or 1.0% of net sales, for 1995. This dollar
increase is related to on-going development of both current and future product
offerings.
General and administrative expense totaled $47.9 million, or 6.4% of net
sales, for 1996 compared to $31.1 million, or 5.9% of net sales, for 1995. Legal
expenses increased during 1996 by $3.5 million over the same period during the
prior year. These legal expenses have resulted from certain patent defense
actions, product liability claims and legal fees associated with the WHF
Litigation. General and administrative expenses in 1996 for the European
subsidiaries totaled $5.4 million. Expenditures under the Company's self-insured
health plan increased by $.8 million. A $2.7 million management fee derived from
monthly profits earned under management agreements for services provided to
Weider Sporting Goods, Inc. (''WSG'') through November 14, 1995 was recorded in
1995 with no corresponding amount in 1996. This fee was recorded as an offset
against general and administrative expense incurred on behalf of WSG and was
nonrecurring. Following the Recapitalization, fees under the WSG agreement
stopped. Other increases totaling $4.4 million have occurred following the
Recapitalization to service the increase in sales. The major increases include:
personnel cost, management fees paid to Bain Capital, increased management
information systems expenditures, additional facility rental and other
administrative expenses.
Compensation related to management stock options resulted in an expense of
$2.8 million in 1996 compared to $39.0 million of compensation expense in 1995.
As a result of the foregoing factors, operating income increased to $54.8
million, or 7.3% of net sales, in 1996, from operating income of $8.4 million,
or 1.6% of net sales, in 1995.
Interest expense and amortization of deferred financing fees increased to
$30.4 million for ICON Health and $40.2 million for IHF Holdings and ICON
Fitness in 1996 compared to $18.6 million for ICON Health and $23.2 million for
IHF Holdings and ICON Fitness for 1995. Interest expense increased due to the
Company's high level of borrowing incurred in connection with the
Recapitalization. Moreover, borrowings incurred in connection with the
Recapitalization were outstanding for all of 1996, but were outstanding for only
197 days in 1995. In 1996, ICON Fitness recorded interest expense of $5.1
million, compared to $2.8 million in 1995, related to dividends accruing on IHF
Holdings preferred stock issued in connection with the Recapitalization and
which was held by affiliates of the Company. The IHF Holdings preferred stock
was redeemed with the proceeds of the 14% Series A Senior Secured Discount Notes
issued in November 1996.
The income tax provision was $10.8 for ICON Health and $7.9 million for IHF
Holdings and ICON Fitness for 1996 compared with a tax benefit of $3.6 million
for ICON Health and $4.7 million for IHF Holdings and ICON Fitness for 1995.
The effective tax rates for 1996 differ from those for 1995 as a result of the
non-deductibility of the dividends on IHF Holdings preferred stock (ICON
Fitness) and the fact that no income tax benefits were recognized in 1996 for
losses incurred in connection with the Company's European subsidiaries due to
uncertainty regarding the subsidiaries' ability to generate future taxable
income against which such losses can be applied.
As a result of the foregoing factors, net income increased to $13.6 million
for ICON Health, $6.7 million for IHF Holdings, and $1.6 million for ICON
Fitness in 1996 compared to net losses of $6.5 million for ICON Health, $10.1
million for IHF Holdings and $12.9 million for ICON Fitness for 1995.
Seasonality
The following are the net sales and operating income of the Company by
quarter for years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Net Sales
1997 ..... $125.8 $249.5 $248.7 $212.2
1996 ..... 124.8 228.5 240.9 153.4
1995 ..... 70.6 163.0 182.8 114.4
Operating Income
1997 ..... $ 2.0 $ 1.2(2) $ 8.5 $ 8.5
1996 ..... 6.4 20.0 25.4 3.0
1995 ..... 2.6 (22.9)(1) 22.9 5.8
Net Income (Loss)-ICON
Fitness
1997 ..... $ (5.8) $ (8.9) $ (3.2) $ (8.6)
1996 ..... (3.4) 4.2 7.1 (6.3)
1995 ..... .9 (16.3)(1) 5.3 (2.8)
</TABLE>
[FN]
(1) Includes $39.0 million in one-time compensation expense attributable to the
exchange and partial redemption of management options.
(2) Includes WHF Settlement expenses of $16.5 million.
Historically, the Company has sold a majority of its products to customers in
its second and third fiscal quarters (i.e., from September through February).
Increased sales and distribution typically have occurred in the Christmas retail
season and the beginning of a new calendar year because of increased promotions
by customers, increased consumer purchases and seasonal changes that prompt
people to exercise inside. If actual sales for a quarter do not meet or exceed
projected sales for that quarter, expenditures and inventory levels could be
disproportionately high for such quarter and the Company's cash flow for that
quarter and future quarters could be adversely affected. The timing of large
orders from customers and the mix of products sold may also contribute to
periodic fluctuations. While seasonality has been the trend, it may not be
indicative of the results to be expected for this fiscal year or for any future
years.
Liquidity and Capital Resources
In 1997, the Company used $37.7 million of cash from operating activities and
had net borrowings of approximately $89.5 million under the Credit Agreement's
revolving credit facility primarily to finance increases in accounts receivable.
The Company used $16.0 million in cash for capital expenditures related to
upgrades in plant and tooling, purchases of additional manufacturing equipment
and building expansion and $6.3 million for repayments of long term debt. The
Company used $25.8 million to acquire HealthRider and $11.1 million to acquire
Weider Sports and CanCo. In addition, the effect of exchange rates decreased
the Company's cash balances at May 31, 1997 by $1.0 million. As a result of the
foregoing factors, the Company had a net decrease in cash of $13.8 million from
May 31, 1996 to May 31, 1997.
In 1996, the Company generated $24.5 million of cash from operating
activities and had net borrowings of approximately $6.4 million under the Credit
Agreement's revolving credit facility primarily to finance increases in accounts
receivable. The Company used $15.4 million in cash for capital expenditures
related to upgrades in plant and tooling, purchases of additional manufacturing
equipment and building expansion and $.7 million for repayments of long term
debt. In addition, the effect of exchange rates increased the Company's cash
balances at May 31, 1996 by $.4 million. As a result of the foregoing factors,
the Company had a net increase in cash of $15.2 million from May 31, 1995 to May
31, 1996.
In 1995, the Company used $31.7 million of cash in operating activities
primarily as a result of increases in working capital, particularly inventories,
and other operating assets of $36.0 million. The Company made distributions of
$166.7 million to its shareholders as part of the Recapitalization and used
$58.2 million to make payments on long-term indebtedness. These uses of cash
were financed primarily with the proceeds of long-term borrowing that totaled
$195.0 million, net borrowings under the Credit Agreement of $66.4 million and
net proceeds from the issuance of stock of $39.0 million. The Company also used
$8.0 million in cash in 1995 for capital expenditures related to tooling and
manufacturing equipment. During 1995, the Company had a net increase in cash of
$4.0 million.
The Company's primary short-term liquidity needs consist of financing
seasonal merchandise inventory buildups and paying cash interest expense under
its Credit Agreement and on the Senior Subordinated Notes. The Company's
principal source of financing for seasonal merchandise inventory buildup and
increased receivables during the past several years has been revolving lines of
credit with various financial institutions. Since the Recapitalization Closing,
its principal source of financing for such needs has been revolving credit
borrowings under the Credit Agreement. The Company's working capital borrowing
needs are typically at their lowest level in April through June, increase
somewhat through the summer and sharply increase from September through November
to finance accounts receivable and purchases of inventory in advance of the
Christmas and post-holiday selling season. Generally, in the period from
November through February, the Company's working capital borrowings remain at
their highest level and then are paid down to their lowest annual levels by
April.
At May 31, 1997, the Company had $178.8 million of revolving credit
borrowings outstanding under the Credit Agreement. Advances under the Credit
Agreement's revolving credit facility are subject to the amount of Eligible
Accounts and Eligible Inventory (each as defined in the Credit Agreement) of the
Company. The Company's ability to make revolving credit borrowings under the
Credit Agreement expires on November 14, 1999. At May 31, 1997 the Company had
$19.8 million of additional indebtedness available to be drawn on a revolving
credit basis under the Credit Agreement. Seasonal borrowings have peaked and
availability under the Credit Agreement is adequate to meet the Company's
obligations in the near term. Revolving credit borrowings have primarily been
used to increase inventory levels, to finance normal trade credit for customers,
to make interest payments on debt issued in connection with the
Recapitalization, to fund the HealthRider, Weider Sports and CanCo Acquisitions
and to make capital expenditures. The Credit Agreement contains a number of
covenants, all of which the Company's believes it was in compliance or has
obtained waiver of as of the date hereof. The Company amended the Credit
Agreement in August of 1996 to permit total borrowings of up to $310 million in
order to meet the Company's longer term needs. There can be no assurance that
the Company will be able to increase its available credit under the Credit
Agreement. The Company believes that cash flow from operations and availability
of revolving credit borrowings under the Credit Agreement will provide adequate
funds for its working capital needs, planned capital expenditures and debt
service obligations. The Company is highly leveraged, and its ability to fund
its operations and make planned capital expenditures, to make scheduled payments
and to refinance its indebtedness depends on its future operating performance
and cash flow, which in turn, are subject to prevailing economic conditions and
to financial, business and other factors, some of which are beyond its control.
The Company's longer term liquidity needs include (a) required quarterly
amortization payments on the term loans under the Credit Agreement, consisting
of $1.0 million from March 31, 1997, $1.3 million from March 31, 1998 and
greater amounts on or after March 31, 1999 and (b) payments of interest and
principal on the Senior Subordinated Notes.
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.
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 principal and accrued interest on the Senior Discount Notes will be due on
November 15, 2007.
The Company made capital expenditures of approximately $16.0 million during
fiscal 1997 and expects to make capital expenditures of approximately $14.9
million in 1998. Such expenditures are primarily for expansion of physical
plant, purchases of additional or replacement manufacturing equipment and
revisions and upgrades in plant tooling. The Company also made research and
development expenditures in 1997 of approximately $7.6 million, and expects to
make research and development expenditures of approximately $8.4 million in
1998.
Inflation and Foreign Currency Fluctuations
Although the Company cannot accurately predict the precise effect of
inflation on its operations, it does not believe that inflation has had a
material effect on sales or results of operations in recent years. The Company
does import some finished products and components from Canada and Asia. All
purchases from Asia have been fixed in U.S. dollars and, therefore, the Company
has not been subject to foreign currency fluctuations on such purchases,
although the Company's vendors may respond to foreign currency fluctuations by
seeking to raise their prices. Purchases of inventory from Canada have been
settled in Canadian dollars and therefore the Company has been subject to
fluctuations in the value of the Canadian dollar which could have an impact on
the Company's operating results. In connection with the importation of products
and components from Canada, the Company from time to time engages in hedging
transactions by entering into forward contracts for the purchase of Canadian
dollars which are designed to protect against such fluctuations. The Company's
hedging transactions do not subject it to exchange rate risk because gains and
losses on these contracts offset losses and gains on the transaction being
hedged. The unhedged portion of purchases from Canada is not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
and Schedules
Page
<S> <C>
Report of Independent Accountants of Price
Waterhouse LLP 43
Consolidated Financial Statements:
Consolidated Balance Sheets, May 31, 1997
and 1996 44
Consolidated Statements of Income for the
Years Ended May 31, 1997, 1996 and 1995 45
Consolidated Statements of Stockholders'
Equity (Deficit) for the Years Ended
May 31, 1997, 1996 and 1995 46
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1997, 1996 and 1995 49
Notes to Consolidated Financial Statements 51
Financial Statement Schedules:
Schedule VIII - Valuation Accounts for the
Three Years Ended May 31, 1997 74
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company, and their ages,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------- --- ----------------------------------------------
<S> <C> <C>
Scott R. Watterson 42 Chairman of the Board and Chief Executive
Officer
Gary E. Stevenson 42 President, Chief Operating Officer and Director
Robert C. Gay 45 Vice Chairman of the Board
Ronald P. Mika 36 Director
Geoffrey S. Rehnert 39 Director
S. Fred Beck 39 Chief Financial and Accounting Officer, Vice
President and Treasurer
Lynn C. Brenchley 51 Vice President, Business Development
David J. Watterson 38 Vice President, Marketing and Research and
Development
Jon M. White 49 Vice President, Manufacturing
William T. Dalebout 49 Vice President, Design
Brad H. Bearnson 43 General Counsel and Secretary
</TABLE>
Scott R. Watterson. Mr. Watterson has served as President and Chief
Executive Officer of Weslo since he co-founded Weslo in 1977 and has served as
President and Chief Executive Officer of ProForm since 1988. Effective as of the
Recapitalization Closing, Mr. Watterson became Chairman of the Board and Chief
Executive Officer of the Company. Mr. Watterson is a director of American Pad
and Paper Company. David Watterson is Mr. Watterson's brother.
Gary E. Stevenson. Mr. Stevenson has served as Chief Operating Officer of
Weslo since he co-founded Weslo in 1977 and has served as Chief Operating
Officer of ProForm since 1988. Effective as of the Recapitalization Closing, Mr.
Stevenson became President, Chief Operating Officer and a Director of the
Company.
Robert C. Gay. Mr. Gay became Vice Chairman of the Board of Directors of
the Company effective as of the Recapitalization Closing. Mr. Gay has been a
Managing Director of Bain Capital since April 1993 and has been a General
Partner of Bain Venture Capital since February 1989. From 1988 through 1989, Mr.
Gay was a principal of Bain Venture Capital. In addition, Mr. Gay is a director
of Alliance Entertainment Corp., American Pad & Paper Company, GT Bicycles,
Inc., GS Industries, Inc. and its subsidiary GS Technologies Operating Co.,
Inc., and Physio-Control International Corporation.
Ronald P. Mika. Mr. Mika became a Director of the Company effective as of
the Recapitalization Closing. Mr. Mika has been a Managing Director of Bain
Capital since December 1996, and prior to that he was a Principal of Bain
Capital from December 1992 through November 1996 and an associate of Bain
Capital from August 1989 through November 1992.
Geoffrey S. Rehnert. Mr. Rehnert became a Director of the Company effective
as of the Recapitalization Closing. Mr. Rehnert has been a Managing Director of
Bain Capital since April 1993 and has been a General Partner of Bain Capital
since 1986. Mr. Rehnert is also a director of GT Bicycles, Inc., Worldcorp,
Inc., FTD, Inc., KollMorgen Corporation and U.S. Order, Inc.
S. Fred Beck. Mr. Beck has served as the Chief Financial Officer of Weslo
since 1989. Mr. Beck became Chief Financial and Accounting Officer, Vice
President and Treasurer of the Company as of the Recapitalization Closing.
Lynn C. Brenchley. Mr. Brenchley currently serves as President of
HealthRider Corp. Mr. Brenchley has served as Vice President of Business
Development of Weslo since 1990 and has continued in that position with the
Company since the Recapitalization Closing. Prior to 1990, he was Vice President
and General Manager of Thorn Apple Valley, a meat processor.
David J. Watterson. Mr. Watterson has served as Vice President of Marketing
and Research and Development of Weslo since 1992 and has continued in that
position with the Company since the Recapitalization Closing. Prior to 1992, Mr.
Watterson served as Vice President of Sales of Weslo. Scott Watterson is David
Watterson's brother.
Jon M. White. Mr. White has served as Vice President of Manufacturing of
Weslo since 1988 and has continued in that position with the Company since the
Recapitalization Closing.
William T. Dalebout. Mr. Dalebout has served as Vice President of Design of
Weslo since 1987 and has continued in that position with the Company since the
Recapitalization Closing.
Brad H. Bearnson. Mr. Bearnson presently serves as General Counsel and
Secretary. Mr. Bearnson first joined the Company in March of 1995 prior to which
he represented the Company and its predecessors, ProForm and Weslo, as outside
counsel since 1983. Prior to March, 1995, Mr. Bearnson was a shareholder with
the law firm of Olson & Hoggan, P.C. Mr. Bearnson is also a certified public
accountant.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
1997, 1996 and 1995 for Mr. Scott Watterson and the Company's other four most
highly compensated executive officers (collectively, the ''Named Executive
Officers''):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term All Other
Compensation Compensation
Name and Principal Position Annual Compensation Options(#)(1) ($)(2)
- -------------------------------------- --------------------------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Year Salary ($) Bonus ($)
---- ---------- ---------
Scott R. Watterson(3) 1997 450,000 1,047,384 -- 2,250
Chairman of the Board and Chief 1996 450,000 690,660 469,988(4)(5) 22,791(6)
Executive Officer 1995 325,000 423,70 447,279 2,402,060(7)
Gary E. Stevenson(3) 1997 400,000 1,047,384 -- 2,250
President and Chief Operating Officer 1996 400,000 690,660 375,251(4)(8) 22,952(6)
1995 300,000 423,704 368,014 1,901,400(7)
S. Fred Beck 1997 178,920 144,533 -- 79,506(12)
Chief Financial and Accounting Officer 1996 168,000 149,000 62,285(9)(10) 1,578
Vice President and Treasurer 1995 160,000 105,926 52,843 2,981
David J. Watterson 1997 218,325 144,533 -- 178,696(12)
Vice President, Marketing and Research 1996 205,000 149,000 62,285(9)(10) 1,547
and Development 1995 195,000 105,926 52,843 2,450
Richard Hebert 1997 388,043(11) -- -- 9,440
General Manager, ICON DuCanada, Inc.
</TABLE>
[FN]
(1) Options to purchase shares of IHF Capital's Class A Common Stock.
(2) Includes amounts contributed by the Company for the benefit of the named
executive officers under the Company's 401(k) Plan.
(3) The table does not reflect the consulting fees that Scott Watterson and
Gary Stevenson received from CanCo equal to an aggregate of 14% of its
pre-tax earnings up to the time that the Company acquired CanCo's assets.
(4) Includes options for 90,588 shares of Class A Common Stock granted in
connection with the Recapitalization at an exercise price of $30.87 per
share, which was substantially above market value. In March 1996 the
exercise price of these options was reset to $8.92 per share, which was the
then current fair market value of the Class A Common Stock.
(5) Includes options to purchase 341,053 shares of Class A Common Stock at
$5.80 per share which were granted in May 1996 when the then current fair
market value of such stock was $8.92 per share.
