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 FITNESS CORPORATION
IHF HOLDINGS, INC.
ICON HEALTH & FITNESS, INC.
(Exact name of registrant as specified in its charter)
Commission File No.: 333-18475, 33-87930-01, 33-87930
For the fiscal year ended May 31, 1998
Delaware 87-0566936, 87-0531209, 87-0531206
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 South, 1000 West, Logan, UT 84321
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 435-750-5000
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, 1998, 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, 1998, 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
<PAGE>
ICON Fitness Corporation and its wholly-owned
subsidiaries, IHF Holdings, Inc.
And ICON Health & Fitness, Inc.
FORM 10-K INDEX
PART I
Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
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 12
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 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrants 25
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
<PAGE>
* * *
Reference in this Annual Report on Form 10-K is made to the following
trademarks and brand names: Accusmart(TM), Concor(TM), CRANK-IT-UP(TM),
Cross Trainer(TM), CrossWalk(r), Image(TM), INSYNC(TM), INTELEX(TM),
JumpKing(r), Legend(TM), ProForm(r), Pro-Tech(TM), Smart Card(TM), Space
Saver(TM), Speed Link(TM), Stowaway(TM), Triple Play(TM), WeiderCare(TM),
Cardioglide(r), HealthRider(r), aeROBICRider(TM), SportRider(TM), and
LifeRider(TM), which are owned by the Company; Lifestyler(TM), 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, ellipticals, exercise bikes, stair steppers and upright rowers and
its line of anaerobic fitness products including home gyms and weight benches
benches. The Company also offers trampolines, recreational sports products,
sports medicine products, fitness accessories and spas and massage products. The
Company markets the majority of its products under the brand names ProForm,
HealthRider, Image, Weslo, WeiderCare, JumpKing and the licensed brand Reebok.
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 its telephone number is 435-750-5000.
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
<PAGE>
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 purchased substantially all the assets of HealthRider, Inc.
The Company markets HealthRider brand fitness equipment and other health-related
products primarily through its own specialty retail stores and kiosks, through
direct response advertising in print and on television, through its mail order
catalogs and through Sears, the exclusive retailer for the full-line of
HealthRider equipment. At the end of fiscal 1998, HealthRider operated 103
stores in approximately 37 states.
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, fitness accessories and spas and massage
products. 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 ProForm, HealthRider, Image and Weslo brand
names.
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. In 1996, the Company introduced a 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.
<PAGE>
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.
Ellipticals. In the Fall of 1997, the Company introduced its Ellipitcal
Cross Trainer. This product offers a low-impact, high-intensity aerobic workout.
This is possible through a patented mechanism which harnesses the momentum of a
natural striding motion and eliminates the impact of typical running or walking.
An innovative mechanism links upper-body motion with the lower-body motion for a
synchronized rhythmic total-body workout. A four-window LED provides feedback on
speed (steps per minute), time, distance, and calories burned. The name
"Elliptical" refers to the oval shape of the user's footpath. The retail price
points of the Elliptical range from $399 to $599.
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.
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.
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 treadmills for cross-training 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
<PAGE>
and benches under the Weider brand name. Retail price points of these products
range from $49 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 $29 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.
Relaxation Products. Since the Spring of 1996, the Company has been
innovating, manufacturing and marketing relaxation products such as portable
spas, rolling massage chairs and massage pillows. These products are currently
distributed through various channels: department stores, mass merchandisers,
sporting goods, home-shopping, catalogs and the Company's own direct response
efforts.
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 157 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 $7.8 million, $7.6 million and $6.8 million in fiscal 1998, 1997, and 1996,
respectively, and has budgeted $8.0 million for research and development in
fiscal 1999.
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 life cycle 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
<PAGE>
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 largest customer for the past several years has been Sears,
Roebuck and Co. ("Sears"). In fiscal 1998, Sears accounted for approximately
32.5% of the Company's total net sales, a 3.5% increase over fiscal 1997. While
no other single customer accounted for more than 10% of the Company's total
sales in fiscal 1998, other important customers include Sam's Wholesale Club
("Sam's"), Kmart, Wal-Mart, Service Merchandise, and The Sports Authority. In
fiscal 1998 and 1997, Sam's accounted for approximately 50% and 70%,
respectively, of net sales at the Company's JumpKing 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 and customer
service. 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
<PAGE>
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)
and LifeFitness Inc. 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 1998 and 1997 were $40.4 million and $45.4
million, respectively. In September 1996, the Company purchased certain assets
of a Canadian manufacturing business ("CanCo") as well as certain distribution
rights. Net sales from Canada for fiscal 1998 were $22.3 million. 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 purchased substantially all the assets of HealthRider, Inc.
The Company markets HealthRider brand fitness equipment and other health-
related products primarily through its own specialty retail stores and kiosks,
through direct response advertising in print and on television, through its mail
order catalogs and through Sears, the exclusive retailer for the full-line of
HealthRider equipment. At the end of fiscal 1998, HealthRider operated 103
stores in approximately 37 states.
Manufacturing and Purchasing
In fiscal 1998, 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 longstanding 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 provide 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
<PAGE>
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. 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
itsproducts 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, transportation delays, 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. In 1996, the Company expanded its
manufacturing capacity by 233,000 square feet through the acquisition of CanCo
in St. Jerome, Canada. 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 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.
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Employees
The Company currently employs approximately 4,200 people, 142 of whom are
represented by a Canadian labor union. Factory employees are compensated through
a targeted incentive system. Managerial employees receive bonuses tied to the
achievement of performance targets. Approximately 252 employees are engaged in
research and development, 802 in sales and marketing, 2,139 in manufacturing and
1,018 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."
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ITEM 2. PROPERTIES
The location, square footage, status and primary use of the Company's principal
properties are set forth below:
<TABLE>
Square
Location Footage Status Primary Uses
- ---------------------- ------- ------------------------ ---------------------------------
<S> <C> <C> <C>
Logan,UT 300,000 Owned Manufacturing, Offices, R&D
Logan,UT 206,606 Leased(Month to Month) Offices, Manufacturing,
Warehousing
Smithfield,UT 71,575 Leased (Expires 9/98) Manufacturing
Clearfield,UT 180,000 Leased (Month to Month) Manufacturing,Warehousing
Clearfield,UT 329,075 Leased (Expires 6/99) Manufacturing,Warehousing
Clearfield,UT 390,400 Leased (Expires 5/00,7/00,6/02) Warehouse
Hyrum,UT 27,000 Leased (Month to Month) Warehouse
Garland,TX 247,670 Leased (Expires 1/99,11/99,1/01) Offices,Manufacturing,Warehousing
Clearfield,UT 782,652 Leased (Expires 6/99,6/00,9/00) Warehousing
Weatherford,TX 22,000 Leased (Expires 1/01) Offices,Manufacturing
Denver,CO 72,485 Leased (Expires 4/99) Manufacturing,Warehousing
South Brunswick,NJ 203,972 Leased (Expires 5/00) Warehouse
Englewood,CO 10,012 Leased (Expires 5/99) Sales Office
Logan,UT 68,750 Leased (Expires 5/01) Warehouse
Smithfield, UT 108,187 Leased (Expires 11/02) Warehouse
Anzin,FR 8,097 Leased (Month to Month) Warehouse,Offices,Apartment
Carrieres Sur Seine,FR 2,966 Leased (Expires 12/98) Warehouse,Office
Neailly Sur Seine,FR 262 Leased (Expires 9/98) Apartment
Leeds,UK 6,000 Leased (Expires 1/99) Offices
Perugia,IT 3,360 Leased (Expires 6/01) Offices
Perugia,IT 6,600 Leased (Month to Month) Warehouse
Salt Lake City,UT 6,635 Leased (Expires 12/98) Offices
Marabel,QC 413,000 Leased (Expires 6/99) Warehouse
San Luis Obispo,CA 4,950 Leased (Expires 12/98) Warehouse
St. Jerome,QC 65,835 Owned Manufacturing,Offices
St. Jerome,QC 105,984 Leased (Expires 7/02) Warehouse
St. Jerome,QC 61,852 Owned Manufacturing,Offices
Providence,UT 4,140 Leased (Month to Month) Warehouse
</TABLE>
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.
<PAGE>
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 $5 million per occurrence and $5
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.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of August 28, 1998, 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") in Boston, Massachusetts, 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's 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 year ended May 31, 1994 has 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, 1997 and 1998 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.
