FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Numbers: 333-18475, 33-87930-0, 33-87930
ICON Fitness Corporation
IHF Holdings, Inc.
ICON Health & Fitness, Inc.
(Exact name of registrant as specified in its charter)
Delaware 87-0566936, 87-0531209, 87-0531206
(State or other jurisdiction of (I.R.S. Employer Identification Nos.)
incorporation or organization)
1500 South 1000 West Logan, Utah 84321
(Address and zip code of principal executive offices)
(801) 750-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes x No___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes __ No __
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
ICON Fitness Corporation 100 shares,
IHF Holdings, Inc. 1,000 shares,
ICON Health & Fitness, Inc. 1,000 shares.
<PAGE>
ICON Fitness Corporation
and its wholly-owned subsidiary, IHF Holdings, Inc.
and its wholly-owned subsidiary, ICON Health & Fitness, Inc.
FORM 10-Q INDEX
Page No.
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 3-7
Consolidated Condensed Balance
Sheets as of November 29, 1997 and
May 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Condensed Statements
of Operations for the six months
ended November 29, 1997 and November 30, 1996 . . . . . . . . 5-6
Consolidated Condensed Statements
of Cash Flows for the six months
ended November 29, 1997 and November 30, 1996 . . . . . . . . . 7
Notes to Consolidated Condensed
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8-12
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 13
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Securities Holders . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)(In Thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health
Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc.
November 29, November 29, November 29, May 31, 1997 May 31,1997 May 31,1997
1997 1997 1997
____________ ______________ _______________ ____________ ____________ ____________
Assets
Current assets
Cash $4,000 $4,700 $4,700 $5,560 $5,560 $5,560
Accounts receivable, net 224,050 224,050 224,050 192,825 192,825 192,825
Inventories:
Raw materials 59,472 59,472 59,472 27,974 27,974 27,974
Finished goods 81,156 81,156 81,156 93,864 93,864 93,864
Deferred income taxes 14,581 14,395 13,952 8,401 8,301 8,006
Other current assets 10,360 10,360 10,360 12,895 12,895 12,895
Asset held for sale 17,080 17,080 17,080 17,080 17,080 17,080
Income tax receivable 7,440 7,440 7,440 7,429 7,429 7,429
_______ _______ _______ _______ _______ _______
Total current assets 418,839 418,653 418,210 366,028 365,928 365,633
Property and equipment
Land 2,371 2,371 2,371 2,371 2,371 2,371
Building 17,130 17,130 17,130 17,391 17,391 17,391
Machinery and equipment 66,326 66,326 66,326 59,318 59,318 59,318
______ ______ ______ ______ ______ ______
Total 85,827 85,827 85,827 79,080 79,080 79,080
Less:accum depreciation (34,064) (34,064) (34,064) (27,342) (27,342) (27,342)
________ ________ ________ ________ ________ ________
Property & equipment, net 51,763 51,763 51,763 51,738 51,738 51,738
Receivable from parent 2,303 2,159 2,159 2,307 2,307 2,307
Trademarks, net 17,747 17,747 17,747 18,236 18,236 18,236
Deferred income taxes 12,228 8,231 -- 8,338 6,405 --
Other assets 30,516 26,594 21,910 28,157 24,066 19,029
________ ________ ________ ________ ________ ________
Total assets $531,657 $523,725 $510,719 $474,804 $468,680 $456,943
======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)(Continued)(In Thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health
Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc.