(6) Includes $19,722 and $19,802 paid on behalf of Scott Watterson and Gary
Stevenson, respectively, for legal fees and expenses.
(7) Includes $2.3 million and $1.8 million received by Scott Watterson and Gary
Stevenson, respectively, in connection with a four-year agreement to not
compete with the Company in certain specified businesses and also includes
$99,500 paid to each of Scott Watterson and Gary Stevenson by the Company
as reimbursement for legal fees and expenses incurred by them in connection
with the Recapitalization.
(8) Includes options to purchase 246,316 shares of Class A Common Stock at
$5.80 per share which were granted in May 1996 when the then current fair
market value of such stock was $8.92 per share.
(9) Includes options for 7,549 shares of Class A Common Stock granted in
connection with the Recapitalization at an exercise price of $30.87 per
share, which was substantially above market value. In September 1995 the
exercise price of these options was reset to $5.80 per share, which was the
10K1997-.X2A -70-
then current fair market value of the Class A Common Stock.
(10) Includes options to purchase 54,736 shares of Class A Common Stock at $5.80
per share which were granted in May 1996 when the then current fair market
value of such stock was $8.92 per share.
(11) Represents Mr. Hebert's salary from September 6, 1996, the date of the ICON
of Canada acquisition, to May 31, 1997.
(12) Includes forgiveness by Company of $60,000 loan to Mr. Beck and Mr. David
Watterson.
The following table sets forth information as of May 31, 1997, concerning
options of IHF Capital exercised by each of the named executive officers in 1997
and year end option values:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES(1)
Value of Unexercised
In-the-Money
Options at
Number of Unexercised May 31, 1997
Options at May 31, 1997 (#) ($)(2)
Shares Acquired Value Exercisable/
on Exercise (#) Realized ($)(2) Exercisable/Unexercisable Unexercisable
--------------- --------------- ------------------------------ ---------------------
Class A Class A Class A Class L Class A Class L
Common Common Common Common Common Common
Name Stock Stock Stock Stock Stock Stock
<S> <C> <C> <C> <C> <C> <C>
Scott Watterson -- -- 469,988/0(3) 48,620/0 3,118,404/0 4,278,725/0
Gary Stevenson -- -- 375,251/0(3) 37,816/0 2,533,877/0 3,327,936/0
S. Fred Beck 15,098 179,213 54,736/22,647 -- 337,721/225,791 --
David J. Watterson 30,196 358,426 54,736/22,647 -- 337,721/225,791 --
Richard Hebert -- -- -- -- -- --
</TABLE>
[FN]
(1) This table includes options issued in connection with the Recapitalization
in exchange for previously outstanding options to purchase stock of the
Recapitalized Companies.
(2) As of May 31, 1997 there was no market for the common stock of IHF Capital.
For purposes of the calculations in this table, the fair value of one share
of IHF Capital's Class A Common Stock was assumed to be $11.97 and the
fair value of one share of its Class L Common Stock was assumed to be
$91.94. These values are based upon the price paid to Weider in November
of 1996. There have been no other arm's-length sales of the Common Stock of
IHF Capital since November of 1996.
(3) The options held by Messrs. Watterson and Stevenson include options for
366,784 and 285,276 shares, respectively, of Class A Common Stock granted
pursuant to the Recapitalization.
1994 Stock Option Plan
In November 1994 the Company adopted the IHF Capital, Inc. 1994 Stock Option
Plan, as amended (the ''1994 Stock Option Plan'') which provided for the grant
to certain eligible employees of either incentive stock options, nonstatutory
options or both. No employee was entitled to grants of options in excess of
700,000 shares. A total of 2,110,207 shares of Class A Common Stock were
reserved for issuance under the 1994 Stock Option Plan, which is administered by
the Board of Directors or a committee thereof, of which 765,159 shares have been
issued or cancelled and 1,345,048 represent outstanding stock options as of May
31, 1997.
1996 Stock Option Plan
In August 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Stock Option Plan") which provides 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 has been authorized
for issuance under the 1996 Stock Option Plan, which is administered by the
Board of Directors. Through May 31, 1997, no options have been granted under
the 1996 plan; however, at May 31, 1997 the Company had committed to grant
options to purchase 30,636 shares of Class A Common Stock at the fair market
value on the date of grant.
Committee Interlocks and Insider Participation
The Company did not maintain a compensation committee during 1997. Messrs.
Scott Watterson's and Stevenson's 1997 compensation was determined prior to the
Recapitalization pursuant to employment contracts that had been in place since
1989 and after the Recapitalization pursuant to the newly entered into
employment agreements described below. Messrs. Watterson and Stevenson
participated in the deliberations concerning the compensation of other officers,
and Mr. Beck participated in the deliberations concerning the compensation of
officers other than himself and Messrs. Watterson and Stevenson. See Item 13
''Certain Relationships and Related Transactions.''
Compensation of Directors
The Company's directors did not receive any compensation for serving on its
Board of Directors in 1996, and are not entitled to receive compensation in
connection with their current service. Directors are reimbursed for their out-
of-pocket expenses incurred in connection with their service as directors. The
Company also maintains liability insurance policies for the Company's directors.
See Item 13 ''Certain Relationships and Related Transactions --Management
Fees.''
Employment Agreements
Concurrent with the Recapitalization Closing, Scott Watterson and Gary
Stevenson entered into five-year employment agreements with the Company. The
Company and Messrs. Watterson and Stevenson executed amendments to the
employment agreements dated September 6, 1996 (as amended, the "Employment
Agreements"). The Employment Agreements provide for the employment of Mr.
Watterson as Chairman and Chief Executive Officer with a base salary as of June
1, 1995 of $450,000 and Mr. Stevenson as President and Chief Operating Officer
with a base salary of $400,000. These agreements also provide for their
respective levels of participation in the management stock option and
deferred compensation plans, to the extent such plans are established. In
every other material respect, the contracts are substantially identical.
Under the Employment Agreements, the executive's salary may be adjusted
upwards at the discretion of the Board of Directors, and the executive is
entitled to the use and cost of operation of a car of his choice and to
participate in the life, welfare and health insurance plans and other fringe
benefit programs made available by the Company to its senior executive officers
(including such deferred compensation plans as may be established by the Board
of Directors for such executives). Each executive is also entitled to
participate in a bonus program providing for a bonus equal to a percentage of
pre-interest (excluding revolving credit interest), pre-tax, pre-bonus
consolidated profits of the Company not taking into account certain changes in
depreciation, amortization, or certain other changes due to the
Recapitalization, which percentage shall equal 1.3% for 1996, 1.4% for 1997 and
thereafter a percentage established by the Board of Directors which cannot be
less than 1.4%; provided, however, no bonus will be paid unless the Company's
pre-interest (excluding revolving credit interest), pre-tax, pre-bonus
consolidated profits exceed a level to be set by the Board of Directors based on
budgets prepared by management for periods after 1995 and which level for 1995
and 1996 is 3% of net sales. The Employment Agreements also provided for a one
time bonus in fiscal 1997 of $700,000 which was divided between Messrs. Waterson
and Stevenson.
Each executive's employment under his Employment Agreement terminates
automatically upon death or bankruptcy of the executive, and is terminable by
the Company for cause as provided in each agreement, upon six months'
disability, or without cause. For these purposes, "cause" includes willful
misconduct, gross negligence, commission of a crime involving material harm,
commission of a crime of moral turpitude, willful insubordination and failure to
comply with certain covenants under the Employment Agreements. The provisions
providing for termination upon bankruptcy of the executive may not be
enforceable under the U.S. Bankruptcy Code, however. Each executive may
similarly terminate his employment immediately for cause as provided in his
Employment Agreement or for any reason upon six months' notice. In the event of
termination by the Company for cause or upon death or bankruptcy (if such
termination is legally enforceable), the executive is not entitled to further
salary, benefits or bonus. Upon termination by the executive, the Company may at
its option continue the executive's employment for the notice period or
terminate the executive's employment. Upon termination by the Company without
cause or upon termination by the executive with or without cause, the Company is
obligated to pay the executive his salary and bonus for a period of two years
from the date of termination. Upon termination by the Company upon the
executive's disability, the Company is obligated to pay as severance an amount
equal to one month's base salary then in effect for each calendar year or part
thereof elapsed since January 1, 1988, provided that such severance pay is
reduced by payments under applicable disability insurance.
The Employment Agreements prohibit the executives from engaging in outside
business activity during the term, except that the executive may sit on outside
business and charitable boards approved by the Board of Directors, make passive
investments in noncompeting businesses, as defined in the Employment Agreement
and spend up to five hours per week subject to a maximum of 100 hours per year
counseling noncompeting businesses in which he invests. The Employment
Agreements provide for customary confidentiality obligations and, in addition, a
noncompetition obligation for a period of four years following termination (two
years if the executive quits or is terminated without cause except that the
Company may at its option extend such period for up to two additional years by
paying the executive his salary and bonus during the extended period). The
Employment Agreements also limit each executive's liability to the Company to
the extent of such executive's salary, bonus and other compensation received by
the executive during the fiscal year in which termination occurs plus any
compensation which subsequently accrues to such executive. This limitation does
not apply in the case of an executive's theft, fraud, embezzlement, violation of
the confidentiality, notice, or non-competition provisions of his Employment
Agreement, breach of the executive's non-competition agreement or certain other
matters and is subject in any event to a maximum liability of $1.24 million in
the case of each of Messrs. Watterson and Stevenson (including any liabilities
under the indemnification provisions of the Master Transaction Agreement, as
defined below) for violation of the confidentiality, notice upon resignation,
and non-competition provisions.
Certain Benefits of Recapitalization to Senior Management
As a part of the Recapitalization, Mr. Scott Watterson and Mr. Gary Stevenson
received in exchange for their options to purchase Capital Stock of Weslo and
ProForm: (i) the Redeemable Options, which IHF Capital redeemed after the
Closing for $14.83 million in the case of Mr. Watterson and $11.53 million in
the case of Mr. Stevenson; (ii) options to purchase an additional 486,199
shares of Class A Common Stock (which have since been exercised) and 48,620
shares of Class L Common Stock of IHF Capital in the case of Mr. Watterson and
378,155 shares of Class A Common Stock (which have since been exercised) and
37,815 shares of Class L Common Stock of IHF Capital in the case of Mr.
Stevenson at an exercise price of $0.00397 per share of Class A Common Stock
and $3.93482 per share of Class L Common Stock; (iii) options to purchase 585.8
shares of Series A-2 IHF Holdings Preferred Stock (which have since been
repurchased by the Company) in the case of Mr. Watterson and 455.6 shares of
Series A-2 IHF Holdings Preferred Stock (which have since been repurchased by
the Company) in the case of Mr. Stevenson, with each such share of Series A-2
IHF Holdings Preferred Stock having a liquidation preference as of the Closing
of the Recapitalization of $4,000 per share and each such option having an
exercise price of $158.98 per share; and (iv) Warrants to purchase 25,478
shares of Class A Common Stock of IHF Capital in the case of Mr. Watterson and
Warrants to purchase 19,816 shares of Class A Common Stock of IHF Capital in
the case of Mr. Stevenson, with each Warrant having been exercised at a strike
price of $.10 per share. The per share price of Class A Common Stock being paid
in the Recapitalization was $0.10, and the per share price of Class L Common
Stock being paid in the Recapitalization was $99.00. See Item 12 "Security
Ownership of Certain Beneficial Owners and Management." Messrs. Watterson and
Stevenson also received employee stock options. The Company reimbursed
$199,000 of Messrs. Watterson's and Stevenson's legal fees and expenses in
connection with the Recapitalization and will maintain certain directors' and
officers' liability insurance policies for the benefit of Messrs. Watterson and
Stevenson and the Company's other directors and officers. Messrs. Watterson and
Stevenson also entered into four-year agreements not to compete with the Company
in certain specified businesses for which they received $2.3 million and $1.8
million, respectively. Messrs. Watterson and Stevenson also received a
consulting fee from CanCo equal to an aggregate of 14% of its pretax earnings
from the date of the Recapitalization through September 6, 1996, the date of the
CanCo Acquisition. Prior to the Recapitalization, Messrs. Watterson and
Stevenson owned a 14% aggregate equity interest in CanCo. Messrs. Watterson and
Stevenson also entered into the employment agreements with ICON Health described
above under "Employment Agreements."
In the Recapitalization, each of Messrs. Beck, David Watterson, White and
Dalebout received, in exchange for his common stock in certain of the
Recapitalized Companies, 63,400 shares of Class A Common Stock and 6,340 shares
of Class L Common Stock of IHF Capital. Each of Messrs. Beck and David
Watterson also purchased 11,700 shares of Class A Common Stock and 1,170 shares
of Class L Common Stock, with the proceeds of loans from IHF Capital in the
amount of $116,987.13 and the par value in cash. Each of Messrs. White and
Dalebout purchased 7,750 shares of Class A Common Stock and 775 shares of Class
L Common Stock, with the proceeds of a loan from IHF Capital in the amount of
$77,491.48 and the par value in cash. The Company received from each of Messrs.
Beck, David Watterson, White and Dalebout an option to purchase certain of the
IHF Capital shares held by these individuals. IHF Capital exercised these
options in January of 1995. Upon exercise, IHF Capital received from Mr. Beck
45,950 shares of its Class A Common Stock and 4,595 shares of its Class L
Common Stock in exchange for $459,500; from Mr. Watterson 45,100 shares of its
Class A Common Stock and 4,510 shares of its Class L Common Stock in exchange
for $451,000; and from each of Messrs. White and Dalebout 44,900 shares of its
Class A Common Stock and 4,490 shares of its Class L Common Stock in exchange
for $449,000. Other members of management purchased an aggregate of 82,800
shares of Class A Common Stock and 8,280 shares of Class L Common Stock, for an
aggregate purchase price of $828,000, $560,000 of which was payable by these
members of senior management in cash, and the balance with the proceeds of
loans from IHF Capital. All members of the Company's senior management will
also participate in IHF Capital's employee stock option arrangements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
IHF Capital owns all of the outstanding common stock of ICON Fitness. The
following table and notes thereto set forth certain information with respect to
the beneficial ownership of IHF Capital's outstanding shares of common stock as
of August 29, 1997 by (i) each person known to IHF Capital to beneficially own
more than 5% of the outstanding shares of common stock of IHF Capital, and (ii)
each director and executive officer of IHF Capital individually and (iii) all
directors and executive officers of IHF Capital as a group.
<TABLE>
<CAPTION>
Common Stock Beneficially Owned (1)(2)
----------------------------------------------------
Class L Common Stock Class A Common Stock
------------------------ ------------------------
Percent of Percent of
Number of Outstanding Number of Outstanding
Shares Shares Shares Shares (3)
Names
<S> <C> <C> <C> <C>
Scott R. Watterson+(3)(4) 248,620 37.3% 3,338,956 40.55%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Gary E. Stevenson+(4)(5) 237,816 36.30 3,050,618 37.49
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
S. Fred Beck(4)(6) 202,915 32.87 2,098,984 26.85
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
David S. Watterson(4)(7) 203,000 32.88 2,084,736 26.67
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Jon M. White(4)(8) 202,625 32.82 2,069,152 26.55
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Robert C. Gay+(4)(9) 559,305 90.60 5,593,050 72.06
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Ronald P. Mika+(4)(9) 559,305 90.60 5,593,050 72.06
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Geoffrey S. Rehnert+(4)(9) 559,305 90.60 5,593,050 72.06
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
The Bain Funds (4)(9) 559,305 90.60 5,593,050 72.06
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
ICON Fitness Corporation 200,000 32.4 2,000,000 25.77
Logan, Utah 84321
All directors and executive officers as
a group (10 persons)(4) 654,280 92.99 8,234,896 94.12
</TABLE>
[FN]
* Less than one percent.
+ Director of IHF Capital.
(1) The Common Stock of IHF Capital consists of two classes of shares, par
value $.01 per share: Class L Common Stock ("Class L") and Class A Common
Stock ("Class A"). There are 1.3 million authorized shares of Class L and
16 million authorized shares of Class A. At April 9, 1997 617,350 shares of
Class L and 7,761,804.43 shares of Class A were issued and outstanding.
Upon a liquidation of IHF Capital, the Class L are entitled to a pro rata
preference, before anything is paid on the Class A, equal to $99 per share
(the price at which such shares were issued in the Recapitalization) plus
an amount equal to the non-liquidating distributions to which the holders
of such shares would otherwise be entitled. After such preference has been
paid to holders of Class L, holders of the Class A receive $0.10 per share
(the price at which such shares were issued in the Recapitalization), and
thereafter holders of the Class A and Class L shares share in any remaining
amounts to be distributed based on the number of shares of Class A which
would be held by each shareholder as of the applicable record date upon the
conversion of all shares of Class L into shares of Class A. In the event of
distributions, other than those made in connection with a liquidation of
IHF Capital, holders of Class L are entitled to first priority with respect
to distributions up to an amount which would generate an internal rate of
return on $99 of 10% per year, compounded quarterly beginning as of the
Closing. After such preference has been satisfied, holders of Class A and
Class L shares share in any remaining amounts based on the number of shares
of Class A which would be held by each shareholder as of the applicable
record date upon the conversion of all shares of Class L into shares of
Class A. Upon a public offering of shares of Class A, each share of Class L
is convertible at the option of IHF Capital into a number of shares of
Class A equal to (a) 1.0(subject to certain adjustments), plus (b) the
quotient obtained by dividing (x) $99 plus an amount sufficient to generate
an internal rate of return on $99 of 10% per year, compounded quarterly
(adjusted downwards to reflect any distributions actually made to holders
of Class L shares between the date of the Closing and the date of the
calculation), by (y) the price per share received by IHF Capital for its
Class A issued in the public offering. The Class L and Class A vote
together as a single class on all matters, with each share of Class L
entitled to a number of votes equal to the number of shares of Class A
which would then be received upon conversion of a share of Class L
(assuming a public offering at a price per share equal to (a) prior to a
public offering, the greater of $0.10 or net book value and (b) after a
public offering, an average of recent market prices). The holders of Class
L and Class A are not entitled to cumulate their votes in the election of
directors, which means that holders of more than half the voting power of
the outstanding Class L and Class A can elect all the directors of IHF
Capital.