<PAGE>
<TABLE>
For the Year Ended May 31,
(dollars in millions)
-----------------------------------------------------------
ICON IHF ICON ICON IHF ICON
Health Holdings Fitness Health Holdings Fitness
1994 1995 1995 1995 1996 1996 1996
------ ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales. . . . . . . . . . . . $403.0 $530.8 $530.8 $530.8 $747.6 $747.6 $747.6
Cost of sales. . . . . . . . . . 288.2 378.4 378.4 378.4 541.5 541.5 541.5
------ ------ ------ ------ ------ ------ ------
Gross profit . . . . . . . . . . 114.8 152.4 152.4 152.4 206.1 206.1 206.1
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling . . . . . . . . . . . . 52.1 68.7 68.7 68.7 93.9 93.9 93.9
Research and development . . . . 2.8 5.2 5.2 5.2 6.8 6.8 6.8
General and administrative . . . 28.6 31.1 31.1 31.1 47.8 47.8 47.8
Compensation expense
attributable to options(1). . . - 39.0 39.0 39.0 2.8 2.8 2.8
---- ----- ----- ----- ----- ----- -----
Total operating expenses . . . . 83.5 144.0 144.0 144.0 151.3 151.3 151.3
---- ----- ----- ----- ----- ----- -----
Income from operations . . . . . 31.3 8.4 8.4 8.4 54.8 54.8 54.8
Interest expense . . . . . . . . 6.2 17.3 21.5 21.5 27.9 36.7 36.7
Dividends on cumulative redeemable
preferred stock of subsidiary held by
minority interest . . . . . . . - - - 2.8 - - 5.1
Amortization of deferred
financing fees . . . . . . . . . - 1.2 1.7 1.7 2.5 3.5 3.5
---- ----- ---- ---- ---- ---- ---
Income before income taxes . . . 25.1 (10.1) (14.8) (17.6) 24.4 14.6 9.5
Provision for (benefit from)
income taxes. . . . . . . . . 9.8 (3.6) (4.7) (4.7) 10.8 7.9 7.9
----- ------ ------ ------ ----- ----- ----
Net income (loss). . . . . . . . $15.3 $(6.5) $(10.1) $(12.9) $13.6 $6.7 $1.6
===== ====== ======= ======= ===== ==== ====
Balance Sheet Data (at end of period):
Cash . . . . . . . . . . . . . . $0.1 $4.1 $4.1 $4.1 $19.3 $19.3 $19.3
Working capital. . . . . . . . . 97.8 137.7 137.7 137.7 157.3 157.6 157.6
Total assets . . . . . . . . . . 184.7 281.9 290.2 290.2 306.5 316.7 316.7
Total indebtedness(2). . . . . . 65.4 207.8 268.1 268.1 213.6 282.8 282.8
Preferred stock of subsidiary
(including accrued dividends). . - - - 42.8 - - 47.9
Cumulative redeemable preferred stock
(including accrued dividends). . - - 42.8 - - 47.9 -
Stockholders' equity . . . . . . 54.5 (14.8) (109.6) (109.6) 2.0 (104.8) (104.8)
Other Data:
Depreciation and amortization. . 4.0 6.9 11.6 11.6 9.9 19.7 19.7
Capital expenditures . . . . . . 6.9 8.0 8.0 8. 0 15.4 15.4 15.4
- --------------
</TABLE>
<PAGE>
<TABLE>
For the Year Ended May 31,
(dollars in millions)
---------------------------------------------------------
ICON IHF ICON ICON IHF ICON
Health Holdings Fitness Health Holdings Fitness
1997 1997 1997 1998 1998 1998
------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
perating Data:
Net sales. . . . . . . . . . . . . $836.2 $836.2 $836.2 $749.3 $749.3 $749.3
Cost of sales. . . . . . . . 583.8 583.8 583.8 535.7 535.7 535.7
Amortization of step-up HealthRider
and ICON of Canada inventory . . . 14.0 14.0 14.0 0.3 0.3 0.3
------ ------ ------ ------ ------ ------
Gross profit . . . . . . . . . . . . 238.4 238.4 238.4 213.3 213.3 213.3
------ ------ ------- ----- ------ -----
Operating expenses:
Selling. . . . . . . . . . . . . . . 132.4 132.4 132.4 120.7 120.7 120.7
Research and development . . . . . . 7.6 7.6 7.6 7.8 7.8 7.8
General and administrative . . . . . 56.7 56.7 56.7 60.9 60.9 60.9
Weider settlement. . . . . . . . . . 16.6 16.6 16.6 - - -
HealthRider integration costs. . . . 4.9 4.9 4.9 - - -
----- ----- ----- ----- ----- -----
Total operating expenses . . . . . . 218.2 218.2 218.2 189.4 189.4 189.4
----- ----- ----- ----- ----- -----
Income from operations . . . . . . . 20.2 20.2 20.2 23.9 23.9 23.9
Interest expense . . . . . . . . . . 33.6 44.1 49.7 35.0 47.4 59.4
Dividends on Cumulative
Redeemable preferred stock of a
subsidiary held by minority interest - - 2.1 - - -
Amortization of deferred
financing fees. . . . . . . . . . . 3.0 4.2 4.6 4.8 6.2 6.9
Other (income)/expense . . . . . . . (.5) (.5) (.5) (.5) (.5) (.5)
Income before income taxes . . . . . (15.9) (27.6) (35.7) (15.4) (29.2) (41.9)
Provision for income taxes . . . . . (4.0) (7.2) (9.2) (5.9) (10.0) (14.3)
------- ------- ------- ------ ------ ------
Net income (loss). . . . . . . . . . $(11.9) $(20.4) $(26.5) $(9.5) $(19.2) $(27.6)
======= ======== ======= ======= ======== =======
Balance Sheet Data (at end of period):
Cash . . . . . . . . . . . . . . . . $ 5.6 $ 5.6 $ 5.6 $ 3.9 $ 3.9 $ 3.9
Working capital. . . . . . . . . . . 220.1 220.4 220.5 152.9 152.9 152.9
Total assets . . . . . . . . . . . . 456.9 468.7 474.8 363.1 378.1 387.9
Total indebtedness(2). . . . . . . . 327.0 406.6 494.8 274.5 366.5 466.8
Stockholders' equity (deficit) . . . (10.7) (78.1) (160.2) (20.3) (97.3) (187.8)
Other Data:
Depreciation and amortization. . . . 16.6 28.2 34.3 21.7 35.5 48.2
Capital expenditures . . . . . . . . 16.0 16.0 16.0 11.8 11.8 11.8
- --------------
</TABLE>
(1) 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.
(2) Total indebtedness is defined as current portion of long term debt plus long
term debt.
<PAGE>
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 1998 ended on May 31, 1998.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", "intends" and similar expressions
are intended to identify forward-looking statements. The Company's actual
results could differ materially from those set forth in the forward-looking
statements.
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processing vendors and software which is run on in-house computer networks.
During fiscal 1998, the Company initiated a review and assessment of all
hardware and software to confirm that it will function properly in the year
2000. With respect to internal systems, the results of that evaluation to date
have not revealed any year 2000 issues that, in the Company's opinion, create a
material risk of disruption of operations. With respect to outside vendors,
those vendors that have been contacted have indicated that their hardware or
software is or will be Year 2000 compliant in time frames that meet regulatory
requirements. Evaluation of these issues is continuing and there can be no
assurance that additional issues, not presently known to the Company, will not
be discovered which could present a material risk of disruption to the Company's
operations.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130") and Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company will implement SFAS 130 and SFAS
131 as required in fiscal 1999, which will require the Company to report and
display separately certain information related to comprehensive income and
operating segments but will not result in any changes to previously recorded
amounts.
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 and then declined to $749.3 in 1998. 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 and in
fact declined in 1998 compared to 1997.
<PAGE>
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 may continue to utilize direct
response marketing with respect to its HealthRider products and its other
brands.
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. The Company began to directly market its
products in Canada in September of 1996. The Company's European and Canadian
operations have been consolidated in the statement of operations for 1998 and
the balance sheet at May 31, 1998. Certain of the Company's European operations
are not currently profitable, and 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. The Company also recorded in 1995 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 these 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 1996, 1997 and 1998:
<PAGE>
<TABLE>
For the Year Ended May 31,
-------------------------------------------------------------
1996 1996 1996 1997 1997 1997
ICON ICON IHF ICON ICON ICON
Health Holdings Fitness Health Holdings Fitness
------ -------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100% . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . 72.4 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 27.6 28.5 28.5 28.5
---- ---- ---- ---- ---- ----
Operating expenses:
Selling . . . . . . . 12.6 12.6 12.6 15.8 15.8 15.8
Research and development 0.9 0.9 0.9 0.9 0.9 0.9
General and administrative 6.4 6.4 6.4 6.8 6.8 6.8
Weider settlement . . - - 2.0 2.0 2.0 2.0
HealthRider integration costs - - - 0.6 0.6 0.6
Stock option compensation
expense 0.4 0.4 0.4 - - -
---- ---- ---- ---- ---- ----
Total operating expenses 20.3 20.3 20.3 26.1 26.1 26.1
Income from operations. . . 7.3 7.3 7.3 2.4 2.4 2.4
Interest expense and amortization
of deferred financing fees 4.0 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 - - 0.3
Other (income)/expense. . . - - - (0.1) (0.1) (0.1)
--- --- --- ----- ----- -----
Income (loss) before income taxes 3.3 2.0 1.3 (1.9) (3.3) (4.3)
Provision (benefit) for income
taxes 1.5 1.1 1.1 (0.5) (0.9) (1.1)
--- --- --- ----- ----- -----
Net income (loss). . . . . . 1.8% 0.9% 0.2% (1.4%) (2.4%) (3.2%)
==== ==== ==== ====== ====== ======
</TABLE>
<TABLE>
For the Year Ended May 31,
------------------------------
1998 1998 1998
ICON ICON IHF
Health Holdings Fitness
------ -------- -------
<S> <C> <C> <C>
Net sales 100% . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . 71.5 71.5 71.5
------ ------ ------
Gross profit . . . . . . . 28.7 28.5 28.5
------ ------ ------
Operating expenses:
Selling . . . . . . . 16.1 16.1 16.1
Research and development 1.1 1.1 1.1
General and administrative 8.1 8.1 8.1
------ ----- -----
Total operating expenses 25.3 25.3 25.3
Income from operations. . . 3.2 3.2 3.2
Interest expense and amortization
of deferred financing fees 5.3 7.1 8.8
---- ---- ----
Income (loss) before income taxes (2.1) (3.9) (5.6)
Provision (benefit) for income
taxes (0.8) (1.3) (1.9)
----- ----- -----
Net income (loss). . . . . . (1.3%) (2.6%) (3.7%)
====== ====== ======
</TABLE>
<PAGE>
Year Ended May 31, 1998 Compared to the Year Ended May 31, 1997
Net sales decreased by $86.9 million, or 10.4% from $836.2 million in 1997
to $749.3 million in 1998. The decrease in sales was primarily attributable to
upright rower sales and ab shaper sales which decreased $77.8 million and $41.2
million, respectively. Also, airwalker sales decreased $16.5 million,
rower/skier sales decreased by $5.2 million and sales in Europe decreased by
approximately $4.9 million. These decreases were offset by increased treadmill
sales of $21.1 million, increased bike sales of $13.3 million, a new elliptical
product introduced in fiscal 1998 accounted for $21.8 million in new sales and
other various product sales including softgoods increased by approximately $2.5
million. Treadmill sales increased from $452.9 million in 1997 to $474.0 million
in 1998. Treadmill sales accounted for approximately 54.2% of net sales in 1997
and 63.3% of net sales in 1998.
Gross profit for 1998 was $213.3 million, or 28.5% of net sales. In 1997
gross profit was also 28.5% of net sales at $238.4 million.
Selling expenses were $120.8 million, or 16.1% of net sales, in 1998
compared to $132.4 million, or 15.8% of net sales in 1997. The dollar decline is
attributed to a decrease in direct response and other advertising of $6.0
million as well as a one time charge of $6.4 million related to the Healthrider
acquisition in fiscal 1997. In addition, commissions expense decreased by $0.9
million during fiscal 1998. These decreases were offset by an increase in bad
debt expense of $1.4 million primarily due to one company that filed for
bankruptcy in fiscal 1998 and other various increases of approximately $0.3
million.
Research and development expense was $7.8 million, or 1.1% of net sales,
for 1998 compared to $7.6 million, or 0.9% of net sales, for 1997. This increase
is due to continued efforts to develop both current and future products.
General and administrative expense totaled $60.9 million, or 8.1% of net
sales, for 1998 compared to $56.7 million, or 6.8% of net sales, for 1997. The
largest single increase in 1998 over 1997 is depreciation expense of $3.1
million, which increased due to the recent acquisition of assets from
HealthRider and CanCo. Product liability insurance claims increased $1.4 million
during fiscal 1998 due to a concerted effort by the legal department to settle
outstanding claims. Also, legal expense and rent expense have increased
approximately $1.1 million and $0.9 million, respectively, in fiscal 1998 over
fiscal 1997. These increases were offset by decreases in the salaries and bonus
expenses of $2.3 million in fiscal 1998 compared to fiscal 1997.