November 29, November 29, November 29, May 31, 1997 May 31,1997 May 31,1997
1997 1997 1997
____________ ______________ _______________ ____________ ____________ _____________
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities
Current portion of
long-term debt $5,921 $5,921 $5,607 $5,401 $5,401 $5,401
Accounts payable 142,485 142,485 117,850 112,079 112,079 112,079
Interest payable -- - 6,220 6,220 6,220
Accrued expenses 27,238 27,238 27,238 20,696 20,696 20,696
Income taxes payable 2,696 2,696 2,696 1,165 1,165 1,165
_______ _______ _______ _______ _______ _______
Total current liabilities 178,340 178,340 147,340 145,561 145,561 145,561
Long term-debt 529,018 434,769 349,024 489,400 401,196 321,625
Deferred income taxes 87 87 686 -- -- 501
Other liabilities -- -- -- -- --
Stockholders' equity (deficit)
Common stock & additional
paid-in capital 49,699 127,767 166,184 49,699 127,767 166,184
Receivable from officers
for purchase of equity (656) (656) (656) (656) (656) (656)
Cumulative translation
adjustment (8) (8) (8) (506) (506) (506)
Retained earnings(deficit) (224,823) (216,574) (182,851) (208,694) (204,682) (175,766)
_________ _________ _________ _________ _________ _________
Total Stockholders' Equity (175,788) (89,471) (17,331) (160,157) (78,077) (10,744)
Total liabilities and _________ _________ _________ _________ _________ _________
stockholders' equity $531,657 $523,725 $510,719 $474,804 $468,680 $456,943
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)(In Thousands)
<TABLE>
<CAPTION> For The Three Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health
Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc.
November 29, November 29, November 29, November 29, November 29, November 29,
1997 1997 1997 1996 1996 1996
____________ ______________ _______________ ____________ ____________ _____________
Net sales $236,312 $236,312 $236,312 $249,495 $249,495 $249,495
Cost of goods sold 168,428 168,428 168,428 170,029 170,029 170,029
Cost of goods sold-
revaluation of HealthRider,
Weider Sports and CanCo
inventory 4 4 4 6,300 6,300 6,300
_______ ________ ________ _______ _______ _______
Total cost of goods sold 168,432 168,432 168,432 176,329 176,329 176,329
_______ ________ ________ _______ _______ _______
Gross profit 67,880 67,880 67,880 73,166 73,166 73,166
Operating expenses:
Selling expenses 33,584 33,584 33,584 37,557 33,557 33,557
Research and development 2,074 2,074 2,074 1,835 1,835 1,835
General and administrative 16,485 16,483 16,483 16,115 16,115 16,115
Weider Settlement - 16,465 16,465 16,465
______ ______ ______ ______ ______ ______
Total operating expenses 52,143 52,141 52,141 71,972 71,972 71,972
_______ _______ _______ _______ _______ _______
Operating income (loss) 15,737 15,739 15,739 1,194 1,194 1,194
Interest expense 14,758 11,736 8,649 11,856 11,594 8,988
Dividend on cumulative
redeemable preferred
stock of Subsidiary -- -- -- 850 -- --
Amortization of deferred
financing fees 1,480 1,310 957 1,110 1,098 800
________ ________ ________ _______ _______ _______
Income(Loss) before income tax (501) 2,693 6,133 (12,622) (11,498) (8,594)
Provision(Benefit)from income
taxes 186 1,261 2,299 (3,731) (3,731) (3,105)
_________ _________ _________ ________ ________ ________
Net loss ($687) $1,432 $3,834 ($8,891) ($7,767) ($5,489)
========= ========= ========= ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)(In Thousands)
<TABLE>
<CAPTION> For The Six Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health
Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc.
November 29, November 29, November 29, November 29, November 29, November 29,
1997 1997 1997 1996 1996 1996
____________ ______________ _______________ ____________ ____________ _____________
Net sales $363,794 $363,794 $363,794 $375,305 $375,305 $375,305
Cost of goods sold 260,762 260,762 260,762 260,610 260,610 260,610
Cost of goods sold-
revaluation of HealthRider,
Weider Sports and CanCo
inventory 330 330 330 8,165 8,165 8,165
_______ ________ ________ _______ _______ _______
Total cost of goods sold 261,092 261,092 261,092 268,775 268,775 268,775
_______ ________ ________ _______ _______ _______
Gross profit 102,702 102,702 102,702 106,530 106,530 106,530
Operating expenses:
Selling expenses 60,229 60,229 60,229 56,370 56,370 56,370
Research and development 3,994 3,994 3,994 3,474 3,474 3,474
General and administrative 30,322 30,320 30,320 27,002 27,002 27,002
Weider Settlement - 16,465 16,465 16,465
______ ______ ______ ______ ______ ______
Total operating expenses 94,545 94,543 94,543 103,311 103,311 103,311
_______ _______ _______ _______ _______ _______
Operating income (loss) 8,157 8,159 8,159 3,219 3,219 3,219
Interest expense 29,349 23,305 17,131 20,629 20,367 15,155
Dividend on cumulative
redeemable preferred
stock of Subsidiary -- -- -- 2,125 -- --
Amortization of deferred
financing fees 3,238 2,898 2,193 2,059 2,047 1,452
________ ________ ________ ________ ________ ________
Income(Loss) before income tax(24,430) (18,044) (11,165) (21,594) (19,195) (13,388)
Provision(Benefit)from income
taxes (8,301) (6,152) (4,080) (5,606) (5,606) (4,278)
_________ _________ _________ _________ _________ ________
Net loss ($16,129) $11,892) ($7,085) ($15,988) ($13,589) ($9,110)
========= ========= ========= ========= ========= ========
</TABLE>
See notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)(In Thousands)
<TABLE>
<CAPTION> For The Six Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON Fitness IHF ICON Health ICON Fitness IHF Holding, ICON Health
Corporation Holdings, Inc. & Fitness, Inc. Corporation Inc. &Fitness,Inc.