(2) Except as otherwise indicated, (i) the named owner has sole voting and
investment power with respect to the shares set forth and (ii) the figures
in this table are calculated in accordance with Rule 13d-3, as amended,
under the Exchange Act. The table includes the ICON Unit Warrants and the
IHF Holdings Unit Warrants (which have an exercise price, subject to
adjustment, of $.01 per share) even though such Warrants are not currently
exercisable. All current shareholders and warrantholders of IHF Capital are
parties to a Stockholders Agreement pursuant to which certain holders
affiliated with management of IHF Capital are entitled to elect two
directors, certain holders affiliated with WHF are entitled to elect two
directors and Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P.,
BCIP Associates and BCIP Trust Associates, L.P. (collectively, the "Bain
Funds") are entitled to fix the number of directors and to elect all
remaining directors. In addition, the Bain Funds are entitled to direct how
these other shareholders will cast their votes with respect to certain
matters, including a public offering of IHF Capital or the disposition of
its assets. The Stockholders Agreement also provides for certain
"drag-along", "tag-along" and registration rights. The shares reported in
this table as owned by a shareholder do not include the shares over which
such shareholder has the right to direct the vote pursuant to such
Stockholders Agreement.
(3) Includes 48,620 shares of Class L Common Stock and 469,988 shares of Class
A Common Stock subject to purchase upon exercise of options that are
exercisable within 60 days after August 28, 1997.
(4) Includes the shares owned by ICON of which the named shareholder is deemed
the beneficial owner by virtue of being a director, an executive officer,
or a controlling shareholder of ICON's parent, IHF Capital.
(5) Includes 37,816 shares of Class L Common Stock and 375,251 shares of Class
A Common Stock subject to purchase upon exercise of options that are
exercisable within 60 days after August 28, 1997.
(6) Includes 54,736 shares of Class A Common Stock subject to purchase upon
exercise of options that are exercisable within 60 days after April 9,
1997. Excludes 37,745 shares of Class A Common Stock subject to purchase
upon exercise of options that are not exercisable within 60 days after
August 28, 1997.
(7) Includes 54,736 shares of Class A Common Stock subject to purchase upon
exercise of options that are exercisable within 60 days after April 9,
1997. Excludes 52,843 shares of Class A Common Stock subject to purchase
upon exercise of options that are not exercisable within 60 days after
August 28, 1997.
(8) Includes 32,837 shares of Class A Common Stock subject to purchase upon
exercise of options that are exercisable within 60 days after April 9,
1997. Excludes 25,163 shares of Class A Common Stock subject to purchase
upon exercise of options that are not exercisable within 60 days after
August 28, 1997.
(9) Includes the shares owned by each of the Bain Funds, of which the named
shareholder is deemed the beneficial owner by virtue of being a general
partner or principal, or a general partner or a principal of the general
partner, of such Bain Fund.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary, although subject to, and qualified in its entirety
by reference to, the agreements summarized below, including the definitions
therein of certain terms, is complete in all material respects. A number of
these agreements were amended in connection with the WHF Settlement.
Master Transaction Agreement. The original shareholders, the option holders of
the Recapitalized Companies and the Company were parties to a First Amended and
Restated Master Transaction Agreement, dated as of October 12, 1994 (the "Master
Transaction Agreement"), providing for certain of the transactions constituting
the Recapitalization. Pursuant to the Master Transaction Agreement, among other
things, the original shareholders and the option holders of the Recapitalized
Companies made certain representations and warranties regarding themselves and
the Recapitalized Companies and provided certain indemnities in favor of the
Company, and the Company made certain representations and warranties regarding
itself and provided certain indemnities in favor of the original shareholders
and the option holders of the Recapitalized Companies, subject in the case of
such indemnities to certain limitations as to time and amount. The Master
Transaction Agreement identifies certain consents of third parties that were
required to consummate the Recapitalization. The Company believes that one
required consent was not obtained, but that the lack of such consent has not had
and will not have a material adverse effect on its financial condition and
results of operation.
Weider Brand Name. Concurrent with the closing of the Recapitalization, the
Company obtained from Weider Sports, WHF, WSG and Weider Europe certain rights
to use the Weider name pursuant to two separate exclusive license agreements.
Pursuant to the first such license agreement between the Company and Weider
Sports (the "Weider Sports License"), Weider Sports granted the Company the
exclusive worldwide right and license to use the "Weider" trademark and certain
other trademark rights owned by or licensed to Weider Sports in Canada (the
"Canadian Trademark Rights") to identify certain fitness and exercise equipment
and non-ingestive sports medicine products other than "soft goods" (the
"Licensed Products") and certain services related thereto (the "Licensed
Services"). Pursuant to the second such license agreement (the "WHF License") by
and among the Company as licensee, and WSG, WHF, and Weider Europe as licensors
(collectively, the "Licensor"), the Licensor granted the Company the exclusive
worldwide right and license to use the "Weider" trademark and certain other
trademark rights owned by or licensed to the Licensor in all areas of the world
other than Canada (the "U.S. and Other Trademark Rights") to identify Licensed
Products and Licensed Services. Under the WHF License, the Licensor has
represented and warranted, among other things, that it is the owner or licensee
of such trademark rights in the United States, Mexico, the United Kingdom,
France, Germany, the Benelux countries, Italy, Austria and Switzerland. Weider
Sports pursuant to the Weider Sports License, and WHF, WSG and Weider Europe
pursuant to the WHF License, retain the ownership of and right to exploit the
Canadian Trademark Rights and the U.S. and Other Trademark Rights, respectively,
throughout the world to identify all present or future products other than the
Licensed Products and services other than Licensed Services. Under the Weider
Sports License, the Company paid a $5 million license fee at the
Recapitalization Closing and has a perpetual, fully paid-up license with respect
to the Canadian Trademark Rights. Under the WHF License, the Company was
required to pay a royalty with respect to the U.S. and Other Trademark Rights
equal to 2% of sales of Licensed Products sold thereunder until such time as the
Company has paid an aggregate royalty with respect to such U.S. and Other
Trademark Rights equal to $12 million plus an interest factor accruing on the
unpaid portion of the royalty at a per annum rate of 10%. In connection with the
WHF Settlement, the Company prepaid this royalty in full on September 6, 1996.
Purchase Option. Under the CanCo Option, the Company had the right at any time
within 30 months after the closing of the Recapitalization to purchase the net
fixed assets, inventory and certain other assets of CanCo at a purchase price
equal to aggregate net book value, which was believed by the parties to be the
fair market value of such fixed assets, inventory and other assets, and the
assumption of certain related leases and contracts. These assets consisted
primarily of manufacturing facilities (which were leased) which had supplied
products to the Recapitalized Companies and other affiliates of WHF and Weider
Europe and are continuing to supply products to the Company. In August 1995, the
Company gave notice of its intention to exercise the CanCo Option, subject to
various conditions, and consummated the acquisition on September 6, 1996.
In 1995, 1996, and prior to the CanCo Acquisition in 1997, the Company
purchased $26.4 million, $50.7 million and $7.0 million, respectively, of
products from CanCo. Prior the exercise of the CanCo Option (and the closing
thereunder), all such purchases by the Company were made on an arm's length
basis.
In addition, the Company provided management services to CanCo while it had
the right to exercise the CanCo option and received a management fee equal to
$0.5 million in the second quarter of 1997 in connection with the WHF
Settlement. No management fees were received from CanCo in 1995 or in 1996.
Scott Watterson and Gary Stevenson received from CanCo an aggregate of 14% of
its adjusted pre-tax earnings from November 14, 1994 to September 6, 1996.
European Operations. The Company purchased certain fixed assets for
approximately $.2 million and assumed certain liabilities (primarily real estate
leases) of Weider Europe. It also hired selected former employees of Weider
Europe and its affiliates. These assets and employees, supplemented by the
Company's domestic resources were used in establishing the Company's presence in
targeted European markets. The Company's European operations purchased $.4
million of products from affiliates of WHF in 1996.
International Distribution Arrangements. Prior to the beginning of 1996, the
Company sold products to affiliates of WHF for international distribution,
primarily in Europe. In 1995, 1996 and prior to the WHF Settlement in 1997 sales
by the Company to such affiliates of WHF aggregated $8.8 million, $9.6 million
and, $3.2 million respectively. Since the beginning of 1996, the Company has
been selling its products directly in Europe.
In connection with the Recapitalization, the Company entered into an
agreement with Weider Sports, under which Weider Sports had exclusive,
perpetual, worldwide distribution rights, except as noted below, for certain of
the Company's products on the same terms and conditions as those given to the
Company's most favored customers in countries other than the United States, the
United Kingdom, France, Germany, the Benelux countries, Italy, Austria,
Switzerland and Mexico. Weider Sports did not have distribution rights with
respect to certain of the Company's products, including products sold under
third party brand names.
In connection with the Weider Sports Acquisition in September 1996, the
Company paid $8.0 million to reacquire the distribution rights granted to Weider
Sports in connection with the Recapitalization, subject to certain rights
granted by Weider Sports to third parties.
WSG and Weider Europe Management Agreements. The Company entered into an
agreement as of June 1, 1994 under which the Company provided certain management
services to WSG and acted as WSG's agent to maintain and liquidate its inventory
and service and collect the accounts receivable of WSG in return for specified
fees. For 1995, the Company was paid a management fee of $2.7 million. Following
the Recapitalization, WSG stopped paying fees under the management agreement and
later terminated that agreement.
In connection with the Recapitalization, the Company and Weider Europe
entered into a substantially similar agreement which became effective as of
January 15, 1995 pursuant to which the Company provided management services to
Weider Europe. Since the Recapitalization Closing and through September 6, 1996,
the Company acted as Weider Europe's agent to maintain and liquidate inventory
and to service and collect accounts receivable of Weider Europe. Weider Europe
did not pay any fees under the management agreement.
The WSG and Weider Europe Management Agreements terminated in connection with
the WHF Settlement.
Noncompete Agreement. In connection with the Recapitalization, the Company
entered into a noncompete agreement with WHF and Messrs. Watterson and
Stevenson, which has been subsequently amended in connection with the WHF
Settlement, under which the Company paid (i) WHF $2.4 million for its agreement
not to compete with the Company in certain specified businesses for a five-year
term and (ii) Messrs. Watterson and Stevenson $2.3 million and $1.8 million,
respectively, for their agreement not to compete with the Company in certain
specified businesses for a four year term.
Tax Sharing Agreement. For federal income tax purposes, the taxable income of
IHF Holdings and Health & Fitness and their subsidiaries has historically been
included in a single consolidated federal income tax return, and IHF Capital has
filed a separate federal income tax return. Such taxable income may also have
been included in certain state and local consolidated, combined or unitary
income tax returns. A tax sharing agreement was entered into in connection with
the Recapitalization among Health & Fitness, IHF Holdings, IHF Capital and their
affiliates to provide that each company included in consolidated returns would
pay its separate company tax liability to IHF Holdings calculated as if it were
not included in consolidated, combined or unitary returns with its parent. Upon
the redemption of the IHF Holdings preferred stock, the taxable income of IHF
Capital, IHF Holdings, Health & Fitness and their affiliates are included in a
single consolidated federal tax return. The tax sharing agreement previously
entered into anticipated this possibility and provides that tax payments will
now be paid to IHF Capital.
Advertising and Marketing Relationships. Historically, the Company purchased
advertising space for certain of their products in magazines and other
publications produced by WHF and its affiliates on terms better than or at least
as favorable as those offered to independent parties. In 1995 and 1996 the
Recapitalized Companies purchased $.3 million and less than $.1 million,
respectively, of such advertising.
Management Fees. Since the closing of the Recapitalization, pursuant to a
management agreement (the "Bain Management Agreement"), Bain Capital Partners
IV, L.P. ("Bain IV"), an affiliate of Bain Capital, provides management
consulting services to the Company including providing advice on strategic
planning, development and acquisitions for an annual fee of $.8 million plus
reimbursement of reasonable out-of-pocket expenses. In 1995, 1996, and 1997 the
Company paid Bain IV $.4 , $.8 million, and $.8 million respectively, in
consulting fees. The Bain Management Agreement includes customary
indemnification provisions in favor of Bain IV. In addition, if the Company
enters into any acquisition transactions involving at least $10.0 million, Bain
IV will receive a fee in an amount which will approximate 1% of the gross
purchase price of the transaction (including assumed debt). In connection with
the HealthRider Acquisition, the Company paid Bain IV $700,000.
Structuring Fee. Pursuant to the Bain Management Agreement, on November 14, 1994
the Company paid to Bain IV a structuring fee of $3.5 million plus reimbursement
of out-of-pocket expenses in consideration of Bain IV's assistance in
facilitating certain debt financing for the Recapitalization.
Reimbursement of Original Shareholder Expenses. In 1995, the Company reimbursed
$2.0 million of expenses incurred by WHF and the other original shareholders in
connection with the Recapitalization.
Loans to Employees. In connection with the exercise of options prior to the
Recapitalization, ProForm accepted as partial payment notes in the amount of
$60,000 from each of Mr. Beck and Mr. David Watterson and $57,000 from each of
Mr. White and Mr. Dalebout at an interest rate of prime plus 0.5%. Such notes
were forgiven in January of 1997. In connection with the purchase of stock in
the Recapitalization, the Company accepted as partial payments, notes bearing
interest at a per annum rate equal to 7.5% in the amount of approximately
$117,000 from each of Mr. Beck and Mr. David Watterson and $77,500 from Mr.
White. As of May 31, 1997, $117,000, $117,000 and $134,500 remain outstanding
from Messrs. Beck, David Watterson and White, respectively.
Westwind II. In June 1996, the Company entered into an agreement with FG
Aviation, Inc. ("FG"), a company which is jointly owned by officers of the
Company, whereby the Company has committed to lease a Westwind II jet from FG.
Minimum rentals under the lease, which expires in May 2005, are $56,610 per
month. In connection with its lease commitments, the Company recorded $679,000
of rental expense and $34,000 of maintenance expense in the year ended May 31,
1997. In addition, the Company advanced $280,000 to FG as a security deposit on
the aircraft lease.
Repurchase of Common Stock. In connection with the settlement of its litigation
with WHF, 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. 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 in which ICON recorded the
amounts paid to the WHF stockholders as a reduction in the additional paid-in
capital of ICON.
Repurchase of IHF Holdings Preferred Stock. In connection with the settlement of
its litigation with WHF, 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
reflected a discount of $3.9 million and the forgiveness of accrued dividends.
In connection with the repurchase of the IHF Holdings Preferred Stock, the
Company purchased the options to purchase IHF Holdings Preferred Stock held by
certain officers of the Company for $3.7 million, which reflected 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 $50.0
million, which consists of (i) $35.8 million which ICON contributed to IHF
Holdings from its proceeds from the issuance of Senior Discount Notes 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 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
Consolidated Financial Statements (See Item 8)
Consolidated Balance Sheets at May 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended May 31, 1997, 1996
and 1995
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended May 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended May 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Financial Statement Schedules (See Item 8)
Schedule VIII - Valuation Accounts for the Three Years Ended May 31, 1997
All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related notes or can be
derived from information contained in the consolidated financial statements and
related notes.
Exhibits
The following designated exhibits have heretofore been filed with the
Securities and Exchange Commission under the Securities Act of 1933 and are
referred to and incorporated herein by reference to such filings. Except as
otherwise indicated, all exhibits are incorporated herein by reference to the
correspondingly numbered exhibit filed as part of the Registrants' Registration
Statement on Form S-1 of IHF Capital, as amended (No. 33-87930/87930-1) and on
Form S-4 of ICON Fitness, as amended (No. 333-18475).
1.1 Purchase Agreement dated November 15, 1996 regarding the issuance and
sale of the Senior Discount Notes between ICON Fitness and Donaldson,
Lufkin & Jenrette Securities Corporation.
3.1 Certificate of Incorporation.
3.1A Amendment to Certificate of Incorporation.
3.2 By-laws.
4.2 Indenture dated as of November 20, 1996 between ICON Fitness as
Issuer, and Fleet National Bank as Trustee, with respect to the
$162,000,000 in aggregate principal amount at maturity of Senior
Discount Notes due 2006, including the form of the Senior Discount
Note.
4.2A Supplemental Indenture dated as of March 20, 1995 between IHF
Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A., as
Trustee, with respect to the $123,700,000 in aggregate principal
amount at maturity of Discount Notes due 2004.
4.3 Registration Rights Agreement dated as of November 20, 1996 by and
between ICON Fitness and Donaldson Lufkin & Jennette Securities
Corporation.
4.4 Registration Rights Agreement dated November 14, 1994 between ICON
Health and Weider Health and Fitness with respect to the Senior
Subordinated Notes due 2002.
10.1 Amended and Restated Credit Agreement dated as of November 14, 1994
among ICON Health, the lenders named therein, and General Electric
Capital Corporation.
10.1A Agreement of IHF Holdings, Inc. and IHF Capital, dated November 14,
1994 in favor of General Electric Capital Corporation, as agent.
10.2 First Amended and Restated Master Transaction Agreement dated as of
October 12, 1994 among ICON Health and each of Weider Health and
Fitness and Weider Sporting Goods, Inc. and each of Hornchurch
Investments Limited, Bayonne Settlement, The Joe Weider Foundation,
Ronald Corey, Jon White, William Dalebout, David Watterson, S. Fred
Beck, Gary Stevenson and Scott Watterson.
10.3 Adjustment Agreement dated as of November 14, 1994 between Weider
Health and Fitness and ICON Health.
10.4 Stockholders Agreement dated as of November 14, 1994 by and among ICON
Health, IHF Holdings each of the Bain Funds named therein and certain
other persons named therein.
10.4A Registration Rights Agreement dated November 14, 1994 among ICON
Health and IHF Holdings and Donaldson, Lufkin & Jenrette Securities
Corporation and Bear, Stearns & Co.
10.5 Non-Competition Agreement dated as of November 14, 1994 among ICON
Health, Weider Health and Fitness, Gary E. Stevenson and Scott R.
Watterson.
10.6 Management and Advisory Agreement dated as of November 14, 1994 among
ICON Health, IHF Holdings, IHF Capital, and Bain Capital Partners IV,
L.P.