In the second quarter of fiscal 1997, the Company and WHF and its
affiliates settled litigation through a number of agreements. The settlement
included the release of certain claims previously asserted by WHF and its
affiliates, amendments to certain agreements existing between the Company and
WHF and its affiliates and certain new agreements among the Company and WHF and
its affiliates. Expenses related to the WHF settlement amounted to $16.6 million
for fiscal 1997. There were no expenses related to this settlement in fiscal
1998.
HealthRider integration costs totaled $4.9 million for fiscal 1997. These
charges were incurred to eliminate the duplication in staff and facilities with
those of ICON Health. There were no charges related to HealthRider integration
during fiscal 1998.
<PAGE>
As a result of the foregoing factors, operating income was $23.9 million,
or 3.2% of net sales in fiscal 1998, compared to $20.2 million, or 2.4% of net
sales in fiscal 1997.
Interest expense, including amortization of deferred financing fees
increased to $39.9 million for ICON Health, $53.6 million for IHF Holdings and
$66.3 million for ICON Fitness in fiscal 1998 compared to $36.7 million for ICON
Health, $48.3 million for IHF Holdings and $54.3 million for ICON Fitness for
fiscal 1997. The increase in interest expense and amortization of deferred
financing fees in fiscal 1998 is the result of additional levels of borrowing
under the Company's credit agreement and accretion of the principal balances of
the Company's outstanding indentures.
Dividends on cumulative redeemable preferred stock totaled $2.1 million for
ICON Fitness for fiscal 1997. This Preferred Stock was redeemed in the second
quarter of fiscal 1997.
The income tax benefit was $5.9 million for ICON Health, $10.0 million for
IHF Holdings and $14.3 million for ICON Fitness for fiscal 1998, compared with a
tax benefit of $4.0 million for ICON Health, $7.2 million for IHF Holdings and
$9.2 million for ICON Fitness during fiscal 1997. This is a result of the loss
before income tax for fiscal 1998 and 1997. At the end of fiscal 1998, ICON
Fitness has a net deferred tax asset of $33.7 million. No valuation allowance
has been recorded against this asset because the Company believes that it will
generate sufficient future taxable income through operations to realize the net
deferred assets prior to expiration of any net operating losses (NOL). NOL's can
be carried forward up to 20 taxable years. There can be no assurance however,
that the Company will generate any specific level of earnings or that it will be
able to realize any of the deferred tax asset in future periods. If the Company
is unable to generate sufficient taxable income in the future through operating
results, a valuation allowance against this deferred tax asset would result in a
charge to earnings.
As a result of the foregoing factors, the net loss was $9.5 million for
ICON Health, $19.2 million for IHF Holdings and $27.6 million for ICON Fitness
for fiscal 1998, compared to net losses of $12.0 million for ICON Health, $20.4
million for IHF Holdings and $26.5 million for ICON Fitness during the same
period of fiscal 1997.
Advertising allowances due to retail customers totaled $2.5 million at May
31, 1998. Advertising allowances are generally a fixed percentage of sales to
customers. Fluctuations in the balance of this allowance are attributable to
changes in customer sales mix and the timing of when allowances are taken.
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.
<PAGE>
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 0.9% of net sales,
for 1997 compared to $6.8 million, or 0.9% 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's growth 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 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
<PAGE>
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.
Seasonality
The following are the net sales and operating income of the Company by
quarter for the fiscal years 1998, 1997 and 1996:
<TABLE>
(in millions)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales
1998 . . . . . . . $127.5 $236.3 $252.0 $133.5
1997 . . . . . . . 125.8 249.5 248.7 212.2
1996 . . . . . . . 124.8 228.5 240.9 153.4
Operating Income
1998 . . . . . . . $(7.6) $15.7 $21.5 $(5.7)
1997 . . . . . . . 2.0 1.2 8.5 8.5
1996 . . . . . . . 6.4 20.0 25.4 3.0
Net Income (Loss)
1998 . . . . . . . $(15.4) $(0.7) $2.1 $(13.6)
1997 . . . . . . . (5.8) (8.9) (3.2) (8.6)
1996 . . . . . . . (3.4) 4.2 7.1 (6.3)
- -----------------------
</TABLE>
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 1998, the Company provided $47.6 million of cash from operating
activities compared to a usage of cash in the amount of $37.7 million in 1997.
The majority of this cash provided by operating activities is a result of a
decrease in accounts receivable. The Company received $6.4 million from
investing activities for fiscal 1998 due to the sale of a building for $18.3
million, offset by $11.8 million of cash used for capital expenditures related
to upgrades in plant and tooling, purchases of additional manufacturing
equipment. Also, the Company used $55.7 million for financing activities during
1998 to pay down lines of credit and other long term debt. As a result of the
foregoing factors, the Company had a net decrease in cash of
<PAGE>
$1.7 million from May 31, 1997 to May 31, 1998.
In 1997, the Company used $37.7 million of cash in operating activities
primarily as a result of 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 in cash 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. During 1997, the
Company had a net decrease in cash of $13.8 million.
In 1996, the Company generated $24.5 million of cash from operating
activities and had net borrowings of approximately $6.4 million under the
Amended Credit Agreement's ("Credit Agreement") 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.
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 is 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, 1998, the Company had $148.5 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, 1998 the Company had
$7.3 million of additional indebtedness available to be drawn on a revolving
credit basis under the newly amended Credit Agreement. The Company believes that
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
and to make capital expenditures. The Credit Agreement contains a number of
covenants, all of which the Company was in compliance with after obtaining
appropriate amendments and waivers 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 for the near-term 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
<PAGE>
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.
At May 31, 1997, the Company had $178.8 million of revolving credit
borrowings outstanding under the Credit Agreement. 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. Revolving credit borrowings
were used in 1997 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 Company was in compliance with the
restated and amended credit agreement at May 31, 1997.
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's longer term liquidity needs include (a) required quarterly
amortization payments on the term loans under the Credit Agreement, consisting
of $1.3 million from March 31, 1998 and $1.6 million from March 31, 1999 until
the final payment of $5.6 million in December 2002, (b) payments of interest on
the 13% Senior Subordinated Notes of $13.2 million in fiscal years 1999 through
2002 and principal of $101.25 million due on July 15, 2002, (c) payments of
interest on the 15% Senior Secured Discount Notes of $10.1 million due May 2000,
these interest payments increase to $18.6 million for fiscal years ending 2001
through 2004 and interest and principal of $132.2 million is due on November 15,
2004, and (d) semi-annual interest payments of $11.3 million on the 14% Senior
Discount Notes beginning May 15, 2002 and ending on November 15, 2007 and $162.0
million in principal on November 15, 2007.
The Company made capital expenditures of approximately $11.8 million during
fiscal 1998 and expects to make capital expenditures of approximately $14.3
million in 1999. 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 1998 of approximately $7.8 million, and expects to
make research and development expenditures of approximately $8.0 million in
1999.
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
<PAGE>
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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated
Financial Statements
and Schedules
Page
Report of Independent Accountants of
Price Waterhouse LLP. . . . . . . . . . . . . . . . . . . . 43
Consolidated Financial Statements:
Consolidated Balance Sheets, May 31, 1998 and 1997 . . . . . . . . 44
Consolidated Statements of Income for the Years Ended
May 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . 45
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended May 31, 1998, 1997 and 1996 . . . . . . 46
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . 49
Notes to Consolidated Financial Statements . . . . . . . . . . . . 51
Financial Statement Schedules:
Schedule VIII -
Valuation Accounts for the Three Years Ended May 31, 1998. . . . . 73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
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>
Name Age Position
- ------------------------ ---- -------------------------------------------
<S> <C> <C>
Scott R. Watterson . . 43 Chairman of the Board and Chief Executive
Officer
Gary E. Stevenson. . . 43 President, Chief Operating Officer and
Director
Robert C. Gay. . . . . 46 Vice Chairman of the Board
Ronald P. Mika . . . . 37 Director
Geoffrey S. Rehnert. . 40 Director
S. Fred Beck . . . . . 40 Chief Financial and Accounting Officer, Vice
President and Treasurer
David J. Watterson . . 39 Vice President, Marketing and
Research and Development
Jon M. White . . . . . 50 Vice President, Manufacturing
William T. Dalebout. . 50 Vice President, Design
Brad H. Bearnson . . . 44 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. In addition, 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 and was 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
<PAGE>
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.
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 redecessors, 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
1998, 1997 and 1996 for Mr. Scott Watterson and the Company's other four most
highly compensated executive officers (collectively, the "Named Executive
Officers"):
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation All Other
------------------- ------------- Compensation
Name and Principal Position Year Salary ($) Bonus($) Options(#)(1) ($)(2)
--------------------------- ---- ---------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Scott R. Watterson(3) 1998 472,500 220,300 - 1,800
Chairman of the Board and Chief 1997 450,000 1,047,384 - 2,250
Executive Officer 1996 450,000 690,660 469,988(4)(5) 22,791(6)
Gary E. Stevenson(3) 1998 420,000 220,300 - 1,800
President and Chief Operating Officer 1997 400,000 1,047,384 - 2,250
1996 400,000 690,660 375,251(4)(7) 22,952(6)
S. Fred Beck 1998 188,000 39,300 - 2,234
Chief Financial and Accounting Officer 1997 178,920 144,533 - 79,506(11)
Vice President and Treasurer 1996 168,000 149,000 62,285(8)(9) 1,588
David J. Watterson 1998 229,000 39,300 - 1,920
Vice President, Marketing and Research 1997 218,325 144,533 - 78,696(11)
and Development 1996 205,000 149,000 62,285(8)(9) 1,547
Richard Hebert 1998 318,916 187,097 - 5,939
General Manager, ICON Du Canada, Inc. 1997 388,043(10) - - 9,440
- -------------
</TABLE>
(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 in
September of 1996.
(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 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.
(8)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
then current fair market value of the Class A Common Stock.
(9)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.
(10)Represents Mr. Hebert's salary from September 6, 1996, the date of the ICON
of Canada acquisition, to May 31, 1997.
(11)Includes forgiveness by Company of $60,000 loan to Mr. Beck and Mr. David
Watterson.
