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 February 28, 1998
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)
435-750-5000
(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 February 28, 1998 and
May 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Condensed Statements
of Operations for the three months and nine months
ended February 28, 1998 and March 1, 1997. . . . . . . . . . 5-6
Consolidated Condensed Statements
of Cash Flows for the nine months
ended February 28, 1998 and March 1, 1997. . . . . . . . . . . . 7
Notes to Consolidated Condensed
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8-13
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 . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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.
February 28, February 29, February 28, May 31, 1997 May 31,1997 May 31,1997
1998 1998 1998
____________ ______________ _______________ ____________ ____________ ____________
Assets
Current assets
Cash $7,793 $7,793 $7,793 $5,560 $5,560 $5,560
Accounts receivable, net 224,917 224,917 224,917 192,825 192,825 192,825
Inventories:
Raw materials 41,292 41,292 41,292 27,974 27,974 27,974
Finished goods 76,671 76,671 76,671 93,864 93,864 93,864
Deferred income taxes 10,451 10,222 9,710 8,401 8,301 8,006
Other current assets 7,537 7,537 7,537 12,895 12,895 12,895
Asset held for sale --- --- --- 17,080 17,080 17,080
Income tax receivable 7,391 7,391 7,391 7,429 7,429 7,429
_______ _______ _______ _______ _______ _______
Total current assets 376,052 375,823 375,311 366,028 365,928 365,633
Property and equipment
Land 1,430 1,430 1,430 2,371 2,371 2,371
Building 17,391 17,391 17,391 17,391 17,391 17,391
Machinery and equipment 68,480 68,480 68,480 59,318 59,318 59,318
______ ______ ______ ______ ______ ______
Total 87,301 87,301 87,301 79,080 79,080 79,080
Less:accum depreciation (37,410) (37,410) (37,410) (27,342) (27,342) (27,342)
________ ________ ________ ________ ________ ________
Property & equipment, net 49,891 49,891 49,891 51,738 51,738 51,738
Receivable from parent 2,365 2,221 2,221 2,307 2,307 2,307
Trademarks, net 17,507 17,507 17,507 18,236 18,236 18,236
Deferred income taxes 14,832 9,804 13 8,338 6,405 --
Other assets 28,609 25,173 21,193 28,157 24,066 19,029
________ ________ ________ ________ ________ ________
Total assets $489,256 $480,419 $466,136 $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.
February 28, February 28, February 28, May 31, 1997 May 31,1997 May 31,1997
1998 1998 1998
____________ ______________ _______________ ____________ ____________ _____________
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities
Current portion of
long-term debt $5,672 $5,672 $5,672 $5,401 $5,401 $5,401
Accounts payable 116,656 116,656 116,656 112,079 112,079 112,079
Interest payable 4,555 4,555 4,555 6,220 6,220 6,220
Accrued expenses 19,315 19,315 19,315 20,696 20,696 20,696
Income taxes payable 3,372 3,372 3,372 1,165 1,165 1,165
_______ _______ _______ _______ _______ _______
Total current liabilities 149,570 149,570 149,570 145,561 145,561 145,561
Long term-debt 514,434 417,161 328,330 489,400 401,196 321,625
Deferred income taxes - - - -- -- 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 (1,103) (1,103) (1,103) (506) (506) (506)
Retained earnings(deficit) (222,688) (212,320) (176,189) (208,694) (204,682) (175,766)
_________ _________ _________ _________ _________ _________
Total Stockholders' Equity (174,748) (86,312) (11,764) (160,157) (78,077) (10,744)
Total liabilities and _________ _________ _________ _________ _________ _________
stockholders' equity $489,256 $480,419 $466,136 $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.