10.7 Distribution Agreement dated as of September 26, 1994, as amended by
letter of Ben Weider dated October 12, 1994 between ICON Health and
Weider Sports Equipment Co., Ltd.
10.8 Exclusive License Agreement dated as of November 14, 1994 among Weider
Health and Fitness, Weider Sporting Goods, Inc., Weider Europe B.V.,
and ICON Health.
10.9 Canada Exclusive License Agreement dated as of November 14, 1994
between Weider Sports Equipment Co., Ltd. and ICON Health.
10.10 Employment Agreement dated as of November 14, 1994 among IHF Capital,
ICON Health, IHF Holdings and Gary E. Stevenson.
10.11 Employment Agreement dated as of November 14, 1994 among the company,
ICON Health, IHF Holdings and Scott R. Watterson.
10.12 Asset Option Agreement dated as of November 14, 1994 among ICON
Health, Weider Sporting Goods, Inc. and Weider Europe B.V., including
ICON Health's assignment of its rights thereunder.
10.13 Asset Option Agreement dated as of November 14, 1994 between ICON
Health and each of Athletimonde Inc., Les Industries Rickbend Inc. and
Fitquip International Inc., including ICON Health's assignment of its
rights thereunder.
10.14 Canco Management and Advisory Agreement dated as of November 14, 1994
by and among ICON Health, Scott Watterson, Gary E. Stevenson and Les
Industries Rickbend Inc., Athletimonde Inc., and Fitquip International
Inc., including ICON Health's assignment of its rights thereunder.
10.15 Weider Europe Management Agreement dated as of November 14, 1994 among
ICON Health and Weider Europe B.V., including ICON Health's assignment
of its rights thereunder.
10.16 Amended and Restated WSG Management Agreement dated as of June 1, 1994
among ICON Health, Weider Health and Fitness and Weider Sporting
Goods, Inc.
10.17 Advertising Space Contract dated as of November 14, 1994 between ICON
Health and Weider Publications, Inc.
10.18 Trade Payables Agreement dated as of November 14, 1994 between ICON
Health and IHF Holdings.
10.19 Tax Agreement dated as of November 14, 1994 among the Company and its
subsidiaries.
10.20 The Company's Stock Subscription and Exchange Agreement dated as of
November 14, 1994 among the Company and each of the Existing
Stockholders named therein.
10.21 Warrant Agreement dated as of November 14, 1994 among IHF Capital,
Weider Health and Fitness, Scott Watterson and Gary Stevenson.
10.22 Bain Stock Subscription Agreement dated as of November 14, 1994 among
the Company and each of the Bain Funds and other subscribers named
therein.
10.23 IHF Capital's Stock Subscription and Purchase Agreement dated as of
November 14, 1994 among IHF Capital and the Subscribers named therein.
10.24 IHF Holdings Stock Subscription and Exchange Agreement dated as of
November 14, 1994 among IHF Holdings and each of the persons named
therein.
10.25 IHF Capital's Option Exchange Agreement dated as of November 14, 1994,
among the Company, Scott Watterson and Gary Stevenson.
10.26 IHF Holdings Option Exchange Agreement dated as of November 14, 1994
among IHF Holdings, Scott Watterson and Gary Stevenson.
10.27 IHF Capital's Employee Stock Option Plan dated as of November 14,
1994.
10.27.1 Form of Option Certificate for Management Options.
10.27.2 Form of Option Certificate for Performance Options.
10.28 Agreement and Plan of Merger dated as of November 14, 1994 among ICON
Health, American Physical Therapy, Inc., Weslo, Inc. and ProForm
Fitness Products, Inc.
10.29 Promissory Note dated December 30, 1993 and a loan made by David
Watterson in favor of ProForm Fitness Products, Inc. in the amount of
$60,000.
10.30 Promissory Note dated December 30, 1993 and a loan made by William
Dalebout in favor of ProForm Fitness Products, Inc. in the amount of
$57,000.
10.31 Promissory Note dated December 30, 1993 and a loan made by Fred Beck
in favor of ProForm Fitness Products, Inc. in the amount of $60,000.
10.32 Promissory Note dated December 30, 1993 and a loan made by Jon White
in favor of ProForm Fitness Products, Inc. in the amount of $57,000.
10.33 Sublease dated as of June 1, 1994 between Weider Health and Fitness
and ProForm Fitness Products, Inc.
10.34 Indenture dated as of November 14, 1994 between ICON Health, as
Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $101,250,000 in aggregate principal amount of Senior
Subordinated Notes due 2002, including the form of Senior Subordinated
Note.
10.34A Supplemental Indenture dated as of March 20, 1995 between ICON Health,
as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $101,250,000 in aggregate principal amount of Senior
Subordinated Notes due 2002.
10.35 Indenture dated as of November 14, 1994 between IHF Holdings, as
Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with
respect to the $123,700,000 in aggregate principal amount at maturity
of Discount Notes due 2004, including the form of Discount Note.
10.35A Supplemental Indenture dated as of March 20, 1995 between IHF
Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A., as
Trustee, with respect to the $123,700,000 in aggregate principal
amount at maturity of Discount Notes due 2004.
10.36 Registration Rights Agreement dated November 14, 1994 between ICON
Health and Weider Health and Fitness with respect to the Senior
Subordinated Notes due 2002.
10.37 Asset Purchase Agreement dated as of July 3, 1996 by and among IHF
Capital, Inc. HealthRider Acquisition Corp. and HealthRider, Inc.
10.38 Asset Purchase Agreement for the purchase of certain assets of Parkway
Manufacturing, Inc. dated July 3, 1996.
10.39 Buy-Out Agreement between HealthRider Acquisition Corp. and Parkway
Manufacturing, Inc. dated August 26, 1996.
10.40 IHF Capital's 1996 Stock Option Plan.
10.41 WSE Asset Purchase Agreement, dated September 6, 1996 between Weider
Sports Equipment Co. Ltd. and ICON Health
10.42 Canco Asset Purchase Agreement, dated September 6, 1996 among ICON of
Canada Inc., ICON Health, ALLFITNESS, Inc, Scott
Watterson and Gary Stevenson.
10.43 Stock and Warrants Purchase Agreement, dated September 6, 1996 among
IHF Capital, Inc., IHF Holdings, Inc., Weider Health & Fitness,
Greyfriars Limited, Bayonne Settlement, Hornchurch Investments
Limited, Ronald Corey, Bernard Cartoon, Ronald Novak, Eric Weider,
Richard Bizarro, Robert Reynolds, Michael Carr, Thomas Deters, Barbara
Harris and Zbigniew Kindella.
10.44 Amendment No. 1 to Stockholders Agreement, dated September 6,1996
among IHF Holdings, Inc., Weider Health & Fitness, Greyfriars Limited,
Bayonne Settlement, Hornchurch Investments Limited, the Fund
Investors, DLJ Capital Corporation, General Electric Capital
Corporation, and certain other signatories named therein.
10.45 Amendment and Restatement of Stockholders Agreement, dated as of
September 6, 1996 among IHF Holdings, Inc., Weider Health & Fitness,
Greyfriars Limited, Bayonne Settlement, Hornchurch Investments
Limited, the Fund Investors, DLJ Capital Corporation, General Electric
Capital Corporation, and certain other signatories named therein.
10.46 Key Executive Preferred Stock Option Purchase Agreement, dated
September 6, 1996 among IHF Capital, Inc., Gary Stevenson and Scott
Watterson.
10.47 First Amendment to Stevenson Employment Agreement, dated September 6,
to the Employment Agreement dated November 14, 1994 among ICON Health
& Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Gary Stevenson.
10.48 First Amendment to Watterson Employment Agreement, dated September 6,
to the Employment Agreement dated November 14, 1994 among ICON Health
& Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Scott Watterson.
10.49 Weider Release, dated September 6, 1996 by Weider Health & Fitness,
Weider Sports Equipment Co., Ltd., Weider Sporting Goods, Inc., Weider
Europe, B.V., CANCO, Ben Weider, Eric Weider, Richard Renaud and the
Weider Releasors.
10.50 Icon Fitness Release, dated September 6, 1996 made by ICON Health,
IHF Capital, Inc., IHF Holdings, Inc., Scott Watterson, Gary
Stevenson and the ICON Fitness Releasors.
10.51 Settlement Agreement, dated September 6, 1996 among ICON Health,
IHF Capital, Inc., the Fund Investors, IHF Holdings, Inc.,
Weider Health & Fitness, Weider Sports Equipment, CANCO, Weider
Sporting Goods, Inc., Weider Europe, B.V., and each of Ben Weider,
Eric Weider, Richard Renaud, Gary Stevenson and Scott Watterson.
10.52 Escrow Agreement, dated September 6, 1996 among ICON Health,
ICON of Canada, Inc., CANCO, Lapointe Rosenstein and Goodman Phillips
of Vineberg.
10.53 Representation Agreement, dated September 6, 1996 between ICON Health
and Ben Weider.
10.54 Letter Agreement regarding advertising space, dated September 6, 1996
between Weider Publications, Inc. and ICON Health
10.55 Letters of Credit issued by Royal Bank of Canada to ICON Health
dated September 5, 1996.
10.56 Letters of Credit issued by Royal Bank of Canada to ICON Health
and ICON of Canada, Inc., dated September 5, 1996.
10.57 Letter from Royal Bank of Canada to ICON of Canada, Inc., dated
September 5, 1996, outlining terms of financing by Royal Bank of
Canada in favor of ICON of Canada, Inc.
10.58 Letter Agreement dated September 6, 1996 among ICON Health,
Ben Weider and Eric Weider regarding charitable contributions.
10.59 Deed of Sale.
21 Subsidiaries of the Company.
24 Powers of Attorney (included on signature page).
25 Statement of Eligibility of Fleet National Bank, Trustee.
27 Financial Data Schedule
99.1 Form of Letter of Transmittal used in connection with the Exchange
Offer.
99.2 Form of Notice of Guaranteed Delivery used in connection with The
Exchange Offer.
Reports on Form 8-K
None
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act:
No annual report covering the Registrants' last fiscal year or any proxy
material with respect to a meeting of security holders has been sent to any
of the Registrants' security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ICON Health & Fitness, Inc. has duly caused this report to
be signed on its behalf by the undersigned, there unto duly authorized.
ICON HEALTH & FITNESS, INC.
By: /s/ Scott R. Watterson
Name: Scott R. Watterson
Title: Chairman of the Board and Chief
Executive Officer
Date: August 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signatures Capacity Date
- -------------------- ------------------------------ ----------------
/s/ Scott R. Watterson
Scott R. Watterson Chairman of the Board of August 28, 1997
Directors and Chief Executive
Officer (principal executive
officer)
/s/ Gary E. Stevenson
Gary E. Stevenson President and Chief Operating August 28, 1997
Officer
/s/ S. Fred Beck
S. Fred Beck Vice President, Chief Financial August 28, 1997
and Accounting Officer, and
Treasurer
/s/ Robert C. Gay
Robert C. Gay Vice Chairman of the Board of August 28, 1997
Directors
/s/ Ronald P. Mika
Ronald P. Mika Director August 28, 1997
Geoffrey S. Rehnert Director August ___, 1997
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, IHF Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, there unto duly authorized.
IHF HOLDINGS, INC.
By: /s/ Scott R. Watterson
Name: Scott R. Watterson
Title: Chairman of the Board and
Chief Executive Officer
Date: August 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signatures Capacity Date
- -------------------- ------------------------------ ----------------
/s/ Scott R. Watterson
Scott R. Watterson Chairman of the Board of August 28, 1997
Directors and Chief Executive
Officer (principal executive
officer)
/s/ Gary E. Stevenson
Gary E. Stevenson President and Chief Operating August 28, 1997
Officer
/s/ S. Fred Beck
S. Fred Beck Vice President, Chief Financial August 28, 1997
and Accounting Officer, and
Treasurer
/s/ Robert C. Gay
Robert C. Gay Vice Chairman of the Board of August 28, 1997
Directors
/s/ Ronald P. Mika
Ronald P. Mika Director August 28, 1997
Geoffrey S. Rehnert Director August ___, 1997
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, IHF Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, there unto duly authorized.
ICON Fitness Corporation
By: /s/ Scott R. Watterson
Name: Scott R. Watterson
Title: Chairman of the Board and
Chief Executive Officer
Date: August 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signatures Capacity Date
- -------------------- ------------------------------ ----------------
/s/ Scott R. Watterson
Scott R. Watterson Chairman of the Board of August 28, 1997
Directors and Chief Executive
Officer (principal executive
officer)
/s/ Gary E. Stevenson
Gary E. Stevenson President and Chief Operating August 28, 1997
Officer
/s/ S. Fred Beck
S. Fred Beck Chief Financial and Accounting August 28, 1997
Officer, and Treasurer
/s/ Robert C. Gay
Robert C. Gay Vice Chairman of the Board of August 28, 1997
Directors
/s/ Ronald P. Mika
Ronald P. Mika Director August 28, 1997
Geoffrey S. Rehnert Director August ___, 1997
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of ICON Fitness Corporation, IHF
Holdings, Inc. and ICON Health & Fitness, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index on page 23 present fairly, in all material respects, the financial
position of ICON Fitness Corporation, and its subsidiary, IHF Holdings, Inc.,
and its subsidiary, ICON Health & Fitness, Inc. and its subsidiaries, at May 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 28, 1997
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
May 31,
---------------------------------------------------------------------------------------
1997 1996
------------------------------------------- ------------------------------------------
ICON ICON ICON ICON
Fitness IHF Health & Fitness IHF Health &
Corporation Holdings, Inc. Fitness, Inc. Corporation Holdings, Inc. Fitness, Inc.
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 5,560 $ 5,560 $ 5,560 $ 19,313 $ 19,313 $ 19,313
Accounts receivable, net 192,825 192,825 192,825 126,869 126,869 126,869
Inventories 121,838 121,838 121,838 95,922 95,922 95,922
Deferred income taxes 8,401 8,301 8,006 5,240 5,240 5,240
Other assets 12,895 12,895 12,895 3,348 3,348 3,348
Asset held for sale 17,080 17,080 17,080 - - -
Income taxes receivable 7,429 7,429 7,429 882 882 589
-------- -------- -------- -------- --------- --------
Total current assets 366,028 365,928 365,633 251,574 251,574 251,281
Property and equipment, net 51,738 51,738 51,738 32,312 32,312 32,312
Receivable from parent 2,307 2,307 2,307 - - -
Trademarks, net 18,236 18,236 18,236 - - -
Deferred income taxes 8,338 6,405 - 5,489 5,489 1,770
Other assets 28,157 24,066 19,029 27,352 27,352 21,125
-------- -------- -------- -------- --------- --------
$474,804 $468,680 $456,943 $316,727 $316,727 $306,488
======== ======== ======== ======== ========
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 5,401 $ 5,401 $ 5,401 $ 3,065 $ 3,065 $ 3,065
Accounts payable 112,079 112,079 112,079 73,652 73,652 73,652
Interest payable 6,220 6,220 6,220 5,815 5,815 5,815
Accrued expenses 20,696 20,696 20,696 11,424 11,424 11,424
Income taxes payable 1,165 1,165 1,165 - - -
-------- -------- -------- -------- --------- --------
Total current liabilities 145,561 145,561 145,561 93,956 93,956 93,956
-------- -------- -------- -------- --------- --------
Long-term debt 489,400 401,196 321,625 279,693 210,546
Deferred income taxes - - 501 - - -
Series A cumulative redeemable
preferred stock - - - - 47,904 -
Minority interest in cumulative
redeemable preferred stock
of subsidiary - - - 47,904 - -
Stockholders' equity (deficit):
Common stock and additional
paid-in capital 49,699 127,767 166,184 77,730 77,730 166,176
Receivable from officers for purchase
of equity (656) (656) (656) (758) (758) (758)
Cumulative translation adjustment (506) (506) (506) 386 386 386
Accumulated deficit (208,694) (204,682) (175,766) (182,184) (182,184) (163,818)
-------- -------- -------- -------- --------- --------
Total stockholders' equity (deficit) (160,157) (78,077) (10,744) (104,826) (104,826) 1,986
-------- -------- -------- -------- --------- --------
Commitments and contingencies - - - - - -
(Notes 13 and 14)
$474,804 $468,680 $456,943 $316,727 $316,727 $306,488
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
The accompanying notes are an integral part of the consolidated financial
statements.