<PAGE>
The following table sets forth information as of May 31, 1998, concerning
options of IHF Capital exercised by each of the named executive officers in 1998
and year end option values: <TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES(1)
Shares Number of Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options
On Realized May 31, 1998 (3) May 31, 1998 ($)(2)
Exercise(#) ($)(2) Exercisable/Unexercisable Exercisable/Unexercisable
----------- --------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Class A Class A Class L Class A Class L
Common Common Common Common Common Common
Stock Stock Stock Stock Stock Stock
Scott Watterson. . . - - 469,988/0(3) 48,620/0 -/- -/-
Gary Stevenson . . . - - 375,251/0(3) 37,816/0 -/- -/-
S. Fred Beck . . . . - - 77,383/0 - -/- -/-
David J. Watterson . 15,098 - 62,285/0 - -/- -/-
Richard Hebert . . . - - - - - -
</TABLE>
(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, 1998 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 $0.09375 and the
fair value of one share of its Class L Common Stock was assumed to be
$.7203.
(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 802,290
shares have been issued or canceled and 1,309,299 represent outstanding stock
options as of May 31, 1998.
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, 1998, no options have been granted under the
1996 plan.
Committee Interlocks and Insider Participation
The Company did not maintain a compensation committee during 1998.
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
<PAGE>
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 1998, 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.
Watterson 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
<PAGE>
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
non-competition 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 ompensation received by
the executive during the fiscal year in which termination occurs plus any
compensation which subsequently accrues to uch executive. This limitation does
not apply in the case of an xecutive's theft, fraud, embezzlement, violation of
the onfidentiality, notice, or non-competition provisions of his mployment
Agreement, breach of the executive's non-competition greement or certain other
matters and is subject in any event to a aximum 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
<PAGE>
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.
<PAGE>
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 July 23, 1998 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.
<PAGE>
<TABLE>
Common Stock Beneficially Owned (1)(2)
------------------------------------------------------
Class L Common Stock Class A Common Stock
----------------------- ----------------------------
Percent of Percent of
Number of Outstanding Number of Outstanding
Names Shares Shares Shares Shares (3)
<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
Robert C. Gay +(4)(8) 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)(8) 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)(8) 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)(8) 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
1500 South 1000 West
Logan, Utah 84321
All directors and executive officers as a
group (10 persons)(4) . . . . . . . . . 654,280 92.99 8,234,896 94.12
- ------------
</TABLE>
* 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 July 23, 1998 617,350 shares of Class L and
7,859,890 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
<PAGE>
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 warrant holders 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 July
23, 1998. (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 July 23, 1998. (6)Includes 77,383 shares of Class A Common Stock subject
to purchase upon exercise of options that are exercisable within 60 days after
July 23, 1998. (7)Includes 62,285 shares of Class A Common Stock subject to
purchase upon exercise of options that are exercisable within 60 days after July
23, 1998. (8)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.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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
<PAGE>
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.
Non-compete Agreement. In connection with the Recapitalization, the Company
entered into a non-compete 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. On June 1, 1997, ICON of Canada, Inc.
("ICON Canada") entered into a non-compete agreement with Richard Herbert which
requires him not to compete with ICON Canada in certain specified businesses
during the term of his employment with ICON Canada and for a period of 18 months
thereafter. In return, Mr. Herbert will receive payment of $1,000,000, of which
$600,000 was paid in cash upon execution of the agreement. The remaining balance
is payable at the end of the first nine months of Mr. Hebert's 18 month
non-competition period.
Tax Sharing Agreement. For federal income tax purposes, the taxable income of
ICON Fitness, IHF Holdings and Health & Fitness and their subsidiaries has
historically been included in a single consolidated federal income tax return
under IHF Capital. 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, ICON Fitness, 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.
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 1996, 1997, and 1998 the
Company paid Bain IV $0.8, $0.8 million, and $0.8 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
<PAGE>
purchase price of the transaction (including assumed debt). In connection with
the HealthRider Acquisition, the Company paid Bain IV $700,000.
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, 1998, $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,
1998. 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.
<PAGE>
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, 1998 and 1997
Consolidated Statements of Income for the Years Ended May 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended May 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended May 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules (See Item 8)
Schedule VIII - Valuation Accounts for the Three Years Ended May 31, 1998
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.
<PAGE>
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.
10.1B Amended and Restated Credit Agreement dated as of July 15, 1998 among
ICON Health & Fitness, Inc., the lenders named therein, and General
Electric Capital Corporation.
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 Health & Fitness.
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, the Company, 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
Health & Fitness.
10.9 Canada Exclusive License Agreement dated as of November 14, 1994 between
Weider Sports Equipment Co., Ltd. and Health & Fitness.
10.10 Employment Agreement dated as of November 14, 1994 among the Company,
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 Health &
Fitness, 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 Health & Fitness' 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 Health & Fitness'
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.
<PAGE>
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.
10.27.1Form of Option Certificate for Management Options.
10.27.2Form 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 Holding,
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
<PAGE>
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, 199 among IHF Capital, Inc., Gary Stevenson and Scott Watterson.
10.47 First Amendment to Stevenson Employment Agreement, dated September 6, to
the Employment Agreement dated November 14, 1994 among ICON Health &
Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Gary Stevenson.
10.48 First Amendment to Watterson Employment Agreement, dated September 6, to
the Employment Agreement dated November 14, 1994 among ICON Health &
Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Scott Watterson.
10.49 Weider Release, dated September 6, 1996 by Weider Health & Fitness,
Weider Sports Equipment Co., Ltd., Weider Sporting Goods, Inc., Weider
Europe, B.V., CANCO, Ben Weider, Eric Weider, Richard Renaud and the
Weider Releasors.
10.50 ICON Release, dated September 6, 1996 made by ICON Health, IHF Capital,
Inc., IHF Holdings, Inc., Scott Watterson, Gary Stevenson and the ICON
Releasors.
10.51 Settlement Agreement, dated September 6, 1996 among ICON Health, 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.
<PAGE>
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 Schedules
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
A Form 8-K was filed on August 19, 1998
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.
<PAGE>
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, 1998
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
By:/s/ Scott R. Watterson
- ------------------------- Chairman of the Board of Directors August 28, 1998
Scott R. Watterson and Chief Executive Officer
(principal executive officer)
By:/s/ Gary E. Stevenson
- ------------------------ President and Chief Operating August 28, 1998
Gary E. Stevenson Officer
By:/s/ S. Fred Beck
- ------------------- Vice President, Chief Financial August 28, 1998
S. Fred Beck and Accounting Officer,
Treasurer and
- ------------- Vice Chairman of the Board of August __, 1998
Robert C. Gay Directors
By:/s/ Ronald P. Mika
- --------------------- Director August 28, 1998
Ronald P. Mika
By:/s/ Geoffrey S. Rehnert
- -------------------------- Director August 28, 1998
Geoffrey S. Rehnert
<PAGE>
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, 1998
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
By:/s/ Scott R. Watterson
- ------------------------- Chairman of the Board of Directors August 28,1998
Scott R. Watterson And Chief Executive Officer
principal executive officer)
By:/s/ Gary E. Stevenson
- ------------------------ President and Chief Operating August 28, 1998
Gary E. Stevenson Officer
By:/s/ S. Fred Beck Vice President, Chief Financial August 28, 1998
- ------------------- Accounting Officer, and Treasurer
S. Fred Beck
Vice Chairman of the Board of August __, 1998
- ------------- Directors
Robert C. Gay
By:/s/ Ronald P. Mika Director August 28, 1998
- ---------------------
Ronald P. Mika
By:/s/ Geoffrey S. Rehnert Director August 28, 1998
- --------------------------
Geoffrey S. Rehnert
<PAGE>
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, 1998
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
By:/s/ Scott R. Watterson Chairman of the Board of Directors August 28, 1998
- ------------------------- and Chief Executive Officer
Scott R. Watterson (principal executive officer)
By:/s/ Gary E. Stevenson President and Chief Operating August 28, 1998
- ------------------------ Officer
Gary E. Stevenson
By:/s/ S. Fred Beck Chief Financial and Accounting August 28, 1998
- ------------------- Officer, and Treasurer
S. Fred Beck
Vice Chairman of the Board of August __, 1998
- ------------- Directors,
Robert C. Gay
By:/s/Ronald P. Mika Director August 28, 1998
- --------------------
Ronald P. Mika
By:/s/ Geoffrey S. Rehnert Director August 28, 1998
- --------------------------
Geoffrey S. Rehnert
<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 24 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended May 31, 1998, 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.
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 23, 1998
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
May 31,
------------------------------------------------------------------------------
1998 1997
--------------------------------------- -------------------------------------
ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness,Inc. Corporation Inc. Fitness,Inc.
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 3,892 $ 3,892 $ 3,892 $ 5,560 $ 5,560 $ 5,560
Accounts receivable, net 124,301 124,301 124,301 192,825 192,825 192,825
Inventories 121,466 121,466 121,466 121,838 121,838 121,838
Deferred income taxes 11,177 11,177 11,177 8,401 8,301 8,006
Other assets 6,202 6,202 6,202 12,895 12,895 12,895
Asset held for sale -- -- -- 17,080 17,080 17,080
Income taxes receivable 781 781 781 7,429 7,429 7,429
--------- --------- --------- --------- --------- ---------
Total current assets 267,819 267,819 267,819 366,028 365,928 365,633
Property and equipment, net 48,819 48,819 48,819 51,738 51,738 51,738
Receivable from parent 2,362 2,362 2,362 2,307 2,307 2,307
Trademarks, net 17,244 17,244 17,244 18,236 18,236 18,236
Deferred income taxes 22,572 16,265 4,927 8,338 6,405 --
Other assets 29,057 25,585 21,958 28,157 24,066 19,029
--------- --------- --------- --------- --------- ---------
$ 387,873 $ 378,094 $ 363,129 $ 474,804 $ 468,680 $ 456,943
========= ========= ========= ========= ========= =========
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 6,051 $ 6,051 $ 6,051 $ 5,401 $ 5,401 $ 5,401
Accounts payable 83,965 83,965 83,965 112,079 112,079 112,079
Interest payable 6,596 6,596 6,596 6,220 6,220 6,220
Accrued expenses 18,090 18,090 18,090 20,696 20,696 20,696
Income taxes payable 249 249 249 1,165 1,165 1,165
--------- --------- --------- --------- --------- ---------
Total current liabilities 114,951 114,951 114,951 145,561 145,561 145,561
--------- --------- --------- --------- --------- ---------
Long-term debt 460,707 360,413 268,495 489,400 401,196 321,625
Deferred income taxes -- -- -- -- -- 501
Commitments and contingencies
(Note 13) -- -- -- -- -- --
Stockholders' equity (deficit):
Common stock and additional
paid-in capital 49,701 127,769 166,186 49,699 127,767 166,184
Receivable from officers for
purchase of equity (656) (656) (656) (656) (656) (656)
Cumulative translation
adjustment (547) (547) (547) (506) (506) (506)
Accumulated deficit (236,283) (223,836) (185,300) (208,694) (204,682) (175,766)
--------- --------- --------- --------- --------- ---------
Total stockholders' deficit (187,785) (97,270) (20,317) (160,157) (78,077) (10,744)
--------- --------- --------- --------- --------- ---------
$ 387,873 $ 378,094 $ 363,129 $ 474,804 $ 468,680 $ 456,943
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Income
(In thousands)
<TABLE>
May 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------- -------------------------------
ICON ICON ICON
ICON IHF Health & ICON IHF Health & ICON IHF Health,
Fitness Holdings, Fitness, Fitness Holdings, Fitness, Fitness Holdings, Fitness
Corp Inc. Inc. Corp Inc. Inc. Corp Inc. Inc.