February 28, February 28, February 28, March 1, March 1, March 1,
1998 1998 1998 1997 1997 1997
____________ ______________ _______________ ____________ ____________ _____________
Net sales $252,027 $252,027 $252,027 $248,670 $248,670 $248,670
Cost of goods sold 176,519 176,519 176,519 175,062 175,062 175,062
Cost of goods sold-
revaluation of HealthRider,
Weider Sports and CanCo
inventory - -- - 2,060 2,060 2,060
_______ ________ ________ _______ _______ _______
Total cost of goods sold 176,519 176,519 176,519 177,122 177,122 177,122
_______ ________ ________ _______ _______ _______
Gross profit 75,508 75,508 75,508 71,548 71,548 71,548
Operating expenses:
Selling expenses 37,064 37,064 37,064 43,632 43,632 43,632
Research and development 1,984 1,984 1,984 1,978 1,978 1,978
General and administrative 14,981 14,981 14,981 12,289 12,289 12,289
Weider Settlement - - - 1,000 1,000 1,000
HealthRider consolidation - - - 3,949 3,949 3,949
______ ______ ______ ______ ______ ______
Total operating expenses 54,029 54,029 54,029 62,848 62,848 62,848
_______ _______ _______ _______ _______ _______
Operating income (loss) 21,479 21,479 21,479 8,700 8,700 8,700
Interest expense 15,666 12,643 9,556 15,286 11,734 9,128
Amortization of deferred
financing fees 1,827 1,657 1,305 1,290 1,101 803
________ ________ ________ _______ _______ _______
Income(Loss) before income tax 3,986 7,179 10,618 (7,876) ( 4,135) (1,231)
Provision(Benefit)from income
taxes 1,851 2,925 3,956 (4,919) (2,705) (801)
________ _________ _________ ________ ________ ________
Net loss $2,135 $4,254 $6,662 ($2,957) ($1,430) ($430)
========= ========= ========= ======== ======== ========
</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 Nine 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.
February 28, February 28, February 28, March 1, March 1, March 1,
1998 1998 1998 1997 1997 1997
____________ ______________ _______________ ____________ ____________ _____________
Net sales $615,821 $615,821 $615,821 $623,974 $623,974 $623,974
Cost of goods sold 437,281 437,281 437,281 435,672 435,672 435,672
Cost of goods sold-
revaluation of HealthRider,
Weider Sports and CanCo
inventory 330 330 330 10,225 10,225 10,225
_______ ________ ________ _______ _______ _______
Total cost of goods sold 437,611 437,611 437,611 445,897 445,897 445,897
_______ ________ ________ _______ _______ _______
Gross profit 178,210 178,210 178,210 178,077 178,077 178,077
Operating expenses:
Selling expenses 97,293 97,293 97,293 100,001 100,001 100,001
Research and development 5,978 5,978 5,978 5,452 5,452 5,452
General and administrative 45,303 45,301 45,301 39,290 39,290 39,290
Weider Settlement - - - 17,465 17,465 17,465
HealthRider consolidation - - - 3,949 3,949 3,949
_______ _______ _______ _______ _______ _______
Total operating expenses 148,574 148,572 148,572 166,157 166,157 166,157
_______ _______ _______ _______ _______ _______
Operating income (loss) 29,636 29,638 29,638 11,920 11,920 11,920
Interest expense 45,015 35,948 26,687 35,915 32,102 24,284
Amortization of deferred
financing fees 5,065 4,555 3,498 3,348 3,147 2,255
Dividend on cumulative
redeemable preferred
stock of Subsidiary -- -- -- 2,125 -- --
________ ________ ________ ________ ________ ________
Income(Loss) before income tax(20,444) (10,865) (547) (29,468) (23,329) (14,619)
Provision(Benefit)from income
taxes (6,450) (3,227) (127) (10,524) (8,311) (5,079)
_________ _________ _________ _________ _________ ________
Net loss ($13,994) ($7,638) ($423) ($18,944) ($15,018) ($9,540)
========= ========= ========= ========= ========= ========
</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 Nine 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.