November 29, November 29, November 29, November 29, November 29, November 29,
1997 1997 1997 1996 1996 1996
____________ ______________ _______________ ____________ ____________ _____________
OPERATING ACTIVITIES:
Net income/(loss) ($16,129) ($11,892) ($7,085) ($15,988) ($13,589) ($9,110)
Adjustments to reconcile net
income to net cash provided
by operating activity:
Provision for bad debt and
advertising allowance 10,263 10,263 10,263 5,284 5,284 5,284
Provision/(benefit)for
deferred taxes (9,983) (7,834) (5,762) (1,596) (1,596) (101)
Amortization of debt
discount and deferred
financing fees
Depreciation & amortization 23,450 17,066 10,187 12,153 11,879 6,072
Inventory revaluation 330 330 330 8,165 8,165 8,165
Interest expense attributable
to dividends on preferred
stock -- -- -- 2,125 -- --
Changes in operating assets
and liabilities:
Accounts receivable (41,410) (41,410) (41,410) (86,137) (86,137) (86,137)
Inventory (19,120) (19,120) (19,120) (36,921) (36,921) (36,921)
Other assets (2,073) (2,252) (2,252) (10,756) (9,618) (9,785)
Account payable and
accrued expenses 32,264 32,441 32,441 31,098 31,098 31,098
______ ______ ______ _______ ______ ______
Net cash received from
(used in) operating
activities (22,408) (22,408) (22,408) (92,573) (91,435) (91,435)
________ ________ ________ ________ ________ ________
INVESTING ACTIVITIES:
Payments for acquisitions -- -- -- (38,962) (38,962) (38,962)
Purchases of property
and equipment (6,748) (6,748) (6,748) (13,622) (13,622) (13,622)
_______ _______ _______ ________ ________ ________
Net cash received from
(used in) investing
activities (6,748) (6,748) (6,748) (52,584) (52,584) (52,584)
_______ _______ _______ ________ ________ ________
FINANCING ACTIVITIES:
Proceeds from long-term
debt, net of payments 27,799 27,799 27,799 219,030 136,763 136,763
Return of capital to parent - - - (42,319) - -
Retirement of preferred
stock - -- -- (35,748) (35,748) -
Capital contribution by
parent -- -- -- -- 35,748 --
Payment of debt financing
fees -- -- -- -- (3,062)
______ _______ _______ ________ ________ ________
Net cash received from
(used in) financing
activities 27,799 27,799 27,799 137,901 136,763 136,763
Effect of exchange rate
change on cash 497 497 497 (492) (492) (492)
Net increase(decrease) _______ _______ _______ ________ ________ ________
in cash (860) (860) (860) (7,748) (7,748) (7,748)
Cash at beginning of period 5,560 5,560 5,560 19,313 19,313 19,313
_______ _______ _______ _______ _______ _______
Cash at end of period $4,700 $4,700 $4,700 $11,565 $11,565 $11,565
SUPPLEMENTAL DISCLOSURES:
Cash paid (received)
during the year for:
Interest $17,773 $17,773 $17,773 $21,897 $21,897 $21,897
Income taxes $58 $58 $58 $3,799 $3,799 $3,799
</TABLE>
See notes to consolidated condensed financial statements.