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $749,313 $749,313 $749,313 $836,162 $836,162 $836,162 $747,577 $747,577 $747,577
Cost of sales 535,646 535,646 535,646 583,747 583,747 583,747 541,443 541,443 541,443
Cost of sales
amort of step-up
HealthRider & ICON
of Canada inventory 330 330 330 14,009 14,009 14,009 - - -
-------- -------- --------- -------- --------- -------- -------- -------- --------
Gross profit 213,337 213,337 213,337 238,406 238,406 238,406 206,134 206,134 206,134
-------- -------- --------- -------- --------- -------- -------- -------- --------
Operating expenses:
Selling 120,752 120,752 120,752 132,392 132,392 132,392 93,924 93,924 93,924
Research and
development 7,777 7,777 7,777 7,620 7,620 7,620 6,759 6,759 6,759
General and
administrative 60,912 60,912 60,912 56,689 56,689 56,689 47,859 47,859 47,859
Weider
settlement - - - 16,583 16,583 16,583 - - -
HealthRider
Integration exp - - - 4,880 4,880 4,880 - - -
Compensation exp
attributable to
options - - - - - - 2,769 2,769 2,769
-------- ------- -------- ------- -------- ------- -------- -------- --------
Total operating
expenses 189,441 189,441 189,441 218,164 218,164 218,164 151,311 151,311 151,311
-------- -------- -------- ------- -------- -------- -------- ------- --------
Income from operations 23,896 23,896 23,896 20,242 20,242 20,242 54,823 54,823 54,823
Interest expense (59,496) (47,406) (35,058) (49,747) (44,051) (33,627) (36,723) (36,723) (27,923)
Dividends on cumul
redeemable preferred
stock of a sub
held by minority
interest - - - (2,125) - - (5,100) - -
Amortization deferred
financing fees (6,834) (6,215) (4,806) (4,597) (4,248) (3,058) (3,483) (3,483) (2,479)
Other income 1,223 1,223 1,223 700 700 700 - - -
Other expense (686) (686) (686) (193) (193) (193) - - -
-------- --------- --------- -------- -------- -------- ------- -------- -------
Income (loss) before
income taxe (41,897) (29,188) (15,431) (35,720) (27,550) (15,936) 9,517 14,617 24,421
Provision for
(benefit from)
income taxes (14,308) (10,034) (5,897) (9,210) 7,177) (3,988) 7,896 7,896 10,832
------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss) $(27,589) $(19,154) $(9,534) $(26,510) $(20,373) $(11,948) $1,621 $6,721 $13,589
======== ========= ======== ========= ========= ========= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands, except share amounts)
<TABLE>
Receivable from
officers for Total
Additional exercised Cumulative Retained stockholders'
Common stock paid-in stock translation earnings equity
Shares Value capital options adjustment (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
ICON Fitness Corporation
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)
Proceeds from exercise of
Common stock options and
Contribution of capital by
IHF Capital, Inc. - - 2 - - - 2
Foreign currency translation - - - - (41) - (41)
Net loss - - - - - (27,589) (27,589)
------ ------- ------- -------- --------- --------- -----------
ICON Fitness Corporation
Balance, May 31, 1998 100 $ - $49,701 $(656) $(547) $(236,283) $(187,785)
=== === ======= ====== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (continued) (In
thousands, except share amounts) <TABLE>
Receivable from
officers for Total
Additional exercised Cumulative Retained stockholders'
Common stoc paid-in stock translation earnings equity
Shares Value capital options adjustment (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
IHF Holdings, Inc.
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)
------ ----- ------- -------- ------ --------- --------
Balance, May 31, 1997 1,000 - 127,767 (656) (506) (204,682) (78,077)
Proceeds from exercise of
Common stock options and
Contribution of capital by
ICON Fitness Corpoation - - 2 - - - 2
Foreign currency translation - - - - (41) - (41)
Net loss - - - - - (19,154) (19,154)
------- ------ ------- -------- --------- ---------- --------
IHF Holdings, Inc.
Balance, May 31, 1998 1,000 $ - $127,769 $(656) $(547) $(233,836) $(97,270)
===== ==== ======== ====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc.and ICON Health & Fitness, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
(In thousands, except share amounts)
<TABLE>
Receivable from
Officers for Total
Additional exercised Cumulative Retained stockholders'
Common stock paid-in stock translation earnings equity
Shares Value capital options adjustment (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
ICON Health & Fitness, Inc.
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)
Proceeds from exercise of
Common stock options and
Contribution of capital
By IHF Holdings, Inc. - - 2 - - - 2
Foreign currency translation - - - - (41) - (41)
Net loss - - - - - (9,534) (9,534)
------ -------- ---------- ------- ------- ------- -------
ICON Health & Fitness, Inc.
Balance, May 31, 1998 1,000 $ - $166,186 $(656) $(547) $(185,300) $(20,317)
===== ===== ======== ====== ====== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc. Consolidated Statements of Cash Flows (In thousands)
<TABLE>
May 31,
-------------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------------
ICON IHF ICON ICON ICON
Fitness Holdings, Health & Fitness IHF Health &
Corporation Inc. Fitness,Inc. Corporation Holdings, Inc. Fitness, Inc.
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $(27,589) $(19,154) $(9,534) $(26,510) $(20,373) $(11,948)
Adjustments to reconcile net income
(loss) to net cash provided
by (used in) operating activities:
Provision (benefit) for deferred
taxes (17,010) (12,736) (8,599) (3,880) (1,847) 1,635
Depreciation and amortization 16,658 16,658 16,658 13,351 13,351 13,351
Amortization of deferred financing
fees and debt discount 31,511 18,802 5,045 20,923 14,878 3,264
Non-cash employee compensation
expense - - - 296 296 296
Amortization of inventory
step-up 330 330 330 14,009 14,009 14,009
Gain on barter transaction - - - (2,095) (2,095) (2,095)
Loss on disposal of property and
equipment 333 333 333 67 67 67
Interest expense attributable to
dividends on preferred stock - - - 2,125 - -
Changes in operating assets and
liabilities:
Accounts receivable 68,524 68,524 68,524 (46,862) (46,862) (46,862)
Inventories 42 42 42 (1,465) (1,465) (1,465)
Income taxes receivable/payable 5,732 5,732 5,732 803 803 510
Other assets (606) (606) (606) (6,466) (6,466) (6,466)
Accounts payable and accrued
expenses (29,932) (29,932) (29,932) (2,401) (2,401) (2,401)
Interest payable (376) (376) (376) 405 405 405
-------- -------- ------- ------- -------- -------
Net cash provided by (used in)
operating activities 47,617 47,617 47,617 (37,700) (37,700) (37,700)
-------- -------- ------- ------- -------- -------
Investing activities:
Proceeds from sale of building 18,250 18,250 18,250 - - -
Purchases of property and
equipment (11,825) (11,825) (11,825) (16,039) (16,039) (16,039)
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 6,425 6,425 6,425 (52,897) (52,897) (52,897)
-------- --------- -------- -------- -------- --------
Financing activities:
Borrowings (payments) on revolving
loans and lines of credit, net (36,302) (36,302) (36,302) 89,484 89,484 89,484
Payments on long-term debt (16,418) (16,418) (16,418) (6,341) (6,341) (6,341)
Proceeds from long-term debt - - - 82,508 - -
Proceeds from issuance of
common stock 2 2 2 8 8 8
Receivable from parent (55) (55) (55) (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 (2,896) (2,896) (2,896) (7,463) (3,023) (3,023)
-------- --------- --------- --------- --------- -------
Net cash provided by financing
activities (55,669) (55,669) (55,669) 77,821 77,821 77,821
-------- --------- -------- --------- -------- ----------
Effect of exchange rate changes on
cash (41) (41) (41) (977) (977) (977)
------- --------- -------- --------- --------- ----------
Net increase (decrease) in cash (1,668) (1,668) (1,668) (13,753) (13,753) (13,753)
Cash, beginning of period 5,560 5,560 5,560 19,313 19,313 19,313
------- ------ ------- ------- ------- -------
Cash, end of period $3,892 $3,892 $3,892 $5,560 $5,560 $5,560
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
ICON Fitness Corporation, IHF Holdings, Inc. and
ICON Health & Fitness, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
May 31, 1996
--------------------------------------------
ICON IHF ICON
Fitness Holdings, Health &
Corporation Inc. Fitness, Inc.
<S> <C> <C> <C>
Operating activities:
Net income (loss) $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 (20) (20) 2,623
Depreciation and amortization 7,205 7,205 7,205
Amortization of deferred
financing fees and debt discount 12,458 12,458 2,654
Non-cash employee compensation expense 2,769 2,769 2,769
Interest expense attributable to
dividends on preferred stock 5,100 - -
Changes in operating assets
and liabilities:
Accounts receivable (12,544) (12,544) (12,544)
Inventories (287) (287) (287)
Income taxes
receivable/payable (1,012) (1,012) (719)
Other assets 7,073 7,073 7,073
Accounts payable and
accrued expenses 2,149 2,149 2,149
-------- ------- ------
Net cash provided by (used in)
operating activities 24,512 24,512 24,512
------ ------ ------
Investing activities:
Purchases of property and equipment (15,356) (15,356) (15,356)
-------- -------- --------
Net cash used in investing activities (15,356) (15,356) (15,356)
-------- -------- --------
Financing activities:
Borrowings (payments) on revolving
credit and term loan facilities, net 6355 6,355 6,355
Proceeds from issuance of
common stock 4 4 4
Payments on other long-term debt (687) (687) (687)
------- ------ ------
Net cash provided by financing
activities 5,672 5,672 5,672
------ ----- -----
Effect of exchange rate changes on cash 386 386 386
------ ----- -----
Net increase (decrease) in cash 15,214 15,214 15,214
Cash, beginning of period 4,099 4,099 4,099
------- ------- -------
Cash, end of period $19,313 $19,313 $19,313
======= ======= =======
</TABLE>
<PAGE>
1. Basis of Presentation and Description of the Business
Basis of Presentation - The consolidated financial statements include the
accounts of ICON Fitness Corporation ("ICON Fitness"), its wholly-owned
subsidiary IHF Holdings, Inc. ("IHF Holdings"), IHF Holdings' wholly-owned
subsidiary, ICON Health & Fitness, Inc. ("ICON Health") and ICON Health's
wholly-owned subsidiaries (collectively, the "Company"). ICON Health 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 Fitness' parent, IHF Capital, Inc. ("IHF Capital") (Note
9). Prior to the incorporation of ICON Fitness on November 12, 1996 and the
concurrent contribution of IHF Capital's investment in IHF Holdings to ICON
Fitness in exchange for all of the outstanding common stock of ICON Fitness, IHF
Holdings was a wholly-owned subsidiary of IHF Capital. ICON Fitness' financial
statements carry over the historical financial position and results of
operations of IHF Capital, adjusted to reflect the fact that 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 Fitness 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 ICON Health. The cumulative redeemable preferred stock was redeemed with the
proceeds of the Senior Discount Notes.