February 28, February 28, February 28, March 1, March 1, March 1,
1998 1998 1998 1997 1997 1997
____________ ______________ _______________ ____________ ____________ _____________
OPERATING ACTIVITIES:
Net income/(loss) ($13,994) ($7,638) ($423) ($18,944) ($15,018) ($9,540)
Adjustments to reconcile net
income to net cash provided
by operating activity:
Provision for bad debt and
advertising allowance 20,925 20,925 20,925 9,292 9,292 9,292
Provision/(benefit)for
deferred taxes (8,544) (5,321) (2,218) (1,596) (1,596) (101)
Amortization of debt
discount and deferred
financing fees 23,572 13,996 3,678 19,191 11,172 2,462
Depreciation & amortization 12,037 12,037 12,037 8,628 8,628 8,628
Inventory revaluation 330 330 330 10,225 10,225 10,225
Non-cash compensation - - - 234 234 234
Loss on sale of assets 333 333 333 - - -
Interest expense attributable
to dividends on preferred
stock -- -- -- 2,125 -- --
Changes in operating assets
and liabilities:
Accounts receivable (52,939) (52,939) (52,939) (98,860) (98,860) (98,860)
Inventory 3,543 3,543 3,543 (19,542) (19,542) (19,542)
Other assets (1,611) (1,614) (1,614) (27,810) (20,694) (18,957)
Account payable and
accrued expenses 3,856 3,856 3,856 24,873 24,724 24,724
______ ______ ______ _______ ______ ______
Net cash received from
(used in) operating
activities (12,492) (12,492) (12,492) (92,184) (91,435) (91,435)
________ ________ ________ ________ ________ ________
INVESTING ACTIVITIES:
Proceeds from sale
Of assets 18,250 18,250 18,250 - - -
Purchases of property
and equipment (9,724) (9,724) (9,724) (55,802) (55,802) (55,802)
_______ _______ _______ ________ ________ ________
Net cash received from
(used in) investing
activities 8,526 8,526 8,526 (55,802) (55,802) (55,802)
_______ _______ _______ ________ ________ ________
FINANCING ACTIVITIES:
Proceeds from long-term
debt, net of payments 6,796 6,796 6,796 215,924 133,657 133,657
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 -- -- -- (3,451) - -
______ _______ _______ ________ ________ ________
Net cash received from
(used in) financing
activities 6,796 6,796 6,796 134,406 133,657 133,657
Effect of exchange rate
change on cash (597) (597) (597) (889) (889) (889)
Net increase(decrease) _______ _______ _______ ________ ________ ________
in cash 2,233 2,233) 2,233 (14,469) (14,469) (14,469)
Cash at beginning of period 5,560 5,560 5,560 19,313 19,313 19,313
_______ _______ _______ ________ _______ _______
Cash at end of period $7,793 $7,793 $7,793 $4,844 $4,844 $4,844
SUPPLEMENTAL DISCLOSURES:
Cash paid (received)
during the year for:
Interest $26,792 $26,792 $26,792 $18,200 $18,200 $18,200
Income taxes $144 $144 $144 $1,175 $1,175 $1,175
</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 Health"), 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.
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 the third quarter of 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.
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 three 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 $252.0 ---
Fiscal 1997 $125.8 $249.5 $248.7 $212.2
Fiscal 1996 $124.8 $228.5 $240.9 $153.4
Operating Results for the Third Quarters of Fiscal 1998 and 1997
During the third quarter of fiscal year 1998, net sales increased 1.3% to
$252.0 million from $248.7 million in the third quarter of fiscal 1997.
Domestic treadmill sales for the third quarter of fiscal year 1998 accounted
for approximately 69% of total net sales versus 66% in the third quarter of
fiscal 1997. Third quarter fiscal year 1998 domestic treadmill sales were
$174.7 million compared to $164.6 million which is a $10.1 million increase.
Other increases include eliptical products of $11.4 million, home gyms of $4.4
million, stationary bike sales of $4.0 million, and relaxation chairs, home
spas and trampolines increased approximately $4.5 million in aggregate over
the same period of a year ago. However, the sale of ab shapers and upright
rowers decreased approximately $28.2 million due to a general softening of
demand for those particular product categories and airwalker sales decreased
$2.9 million over a year ago.
Gross profit for the third quarter of fiscal 1998 was $75.5 million, or 30.0%
of net sales, compared to $71.5 million, or 28.8% of net sales, for the third
quarter of fiscal 1997. Included in the third quarter of fiscal 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 $2.1 million. Without the
$2.1 million expense for the third quarter of fiscal 1997, the profit margin
would have been $73.6 million, or 29.6% of net sales. The slight increase of
0.4% in profit margin is attributable to the changes in product mix. Margins
on treadmills have increased to 29.6%, approximately 2.0% higher for the third
quarter of 1998 as compared to the third quarter of 1997.