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Income
(In thousands)
<TABLE>
<CAPTION> May 31,
----------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- ----------------------------------
ICON IHF ICON ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 836,162 $ 836,162 $ 836,162 $ 747,577 $ 747,577 $ 747,577 $ 530,774 $ 530,774 $ 530,774
Cost of sales 583,747 583,747 583,747 541,443 541,443 541,443 378,322 378,322 378,322
Cost of sales
-amortization of
step-up
HealthRider and
ICON of Canada
inventory 14,009 14,009 14,009 - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit 238,406 238,406 238,406 206,134 206,134 206,134 152,452 152,452 152,452
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling 132,392 132,392 132,392 93,924 93,924 93,924 68,706 68,706 68,706
Research and
development 7,620 7,620 7,620 6,759 6,759 6,759 5,163 5,163 5,163
General and
administrative 56,689 56,689 56,689 47,859 47,859 47,859 31,097 31,097 31,097
Weider settlement 16,583 16,583 16,583 - - - - - -
HealthRider
integration costs 4,880 4,880 4,880 - - - - - -
Compensation expense
attributable to
options - - - 2,769 2,769 2,769 39,046 39,046 39,046
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses 218,164 218,164 218,164 151,311 151,311 151,311 144,012 144,012 144,012
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from operations 20,242 20,242 20,242 54,823 54,823 54,823 8,440 8,440 8,440
Interest expense (49,747) (44,051) (33,627) (36,723) (36,723) (27,923) (21,495) (21,495) (17,303)
Dividends on cumulative
redeemable preferred
stock of a subsidiary
held by minority
interest (2,125) - - (5,100) - - (2,804) - -
Amortization of
deferred financing
fees (4,597) (4,248) (3,058) (3,483) (3,483) (2,479) (1,741) (1,741) (1,263)
Other income 700 700 700 - - - - - -
Other expense (193) (193) (193) - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes (35,720) (27,550) (15,936) 9,517 14,617 24,421 (17,600) (14,796) (10,126)
Provision for (benefit
from) income taxes (9,210) (7,177) (3,988) 7,896 7,896 10,832 (4,719) (4,719) (3,643)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $(26,510) $(20,373) $(11,948) $ 1,621 $ 6,721 $ 13,589 $(12,881) $ (10,077) $ (6,483)
======== ======== ======== ======== ======== ======== ======== ========= ========
</TABLE>
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Receivable
from
Cumulative preferred officers for
stock Common stock Additional exercised Cumulative Retained stockholders'
---------------- -------------- paid-in stock translation earnings equity
Shares Value Shares Value capital options adjustment (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ICON Fitness Corporation
Balance, June 1, 1994 65,492 $6,549 749,161 $ 2 $ 1,177 $ (101) $ - $ 46,905 $ 54,532
Preferred stock dividends - - - - - - - (243) (243)
Equity exchanges and
distributions to
stockholders of
ICON Fitness Corporation (65,492) (6,549) (749,161) (2) (1,177) - - (217,586) (225,314)
Issuance of common
stock and contribution
of capital by IHF
Capital, Inc. - - 100 - 74,957 (657) - - 74,300
Net loss - - - - - - - (12,881) (12,881)
------ ------ ------- ----- -------- ------- ------ -------- --------
Balance, May 31, 1995 - - 100 - 74,957 (758) - (183,805) (109,606)
Proceeds from exercise
of common stock options
and contribution of capital
by IHF Capital, Inc. - - - - 4 - - - 4
Issuance of options to
management and
contribution of capital
by IHF Capital, Inc. - - - - 2,769 - - - 2,769
Foreign currency
translation - - - - - - 386 - 386
Net income - - - - - - - 1,621 1,621
------ ------ ------- ----- -------- ------- ------ -------- --------
Balance, May 31, 1996 - - 100 - 77,730 (758) 386 (182,184) $(104,826)
Proceeds from exercise
of common stock
options and contribution
of capital by
IHF Capital, Inc. - - - - 8 - - - 8
Loan balances forgiven - - - - - 102 - - 102
Discount on redemption
of and forgiveness of
dividends on minority
interest in cumulative
redeemable preferred
stock of subsidiary - - - - 14,280 - - - 14,280
Repurchase of the capital
stock of parent and
return of capital to
IHF Capital, Inc. - - - - (42,319) - - - (42,319)
Foreign currency
translation - - - - - - (892) - (892)
Net loss - - - - - - - (26,510) (26,510)
------ ------ ------- ----- -------- ------- ------ -------- --------
ICON Fitness Corporation
balance, May 31, 1997 - $ - 100 $ - $ 49,699 $(656) $(506) $(208,694) $(160,157)
====== ====== ======= ===== ======== ======= ====== ========= =========
IHF Holdings, Inc.
Balance, June 1, 1994 65,492 $6,549 749,161 $ 2 $ 1,177 $(101) $ - $ 46,905 $ 54,532
Preferred stock dividends - - - - - - - (243) (243)
Equity exchanges and
distributions to
stockholders of IHF
Holdings, Inc. (65,492) (6,549) (749,161) (2) (1,177) - - (217,586) (225,314)
Issuance of common
stock and contribution
of capital by ICON
Fitness Corporation - - 1,000 - 74,957 (657) - - 74,300
Cumulative redeemable
preferred stock dividend - - - - - - - (2,804) (2,804)
Net loss - - - - - - - (10,077) (10,077)
------ ------ ------- ----- -------- ------- ------ -------- --------
Balance, May 31, 1995 - - 1,000 - 74,957 (758) - (183,805) (109,606)
Proceeds from exercise
of common stock options
and contribution of
capital by ICON Fitness
Corporation - - - - 4 - - - 4
Issuance of options to
management and
contribution of capital
by ICON Fitness
Corporation - - - - 2,769 - - - 2,769
Cumulative redeemable
preferred stock dividend - - - - - - - (5,100) (5,100)
Foreign currency
translation - - - - - - 386 - 386
Net income - - - - - - - 6,721 6,721
------ ------ ------- ----- -------- ------- ------ -------- --------
Balance, May 31,1996 - - 1,000 - 77,730 (758) 386 (182,184) (104,826)
Proceeds from exercise
of common stock
options and contribution
of capital by ICON
Fitness Corporation - - - - 8 - - - 8
Cumulative redeemable
preferred stock dividend - - - - - - - (2,125) (2,125)
Loan balances forgiven - - - - - 102 - - 102
Redemption of cumulative
redeemable preferred
stock and contribution of
capital by ICON Fitness
Corporation - - - - 50,029 - - - 50,029
Foreign currency
translation - - - - - - (892) - (892)
Net loss - - - - - - - (20,373) (20,373)
------ ------ ------- ----- -------- ------- ------ -------- --------
IHF Holdings, Inc.
balance, May 31, 1997 - $ - 1,000 $ - $127,767 $(656) $(506) $(204,682) $(78,077)
====== ====== ======= ===== ======== ======= ====== ========= ========
ICON Health & Fitness, Inc.
Balance, June 1, 1994 65,492 $6,549 749,161 $ 2 $ 1,177 $(101) $ - $ 46,905 $ 54,532
Preferred stock dividends - - - - - - - (243) (243)
Equity exchanges and
distributions to
stockholders (65,492) (6,549) (749,161) (2) (1,177) - - (217,586) (225,314)
Issuance of common
stock and contribution
of capital by
IHF Holdings, Inc. - - 1,000 - 163,403 (657) - - 162,746
Net income - - - - - - - (6,483) (6,483)
------ ------ ------- ----- -------- ------- ------ -------- --------
Balance, May 31, 1995 - - 1,000 - 163,403 (758) - (177,407) (14,762)
Proceeds from exercise
of common stock
options and contribution
of capital by IHF
Holdings, Inc. - - - - 4 - - - 4
Issuance of options to
management and
contribution of capital
by IHF Holdings, Inc. - - - - 2,769 - - - 2,769
Foreign currency
translation - - - - - - 386 - 386
Net income - - - - - - - 13,589 13,589
------ ------ ------- ----- -------- ------- ------ -------- --------
Balance, May 31, 1996 - - 1,000 - 166,176 (758) 386 (163,818) 1,986
Proceeds from exercise
of common stock
options and contribution
of capital by
IHF Holdings, Inc. - - - - 8 - - - 8
Loan balances forgiven - - - - - 102 - - 102
Foreign currency
translation - - - - - - (892) - (892)
Net loss - - - - - - - (11,948) (11,948)
------ ------ ------- ----- -------- ------- ------ -------- --------
ICON Health & Fitness,
Inc. balance,
May 31, 1997 - $ - 1,000 $ - $166,184 $(656) $(506) $(175,766) $(10,744)
====== ====== ======= ===== ======== ======= ====== ========= ========
</TABLE>
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
May 31,
---------------------------------------------------------------------------------
1997 1996
--------------------------------------- ----------------------------------------
ICON ICON ICON ICON
Fitness IHF Health & Fitness IHF Health &
Corporation Holdings, Inc. Fitness, Inc. Corporation Holdings, Inc. Fitness, Inc.
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $(26,510) $ (20,373) $(11,948) $ 1,621 $ 6,721 $ 13,589
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision (benefit) for deferred taxes (3,880) (1,847) 1,635 (20) (20) 2,623
Depreciation and amortization 13,351 13,351 13,351 7,205 7,205 7,205
Amortization of deferred financing fees
and debt discount 20,923 14,878 3,264 12,458 12,458 2,654
Non-cash employee compensation expense 296 296 296 2,769 2,769 2,769
Amortization of inventory step-up 14,009 14,009 14,009 - - -
Gain on barter transaction (2,095) (2,095) (2,095) - - -
Loss on disposal of property and equipment 67 67 67 - - -
Interest expense attributable to dividends
on preferred stock 2,125 - - 5,100 - -
Changes in operating assets and liabilities:
Accounts receivable (46,862) (46,862) (46,862) (12,544) (12,544) (12,544)
Inventories (1,465) (1,465) (1,465) (287) (287) (287)
Income taxes receivable/payable 803 803 510 (1,012) (1,012) (719)
Other assets (6,466) (6,466) (6,466) 7,073 7,073 7,073
Accounts payable and accrued expenses (2,401) (2,401) (2,401) 2,149 2,149 2,149
Interest payable 405 405 405 - - -
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities (37,700) (37,700) (37,700) 24,512 24,512 24,512
-------- -------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment (16,039) (16,039) (16,039) (15,356) (15,356) (15,356)
Purchase of HealthRider, net of
cash acquired (Note 3) (25,800) (25,800) (25,800) - - -
Purchase of Weider Sports and CanCo
(Note 14) (11,058) (11,058) (11,058) - - -
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (52,897) (52,897) (52,897) (15,356) (15,356) (15,356)
-------- -------- -------- -------- -------- --------
Financing activities:
Borrowings (payments) on revolving loans
and lines of credit, net 89,484 89,484 89,484 6,355 6,355 6,355
Payments on long-term debt (6,341) (6,341) (6,341) (687) (687) (687)
Proceeds from long-term debt 82,508 - - - - -
Proceeds from issuance of common stock 8 8 8 4 4 4
Receivable from parent (2,307) (2,307) (2,307) - - -
Retirement of preferred stock (35,749) - - - - -
Repurchase of capital stock of parent (42,319) - - - - -
Payment of debt financing fees (7,463) (3,023) (3,023) - - -
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 77,821 77,821 77,821 5,672 5,672 5,672
-------- -------- -------- -------- -------- --------
Effect of exchange rate changes on cash (977) (977) (977) 386 386 386
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash (13,753) (13,753) (13,753) 15,214 15,214 15,214
Cash, beginning of period 19,313 19,313 19,313 4,099 4,099 4,099
-------- -------- -------- -------- -------- --------
Cash, end of period $ 5,560 $ 5,560 $ 5,560 $ 19,313 $ 19,313 $ 19,313
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
May 31,
-------------------------------------------
1995
-------------------------------------------
ICON ICON
Fitness IHF Health &
Corporation Holdings, Inc. Fitness, Inc.
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (12,881) $ (10,077) $ (6,483)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision (benefit) for deferred taxes (9,493) (9,493) (8,417)
Depreciation and amortization 5,561 5,561 5,561
Amortization of deferred financing fees and debt discount 6,018 6,018 1,348
Compensation expense attributable to options 12,303 12,303 12,303
Interest expense attributable to dividends on preferred stock 2,804 - -
Changes in operating assets and liabilities:
Accounts receivable (14,106) (14,106) (14,106)
Inventories (41,429) (41,429) (41,429)
Income taxes receivable/payable 130 130 130
Other assets (5,837) (5,837) (5,837)
Accounts payable and accrued expenses 29,961 29,961 29,961
Payable to Weider (4,697) (4,697) (4,697)
--------- --------- ---------
Net cash provided by (used in) operating activities (31,666) (31,666) (31,666)
--------- --------- ---------
Investing activities:
Purchases of property and equipment (7,977) (7,977) (7,977)
Payment for non-compete agreements (4,070) (4,070) (4,070)
--------- --------- ---------
Net cash used in investing activities (12,047) (12,047) (12,047)
--------- --------- ---------
Financing activities:
Borrowings (payments) on revolving loans and lines of credit, net 66,400 66,400 66,400
Proceeds from long-term debt 194,999 194,999 135,006
Payments on long-term debt (58,197) (58,197) (58,197)
Proceeds from issuance of common stock 39,004 39,004 91,288
Payments of dividends (243) (243) (243)
Distributions to stockholders (166,738) (166,738) (166,738)
Payment of debt financing fees (27,508) (27,508) (19,799)
--------- --------- ---------
Net cash provided by financing activities 47,717 47,717 47,717
--------- --------- ---------
Effect of exchange rate changes on cash - - -
--------- --------- ---------
Net increase (decrease) in cash 4,004 4,004 4,004
Cash, beginning of period 95 95 95
--------- --------- ---------
Cash, end of period $ 4,099 $ 4,099 $ 4,099
========= ========= =========
</TABLE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation and Description of the Business
Basis of Presentation - The consolidated financial statements include the
accounts of ICON Fitness Corporation ("ICON"), its wholly-owned subsidiary
IHF Holdings, Inc. ("IHF Holdings"), IHF Holdings' wholly-owned subsidiary,
ICON Health & Fitness, Inc. ("Health & Fitness") and Health & Fitness'
wholly-owned subsidiaries (collectively, the "Company"). Health & Fitness
was formerly known as Weslo, Inc. and its wholly-owned subsidiaries,
ProForm Fitness Products, Inc. and its wholly-owned subsidiaries, and
American Physical Therapy, Inc. (collectively, the "Recapitalized
Companies"). The minority interest in IHF Holdings represented cumulative
redeemable preferred stock held by certain shareholders of ICON's parent,
IHF Capital, Inc. ("IHF Capital") (Note 9). Prior to the incorporation of
ICON on November 12, 1996 and the concurrent contribution of IHF Capital's
investment in IHF Holdings to ICON in exchange for all of the outstanding
common stock of ICON, IHF Holdings was a wholly-owned subsidiary of IHF
Capital. ICON's financial statements carry over the historical financial
position and results of operations of IHF Capital, adjusted to reflect the
fact that it is a wholly-owned subsidiary of IHF Capital. Other than the
Senior Discount Notes (Note 8) and related deferred financing fees and
deferred income tax benefit, all assets and liabilities of ICON are those
of IHF Holdings. Other than the Senior Secured Notes (Note 8) and related
deferred financing fees and deferred income tax benefit and the cumulative
redeemable preferred stock (Note 9) issued by IHF Holdings, all assets and
liabilities of IHF Holdings are those of Health & Fitness. The cumulative
redeemable preferred stock was redeemed with the proceeds of the Senior
Discount Notes in November of 1996.
Description of Business - The Company is principally involved in the
development, manufacturing and distribution of home fitness equipment and
is considered to operate in only one industry segment. The majority of the
Company's revenues are derived from the sale of two or three aerobic
fitness product lines in domestic markets. Because product life cycles can
be short in the fitness industry, the Company emphasizes new product
innovation and product repositioning. The Company primarily sells its
products to retailers and, to a limited extent, to end-users through direct
response advertising efforts and retail outlets.
The Recapitalization - On November 14, 1994 the recapitalization (the
"Recapitalization") took place as follows: (1) the existing shareholders
of the Recapitalized Companies contributed their capital stock of the
Recapitalized Companies to IHF Capital, IHF Holdings and Health & Fitness
in exchange for $21.9 million of Class A and Class L Common Stock of IHF
Capital, $36.0 million of IHF Holdings Preferred Stock, warrants to
purchase Class A Common Stock of IHF Capital, and $159.3 million of demand
promissory notes of Health & Fitness (the "Shareholder Notes"); (2) certain
senior executives of the Company exchanged their options to purchase
capital stock of the Recapitalized Companies for $34.7 million of
replacement options and warrants to purchase Class A and Class L Common
Stock of IHF Capital and $4.0 million of options to purchase preferred
stock of IHF Holdings; (3) affiliates of Bain Capital, Inc. ("Bain
Capital") and certain other parties purchased $40.4 million of Class A and
Class L Common Stock of IHF Capital, (4) the 13% Senior Subordinated Notes
and 15% Senior Secured Discount Notes were issued (Note 8), the proceeds of
which were used to repay the Shareholder Notes; and (5) Health & Fitness
caused the Recapitalized Companies to be merged with and into itself. As a
result of the Recapitalization, IHF Holdings owns all of the outstanding
capital stock of Health & Fitness, and IHF Capital owned all of the
outstanding common stock of IHF Holdings.
Concurrent with the closing of the Recapitalization, the Company obtained
exclusive licenses to market certain fitness equipment and certain
non-ingestive sports medicine products under the "Weider" and related brand
names (Note 14).
2. Significant Accounting Policies
Principles of Consolidation - All significant intercompany accounts and
transactions have been eliminated in the consolidation of the Company.
Cash- Substantially all of the Company's cash is held by two banks at May
31, 1997. The Company does not believe that as a result of this
concentration it is subject to any unusual financial risk beyond the normal
risk associated with commercial banking relationships.
Inventories - Inventories include freight-in, materials, labor, and
manufacturing overhead costs and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
Asset Held for Sale - In connection with the HealthRider Acquisition (Note
3), the Company acquired certain real estate which had served as
HealthRider's headquarters and which management expects to sell in the
near-term. The real estate is subject to a mortgage note payable (Note 8),
and the Company currently leases a portion of the building to tenants (Note
13). At May 31, 1997, the carrying value of this asset reflects the amount
of the original purchase price of HealthRider which had been ascribed to
the property and represents management's best estimate of the net sales
price to be received when the property is sold.
Property and Equipment - Property and equipment is stated at cost and
depreciated using the straight-line method over the estimated useful lives
of the respective assets. Expenditures for renewals and improvements are
capitalized, and maintenance and repairs are charged to operations.
Trademarks - In connection with the HealthRider Acquisition (Note 3) and
the Weider Sports and CanCo Acquisitions (Note 14), $12,024,000 and
$6,915,000, respectively, was ascribed to trademarks. These assets are
being amortized on a straight-line basis over 20 years. At May 31, 1997,
trademarks are net of accumulated amortization of $703,000.
Concurrent with the acquisitions, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Assets to Be Disposed Of".
Adoption of the standard did not have any impact on the Company's financial
condition, results of operations, or cash flows. SFAS No. 121 requires the
assessment of whether there has been an impairment whenever events or
circumstances indicate that the carrying amount of long-lived assets may
not be recoverable. The Company evaluates potential impairment by
comparing anticipated undiscounted future cash flows from the acquired
businesses with the carrying value of the trademarks.
With respect to the HealthRider trademark, HealthRider had experienced
losses and operating cash flow deficits in 1996 through the date of
acquisition. These negative indicators were the results of a concentration
of sales in one product line with a rapidly shrinking market. Subsequent
to the acquisition, the Company restructured the operations, invested in
further enhancing the HealthRider name and broadened the market focus of
the HealthRider line of products. As a result, management expects to
generate future profits from the HealthRider business line. Accordingly,
at May 31, 1997, management believes that there has been no impairment in
the value of the HealthRider trademark.