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 Company's revenues are
derived from the sale of various aerobic and anaerobic fitness product lines in
domestic and foreign 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 ICON Health 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 ICON Health (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
<PAGE>
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) ICON Health 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 ICON Health, 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,
1998. 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 consist primarily of freight-in, raw materials, labor
and manufacturing overhead costs and are valued 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. At May 31, 1997, the real estate was subject to a mortgage note
payable (Note 8). During fiscal 1998, the Company leased a portion of the
building to tenants (Note 13). On February 5, 1998, the building and certain
other assets associated with the building were sold for $18,250,000. The net
book value of the assets sold was $18,583,000 ($17,080,000 for the building and
$1,503,000 for other fixed assets) and the Company recorded a loss of $333,000.
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 expense as incurred.
Trademarks - During the fiscal year ended May 31, 1997 the Company acquired
HealthRider (Note 3) and Weider Sports and CanCo (Note 14). In connection with
these acquisitions, the Company recorded trademarks of $12,024,000 and
$6,915,000, respectively. These assets are being amortized on a straight-line
basis over 20 years. At May 31, 1998 and 1997, trademarks are net of accumulated
amortization of $1,695,000 and $703,000, respectively.
<PAGE>
Long-lived assets are periodically reviewed for impairment in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Assets to Be Disposed Of". SFAS 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. As a result of its review, the Company does not believe that any
impairment currently exists related to its long-lived assets.
Non-Compete Agreements - Included in other long-term assets are capitalized
costs associated with non-compete agreements the Company entered into with
certain key executives of the Company for terms ranging from two to four years.
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 other long-term 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, 1998 and 1997, $273,000 and $801,000,
respectively, were included in other long-term assets. For the years ended May
31, 1998, 1997 and 1996, total advertising expense was approximately
$33,303,000, $31,810,000, and $22,537,000.
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 are made to Sears Roebuck
("Sears"). Sears accounted for approximately 33%, 29% and 34% of total sales for
the years ended May 31, 1998, 1997 and 1996, respectively. Accounts receivable
from Sears accounted for approximately 32% and 34% of gross accounts receivable
at May 31, 1998 and 1997, respectively.
Research and Development Costs - Research and product development
<PAGE>
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 Fitness, IHF Capital filed a separate tax return and ICON
Health was included as part of the consolidated tax return filed by IHF
Holdings. Currently, ICON Fitness, IHF Holdings and ICON Health are included as
part of the consolidated tax return filed by IHF Capital. The income tax
provisions for ICON Fitness, IHF Holdings and ICON Health 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, German marks, 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, 1998, 1997 and 1996. In the years ended May 31, 1998, 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.
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
Consolidated Statement of Cash Flows in the same category as the hedged
transactions. As of May 31, 1998, 1997 and 1996 the Company had approximately
$32 million Canadian, $22 million Canadian and $25 million Canadian,
respectively, of open forward exchange contracts to sell Canadian dollars
throughout fiscal years May 31, 1999, 1998 and 1997, respectively. The fair
value of these forward exchange contracts are based on quoted market prices. At
May 31, 1998 the estimated
<PAGE>
unrealized loss on outstanding forward exchange contracts was $459,000, at May
31, 1997 the estimated unrealized loss was $217,000 and at May 31, 1996 the
estimated unrealized gain was $163,000. During 1998 the Company recognized
losses of $449,000 and in 1997 and 1996 the Company recognized gains of $149,000
and $169,000, respectively, upon the settlement of foreign currency transactions
denominated in Canadian dollars.
Barter Transaction - Included in other current and other long-term assets at May
31, 1998, and in other current assets at May 31, 1997, are barter credits of
$4,484,000 and $6,240,000, respectively, 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 1999
and 2000.
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.
SFAS No. 123 , "Accounting for Stock-Based Compensation" 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, 1998 and 1997, 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>
1998 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
13% Snr Subordinated Notes $99,743 $108,084 $99,503 $113,400
14% Snr Discount Notes 100,294 74,520 88,204 85,860
15% Snr Secured Discount Notes 91,919 97,775 79,571 102,713
</TABLE>
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires
<PAGE>
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 1997 financial
statements to conform to the 1998 presentation. These reclassifications had no
effect on net income for 1997 or 1996.
New Accounting Pronouncements - In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130") and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). The Company
will implement SFAS 130 and SFAS 131 as required in fiscal 1999, which will
require the Company to report and display separately certain information related
to comprehensive income and operating segments but will not result in any
changes to previously recorded amounts.
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 $16.8 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 (Note 8).
The HealthRider Acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price plus direct costs of the acquisition
were 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 were consolidated with the Company's results from August 16, 1996 to
September 3, 1997, when HealthRider was merged into ICON Health.
The following unaudited pro forma summary presents the consolidated results of
operations assuming that the HealthRider Acquisition had occurred on June 1,
1996. The historical results for ICON Fitness, IHF Holdings and ICON Health 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
<PAGE>
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>
Year Ended May 31,
(in thousands)
-------------------------------------------------------------------------
1997 1996
----------------------------------- -------------------------------------
IHF ICON IHF ICON
ICON Holdings Health ICON Holdings Health
(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>
May 31,
-------------------
1998 1997
-------------------
<S> <C> <C>
Accounts receivable $131,188 $201,778
Less allowance for doubtful accounts,
advertising and credit memos (6,887) (8,953)
--------- --------
$124,301 $192,825
======== ========
</TABLE>
At May 31, 1998 and 1997, accounts receivable are net of $231,000 and $324,000,
respectively, of unearned interest charges resulting from the Company's
multi-month payment plans.
<PAGE>
5. Inventories
Inventories consist of the following (table in thousands):
<TABLE>
May 31,
---------- --------
1998 1997
---------- --------
<S> <C> <C>
Raw materials, principally parts and supplies $42,609 $27,974
Finished goods 78,857 93,864
--------- --------
$121,466 $121,838
======== ========
</TABLE>
Inventories are net of allowances of $3,335,000 and $2,761,000 at May 31, 1998
and 1997, 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. In addition, inventories are net of
intercompany profits of $1,812,000 and $258,000 at May 31, 1998 and 1997,
respectively.
6. Property and Equipment
Property and equipment, net, consists of the following (table in thousands):
<TABLE>
May 31,
------------------
1998 1997
-------- --------
Estimated
Useful Life
(Years)
<S> <C> <C> <C>
Land - $ 1,430 $ 2,371
Buildings and improvements up to 31 16,476 17,130
Equipment 3-7 71,293 59,318
Construction in progress - 199 261
------- -------
89,398 79,080
Less accumulated depreciation (40,579) (27,342)
-------- -------
$48,819 $51,738
======== =======
</TABLE>
For the years ended May 31, 1998, 1997, and 1996, the Company recorded
depreciation expense of $13,698,000, $11,630,000, and $6,188,000, respectively.
7. Other Assets
Other assets consist of the following (table in thousands):
<PAGE>
<TABLE>
May 31,
----------------------------------------------------
1998 1997
------------------------- -------------------------
ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health
<S> <C> <C> <C> <C> <C> <C>
Non-compete agreements $509 $509 $509 $1,526 $1,526 $1,526
Deferred financing costs 21,211 17,739 14,112 25,150 21,059 16,022
Deferred advertising costs 273 273 273 801 801 801
Barter credits 2,000 2,000 2,000 - - -
Long-term receivables, net 3,198 3,198 3,198 - - -
Intangibles, net 1,132 1,132 1,132 - - -
Other 734 734 734 680 680 680
------- -------- -------- ------- -------- -------
$29,057 $25,585 $21,958 $28,157 $24,066 $19,029
======= ======= ======== ======= ======== =======
</TABLE>
At May 31, 1998 and 1997, capitalized non-compete payments made to the Company's
key executives are net of accumulated amortization of $3,561,000, and
$2,544,000, respectively.
At May 31, 1998 and 1997 capitalized deferred financing costs are net of
accumulated amortization of $16,655,000, and $9,821,000, respectively, for ICON
Fitness; $15,687,000 and $9,472,000, respectively, for IHF Holdings; and
$11,606,000 and $6,800,000, respectively, for ICON Health.
<PAGE>
8. Long-Term Debt
Long-term debt consists of the following (table in thousands):
<TABLE>
May 31,
--------------------------------------------------------------
1998 1998
------------------------------ -----------------------------
ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health
<S> <C> <C> <C> <C> <C> <C>
Revolving Credit Facility $148,488 $148,488 $148,488 $178,781 $178,781 $178,781
Term Loan A Facility 9,225 9,225 9,225 13,956 13,956 13,956
Term Loan B Facility 15,802 15,802 15,802 17,080 17,080 17,080
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 $1,507 at May 31, 1998
and $1,747 at May 31, 1997 99,743 99,743 99,743 99,503 99,503 99,503
15% Senior Secured Discount
Notes, face amount $123,700
net of unamortized discount
of $31,782 at May 31, 1998
and $44,129 at May 31, 1997 91,918 91,918 - 79,571 79,571 -
14% Senior Discount Notes,
face amount $162,000 net
of unamortized discount of
$61,706 at May 31, 1998 and
$73,796 at May 31, 1997 100,294 - - 88,204 - -
Other 1,288 1,288 1,288 1,771 1,771 1,771
------- ------- ---------- ------- ------- -------
466,758 366,464 274,546 494,801 406,597 327,026
Less current portion (6,051) (6,051) (6,051) (5,401) (5,401) (5,401)
------- -------- --------- ------ ------- ---------
Total long-term debt $460,707 $360,413 $268,495 $489,400 $401,196 $321,625
======== ======== ======== ========= ======== ========
</TABLE>
The Company did not have any outstanding letters of credit under its Revolving
Credit Facility at May 31, 1998; however, the Company had $4,430,000 outstanding
at May 31, 1997.