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly owned subsidiary,
ICON Health & Fitness, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
The consolidated condensed financial statements include the accounts of ICON
Fitness Corporation ("ICON Fitness"), its wholly-owned subsidiary, IHF
Holdings, Inc. ("IHF Holdings"), and its wholly-owned subsidiary, ICON Health
& Fitness, Inc. ("ICON"), and its wholly-owned subsidiaries (collectively, the
"Company"). ICON Fitness' parent company, IHF Capital, Inc. ("IHF Capital"),
is not a registrant.
The accompanying consolidated condensed financial statements and notes should
be read in conjunction with the financial statements contained in the
Company's 'Annual Report on Form 10-K. In management's opinion, the
accompanying consolidated condensed financial statements include all
adjustments necessary for a fair presentation of the results of the interim
periods presented and all such adjustments are of a normal recurring nature.
The home fitness industry is seasonal in nature and the results of operations
for the interim periods presented may not be indicative of the results for the
full year.
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the consolidated
financial statements and the reported amount of revenues and expenses during
the period. Actual results could differ from those estimates.
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This quarterly Report on Form 10Q 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.
Seasonality
The Company has historically sold the 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
customer promotions and customer purchases. While this seasonality has been
the trend, it may not be indicative of the results to be expected for this
fiscal year or any future years. The following table reflects the Company's
consolidated net sales for the first two quarters of fiscal 1998 and for each
quarter in fiscal 1997, and 1996.
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1998 $127.5 $236.3 --- ---
Fiscal 1997 $125.8 $249.5 $248.7 $212.2
Fiscal 1996 $124.8 $228.5 $240.9 $153.4
Operating Results for the Second Quarters of Fiscal 1998 and 1997
During the second quarter of fiscal year 1998, net sales decreased 5.3% to
$236.3 million from $249.5 million in the second quarter of fiscal 1997.
Domestic treadmill sales for the second quarter of fiscal year 1998 accounted
for approximately 61% of total net sales versus 45% in the second quarter of
fiscal 1997. Second quarter fiscal year 1998 treadmill sales increased
approximately $28.9 million over the same period a year ago. Other increases
include air walker sales of $5.7 million, stationary bike sales of $3 million,
and relaxation chairs, home spas and elliptical products increased
approximately $3 million in aggregate over the same period of a year ago.
However, the sale of cardioglides and HealthRiders decreased $30 million and
the ab shapers decreased approximately $16.7 million, due to a general
softening of demand for those particular product categories. Trampoline sales
decreased $4.1 million, and rowers and skiers sales decreased approximately $3
million over the preceding year's same period.
Gross profit for the second quarter of fiscal 1998 was $67.9 million, or 28.7%
of net sales, compared to $73.2 million, or 29.3% of net sales, for the second
quarter of fiscal 1997. Included in the second quarter of fiscal year 1997
cost of goods sold, was a one time step-up expense for the purchase of
HealthRider, Weider Sports and CanCo inventory in the amount of $6.3 million.
Without the $6.3 million expense for the second quarter of fiscal 1997, the
profit margin would have been $79.5 million, or 31.9% of net sales. The 3.2%
decrease in profit margin is attributable to the changes in product mix.
Margins on treadmills have increased to 29%, approximately 2% higher for the
second quarter of fiscal 1998 as compared to the second quarter of fiscal
1997; however, they still do not compare with the 40% weighted margins the
Company received in the prior year on ab shapers and HealthRiders.
Selling expenses were $33.6 million, or 14.2% of net sales, in the second
quarter of fiscal 1998 compared to $37.6 million, or 15.1% of net sales, for
the second quarter of fiscal 1997. This decrease is primarily attributed to
the one-time HealthRider selling expenses of $3.2 million included in second
quarter of fiscal year 1997. Also, direct response advertising expenses
decreased approximately $.8 million for the second quarter of 1998 versus the
second quarter of 1997. No other significant changes occurred in selling
expenses.
Research and development expenses were $2.1 million or .9% of net sales, for
the second quarter of fiscal 1998 compared to $1.8 million, or .7% of net
sales, for the second quarter of fiscal 1997.