Selling expenses were $37.1 million, or 14.7% of net sales, in the third
quarter of fiscal 1998 compared to $43.6 million, or 17.5% of net sales, for
the third quarter of fiscal 1997. This decrease is attributed primarily to
one-time HealthRider selling expenses of $3.2 million included in the third
quarter of fiscal 1997. In addition, the Company decreased advertising
expenses by approximately $2.5 million for the third quarter of 1998 versus
the third quarter of 1997.
Research and development expenses were $2.0 million or 0.8% of net sales, for
the third quarter of fiscal 1998 and 1997.
General and administrative expenses totaled $15.0 million, or 5.9 % of net
sales, for the third quarter of fiscal 1998 compared to $12.3 million, or 4.9%
of net sales, for the third quarter of fiscal 1997. This 1.0% increase in
general and administrative expenses for the third quarter of fiscal 1998 is
attributable to an increase in depreciation expense of $0.8 million due to
higher fixed assets in fiscal 1998, an increase in insurance expense of $1.5
million and a legal expense increase of $0.4 million. The increase in
insurance and legal expense is primarily related to product liability costs.
In the second quarter of fiscal 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. Of the total expense incurred
in connection with the WHF settlement, $1.0 million was incurred in the third
quarter of fiscal 1997.
HealthRider consolidation expenses totaled $4.0 million during the third
quarter of fiscal 1997. These charges were incurred to eliminate the
duplication in staff and facilities with those of ICON Health.
As a result of the foregoing factors, operating income was $21.5 million, or
8.5% of net sales in the third quarter of fiscal 1998, compared to $8.7
million, or 3.5% of net sales in the third quarter of fiscal 1997. Operating
income before the revaluation of acquired inventories, one-time selling
expenses, the Weider settlement, and the HealthRider consolidation expenses
would have been $19 million or 7.6% of net sales for the third quarter of
fiscal 1997.
Interest expense was $9.6 million for ICON Health, $12.6 million for IHF
Holdings and $15.7 million for ICON Fitness in the third quarter of fiscal
1998 compared to $9.1 million for ICON Health, $11.7 million for IHF Holdings
and $15.3 million for ICON Fitness for the third quarter of fiscal 1997. The
increase in interest expense is due to a higher level of outstanding
indebtedness in fiscal 1998 as a result of the additional level of borrowings
under the Company's credit agreement and accretion of the principal balances
of the Company's outstanding indentures.
The income tax provision is $4.0 million for ICON Health, $2.9 million for
IHF Holdings and $1.9 million for ICON Fitness for the third quarter of fiscal
1998, compared with a tax benefit of $0.8 million for ICON Health, $2.7
million for IHF Holdings and $4.9 for ICON Fitness during the third quarter of
fiscal 1997. This is a result of the increase in income before income tax
during the third quarter of fiscal 1998 compared to the same period in the
preceding year.
As a result of the foregoing factors, net income was $6.7 million for ICON,
$4.3 million for IHF Holdings and $2.1 million for ICON Fitness for the third
quarter of fiscal 1998 compared to net losses for all three companies in the
third quarter of fiscal 1997 of $0.4 million for ICON Health, $1.4 million for
IHF Holdings and $3.0 million for ICON Fitness.
Operating Results for the First Nine Months of fiscal 1998 and 1997
Net sales were $615.8 million in the first nine months of fiscal 1998,
compared to $624.0 million in the first nine months of fiscal 1997. This
represents a 1.3% decline in sales for the first nine months of the current
fiscal year. Domestic treadmill sales totaled $385.0 million in the first
nine months of fiscal 1998 compared to $321.4 for the first nine months of the
preceding year. This is an increase of $63.6 million. Other increases
include elliptical product sales of $17.0 million, stationary bike sales of
$9.2 million, airwalker sales of $5.4 million and relaxation chairs, home
spas, home gyms and steppers increased sales of approximately $3.5 million in
aggregate over the same period of a year ago. Ab shapers and upright rowers
decreased by $92.8 million during the first nine months of fiscal 1998, due to
a general softening of demand for those particular product categories. Also,
the sale of trampolines decreased by $9.1 million, and rowers and skiers
decreased by $5.0 million.