Credit Agreement
In connection with the Recapitalization (Note 1), the Company, through ICON
Health, 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 ICON
Health and its subsidiaries. Under the terms of the Credit Agreement, ICON
Health must comply with certain restrictive covenants, which include the
requirement that ICON Health maintain minimum amounts of profitability,
solvency, and liquidity. In addition, the Credit Agreement restricts ICON Health
from making certain payments, including dividend payments, to its shareholders.
At May 31, 1998, after giving effect to the latest amendment to the Credit
Agreement, ICON Health was in compliance with all of its financial covenants.
Management believes that ICON Health will be in compliance with its financial
covenants through 1999 and, therefore, borrowings under the
<PAGE>
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 Credit 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") (8.44% rate as of May 31, 1998 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 0.375% to 0.5% per annum
on the average unused commitment under the Revolving Credit Facility. For the
years ended May 31, 1998, 1997 and 1996, the Company paid an unused commitment
fee of $564,000, $421,000 and $196,000, respectively. As of May 31, 1998, $7.3
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, $937,500 and $1,250,000 became due beginning
each March 31, 1996, 1997 and 1998, respectively. Quarterly payments increase 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 (8.73% as of May 31, 1998 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 were 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 (9.23% as of May 31, 1998
under the LIBOR Rate option).
<PAGE>
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.
Senior Subordinated Notes
In conjunction with the Recapitalization (Note 1), the Company issued
$101,250,000 face amount (net proceeds of $100.0million) of 13% Senior
Subordinated Notes of ICON Health (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 $0.01 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. 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. As the operations and cash flows of the Company are those of ICON
Health, the ability to make cash payments of interest and principal on the
Senior Secured Notes is contingent on the ability of ICON Health 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
<PAGE>
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 Fitness but are effectively subordinated to all
indebtedness and other liabilities of ICON Fitness' 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. As the operations and cash flows of the Company are those of ICON Health,
the ability to make cash payments of interest and principal on the Senior
Discount Notes is contingent on the ability of ICON Health to dividend funds to
ICON Fitness, as subject to certain restrictions in the Credit Agreement.
Upon the completion of a public offering by ICON Fitness or any of its parents
or subsidiaries, the Company will be required to repurchase the Senior Discount
Notes at redemption prices ranging from 106.50% of accreted value in the year
ended November 14, 1998 to 110.00% of accreted value in the year ended November
14, 2001. The accreted value increases from the initial discount price at a rate
of 14% compounded semi-annually through November 14, 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 14, 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 and of 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.
During fiscal 1998, ICON Fitness, IHF Holdings and ICON Health incurred a net
loss of $27.6 million, $19.2 million and $9.5 million respectively. In addition,
the Company experienced a large decrease in working capital. Management's
estimate of the Company's fiscal 1999 projections contemplate significant
positive cash flow from operations. In the event that fiscal 1999 operating
results do not meet management expectations, the Company may not have adequate
cash flow from operations to meet working capital needs, planned capital
expenditures and debt service obligations and may be required to seek additional
equity of debt financing. The Company's ability to raise additional debt or
equity is uncertain.
Upon a change in control, as defined in the Notes agreements, each
<PAGE>
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, 1998, the scheduled future principal payments of long-term debt
(excluding the Revolving Credit Facility) are as follows (in thousands):
<TABLE>
ICON IHF ICON
Year ended May 31, Fitness Holdings Health
<S> <C> <C> <C>
1999 $6,051 $6,051 $6,051
2000 6,133 6,133 6,133
2001 6,578 6,578 6,578
2002 7,552 7,552 7,552
2003 101,250 101,250 101,250
Thereafter 285,700 123,700 -
</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 ICON Health ("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 expire 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 and 1996 accrued dividends of
$2.1 million and $5.1 million, respectively, on the issued and outstanding
preferred shares and outstanding options. Dividends
<PAGE>
accrued to the minority shareholders of IHF Holdings were charged to ICON
Fitness' 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
Common Stock and Additional Paid-in Capital In conjunction with the
Recapitalization (Note 1), 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 ICON Health. ICON Health 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 Fitness (Note 1), 100 shares of common stock, were issued to IHF Capital in
exchange for its investment in IHF Holdings. ICON Fitness, IHF Holdings and ICON
Health each have 3,000 authorized shares of $.01 par value common stock.
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.
<PAGE>
Activity under the 1994 Plan is summarized as follows:
<TABLE>
Weighted
Number of Range of Average
Optioned Exercise Price Exercise Price
Shares Per Share Per Share
<S> <C> <C> <C>
Outstanding at May 31, 1995 506,464 $0.10-8.92 $3.82
Granted 963,876 $5.80 $5.80
Exercised (44,539) $0.10-5.80 $1.00
Forfeited (1,868) $0.10 $0.10
Outstanding at May 31, 1996 1,423,933 $0.10-8.92 $5.27
Exercised (74,735) $0.10 $0.10
Forfeited (2,768) $0.10-5.80 $2.39
Outstanding at May 31, 1997 1,346,430 $0.10-8.92 $5.57
Exercised (23,351) $0.10-5.80 $0.12
Forfeited (13,780) $0.10-5.80 $3.16
----------
Outstanding at May 31, 1998 1,309,299 $0.10-8.92 $5.67
=========
Options exercisable at May 31, 1998 1,306,567 $0.10-8.92 $5.68
=========
</TABLE>
The weighted average fair value of options granted during 1996 was $4.35. There
were no option grants during fiscal 1997 and 1998. At May 31, 1998, the weighted
average remaining contractual life of outstanding options was 7.5 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, 1998, 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):
ICON IHF ICON
Fitness Holdings Health
-------- -------- ---------
1996 net income - as reported $1,621 $6,721 $13,589
1996 net income - pro forma 1,000 6,100 12,968
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
<PAGE>
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, 1998, no options have been granted under the 1996
plan.
11. Income Taxes
The provision for (benefit from) income taxes consists of the following(in
thousands):
<TABLE>
May 31,
--------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------- -----------------------------
ICON IHF ICON ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health Fitness Holdings Health
<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
State income taxes 426 426 426 (513) (513) (536) 595 595 618
Foreign income taxes 2,276 2,276 2,276 1,165 1,165 1,165 375 375 375
-------- -------- -------- -------- ------- ------ ------ ------ ------
Total current 2,702 2,702 2,702 (5,330) (5,330) (5,623) 7,916 7,916 8,209
-------- -------- -------- -------- ------- ------ ------ ------ -----
Deferred
Federal income taxes (15,421) (11,485) (7,672) (3,567) (1,695) 1,512 (18) (18) 2,416
State income taxes (1,857) (1,519) (1,195) (307) (146) 129 (2) (2) 207
Foreign income taxes 268 268 268 (6) (6) (6) - - -
------- --------- -------- --------- ------ ------- ------- ------ -------
Total deferred (17,010) (12,736) (8,599) (3,880) (1,847) 1,635 (20) (20) 2,623
--------- --------- -------- -------- -------- -------- ------- ------- -------
$(14,308) $(10,034) $(5,897) $(9,210) $(7,177) $(3,988) $7,896 $ 7,896 $10,832
========= ========= ======== ======== ======== ======== ====== ======= =======
</TABLE>
<PAGE>
The components of the Company's pre-tax income (loss) are as follows (in
thousands):
<TABLE>
May 31,
---------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ---------------------------- -------------------------
ICON IHF ICON ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health Fitness Holdings Health
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic $(44,414) $(31,705) $(17,948) $(33,784)$(25,614) $(14,000) $12,018 $17,118 $26,922
Foreign 2,517 2,517 2,517 (1,936) (1,936) (1,936) (2,501) (2,501) (2,501)
------- -------- -------- -------- --------- ------- -------- ------- --------
$(41,897) $(29,188) $(15,431) $(35,720)$(27,550) $(15,936) $ 9,517 $14,617 $24,421
========= ========= ========= ======== ========= ========= ======= ======= =======
</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>
May 31,
-------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ------------------------- ------------------------
ICON IHF ICON ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health Fitness Holdings Health
<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) (2) (2) (2) (3) (2) (3) 6 4 3
Other-non-deductible items 1 (1) - 3 3 - 8 5 -
Dividends on preferred stock - - - 2 - - 19 - -
Foreign losses for which
no benefit has been
recognized 2 3 6 5 6 11 15 10 6
Other - 1 (7) 2 2 2 - - -
---- ---- ---- ---- ---- ---- ---- ---- ----
Provision for (benefit
(from) income taxes (34)% (34)% (38)% (26)% (26)% (25)% 83% 54% 44%
===== ===== ===== ===== ===== ===== ==== === ===
</TABLE>
As of May 31, 1998 and 1997, the Company recorded gross deferred tax assets and
gross deferred tax liabilities as follows (in thousands):
<TABLE>
May 31,
--------------------------------------------------------
1998 1997
--------------------------- ---------------------------
ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health
<S> <C> <C> <C> <C> <C> <C>
Gross deferred tax assets $44,195 $37,888 $26,686 $25,558 $23,525 $16,164
Gross deferred tax
liabilities (5,956) (5,956) (6,092) (5,465) (5,465) (5,305)
-------- --------- -------- ------- -------- -------
38,239 31,932 20,594 20,093 18,060 10,859
Valuation allowance (4,490) (4,490) (4,490) (3,354) (3,354) (3,354)
-------- --------- -------- ------- -------- -------
Net deferred tax asset $33,749 $ 27,442 $16,104 $16,739 $14,706 $7,505
======= ======== ======= ======= ======= ======
</TABLE>
<PAGE>
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, 1997 to May 31, 1998 is attributable to losses incurred
by the Company's European operations in the year ended May 31, 1997. No
valuation allowance has been recorded against the domestic deferred tax assets.
Management of the Company believes that it is more likely than not that the
Company will generate sufficient future taxable income through operations to
realize the net deferred tax assets prior to expiration of any net operationg
losses (NOL's). NOL's can be carried forward up to 20 taxable years. There can
be no assurance however, that the Company will generat any specific level of
earnings or that it will be able to realize any of the deferred tax assets in
future periods. If the Company is unable to generate sufficient taxable income
in the future through operating results, a valuatoin allowance against this
deferred tax asset would result in a charge to earnings.