Non-Compete Agreements - Included in long-term other assets are capitalized
costs associated with non-compete agreements the Company entered into with
certain key executives of the Company for a four year term. These assets
are being amortized using the straight-line method over the life of the
agreements (Note 7).
Deferred Financing Costs - The Company deferred certain debt issuance costs
relating to the establishment of the Credit Agreement (Note 8) and the
issuance of the 13% Senior Subordinated Notes, the 14% Senior Discount
Notes and the 15% Senior Secured Notes (collectively referred to as the
"Notes"). These costs are capitalized in long-term other assets and are
being amortized using the straight-line method for costs associated with
the Credit Agreement and the effective interest method for costs associated
with the Notes (Note 7).
Advertising Costs - The Company expenses the costs of advertising as
incurred, except for direct response advertising, which is capitalized and
amortized over its expected period of future benefit, generally twelve
months. Direct response advertising costs consist primarily of costs to
produce infomercials for the Company's products. At May 31, 1997 and 1996,
$801,000 and $1,422,000, respectively, were included in other long-term
assets. For the years ended May 31, 1997, 1996 and 1995, total advertising
expense was approximately $31,810,000, $22,537,000 and $23,846,000,
respectively.
Revenue Recognition - The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs, and warranty costs associated with these
sales. Finance charges under the Company's payment plans are recognized as
other income.
Concentration of Credit Risk - Financial instruments which potentially
expose the Company to concentration of credit risk include trade accounts
receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed and reserves are maintained;
however, collateral is not required. A significant portion of the
Company's sales in the retail sector are made to two customers, Sears
Roebuck ("Sears") and Sam's Wholesale Clubs ("Sam's"). Sears accounted for
approximately 29%, 34% and 31% of total sales for the years ended May 31,
1997, 1996 and 1995, respectively. Sam's accounted for approximately 8%,
8% and 12% of total sales for the years ended May 31, 1997, 1996 and 1995,
respectively. Accounts receivable from these two customers accounted for
approximately 38% and 37% of total accounts receivable at May 31, 1997 and
1996, respectively. Accounts receivable from Sears accounted for
approximately 34% and 32% of gross accounts receivable at May 31, 1997 and
1996, respectively. Accounts receivable from a third customer, Service
Merchandise Company, accounted for 6% and 11% of gross accounts receivable
at May 31, 1997 and 1996, respectively.
Research and Development Costs - Research and product development costs are
expensed as incurred. Research and development activities include the
design of new products and product enhancements and are performed by both
internal and external sources.
Income Taxes - The Company accounts for income taxes utilizing the asset
and liability method as prescribed by SFAS No. 109, "Accounting for Income
Taxes". SFAS 109 requires the Company to record in its balance sheet
deferred tax assets and liabilities for expected future tax consequences of
events that have been recognized in different periods for financial
statements versus tax returns.
Prior to the redemption of the IHF Holdings preferred stock (Note 9) and
incorporation of ICON, IHF Capital filed a separate tax return and Health &
Fitness was included as part of the consolidated tax return filed by IHF
Holdings. Currently, ICON, IHF Holdings and Health & Fitness are included
as part of the consolidated tax return filed by IHF Capital. The income
tax provisions for ICON, IHF Holdings and Health & Fitness have been
prepared as though they were separate companies.
Foreign Operations - Assets and liabilities of the Company's European and
Canadian subsidiaries are translated into U.S. dollars at the applicable
rates of exchange at each period end. The Company's foreign transactions
are primarily denominated in Canadian dollars, British pounds, French
francs and Italian Lire, and transactions with foreign entities that result
in income and expense for the Company are translated at the average rate of
exchange during the period. Translation gains and losses are reflected as
a separate component of stockholders' equity. Transaction gains and losses
are recorded in the consolidated statements of income and were not material
in the years ended May 31,1997, 1996 and 1995.
In the years ended May 31, 1997 and 1996, the Company's foreign operations
represented less than 10% of the Company's net sales and effects of
exchange rate changes have not had a material impact on the Company's
earnings. To date, foreign earnings have been invested in local operations
and have not been remitted to the domestic parent.
Foreign Currency Hedges - The Company enters into foreign currency forward
exchange contracts to hedge foreign currency transactions on a continuing
basis for periods consistent with its anticipated or committed foreign
currency exposures on purchases in Canadian dollars. The effect of this
practice is to minimize the impact of foreign exchange rate movements on
the Company's operating results. The Company's hedging activities do not
subject the Company to significant exchange rate risk because gains and
losses on these contracts offset losses and gains on the assets and
transactions being hedged. Unrealized gains and losses on these contracts
are deferred and accounted for as part of the hedged transactions. Cash
flows from these contracts are classified in the Statement of Cash Flows in
the same category as the hedged transactions. As of May 31, 1997, 1996 and
1995 the Company had approximately $22 million Canadian, $25 million
Canadian and $19 million Canadian, respectively, of open forward exchange
contracts to sell Canadian dollars throughout fiscal years May 31, 1998,
1997 and 1996, respectively. The fair value of these forward exchange
contracts are based on quoted market prices. At May 31, 1997 the estimated
unrealized loss on outstanding forward exchange contracts was $217,000 and
at May 31, 1996 the estimated unrealized gain was $163,000. During 1997,
1996 and 1995 the Company recognized gains of $149,000, $169,000 and
$160,000, respectively, upon the settlement of foreign currency
transactions denominated in Canadian dollars.
Barter Transaction - Included in other current assets at May 31, 1997 is a
barter credit of $6,240,000 which was recorded in connection with a barter
agreement the Company entered into during fiscal 1997. The Company
recorded the barter credit at the fair value of the inventory exchanged and
recorded a gain of $2,095,000 in connection with the transaction. The
Company intends to use this asset primarily to purchase advertising during
fiscal 1998.
Accounting for Stock-Based Compensation - The Company applies APB Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans and related equity issuances. Under these standards, no
compensation expense is recognized for stock options issued to employees
("qualified employees") provided the exercise price per share equals the
fair market value of the Company's common stock at the date of grant.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 , "Accounting for Stock-Based Compensation". This standard became
effective in fiscal 1997 and requires that compensation for stock options
and related equity instruments issued to qualified employees be measured at
fair value. Fair value is determined using the minimum value pricing model
and the resulting expense is recognized over the service period which is
generally the vesting period. The Company has elected to implement SFAS
No. 123 on a disclosure basis only (Note 10).
Fair Value of Financial Instruments - The fair value of financial
instruments including cash, accounts receivable, accounts payable, accrued
liabilities, convertible redeemable preferred stock and long-term debt
approximate book values at May 31, 1997 and 1996, except for the long-term
debt included in the following table. The carrying value for the Senior
Subordinated Notes and the Senior Secured Notes was established based on
market conditions at the time the debt was issued. The estimated fair
value for the long-term notes is based on quoted market prices (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
13% Senior Subordinated Notes $ 99,503 $ 113,400 $ 99,298 $ 112,894
14% Senior Discount Notes 88,204 85,860 - -
15% Senior Secured Discount Notes 79,571 102,713 69,147 85,353
</TABLE>
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses for the periods presented.
Actual results could differ from those estimates.
Reclassifications - Reclassifications have been made to the 1996 financial
statements to conform to the 1997 presentation. These reclassifications
had no effect on net income for 1996 or 1995.
3. HealthRider Acquisition
On August 16, 1996, the Company: (i) purchased substantially all the
assets of HealthRider, Inc. ("HealthRider"), a distributor of aerobic home
fitness equipment, for approximately $16.1 million and assumed (or
refinanced) substantially all of the liabilities of HealthRider (including
$.7 million of fees and expenses related to the acquisition); (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 payment 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 $1.3 million
was paid in cash and $.1 million was paid 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") (Note 8).
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
results of operations of HealthRider have been consolidated with the
Company's results from August 16, 1996.
The following unaudited pro forma summary presents the consolidated results
of operations assuming that the HealthRider Acquisition had occurred on May
31, 1995. The historical results for ICON, IHF Holdings and Health &
Fitness for fiscal 1996 have been combined with the HealthRider results for
the 12 months ended June 30, 1996. The results of HealthRider for the
month ended June 30, 1996 have also been utilized in preparing the combined
results of the Company and HealthRider for fiscal 1997. No adjustments are
required to conform the accounting policies of HealthRider to those of the
Company. 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 $13.2 million non-recurring, non-cash charge
resulting from the fact that the Company's purchase accounting included
writing-up the book value of the HealthRider inventory to fair market value
less estimated sales costs.
<TABLE>
<CAPTION>
Year Ended May 31,
(in thousands)
-----------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 852,362 $ 852,362 $ 852,362 $ 985,142 $ 985,142 $ 985,142
Net income (loss) (32,705) (26,568) (18,143) (157) 4,943 11,811
</TABLE>
4. Accounts Receivable
Accounts receivable, net, consist of the following (table in thousands):
<TABLE>
<CAPTION>
May 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Accounts receivable $ 201,778 $ 134,464
Less allowance for doubtful accounts,
advertising and credit memos (8,953) (7,595)
----------- -----------
$ 192,825 $ 126,869
=========== ===========
</TABLE>
At May 31, 1997, accounts receivable are net of $324,000 of unearned
interest charges resulting from the Company's multi-month payment plans.
5. Inventories
Inventories consist of the following (table in thousands):
<TABLE>
<CAPTION>
May 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Raw materials, principally parts and supplies $ 27,974 $ 26,264
Finished goods 93,864 69,658
--------- ---------
$ 121,838 $ 95,922
========= =========
</TABLE>
Inventories are net of allowances of $2,761,000 and $2,122,000 at May 31,
1997 and 1996, respectively. These allowances are established based on
management's estimates of inventory held at year end that is potentially
obsolete or for which its market value is below cost.
6. Property and Equipment
Property and equipment, net, consists of the following (table in
thousands):
<TABLE>
<CAPTION>
May 31,
-----------------------
1997 1996
-------- --------
Estimated
Useful Life
(Years)
<S> <C> <C> <C>
Land - $ 2,371 $ 1,230
Buildings and improvements up to 31 17,130 11,235
Equipment 3-7 59,318 37,191
Construction in progress - 261 2,397
-------- --------
79,080 52,053
Less accumulated depreciation (27,342) (19,741)
-------- --------
$ 51,738 $ 32,312
======== ========
</TABLE>
For the years ended May 31, 1997, 1996 and 1995, the Company recorded
depreciation expense of $11,630,000, $6,188,000 and $5,052,000,
respectively.
7. Other Assets
Other assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
May 31,
-----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C>
Non-compete agreements $ 1,526 $ 1,526 $ 1,526 $ 2,544 $ 2,544 $ 2,544
Deferred financing costs 25,150 21,059 16,022 22,284 22,284 16,057
Deferred advertising costs 801 801 801 1,422 1,422 1,422
Other 680 680 680 1,102 1,102 1,102
---------- ---------- ---------- ---------- ---------- ----------
$ 28,157 $ 24,066 $ 19,029 $ 27,352 $ 27,352 $ 21,125
========== ========== ========== ========== ========== ==========
</TABLE>
At May 31, 1997 and 1996, capitalized non-compete payments made to the
Company's key executives are net of accumulated amortization of $2,544,000
and $1,526,000, respectively.
At May 31, 1997 and 1996 capitalized deferred financing costs are net of
accumulated amortization of $9,821,000 and $5,224,000, respectively, for
ICON; $9,472,000 and $5,224,000, respectively, for IHF Holdings; and
$6,800,000 and $3,742,000, respectively, for Health & Fitness.
8. Long-Term Debt
Long-term debt consists of the following (table in thousands):
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------------------------
1997 1996
------------------------------------- ----------------------------------
IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C>
Revolving Credit Facility $ 178,781 $ 178,781 $ 178,781 $ 80,000 $ 80,000 $ 80,000
Term Loan A Facility 13,956 13,956 13,956 16,875 16,875 16,875
Term Loan B Facility 17,080 17,080 17,080 17,438 17,438 17,438
Note Payable, interest rate of
9.25% at May 31, 1997,
monthly installments of
$166, remaining principal
due April 2003, secured by
the HealthRider building 15,935 15,935 15,935 - - -
13% Senior Subordinated
Notes, face amount $101,250
net of unamortized discount
of $1,747 at May 31, 1997
and $1,952 at May 31, 1996 99,503 99,503 99,503 99,298 99,298 99,298
15% Senior Secured Discount
Notes, face amount $123,700
net of unamortized discount
of $44,129 at May 31, 1997
and $54,553 at May 31, 1996 79,571 79,571 - 69,147 69,147 -
14% Senior Discount Notes,
face amount $162,000 net
of unamortized discount of
$73,796 at May 31, 1997 88,204 - - - - -
Other 1,771 1,771 1,771 - - -
---------- ---------- ---------- --------- --------- ---------
494,801 406,597 327,026 282,758 282,758 213,611
Less current portion (5,401) (5,401) (5,401) (3,065) (3,065) (3,065)
---------- ---------- ---------- --------- --------- ---------
Total long-term debt $ 489,400 $ 401,196 $ 321,625 $ 279,693 $ 279,693 $ 210,546
========== ========== ========== ========= ========= =========
</TABLE>
In addition, the Company had $4,430,000 in outstanding letters of credit
under its Revolving Credit Facility at May 31, 1997.
Credit Agreement
In connection with the Recapitalization (Note 1), the Company, through
Health & Fitness, entered into a Credit Agreement with a syndicate of
banks. Borrowings under the Amended and Restated Credit Agreement consist
of the Revolving Credit Facility, the Term Loan A Facility, and the Term
Loan B Facility, and are secured by a perfected first priority security
interest in the assets of Health & Fitness and its subsidiaries. Under the
terms of the Credit Agreement, Health & Fitness must comply with certain
restrictive covenants, which include the requirement that Health & Fitness
maintain minimum amounts of profitability, solvency, and liquidity. In
addition, the Credit Agreement restricts Health & Fitness from making
certain payments, including dividend payments, to its shareholders. At May
31, 1997, Health & Fitness was in compliance with all of its financial
covenants. Management believes that Health & Fitness will be in compliance
with its financial covenants through 1998 and, therefore, borrowings under
the Credit Agreement have been classified as long-term, exclusive of
amounts due within one year under the Term Loan A Facility and Term Loan B
Facility.
Revolving Credit Facility
As of May 31, 1996, the agreement provided for borrowings of up to $160.0
million based upon a percentage of eligible accounts receivable and
inventories. As of August 23, 1996, the Credit Agreement was amended to
permit total borrowings of up to $310.0 million, with certain changes to
the percentage of eligible receivables and inventory, in order to fund the
HealthRider Acquisition (Note 3), the settlement of the WHF Litigation
(Note 14), the Weider Sports and CanCo Acquisitions (Note 14) and other
working capital needs. The Revolving Credit Facility expires on November
14, 1999. Advances under the Revolving Credit Facility bear interest, at
the Company's option, at either (1) a margin of 1.50% to 2.50% over the
rate at which certain Eurodollar deposits are offered in the interbank
Eurodollar market (the "LIBOR Rate") or (2) a margin of 0% to 1.00% over
the higher of (a) the highest of the most recently published or announced
prime corporate base, reference or similar benchmark rate announced by
Bankers Trust Company or (b) the published rate for ninety-day dealer
placed commercial paper (the "Index Rate") (8.32% rate as of May 31, 1997
under the LIBOR Rate option). The applicable margin is based on the
Company's debt service ratio. The Company is required to pay a fee of
between .375% to 0.5% per annum on the average unused commitment under the
Revolving Credit Facility. For the years ended May 31, 1997, 1996 and
1995, the Company paid an unused commitment fee of $421,000, $196,000 and
$42,000, respectively. As of May 31, 1997, $19.8 million was available to
be borrowed under the Revolving Credit Facility.
Term Loan A Facility
Under the Term Loan A Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $625,000 became due beginning March 31, 1996
and increased to $937,500 beginning March 31, 1997. Quarterly payments
increase to $1,250,000 beginning March 31, 1998, and to $1,562,500
beginning March 31, 1999, with the balance of $1,562,500 due at maturity on
November 14, 1999. Advances under the Term Loan A Facility bear interest,
at the Company's option, at a rate equal to either (1) a margin of 1.75% to
2.75% over the LIBOR Rate or (2) a margin of 0.25% to 1.25% over the Index
Rate (8.05% as of May 31, 1997 under the LIBOR Rate option).
Term Loan B Facility
Under the Term Loan B Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $62,500 are due beginning March 31, 1996.
Quarterly payments increase to $1,562,500 beginning March 31, 2000 through
September 30, 2001, and the balance of $5,562,500 is due at maturity on
November 14, 2001. Advances under the Term Loan B Facility bear interest,
at the Company's option, at a rate equal to either (1) a margin of 2.25% to
3.25% over the LIBOR Rate or (2) a margin of 0.75% to 1.75% over the Index
Rate (8.55% as of May 31, 1997 under the LIBOR Rate option).
In addition, the Company is required to use the proceeds of permitted sales
of assets to pay down the Term Loan A and Term Loan B Facilities.
A portion of the proceeds from the Credit Agreement were used to repay the
long-term debt outstanding prior to the Recapitalization.
Senior Subordinated Notes
In conjunction with the Recapitalization (Note 1), the Company issued
$101,250,000 face amount (net proceeds of $100.0 million) of 13% Senior
Subordinated Notes of Health & Fitness (the "Senior Subordinated Notes")
and warrants to purchase 200,000 shares of Class A and 20,000 shares of
Class L Common Stock of IHF Capital. The Senior Subordinated Notes are
unsecured and bear interest at 13%, payable January 15 and July 15 through
the maturity date of July 15, 2002. The warrants have an exercise price of
$.01 per share and expire on November 14, 1999. In conjunction with the
sale, $968,000 of the issuance price was ascribed to the warrants and is
included in the total discount on the notes. This discount is being
amortized using the effective interest method.
Upon certain asset sales, the Company may be obligated to purchase the
Senior Subordinated Notes with the net cash proceeds of the asset sales at
a redemption price of 100% of principal plus accrued and unpaid interest.