General and administrative expenses totaled $16.5 million, or 7.0 % of net
sales, for the second quarter of fiscal 1998 compared to $16.1 million, or
6.5% of net sales, for the second quarter of fiscal 1997. This increase in
general and administrative expenses as a percent of sales can be attributed in
part to the decrease in sales for the second quarter of fiscal year 1998. The
increase in dollars spent in the second quarter of fiscal 1998 over 1997
represents an increase in depreciation taken on higher fixed assets in 1998.
In the second quarter of fiscal year 1997 the Company and Weider Health and
Fitness ("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. The result was a charge of
$16.5 million in the second quarter of fiscal 1997.
As a result of the foregoing factors, operating income was $15.7 million, or
6.6% of net sales in the second quarter of fiscal 1998, compared to $1.2
million, or .5% of net sales, in the second quarter of fiscal 1997. Operating
income before the revaluation of acquired inventories, one-time selling
expenses and the Weider settlement would have been $27.1 million or 10.9% of
net sales for the second quarter of fiscal 1997.
Interest expense was $8.6 million for ICON, $11.7 million for IHF Holdings and
$14.8 million for ICON Fitness in the second quarter of fiscal year 1998
compared to $9.0 million for ICON, $11.6 million for IHF Holdings and $11.9
million for ICON Fitness for the second quarter of fiscal year 1997. The
increase in interest expense is due to a higher level of outstanding
indebtedness in fiscal year 1998 as a result of the loan agreement entered
into by ICON Fitness in November 1996.
Dividends on cumulative redeemable Preferred stock were $.9 million for ICON
Fitness during the second quarter of fiscal 1997. The Preferred Stock was
redeemed in the second quarter of 1997; accordingly, there were no dividends
in the same period of 1998.
The income tax provision was $2.3 million for ICON, $1.3 million for Holdings
and $.2 million for ICON Fitness for the second quarter of fiscal 1998,
compared with a tax benefit of $3.1 million for ICON, $3.7 million for IHF
Holdings and ICON Fitness during the second quarter of fiscal 1997. This is a
result of the increase in income before income tax during the second quarter
of fiscal 1998 compared to the same period in the preceding year.
As a result of the foregoing factors, the net income was $3.8 million for
ICON, $1.4 million for IHF Holdings and a net loss of $.7 million for ICON
Fitness for the second quarter of fiscal 1998 compared to net losses for all
three companies in the second quarter of fiscal year 1997 of $5.5 million for
ICON, $7.8 million for IHF Holdings and $8.9 million for ICON Fitness.
Operating Results for the First Six Months of fiscal 1998 and 1997
Net sales were $363.8 million in the first six months of fiscal 1998, compared
to $375.3 million in the first six months of fiscal 1997. Treadmill sales
totaled $210.3 million in the first six months of fiscal year 1998 compared to
$165.5 for the first six months of the preceding year. Other increases
include air walker sales of $8.1 million, bike sales of $5.3 million, and
relaxation chairs, home spas, and elliptical products increased sales
approximately $5.5 million in aggregate over the same period of a year ago.
HealthRiders and Cardioglides totaled $4.0 million during the first six months
of fiscal 1998 versus $54.3 million for the same period in the preceding year,
and sales of the Company's ab shaper decreased $24.9 million, due to a general
softening of demand for those particular product categories.
Gross profit for the first six months of fiscal 1998 was $102.7 million, or
28.2% of net sales, compared to $106.5 million, or 28.4% of net sales, for the
first six months of fiscal 1997. The step-up of the HealthRider and ICON of
Canada inventory increased the cost of sales by $8.2 million for the first six
months of fiscal year 1997. Without this charge, gross profit would have been
30.6% for the first six months of fiscal 1997. The decrease of 2.2% profit
margin relates directly with the product mix sold as treadmills have a lower
margin than HealthRiders and ab shapers. Margins on treadmills have increased
to 29%, approximately 2% higher for the second quarter of 1998 than 1997;
however, they still do not compare with the 40% weighted margins we received
in the prior year on ab shapers and HealthRriders.