Net deferred tax assets consist of the following table (in thousands):
<TABLE>
May 31,
-----------------------------------------------------------
1998 1997
--------------------------- ------------------------------
ICON IHF ICON ICON IHF ICON
Fitness Holdings Health Fitness Holdings Health
<S> <C> <C> <C> <C> <C> <C>
Foreign net operating loss
carryforward $4,490 $4,490 $4,490 $3,354 $3,354 $3,354
Domestic net operating loss
carryforward 9,997 9,740 9,154 444 344 49
Stock compensation expense 4,145 4,145 4,145 4,146 4,146 4,146
Future deductible interest 16,199 10,260 (137) 8,661 6,760 (35)
Depreciation (4,463) (4,463) (4,463) (4,176) (4,176) (4,176)
Reserves and allowances 5,622 5,622 5,622 6,312 6,312 6,312
Contribution of land (456) (456) (456) (500) (500) (500)
Uniform capitalization
of inventory 830 830 830 1,157 1,157 1,157
Other, net 1,875 1,764 1,409 695 663 552
------- ------- ------- ------- ------- -------
38,239 31,932 20,594 20,093 18,060 10,859
Valuation allowance (4,490) (4,490) (4,490) (3,354) (3,354) (3,354)
------- -------- ------- ------- ------- -------
Net deferred tax asset $33,749 $27,442 $16,104 $16,739 $14,706 $ 7,505
======= ======= ======= ======= ======= =======
</TABLE>
In the year ended May 31, 1998, the Company did not realize any income tax
benefits from federal and state net operating loss carryforwards from the
current and prior years. 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.
At May 31, 1998, the Company had approximately $10.0 million of foreign net
operating loss which may be carried forward indefinitely and $26.3 million of
domestic net operating loss carryforwards of which $4.6 million expire in 2013
and $21.7 million expire in 2018. These carryforwards are available to reduce
future foreign taxable income and domestic taxable income
12. Supplemental Disclosures of Cash Flow Information
<TABLE>
Year Ended May 31,
-------------------------------
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Cash paid during the period for (in thousands):
Interest paid $32,891 $33,017 $25,191
Income taxes paid (refunds received), net 1,505 (685) 8,928
</TABLE>
Non-cash investing and financing activities In connection with the issuance of
the Senior Subordinated Notes and the Senior Secured Notes (Note 8), the
<PAGE>
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 Fitness 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 Holdings 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
13. Commitments and Contingencies
Leases - The Company has non cancelable 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 non cancelable operating leases consist
of the following at May 31, 1998 (table in thousands):
<TABLE>
Year ended May 31:
<S> <C>
1999 9,518
2000 5,751
2001 2,518
2002 448
2003 63
</TABLE>
Rental expense under noncancelable operating leases was approximately
$10,222,000, $9,373,000 and $2,513,000 for the years ended May 31, 1998, 1997,
and 1996, respectively.
Lease of Asset Held for Sale - The Company leased 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 $1,223,000 and $700,000
for the years ended May 31, 1998 and 1997, respectively. Due to the sale of this
asset in fiscal 1998, the Company will not receive any future lease income
related to this asset.
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
<PAGE>
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 $3,000,000, $2,000,000 and $1,500,000 included in accrued expenses at May 31,
1998, 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 - The Company is involved in various litigation, 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 material to the financial statements.
While the Company believes it has meritorious defenses against outstanding
claims, the ultimate resolution of these matters could result in material losses
charged directly to expense as incurred.
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,
1998 and 1997, the Company had an accrual for warranty costs on products sold of
approximately $4,784,000 and $6,570,000, respectively, included in accrued
expenses in the accompanying consolidated balance sheets. Retirement Plans - All
employees who have met minimum age and service requirements are eligible to
participate in a 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, 1998, 1997 and 1996 were $384,000,
$374,000 and $233,000, 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
<PAGE>
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
Fitness in which ICON Fitness recorded the amounts paid to the WHF stockholders
as a reduction in the additional paid-in capital of ICON Fitness.
Option to Repurchase Preferred Stock. The Company obtained the right to purchase
the IHF Holdings Preferred Stock held by WHF and certain other stockholders. On
November 20, 1996 the Company exercised this right for $32.1 million, which
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
Messrs. Watterson and Stevenson for $3.7 million, which reflects a discount of
$0.3 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 Fitness 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
Fitness of $14.3 million to reflect the gain recognized on the early
extinguishment of and the forgiven dividends related to the IHF Holdings
Preferred Stock and options to purchase IHF Holdings Preferred Stock.
Settlement Expenses and Intercompany Payables. The Company: (i) paid $12.1
million to terminate the lawsuits; (ii) paid $3.9 million to WHF and its
affiliates as payment in full under its brand license agreements with them; and
(iii) received $1.2 million in full payment and settlement of the Company's
intercompany payable to WHF and its affiliates ($1.8 million) and amounts due
the Company under the amended Management Agreement ($3.0 million). The Company
also received $0.5 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 $0.5 million of CanCo management fees. The Company also recorded
the intercompany balance reductions noted in (iii) in its consolidated balance
sheets.
<PAGE>
Payments to Messrs. Watterson and Stevenson. In connection with the WHF
Settlement, WHF and its affiliates: (i) paid Messrs. Watterson and Stevenson an
aggregate amount of approximately $4.2 million in exchange for the surrender of
their options to purchase stock of WHF and its affiliates; and (ii) paid Messrs.
Watterson and Stevenson an aggregate amount of $0.5 million. Messrs. Watterson
and Stevenson also each received $0.3 million in full payment and settlement of
CanCo's management fee obligations under the CanCo Management and Advisory
Agreements. The WHF Settlement also contained various miscellaneous provisions
that the Company does not believe are material.
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 ICON Health 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 and 1996, the Company purchased
approximately $7.0 million and $50.7 million of products from WHF and had a
trade payable of $0.7 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, 1998, 1997 and 1996, the Company recorded management fee expense of $800,000
each year. In addition, if the Company enters into any acquisition transactions
involving at least $10 million, the Company must pay a fee 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.
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 and $549,000 during
1997 and 1996, 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.
<PAGE>
Distribution Agreement
The Company had appointed a Canadian WHF affiliate to be the exclusive
distributor of ICON Health 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 and $6.9 million for the years ended May 31, 1997 and
1996, respectively. At May 31, 1996, the Company had a trade receivable from WHF
affiliates of $1.5 million. 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 $1.5 million
Canadian mortgage on the properties and the payment of $0.5 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.
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 for the years
ended May 31, 1998 and 1997. Also, the Company incurred $206,000 and $34,000 of
maintenance expense in the years ended May 31, 1998 and 1997, respectively. In
addition, the Company advanced $280,000 to FG as a security deposit on the
aircraft lease.
<PAGE>
Receivable from Parent
Through May 31, 1998, IHF Capital incurred $2,362,000 in expenses and fees
related to its withdrawn public equity offering. In order to fund the payment
for these expenses, the Company, through ICON Health, advanced IHF Capital
$2,362,000 in the form of a non-interest bearing loan. At May 31, 1998, this
amount is reflected as a non-current receivable from parent on the consolidated
balance sheet of ICON Fitness, IHF Holdings and ICON Health. 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 0.5%, 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
$656,000 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>
Valuation Accounts
May 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Allowances for Doubtful Accounts,
Advertising and Credit Memos:
Balance at beginning of year $8,953,000 $7,595,000 $5,308,000
Additions
Charged to Costs and Expenses (Allowance
for Doubtful Accounts and Credit Memos) 4,566,000 6,027,000 3,662,000
Charged to Costs and Expenses
(Discounts and Advertising) 33,234,000 33,512,000 34,585,000
Recoveries on Accounts Charged Off 22,000 - 74,000
Deductions
Accounts Charged Off (Allowance for
Doubtful Accounts and Credit Memos) (6,478,000) (3,241,000) (3,569,000)
Accounts Charged Off (Advertising) (33,410,000) (34,940,000) (32,465,000)
-------------- ------------- ------------
Balance at end of year $6,887,000 $8,953,000 $7,595,000
========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 27.1
This schedule contains summary financial information extracted from the May 31,
1998 Financial Statements included in the Company's Form 10-K and is qualified
in its entirety by reference to such Form 10-K. </LEGEND>
<CIK> 0001029294
<NAME> ICON Fitness Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 3892
<SECURITIES> 0
<RECEIVABLES> 131188
<ALLOWANCES> 6887
<INVENTORY> 121466
<CURRENT-ASSETS> 267819
<PP&E> 89398
<DEPRECIATION> 40579
<TOTAL-ASSETS> 387873
<CURRENT-LIABILITIES> 114951
<BONDS> 460707
0
0
<COMMON> 49701
<OTHER-SE> (237486)
<TOTAL-LIABILITY-AND-EQUITY> 387873
<SALES> 749313
<TOTAL-REVENUES> 749313
<CGS> 535976
<TOTAL-COSTS> 189441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59496
<INCOME-PRETAX> (41897)
<INCOME-TAX> (14308)
<INCOME-CONTINUING> (27589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27589)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 27.2
This schedule contains summary financial information extracted from the May 31,
1998 Financial Statements included in the Company's Form 10-K and is qualified
in its entirety by reference to such Form 10-K. </LEGEND>
<CIK> 0000934799
<NAME> IHF Holdings Inc
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 3892
<SECURITIES> 0
<RECEIVABLES> 131188
<ALLOWANCES> 6887
<INVENTORY> 121466
<CURRENT-ASSETS> 267819
<PP&E> 89398
<DEPRECIATION> 40579
<TOTAL-ASSETS> 378094
<CURRENT-LIABILITIES> 114951
<BONDS> 360413
0
0
<COMMON> 127769
<OTHER-SE> (225039)
<TOTAL-LIABILITY-AND-EQUITY> 378094
<SALES> 749313
<TOTAL-REVENUES> 749313
<CGS> 535976
<TOTAL-COSTS> 189441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47406
<INCOME-PRETAX> (29188)
<INCOME-TAX> (10034)
<INCOME-CONTINUING> (19154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19154)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 27.3
This schedule contains summary financial information extracted from the May 31,
1998 Financial Statements included in the Company's Form 10-K and is qualified
in its entirety by reference to such Form 10-K. </LEGEND>
<CIK> 0000934798
<NAME> ICON Health & Fitness Inc
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 3892
<SECURITIES> 0
<RECEIVABLES> 131188
<ALLOWANCES> 6887
<INVENTORY> 121466
<CURRENT-ASSETS> 267819
<PP&E> 89398
<DEPRECIATION> 40579
<TOTAL-ASSETS> 363129
<CURRENT-LIABILITIES> 114951
<BONDS> 268495
0
0
<COMMON> 166186
<OTHER-SE> (186503)
<TOTAL-LIABILITY-AND-EQUITY> 363129
<SALES> 749313
<TOTAL-REVENUES> 749313
<CGS> 535976
<TOTAL-COSTS> 189441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35058
<INCOME-PRETAX> (15431)
<INCOME-TAX> (5897)
<INCOME-CONTINUING> (9534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9534)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