Gross profit for the first nine months of fiscal 1998 was $178.2 million, or
28.9% of net sales, compared to $178.1 million, or 28.5% of net sales, for the
first nine months of fiscal 1997. The step-up of the HealthRider, Weider
Sports and ICON of Canada inventory increased the cost of sales by $10.2
million for the first nine months of fiscal 1997. Without this charge, gross
profit would have been 30.2% for the first nine months of fiscal 1997. The
profit margin decrease of 1.3% relates directly with the product mix sold as
treadmills have a lower margin than ab shapers and upright rowers. Margins on
treadmills have increased to 29.6%, approximately 2.0% higher through the
third quarter of 1998 as compared to 1997. Weighted average margins received
in the prior year on ab shapers and upright rowers was approximately 40.0%.
Selling expenses were $97.3 million, or 15.8% of net sales, in the first nine
months of fiscal 1998 compared to $100.0 million, or 16.0% of net sales for
the first nine months of fiscal 1997. This decrease is attributable to
one-time HealthRider selling expenses of $6.4 million incurred in the first
nine months of fiscal 1997, offset by higher costs of shipping treadmills
versus ab shapers and upright rowers and increased advertising and bad debts
during the first nine months of fiscal 1998. Freight costs were $9.8 million
in the first nine months of fiscal 1998 compared to $8.2 million for the first
nine months of fiscal 1997 and bad debt expense increased $2.1 million for the
first nine months of fiscal 1998 over 1997.
Research and development expenses were $6.0 million or 1.0% of net sales, for
the first nine months of fiscal 1998, compared to $5.5 million, or 0.9% of net
sales, for the first nine months of fiscal 1997.
General and administrative expenses totaled $45.3 million, or 7.4% of net
sales, for the first nine months of fiscal 1998 compared to $39.3 million, or
6.3% of net sales, for the first nine months of fiscal 1997. The largest
single increase in fiscal 1998 over 1997 is depreciation of $3.4 million,
which increased due to the recent acquisition of assets from HealthRider and
CanCo. Insurance expense has increased $1.8 million in the first nine months
of fiscal 1998 over 1997. Legal expenses and distribution expenses have
increased approximately $0.7 million and $0.6 million, respectively, in the
first nine months of fiscal 1998 over 1997. Other increases which are not
significant account for the remaining $0.7 million in fiscal 1998 over 1997.
Bonuses decreased by $1.2 million in the first nine months of fiscal 1998
compared to the same period in 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 $17.5 million
through the third quarter of fiscal 1997.
HealthRider consolidation expenses totaled $4.0 million through the third
quarter of fiscal 1997. These charges were incurred to eliminate the
duplication in staff and facilities with those of ICON Health.
As a result of the foregoing factors, operating income was $29.6 million, or
4.8% of net sales in the first nine months of fiscal 1998, compared to $11.9
million, or 1.9% of net sales in the first nine months of fiscal 1997.
Operating income before the revaluation of acquired inventories, one time
HealthRider selling expenses, consolidation expenses associated with the
HealthRider and CanCo Acquisitions and the expense of the Weider settlement
would have been $50.0 million or 8.0% of net sales for the first nine months
of fiscal 1997.
Interest expense was $26.7 million for ICON Health, $35.9 million for IHF
Holdings and $45.0 million for ICON Fitness in the first nine months of fiscal
1998 compared to $24.3 million for ICON Health, $32.1 million for IHF Holdings
and $35.9 million for ICON Fitness for the first nine months of fiscal 1997.
The increase in interest expense is due to a higher level of outstanding
indebtedness in fiscal 1998 as a result of the additional level of borrowings
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 the first nine months of fiscal 1997. This Preferred Stock
was redeemed in the second quarter of fiscal 1997.
The income tax benefit was $0.1 million for ICON Health, $3.2 million for IHF
Holdings and $6.5 million for ICON Fitness for the first nine months of fiscal
1998, compared with a tax benefit of $5.1 million for ICON Health, $8.3
million for IHF Holdings and $10.5 million for ICON Fitness during the first
nine months of fiscal 1997. This is a result of the loss before income tax
during the first nine months of both years. As of February 28, 1998, ICON
Fitness has a net deferred tax asset of $25.3 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 15 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 $0.4 million for ICON
Health, $7.6 million for IHF Holdings and $14.0 million for ICON Fitness for
the first nine months of fiscal 1998, compared to net losses of $9.5 million
for ICON Health, $15.0 million for IHF Holdings and $18.9 million for ICON
Fitness during the same period of fiscal 1997.