Prior to November 15, 1997, up to $35 million of principal of the Senior
Subordinated Notes may be redeemed at the Company's option with the
proceeds of the sale in a public offering of the common stock of IHF
Holdings or any of its parents or subsidiaries at a redemption price equal
to 112.25% of the principal, together with accrued and unpaid interest at
the redemption date. On or after November 15, 1998, the Senior
Subordinated Notes may be redeemed at the Company's option, in whole or in
part, at redemption prices ranging from 110.00% of principal amount in the
year ended November 14, 1999, plus accrued and unpaid interest, to 100% of
principal amount subsequent to November 14, 2001, plus accrued and unpaid
interest.
Senior Secured Discount Notes
In conjunction with the Recapitalization (Note 1), the Company issued
$123,700,000 face amount (net proceeds of $60.0 million) of 15% Senior
Secured Discount Notes of IHF Holdings (the "Senior Secured Notes") and
warrants to purchase 800,000 shares of Class A and 80,000 shares of Class L
Common Stock of IHF Capital. The Senior Secured Notes are senior secured
obligations of IHF Holdings, which begin bearing cash interest of 15% at
November 15, 1999, payable each May 15 and November 15 thereafter, through
the maturity date of November 15, 2004. Although Health & Fitness provides
no guarantee of these obligations, the operations and cash flows of the
Company are those of Health & Fitness. Accordingly, the ability to make
cash payments of interest and principal on the Senior Secured Notes is
contingent on the ability of Health & Fitness to dividend funds to IHF
Holdings, as subject to certain restrictions in the Credit Agreement. In
conjunction with the sale, $3,838,000 of the issuance price was ascribed to
the warrants and is included in the total discount on the notes. This
discount is being amortized using the effective interest method.
Upon certain asset sales, the Company may be obligated to purchase the
Senior Secured Notes with the net cash proceeds of those sales at a
redemption price of 100% of the accreted value plus accrued and unpaid
interest. The accreted value increases from the initial discount price
through November 15, 1999 to 100% of the face amount of the discount notes
at that date. The Company is required to use at least 50% of the net
proceeds of a public offering of the common stock of IHF Holdings or any of
its parents or subsidiaries for the repurchase of the Senior Secured Notes
at a redemption price of 114.00% of accreted value. On or after November
15, 1999, the Senior Secured Notes may be redeemed at the Company's option,
in whole or in part, at redemption prices ranging from 107.50% of principal
amount in the year ended November 14, 2000, to 100% of principal amount
subsequent to November 14, 2001, plus accrued and unpaid interest.
Senior Discount Notes
On November 20, 1996, ICON issued $162,000,000 face amount (net proceeds of
$82.5 million) of 14% Series A Senior Discount Notes (the "Senior Discount
Notes"). The Senior Discount Notes are secured by the capital stock of IHF
Holdings held by ICON but are effectively subordinated to all indebtedness
and other liabilities of ICON's subsidiaries. The Senior Discount Notes
begin bearing cash interest of 14% at May 15, 2002, payable each May 15 and
November 15, thereafter, through the maturity date of November 15, 2006.
Although Health & Fitness provides no guarantee of these obligations, the
operations and cash flows of the Company are those of Health & Fitness.
Accordingly, the ability to make cash payments of interest and principal on
the Senior Discount Notes is contingent on the ability of Health & Fitness
to dividend funds to ICON, as subject to certain restrictions in the Credit
Agreement.
Upon the completion of a public offering by ICON or any of its parents or
subsidiaries, the Company will be required to repurchase the Senior
Discount Notes at redemption prices ranging from 104.00% of accreted value
in the year ended November 15, 1997 to 110.00% of accreted value in the
year ended November 15, 2001. The accreted value increases from the
initial discount price at a rate of 14% compounded semi-annually through
November 15, 2001. Thereafter, the required redemption price ranges from
110.00% of the principal amount plus accrued and unpaid interest in the
year ended November 2002 to 100% of the principal amount plus accrued and
unpaid interest in the year ended November 2005 and thereafter. At any
time prior to November 15, 2000, the Company may elect to repurchase up to
all of the Senior Discount Notes at these same redemption prices.
Subsequent to November 15, 2000, the Company may elect to repurchase up to
$62.0 million face amount of the amounts at these same redemption prices.
The net proceeds from the issuance of the Senior Discount Notes were used
to fund the purchase of the IHF Capital common stock and IHF Holdings
preferred stock in connection with the WHF Settlement (Note 14).
Degree of Leverage and Change in Control
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing for working capital or other purposes in the future
may be limited; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of the principal of and
interest on its indebtedness, thereby reducing funds available for
operations; and (iii) the Company may be more vulnerable to economic
downturns and be limited in its ability to withstand competitive pressures.
Upon a change in control, as defined in the notes agreements, each holder
of the Senior Discount Notes, Senior Secured Notes and Senior Subordinated
Notes may require the Company to repurchase all or a portion of such
holder's notes at a cash purchase price equal to 101% of the principal
amount, plus accrued and unpaid interest, if any, to the date of
repurchase. The Credit Agreement provides that the occurrence of such a
change of control, as defined therein, constitutes an event of default
under the Credit Agreement, which could require immediate payment of the
Revolving Credit Facility, Term Loan A Facility and Term Loan B Facility.
Future Payments
As of May 31, 1997, the scheduled future principal payments of long-term
debt (excluding the Revolving Credit Facility) are as follows (in
thousands):
<TABLE>
<CAPTION>
IHF Health &
Year ended May 31, ICON Holdings Fitness
<S> <C> <C> <C>
1998 $ 5,401 $ 5,401 $ 5,401
1999 6,588 6,588 6,588
2000 7,411 7,411 7,411
2001 7,244 7,244 7,244
2002 9,351 9,351 9,351
Thereafter 399,697 237,697 113,997
</TABLE>
9. Cumulative Redeemable Preferred Stock - IHF Holdings
Authorization and Issuance of Series A Cumulative Redeemable Preferred
Stock
As part of the Recapitalization (Note 1), IHF Holdings authorized 8,000
shares of Series A-1 Cumulative Redeemable Preferred Stock ("Series A-1
Preferred") and 2,042 shares of Series A-2 Cumulative Redeemable Preferred
Stock ("Series A-2 Preferred"). The Series A-1 Preferred and Series A-2
Preferred (referred to collectively as the "Series A Preferred") were
equivalent in all respects, except with respect to voting rights. In
exchange for common stock and options in the Recapitalized Companies, 8,000
shares of Series A-1 Preferred and 1,000 shares of Series A-2 Preferred
were issued to Weider Health & Fitness ("WHF") at a stated issue price of
$4,000 per share, and options to purchase 1,042 Series A-2 Preferred were
issued to certain officers of the Company. The options had an exercise
price of $158.93 per share, subsequent to adjustment as defined in the
option agreement, and expired on May 31, 2004. Compensation expense and a
corresponding credit to the Series A Preferred carrying value of $4,000,000
was recorded at the date such options were granted.
The Series A Preferred bore dividends at the rate of 12.75% per year with
such dividends also accruing on the shares of Series A Preferred which were
subject to the options held by certain officers of the Company. The
redemption price of the Series A Preferred was $4,000 per share plus
accrued and unpaid dividends. Management anticipated that the option to
redeem the Series A Preferred would be exercised and, for the years ended
May 31, 1997, 1996 and 1995, accrued dividends of $2.1 million,
$5.1 million and $2.8 million, respectively, on the issued and outstanding
preferred shares and outstanding options. Dividends accrued to the
minority shareholders of IHF Holdings were charged to ICON's operations.
In connection with the settlement of the WHF Litigation (Note 14), the IHF
Holdings preferred stock and the options to purchase IHF Holdings preferred
stock were redeemed.
10. Stockholders' Equity
Preferred Stock
For the year ended May 31, 1994 and through November 14, 1994, the
Recapitalized Companies had 100,000 authorized shares of preferred stock
with a $100 par value of which 65,492 shares were issued and outstanding
and held by WHF. Dividends accumulated quarterly at $2.50 per share. For
the period from June 1, 1994 to November 14, 1994, $243,000 of dividends
had accrued and were paid in conjunction with the Recapitalization (Note
1). In connection with the Recapitalization, the preferred stock was
exchanged for stock of IHF Holdings and IHF Capital.
Common Stock and Additional Paid-in Capital
In conjunction with the Recapitalization, IHF Holdings issued 1,000 shares
of common stock, received a capital contribution of $75.0 million from its
parent IHF Capital (net of IHF Capital's $657,000 receivable from officers
related to the Recapitalization), and contributed capital of $163.4 million
(net of the $657,000 receivable) to Health & Fitness. Health & Fitness
exchanged all common and preferred stock in the Recapitalized Companies
(Note 1), issuing 1,000 shares of new common stock, to IHF Holdings. All
of the common stock of the Recapitalized Companies that was issued and
outstanding prior to the Recapitalization was retired as part of that
transaction. In connection with the incorporation of ICON (Note 1), 100
shares of common stock, were issued to IHF Capital in exchange for its
investment in IHF Holdings. Each of ICON, IHF Holdings and Health &
Fitness have 3,000 authorized shares of $.01 par value common stock.
Stock Options
Prior to the Recapitalization, certain officers held options to purchase
shares of the Recapitalized Companies. The exercise prices were based upon
the fair market value of the Recapitalized Companies on the date the
options were granted. The options became fully vested during the year
ended May 31, 1994. During the year ended May 31, 1994, a portion of these
options were exercised in exchange for receivables from officers. As part
of the Recapitalization (Note 1), all remaining options to purchase shares
in the Recapitalized Companies were exchanged for options to purchase
Series A Preferred of IHF Holdings (Note 9) and options to purchase common
stock of IHF Capital. Compensation charges, including related payroll
taxes, totaling $39.0 million were recorded in the year ended May 31, 1995,
relating to the exchange of these options and warrants (including $4.0
million related to the issuance of the Series A-2 Preferred options).
1994 Stock Option Plan
In November 1994, the 1994 Stock Option Plan (the "1994 Plan") was adopted
by the Company and approved by the Board of Directors. The 1994 Plan
originally provided for the granting of options to purchase up to 1,200,000
shares of Class A common stock of IHF Capital. The Board of Directors
determines which individuals shall receive options, the time period during
which the options may be exercised, the exercise price (which cannot be
less than the fair market value of the Class A Common Stock on the date of
grant), and whether or not the options are incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986. Expired and
canceled options are not made available for future grant. In 1996, the
plan was amended to provide for the granting of up to 2,110,207 shares of
Class A Common Stock.
Activity under the 1994 Plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Range of Average
Optioned Exercise Price Exercise Price
Shares per Share Per Share
<S> <C> <C> <C>
Outstanding at May 31, 1994 - - -
Granted 1,146,331 $0.10-8.92 $1.76
Exercised (634,117) $0.10 $0.10
---------
Outstanding at May 31, 1995 512,214 $0.10-8.92 $3.82
Granted 963,876 $5.80 $5.80
Exercised (7,617) $0.10-5.80 $1.00
Forfeited (44,539) $0.10 $0.10
---------
Outstanding at May 31, 1996 1,423,934 $.10-$8.92 $5.27
Exercised (74,735) $0.10 $0.10
Forfeited (4,151) $0.10-5.80 $2.39
---------
Outstanding at May 31, 1997 1,345,048 $0.10-8.92 $5.57
=========
Options exercisable at May 31, 1997 1,196,246 $0.10-8.92 $6.14
=========
</TABLE>
The weighted average fair value of options granted during 1996 was $4.35.
At May 31, 1997, the weighted average remaining contractual life of
outstanding options was 8.5 years. All options under the 1994 Plan become
exercisable upon an initial public offering, subject to the approval of the
Board of Directors. At May 31, 1997, there were no options available for
future grant under the 1994 Plan.
If the Company had valued awards to qualified employees on the minimum
value methodology prescribed by SFAS No. 123, the Company's net income
would have equaled the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
IHF Health &
ICON Holdings Fitness
<S> <C> <C> <C>
1996 net income - as reported $ 1,621 $ 6,721 $ 13,589
1996 net income - pro forma 1,000 6,100 12,968
</TABLE>
The minimum value of each option grant was estimated on the date of grant
using the minimum value option-pricing model with the following assumptions
used for grants in 1996: dividend yield of zero percent; risk-free interest
rate of 5.9%; and, expected lives of 5 years.
In September 1995 and March 1996, the exercise price of all performance
options granted in 1995 under the 1994 Plan with an original exercise price
per share of $30.87 were reset to exercise prices per share ranging from
$5.80 to $8.92 which represented the fair value on the date of the reset
with no change in the number of option share grants or vesting periods. The
original exercise price of $30.87 per share for these performance options
was established by the Board of Directors at the time of the
Recapitalization to provide incentives to key members of management.
During the year ended May 31, 1996, the Company recorded compensation
expense of $2,769,000 equivalent to the difference between the fair market
value of the underlying securities and the exercise price of related options
granted. Such option grants were fully vested upon grant.
1996 Stock Option Plan
In August 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Stock Option Plan") which provides 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 has been authorized for issuance under the 1996 Stock Option
Plan, which is administered by the Board of Directors. Through May 31,
1997, no options have been granted under the 1996 plan; however, at May 31,
1997 the Company committed to grant options to purchase 30,636 shares of
Class A Common Stock at the fair market value on the date of grant.
11. Income Taxes
The provision for (benefit from) income taxes consists of the following
(table in thousands):
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------- ----------------------------
IHF Health & IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current
Federal income taxes $(5,982) $(5,982) $(6,252) $6,946 $ 6,946 $ 7,216 $ 4,277 $ 4,277 $ 4,277
State income taxes (513) (513) (536) 595 595 618 497 497 497
Foreign income taxes 1,165 1,165 1,165 375 375 375 - - -
------- ------- ------- ------ ------- ------- ------- ------- -------
Total current (5,330) (5,330) (5,623) 7,916 7,916 8,209 4,774 4,774 4,774
------- ------- ------- ------ ------- ------- ------- ------- -------
Deferred
Federal income taxes (3,567) (1,695) 1,512 (18) (18) 2,416 (8,466) (8,466) (7,545)
State income taxes (307) (146) 129 (2) (2) 207 (1,027) (1,027) (872)
Foreign income taxes (6) (6) (6) - - - - - -
------- ------- ------- ------ ------- ------- ------- ------- -------
Total deferred (3,880) (1,847) 1,635 (20) (20) 2,623 (9,493) (9,493) (8,417)
------- ------- ------- ------ ------- ------- ------- ------- -------
$(9,210) $(7,177) $(3,988) $7,896 $ 7,896 $10,832 $(4,719) $(4,719) $(3,643)
======= ======= ======= ====== ======= ======= ======= ======= =======
</TABLE>
The components of the Company's pre-tax income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- ----------------------------
IHF Health & IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic $(33,784) $(25,614) $(14,000) $12,018 $17,118 $26,922 $(17,600) $(14,796) $(10,126)
Foreign (1,936) (1,936) (1,936) (2,501) (2,501) (2,501) - - -
-------- -------- -------- ------- ------- ------- -------- -------- --------
$(35,720) $(27,550) $(15,936) $ 9,517 $14,617 $24,421 $(17,600) $(14,796) $(10,126)
======== ======== ======== ======= ======= ======= ======== ======== ========
</TABLE>
The provision for (benefit from) income tax differs from the amount
computed by applying the statutory federal income (loss) tax rate to income
(loss) before taxes as follows:
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- ----------------------------
IHF Health & IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory federal income
tax rate (35)% (35)% (35)% 35% 35% 35% (35)% (35)% (35)%
State tax provision
(benefit) (3) (2) (3) 6 4 3 (3) (3) (3)
Other non-deductible
items 3 3 - 8 5 - 6 6 4
Dividends on preferred
stock 2 - - 19 - - 5 - -
Foreign losses for which
no benefit has been
recognized 5 6 11 15 10 6 - - -
Other 2 2 2 - - - - - (2)
--- --- --- --- --- --- --- --- ---
Provision for (benefit
from) income taxes (26)% (26)% (25)% 83% 54% 44% (27)% (32)% (36)%
=== === === === === === === === ===
</TABLE>
As of May 31, 1997 and 1996, the Company recorded gross deferred tax assets
and gross deferred tax liabilities as follows (in thousands):
<TABLE>
<CAPTION>
May 31,
---------------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C>
Gross deferred tax assets $ 25,558 $ 23,525 $ 16,164 $ 15,506 $ 15,506 $ 11,740
Gross deferred tax liabilities (5,465) (5,465) (5,305) (3,972) (3,972) (3,925)
-------- -------- -------- -------- -------- --------
20,093 18,060 10,859 11,534 11,534 7,815
Valuation allowance (3,354) (3,354) (3,354) (805) (805) (805)
-------- -------- -------- -------- -------- --------
Net deferred tax asset $ 16,739 $ 14.706 $ 7,505 $ 10,729 $ 10,729 $ 7,010
======== ======== ======== ======== ======== ========
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets
related to foreign net operating loss carryforwards since realization of
these future benefits is not sufficiently assured. The increase in the
valuation allowance from May 31, 1996 to May 31, 1997 is attributable to
losses incurred by the Company's European operations in the year ended May
31, 1997.
Net deferred tax assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
May 31,
---------------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
IHF Health & IHF Health &
ICON Holdings Fitness ICON Holdings Fitness
<S> <C> <C> <C> <C> <C> <C>
Foreign net operating loss
carryforward $ 3,354 $ 3,354 $ 3,354 $ 805 $ 805 $ 805
Domestic net operating loss
carryforward 444 344 49 - - -
Stock compensation expense 4,146 4,146 4,146 5,694 5,694 5,694
Future deductible interest 8,661 6,760 (35) 3,766 3,766 -
Depreciation (4,176) (4,176) (4,176) (2,730) (2,730) (2,730)
Reserves and allowances 6,312 6,312 6,312 3,770 3,770 3,770
Contribution of land (500) (500) (500) (500) (500) (500)
Uniform capitalization
of inventory 1,157 1,157 1,157 937 937 937
Other, net 695 663 552 (208) (208) (161)
------- ------- ------- ------- ------- -------
20,093 18,060 10,859 11,534 11,534 7,815
Valuation allowance (3,354) (3,354) (3,354) (805) (805) (805)
------- ------- ------- ------- ------- -------
Net deferred tax asset $16,739 $14,706 $ 7,505 $10,729 $10,729 $ 7,010
======= ======= ======= ======= ======= =======
</TABLE>
In connection with the HealthRider Acquisition (Note 3) and the Weider
Sports and CanCo Acquisitions (Note 14), the Company acquired $2,130,000 of
deferred tax assets of which $388,000 was realized in the year ended May
31, 1997.