Selling expenses were $60.2 million, or 16.5% of net sales, in the first six
months of fiscal 1998 compared to $56.4 million, or 15.0% of net sales for the
first six months of fiscal year 1997. This increase is primarily attributed
to the higher costs of shipping treadmills versus ab shakers and HealthRriders
during the first six months of 1998. Freight costs were $6.5 million in the
first six months of 1998 compared to $3.7 million for the first six months of
fiscal 1997. HealthRider selling expenses accounted for approximately $1
million of the increase in the first six months of 1998 over 1997, as the
retail locations of HealthRider were part of the Company for only three of the
six months in the prior year.
Research and development expenses were $4.0 million or 1.1% of net sales, for
the first six months of fiscal 1998 compared to $3.5 million, or .9% of net
sales, for the first six months of fiscal 1997.
General and administrative expenses totaled $30.3 million, or 8.3% of net
sales, for the first six months of fiscal 1997 compared to $27.0 million, or
7.2% of net sales, for the first six months of 1997. The largest single
increase in 1998 over 1997 is depreciation of $2.8 million, which increased
due to the purchase of HealthRider as well as other fixed asset additions.
Distribution expenses have also increased approximately $1.8 million in the
first six months of fiscal 1998 over 1997. Bonuses have decreased by $1
million and other items which are not significant account for the remaining
$.3 million decrease in the first six months of 1998 over 1997.
In the second quarter of fiscal year 1997 the Company and Weider Health and
Fitness ("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. The result was a charge of
$16.5 million in the second quarter of fiscal 1997.
As a result of the foregoing factors, operating income was $8.2 million, or
2.3% of net sales in the first six months of fiscal 1998, compared to a $3.2
million, or .9% of net sales in the first six months of fiscal 1997.
Operating income before the revaluation of acquired inventories, one time
HealthRider selling expenses, integration expenses associated with the
HealthRider and CanCo Acquisitions and the expense of the Weider settlement
would have been $31.1 million or 8.3% of net sales for the first six months of
fiscal year 1997.
Interest expense was $17.1 million for ICON, $23.3 million for IHF Holdings
and $29.3 million for ICON Fitness in the first six months of fiscal 1998
compared to $15.2 million for ICON, $20.4 million for IHF Holdings and $20.6
million for ICON Fitness for the first six months of fiscal 1997. The
increase in interest expense is due to a higher level of outstanding
indebtedness in fiscal year 1998 as a result of the loan agreement entered
into by ICON Fitness in November 1996.
Dividends on cumulative redeemable Preferred Stock totaled $2.1 million for
ICON Fitness for the first six months of fiscal 1997. The Preferred Stock was
redeemed in the second quarter of 1997; accordingly, there will be no
additional dividends associated with this Preferred Stock.
The income tax benefit was $4.1 million for ICON, $6.2 million for IHF
Holdings and $8.3 million for ICON Fitness for the first six months of fiscal
1998 compared with a tax benefit of $4.3 million for ICON, $5.6 million for
IHF Holdings and ICON Fitness during the first six months of fiscal 1997.
This is a result of the loss before income tax during the first six months of
both years.
As a result of the foregoing factors, the net loss was $7.1 million for ICON,
$11.9 million for IHF Holdings and $16.1 million for ICON Fitness for the
first six months of fiscal 1998 compared to net losses of $9.1 million for
ICON, $13.6 million for IHF Holdings and $16.0 million for ICON Fitness during
the same period for fiscal 1997.
Advertising allowances with retail customers total $5.6 million at November
29, 1997. Advertising allowances are generally a fixed percentage of sales to
customers. Fluctuations in the balance of this allowance are attributable to
changes in customer sales mix and the timing of when allowances are taken.
Liquidity and Capital Resources
In the first six months of fiscal 1998, the Company used $22.4 million of cash
in operating activities compared to $92.6 for the same period in 1997. This
use of cash includes increased accounts receivable and inventory, offset by
increased accounts payable. The Company also used $6.7 million of cash for
investing activities in the first six months of fiscal 1998 for capital
expenditures primarily related to tooling and other manufacturing equipment.
During the first six months of fiscal 1998, the Company had a net decrease in
cash of $.9 million compared to $7.7 million in the same period in 1997.
On November 25, 1997, ICON amended certain terms of its credit agreement,
which is secured by the Company's eligible accounts receivable and inventory.
The Company must comply with certain financial covenants under the credit
agreement. ICON had $233.4 million of revolving credit borrowings under the
Credit Agreement at November 29, 1997 compared to $228.5 at November 30, 1996.