Advertising allowances with retail customers totaled $3.0 million at February
28, 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.
Liquidity and Capital Resources
In the first nine months of fiscal 1998, the Company used $12.5 million of
cash in operating activities compared to $92.1 for the same period in 1997.
The majority of this use of cash relates to an increase in account
receivables. The Company received $8.5 million of cash for investing
activities in the first nine months of fiscal 1998. This cash inflow was
created by the sale of the HealthRider building in February 1998 for $18.25
million, offset by capital expenditures of $9.7 million, the majority of which
is related to tooling and other manufacturing equipment. During the first
nine months of fiscal 1998, the Company had a net increase in cash of $2.2
million compared to a net decrease of $14.5 million in the same period in
1997.
The Company is in compliance with all financial covenants associated with the
amended Credit Agreement. ICON Health had $206.6 million of revolving credit
borrowings under the Credit Agreement at February 28, 1998 compared to $227.0
million at March 1, 1997. The revolving credit borrowings have increased by
$27.8 million from $178.8 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. The term loans have decreased from $31.0 million
reported at the end of fiscal 1997 to $21.1 million at February 28, 1998.
This decrease is a result of scheduled debt payments as well as an additional
loan payment made with the proceeds of the sale of the HealthRider building.
Management believes that cash flows from operations and the Company'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 a period of at least one year. 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)
/s/ Gary Stevenson April 14, 1998
By_______________________________ Date: _______________
Gary Stevenson, President
/s/ S. Fred Beck
By_______________________________________ April 14, 1998
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
February 28, 1998 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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 7793
<SECURITIES> 0
<RECEIVABLES> 233056
<ALLOWANCES> 8139
<INVENTORY> 117964
<CURRENT-ASSETS> 376052
<PP&E> 87301
<DEPRECIATION> 37410
<TOTAL-ASSETS> 489256
<CURRENT-LIABILITIES> 149570
<BONDS> 514434
0
0
<COMMON> 0
<OTHER-SE> (174748)
<TOTAL-LIABILITY-AND-EQUITY> 489256
<SALES> 615821
<TOTAL-REVENUES> 615821
<CGS> 437611
<TOTAL-COSTS> 148574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45015
<INCOME-PRETAX> (20444)
<INCOME-TAX> (6450)
<INCOME-CONTINUING> (13994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13994)
<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
February 28, 1998 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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 7793
<SECURITIES> 0
<RECEIVABLES> 233056
<ALLOWANCES> 8139
<INVENTORY> 117964
<CURRENT-ASSETS> 375823
<PP&E> 87301
<DEPRECIATION> 37410
<TOTAL-ASSETS> 480419
<CURRENT-LIABILITIES> 149570
<BONDS> 417161
0
0
<COMMON> 0
<OTHER-SE> (86312)
<TOTAL-LIABILITY-AND-EQUITY> 480419
<SALES> 615821
<TOTAL-REVENUES> 615821
<CGS> 437611
<TOTAL-COSTS> 148572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35948
<INCOME-PRETAX> (10865)
<INCOME-TAX> (3227)
<INCOME-CONTINUING> (7638)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7638)
<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
February 28, 1998 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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 7793
<SECURITIES> 0
<RECEIVABLES> 233056
<ALLOWANCES> 8139
<INVENTORY> 117964
<CURRENT-ASSETS> 375311
<PP&E> 87301
<DEPRECIATION> 37410
<TOTAL-ASSETS> 466136
<CURRENT-LIABILITIES> 149570
<BONDS> 328330
0
0
<COMMON> 0
<OTHER-SE> (11764)
<TOTAL-LIABILITY-AND-EQUITY> 466136
<SALES> 615821
<TOTAL-REVENUES> 615821
<CGS> 437611
<TOTAL-COSTS> 148572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26687
<INCOME-PRETAX> (547)
<INCOME-TAX> (124)
<INCOME-CONTINUING> (423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (423)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