In the year ended May 31, 1997, the Company realized income tax benefits of
$50,000 related to the use of foreign net operating loss carryforwards and
income tax benefits of $6,481,000 and $556,000 related to the use of
federal and state net operating loss carrybacks, respectively. In the year
ended May 31, 1996, the Company realized income tax benefits of $3,470,000
and $297,000 for the use of federal and state net operating loss
carryforwards, respectively.
At May 31, 1997, the Company had approximately $7.5 million of foreign net
operating losses which may be carried forward indefinitely and $1.2 million
of domestic net operating loss carryforwards expiring in 2013 available to
reduce future foreign taxable income and domestic taxable income,
respectively.
12. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the period for (in thousands):
Interest paid $ 33,017 $ 25,191 $ 12,188
Income taxes paid (refunds received), net (685) 8,928 5,286
</TABLE>
Non-cash investing and financing activities:
As part of the Recapitalization (Note 1): (1) the existing shareholders of
the Recapitalized Companies contributed their capital stock of these
Companies (recorded value of $7.7 million) to IHF Capital, IHF Holdings,
and Health & Fitness in exchange for common stock of IHF Capital, preferred
stock of IHF Holdings, warrants to purchase common stock of IHF Capital
(aggregate fair value of $58.8 million), and the Shareholder Notes ($159.3
million), and (2) certain senior executives of the Company exchanged their
options to purchase capital stock of the Recapitalized Companies for $34.7
million of replacement options to purchase common stock of IHF Capital and
$4.0 million of warrants to purchase preferred stock of IHF Holdings.
Subsequent to the closing of the Recapitalization, IHF Capital redeemed
certain of the options exchanged by the executives as part of the
Recapitalization for $26.4 million.
In connection with the issuance of the Senior Subordinated Notes and the
Senior Secured Notes (Note 8), the Company issued warrants to purchase
common stock of IHF Capital. These warrants were ascribed values of
$968,000 and $3,838,000, respectively, and were recorded as additional
discounts on the notes and were credited to additional paid-in capital.
In connection with the repurchase of the IHF Holdings Preferred Stock (Note
14), ICON recorded a non-cash increase to additional paid-in capital of
$14.3 million to reflect the gain recognized on the early extinguishment of
and the forgiven dividends related to the IHF Holding preferred stock and
options to purchase such stock. In addition, IHF Holdings recorded a non-
cash increase to additional paid-in capital of $50.0 million representing
the carrying value of its preferred stock and options to purchase preferred
stock upon repurchase by its parent.
13. Commitments and Contingencies
Leases - The Company has noncancelable operating leases, primarily for
computer and production equipment, that expire over the next five years.
These leases generally contain renewal options for periods ranging from
three to five years and require the Company to pay all executory costs such
as maintenance and insurance. Future minimum payments under noncancelable
operating leases consist of the following at May 31, 1997 (table in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Year ended May 31:
1998 $ 8,022
1999 5,858
2000 4,189
2001 2,547
2002 356
Thereafter -
-------
Total $20,972
=======
</TABLE>
Rental expense under noncancelable operating leases was approximately
$9,373,000, $2,513,000 and $2,890,000 for the years ended May 31, 1997,
1996, and 1995, respectively.
Lease of Asset Held for Sale - The Company leases a portion of its asset
held for sale (Note 2) to several tenants for use as office space under
noncancelable operating leases. The Company recorded lease income of
$730,000 for the year ended May 31, 1997. For the year ended May 31, 1998,
the Company has monthly lease income commitments of $145,000. Total lease
income due under these leases is $4,521,000 through April 2002.
Product Liability - The Company is one of several named defendants in legal
matters involving product liability claims, several insured and one
uninsured. The plaintiff in each case seeks general and specific damages
in various specified and unspecified amounts. Since many of these matters
are in the initial discovery stage, it is not possible to predict, with any
certainty, the outcome or range of potential loss. Currently pending
claims and any future claims are subject to the uncertainties related to
litigation, and the ultimate outcome of any such proceedings or claims
cannot be predicted. Due to uncertainty with respect to the nature and
extent of manufacturers' and distributors' liability for personal injuries,
there is also no assurance that the product liability insurance of the
Company is or will be adequate to cover such claims. In addition, there
can be no assurance that the Company's insurers will be solvent when
required to make payments on claims. However, management, based in part on
discussions with legal counsel, believes that the Company has meritorious
defenses and that resolution of these matters should not result in
uninsured liability, if any, that would be materially greater than the
estimated liability of $2,000,000 and $1,500,000 included in accrued
expenses at May 31, 1997 and 1996, respectively. The amount accrued is
based on the number of outstanding claims, consideration of the Company's
stop-loss limits, and estimates prepared by the Company's insurance
carrier. Outstanding product liability claims are generally settled within
one to two years of such claims being made.
Other Litigation - During 1996 and 1997, Precise Exercise Equipment, Inc.
("Precise") commenced legal proceedings against the Company, claiming that
the Company's abdominal products, introduced in the fourth quarter of 1996,
infringe two patents issued to Precise. Precise has not quantified the
amount of alleged damages arising out of its infringement related claims,
and the litigation is still in its initial discovery stages. Management,
based in part on discussions with legal counsel, believes that its defenses
are meritorious and plans to vigorously defend its position. The Company
does not believe that the Precise litigation will have a material adverse
impact on the financial position or results of operations of the Company.
In addition, the Company is involved in various other claims, potential
unasserted claims, and legal actions, including several patent infringement
claims, arising in the ordinary course of business. In the opinion of
management, the ultimate outcome of these matters will not have a material
adverse effect on the Company's financial position and results of
operations and, that resolution of these matters should not result in
liability, if any, that would be materially greater than the estimated
liability of $200,000 included in accrued expenses at May 31, 1997. At May
31, 1996, no amounts had been accrued in the financial statements for these
matters.
While the Company believes it has meritorious defenses against outstanding
claims, the ultimate resolution of these matters could result in losses
materially in excess of amounts accrued.
Warranty - The Company warrants its products against defects in materials
and workmanship for a period of 90 days after sale to the end-user. As of
May 31, 1997 and 1996, the Company had an accrual for warranty costs on
products sold of approximately $6,570,000 and $3,050,000, respectively,
included in accrued expenses in the accompanying balance sheets.
Retirement Plans - All employees who have met minimum age and service
requirements are eligible to participate in one of two 401(k) savings
plans. Participants may make tax deferred contributions up to 15% of
total salary in 1995. Company contributions to the two plans for the years
ended May 31, 1997, 1996 and 1995 were $374,000, $233,000 and $220,000,
respectively.
14. Related Party Transactions
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 (the "WHF Litigation") 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 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. 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 in which ICON recorded the amounts paid to
the WHF stockholders as a reduction in the additional paid-in capital of
ICON.
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 reflected a discount of $3.9 million and the
forgiveness of accrued dividends. In connection with the repurchase of the
IHF Holdings Preferred Stock, the Company purchased the options to purchase
IHF Holdings Preferred Stock held by certain officers of the Company for
$3.7 million, which reflected 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 $50.0 million, which
consists of (i) $35.8 million which ICON contributed to IHF Holdings from
its proceeds from the issuance of Senior Discount Notes (Note 8) 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 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 WHF 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 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 $16.6 million, which
includes the expenses noted in (i) and (ii) and other individually
insignificant settlement expenses totaling $1.1 million, offset by the $.5
million of CanCo management fees. The Company also recorded the
intercompany balance reductions noted in (iii) in its consolidated balance
sheet.
The WHF Settlement also contained various miscellaneous provisions that the
Company does not believe are material.
Recapitalization Expenses
The Company reimbursed $2 million of expenses incurred by WHF, Bain
Capital, and other shareholders in connection with the Recapitalization.
In addition, the Company paid Bain Capital a fee of $3.5 million for
services provided in structuring the Recapitalization (Note 1).
Management Fees
The Company received $2.7 million in the year ended May 31, 1995 as a fee
for administrative services provided to WHF in the management of one of its
subsidiaries (the "Management Agreement") which was recorded as a reduction
of general and administrative expense for the period. Subsequent to the
Recapitalization, the Management Agreement required Health & Fitness to the
extent applicable, to source WHF products, or products substantially the
same as those sold by WHF, from WHF prior to seeking sources of those
products from outside vendors. During the years ended May 31, 1997, 1996
and 1995, the Company purchased approximately $7.0 million, $50.7 million
and $26.4 million of products from WHF and had a trade payable of $.7
million at May 31, 1996, respectively. In connection with the WHF
Settlement, this agreement was terminated.
In conjunction with the Recapitalization, the Company executed an agreement
with a majority shareholder who provides management and advisory services.
Total annual fees due under this agreement are $800,000, and, for the years
ended May 31, 1997, 1996 and 1995, the Company recorded management fee
expense of $800,000, $800,000 and $333,000, respectively. In addition, if
the Company enters into any acquisition transactions involving at least $10
million, the Company must pay a fee to the majority shareholder of
approximately 1% of the gross purchase price, including liabilities
assumed, of the transaction. In connection with the HealthRider
Acquisition (Note 3), the Company paid this shareholder $700,000.
Non-Compete Agreements
In November 1994, the Company entered into non-compete agreements with
certain key executives of the Company in connection with the
Recapitalization (Note 2).
License Fees
Concurrent with the closing of the Recapitalization, the Company obtained
certain rights to use the WHF name pursuant to two separate exclusive
license agreements. Under the Weider Sports License, the Company paid a $5
million license fee on November 14, 1994 for a perpetual license with
respect to Weider Canadian Trademark Rights. Under the Weider Health and
Fitness license, the Company was required to pay a royalty with respect to
Weider U.S. and other trademark rights equal to 2% of sales of licensed
products sold thereunder until such time as the Company had paid an
aggregate royalty equal to $12 million plus an interest factor accruing on
the unpaid portion of the royalty at a per annum rate of 10%. The Company
recorded license fees of $129,000, $549,000 and $500,000 during 1997, 1996
and 1995, respectively, under this agreement. The Company had accrued
license fees payable to WHF of $81,000 at May 31, 1996. In connection with
the WHF Settlement, the Company paid $3.9 million in exchange for a fully
paid-up license with respect to the U.S. and other trademarks.
Distribution Agreement
The Company had appointed a Canadian WHF affiliate to be the exclusive
distributor of Health & Fitness products worldwide, excluding the United
States, Mexico and certain countries in Europe. Under the terms of this
agreement, the Company sold its products directly to WHF affiliates for
resale in the agreed-upon territory. In conjunction with this agreement,
the Company recorded revenue of $3.2 million, $6.9 million and $8.8 million
for the years ended May 31, 1997, 1996 and 1995, respectively. At May 31,
1996, the Company had a trade receivable from WHF affiliates of $1.5
million. As part of the expenses incurred in connection with the WHF
Settlement, the Company paid $8.0 million to terminate this agreement.
Weider Sports and CanCo Acquisitions
In connection with the settlement of the WHF Litigation, the Company
acquired certain assets, excluding cash and fixed assets, for $8.9 million
and assumed certain liabilities of the sports equipment business lines of
Weider Sports (the "Weider Sports Acquisition"). The terms of the Weider
Sports Acquisition and WHF Settlement also require the Company to provide
Ben Weider with a salary, office space and three assistants for a period of
five years after the acquisition. The estimated costs of this commitment
of $2.5 million were accrued as part of the purchase accounting for the
Weider Sports Acquisition. As a result of the Weider Sports Acquisition,
the Company reacquired 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.
In addition, the Company acquired certain assets, excluding cash, cash
equivalents and accounts receivable, for $1.7 million and assumed certain
liabilities of three Canadian corporations (collectively, CanCo) (the
"CanCo Acquisition"). The Company also acquired two CanCo plants which
were leased by other WHF affiliates in exchange for the assumption of the
existing CDN $1.5 million mortgage on the properties and the payment of $.5
million.
The Weider Sports and CanCo Acquisitions have been 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 Weider Sports and CanCo Acquisitions did not represent
acquisitions of significant businesses by the Company.
European Acquisition
In connection with the Recapitalization (Note 1), the Company obtained an
option to acquire certain fixed assets and to assume certain related leases
of several European operations owned by WHF at any time prior to May 15,
1997. In July 1995 and December 1995, the Company exercised its options to
purchase certain fixed assets of the WHF European affiliates in connection
with the establishment of its own sales operations in Europe. The total
purchase price for these assets was approximately $200,000 and approximated
the net book value of the assets at the date of purchase.
Aircraft Lease
In June 1996, the Company entered into an agreement with FG Aviation, Inc.
("FG"), a company which is jointly owned by officers of the Company,
whereby the Company has committed to lease an airplane from FG. Minimum
rentals under the lease, which expires in May 2005, are $56,610 per month.
In connection with its lease commitments, the Company recorded $679,000 of
rental expense and $34,000 of maintenance expense in the year ended May 31,
1997. In addition, the Company advanced $280,000 to FG as a security
deposit on the aircraft lease.
Receivable from Parent
Through September 1996, IHF Capital incurred $2,307,000 in expenses related
to its withdrawn public equity offering. In order to fund the payment for
these expenses, the Company, through Health & Fitness, advanced IHF Capital
$2,307,000 in the form of a non-interest bearing loan. At May 31, 1997,
this amount is reflected as a non-current receivable from parent on the
consolidated balance sheet of ICON, IHF Holdings and Health & Fitness.
This amount will be repaid at such time that IHF Capital raises proceeds in
connection with a public or private sale of its equity.
Receivables from Officers
In connection with the exercise of options prior to the Recapitalization,
the Company accepted as partial payment notes, bearing interest at the rate
of prime plus .5%, in the amount of $234,000 from officers. In connection
with the purchase of stock in the Recapitalization, the Company accepted as
partial payments, notes bearing interest at a per annum rate of 7.5% in the
amount of $657,000 from officers. In the year ended May 31, 1997, the
Company forgave a total of $234,000 of principal and $62,000 of accrued
interest on these loans.
<TABLE>
<CAPTION>
Valuation Accounts
May 31,
---------------------------------------------------------
1997 1996 1995
--------------- ---------------- -----------------
<S> <C> <C> <C>
Allowances for Doubtful Accounts,
Advertising and Credit Memos:
Balance at beginning of year $ 7,595,000 $ 5,308,000 $ 3,279,000
Additions
Charged to Costs and Expenses (Allowance 6,027,000 3,662,000 3,792,000
for Doubtful Accounts and Credit Memos)
Charged to Costs and Expenses
(Discounts and Advertising) 33,512,000 34,585,000 14,114,000
Recoveries on Accounts Charged Off - 74,000 -
Deductions
Accounts Charged Off (Allowance for
Doubtful Accounts and Credit Memos) (3,241,000) (3,569,000) (2,666,000)
Accounts Charged Off (Advertising) (34,940,000) (32,465,000) (13,211,000)
--------------- ---------------- ----------------
Balance at end of year $ 8,953,000 $ 7,595,000 $ 5,308,000
=============== ================ ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the balance sheet as
of May 31, 1997, and statement of operations for the year ended May 31, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000934798
<NAME> ICON HEALTH AND FITNESS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 5,560
<SECURITIES> 0
<RECEIVABLES> 201,778
<ALLOWANCES> 8,953
<INVENTORY> 121,838
<CURRENT-ASSETS> 365,633
<PP&E> 79,080
<DEPRECIATION> 27,342
<TOTAL-ASSETS> 456,943
<CURRENT-LIABILITIES> 145,561
<BONDS> 321,625
0
0
<COMMON> 0
<OTHER-SE> (10,744)
<TOTAL-LIABILITY-AND-EQUITY> 456,943
<SALES> 836,162
<TOTAL-REVENUES> 836,162
<CGS> 583,747
<TOTAL-COSTS> 597,756
<OTHER-EXPENSES> 217,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,685
<INCOME-PRETAX> (15,936)
<INCOME-TAX> (3,988)
<INCOME-CONTINUING> (11,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,948)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the balance sheet as
of May 31, 1997, and statement of operations for the year ended May 31, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000934799
<NAME> IHF HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 5,560
<SECURITIES> 0
<RECEIVABLES> 201,778
<ALLOWANCES> 8,953
<INVENTORY> 121,838
<CURRENT-ASSETS> 365,928
<PP&E> 79,080
<DEPRECIATION> 27,342
<TOTAL-ASSETS> 468,680
<CURRENT-LIABILITIES> 145,561
<BONDS> 401,196
0
0
<COMMON> 0
<OTHER-SE> (78,077)
<TOTAL-LIABILITY-AND-EQUITY> 468,680
<SALES> 836,162
<TOTAL-REVENUES> 836,162
<CGS> 583,747
<TOTAL-COSTS> 597,756
<OTHER-EXPENSES> 217,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,299
<INCOME-PRETAX> (27,550)
<INCOME-TAX> (7,177)
<INCOME-CONTINUING> (20,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,373)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the balance sheet as
of May 31, 1997, and statement of operations for the year ended May 31, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001029294
<NAME> ICON FITNESS CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 5,560
<SECURITIES> 0
<RECEIVABLES> 201,778
<ALLOWANCES> 8,953
<INVENTORY> 121,838
<CURRENT-ASSETS> 366,028
<PP&E> 79,080
<DEPRECIATION> 27,342
<TOTAL-ASSETS> 474,804
<CURRENT-LIABILITIES> 145,561
<BONDS> 489,400
0
0
<COMMON> 0
<OTHER-SE> (160,157)
<TOTAL-LIABILITY-AND-EQUITY> 474,804
<SALES> 836,162
<TOTAL-REVENUES> 836,162
<CGS> 583,747
<TOTAL-COSTS> 597,756
<OTHER-EXPENSES> 217,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,469
<INCOME-PRETAX> (35,720)
<INCOME-TAX> (9,210)
<INCOME-CONTINUING> (26,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,510)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