The revolving credit borrowings have increased by $23.6 million from $209.8
million reported at the end of fiscal 1997. Line of Credit borrowings have
been used to fund inventory levels, finance normal trade credit for customers,
make interest payments on debt obligations and to fund capital expenditures.
Management believes that cash flows from operations and ICON's ability to make
revolving credit borrowings under the amended Credit Agreement will provide
adequate funds for working capital, planned capital expenditures and debt
service obligations for the foreseeable future. Nevertheless, the Company is
highly leveraged, and the ability to fund operations, make planned capital
expenditures, make scheduled debt payments and refinance indebtedness depends
on future operating performance and cash flows, which in turn, are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond the Company's control.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party to a variety of non-product liability commercial suits
involving contract claims and intellectual property claims. The Company
believes that potential adverse resolution of these suits will 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 affect on the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule for ICON Fitness Corporation.
27.2 Financial Data Schedule for IHF Holdings, Inc.
27.3 Financial Data Schedule for ICON Health & Fitness, Inc.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
ICON Fitness Corporation
IHF Holdings, Inc.
ICON Health & Fitness, Inc.
(Registrants)
By_______________________________ Date: _____________
Gary Stevenson, President
By_______________________________________
S. Fred Beck, Chief Financial Officer Date: _____________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 27.1
This schedule contains summary financial information extracted from the
November 29, 1997 Financial Statements included in the Company's Form 10-Q and
is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0001029294
<NAME> ICON Fitness Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-29-1997
<CASH> 4700
<SECURITIES> 0
<RECEIVABLES> 235318
<ALLOWANCES> 11268
<INVENTORY> 140627
<CURRENT-ASSETS> 418839
<PP&E> 85827
<DEPRECIATION> 34064
<TOTAL-ASSETS> 531657
<CURRENT-LIABILITIES> 178340
<BONDS> 529018
0
0
<COMMON> 49698
<OTHER-SE> (225486)
<TOTAL-LIABILITY-AND-EQUITY> 531657
<SALES> 236312
<TOTAL-REVENUES> 236312
<CGS> 168432
<TOTAL-COSTS> 52143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14758
<INCOME-PRETAX> (501)
<INCOME-TAX> (186)
<INCOME-CONTINUING> (687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (687)
<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
November 29, 1997 Financial Statements included in the Company's Form 10-Q and
is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000934799
<NAME> IHF Holdings Inc
<MULTIPLIER> 1000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-29-1997
<CASH> 4700
<SECURITIES> 0
<RECEIVABLES> 235318
<ALLOWANCES> 11268
<INVENTORY> 140627
<CURRENT-ASSETS> 418653
<PP&E> 85827
<DEPRECIATION> 34064
<TOTAL-ASSETS> 523725
<CURRENT-LIABILITIES> 178340
<BONDS> 434769
0
0
<COMMON> 127767
<OTHER-SE> (217238)
<TOTAL-LIABILITY-AND-EQUITY> 523725
<SALES> 236312
<TOTAL-REVENUES> 236312
<CGS> 168432
<TOTAL-COSTS> 52141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11736
<INCOME-PRETAX> 2693
<INCOME-TAX> 1261
<INCOME-CONTINUING> 1432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1432
<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
November 29, 1997 Financial Statements included in the Company's Form 10-Q and
is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000934798
<NAME> ICON Health & Fitness Inc
<MULTIPLIER> 1000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-29-1997
<CASH> 4700
<SECURITIES> 0
<RECEIVABLES> 235318
<ALLOWANCES> 11268
<INVENTORY> 140627
<CURRENT-ASSETS> 418210
<PP&E> 85826
<DEPRECIATION> 34064
<TOTAL-ASSETS> 510719
<CURRENT-LIABILITIES> 178340
<BONDS> 349024
0
0
<COMMON> 166184
<OTHER-SE> (183515)
<TOTAL-LIABILITY-AND-EQUITY> 510719
<SALES> 236312
<TOTAL-REVENUES> 236312
<CGS> 168432
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8649
<INCOME-PRETAX> 6133
<INCOME-TAX> 2299
<INCOME-CONTINUING> 3834
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3834
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
