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 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, 33-87930-01, 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 Health & Fitness, Inc. 1,000 shares,
IHF Holdings, Inc. 1,000 shares,
ICON Fitness Corporation 100 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 28, 1998 and
May 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Condensed Statements
of Operations for the three months and six months
ended November 28, 1998 and November 29, 1997 . . . . . . . . 5-6
Consolidated Condensed Statements
of Cash Flows for the six months
ended November 28, 1998 and November 29, 1997 . . . . . . . . . 7
Notes to Consolidated Condensed
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8-14
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 14
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Securities Holders . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc.
November 28, November 28, November 28, May 31, May 31, May 31,
1998 1998 1998 1998 1998 1998
------------ ---------- ------------- ------------ --------- ------------
Assets
Current assets
Cash $4,748 $4,748 $4,748 $3,892 $3,892 $3,892
Accounts receivable-net 204,273 204,273 204,373 124,301 124,301 124,301
Inventories:
Raw materials 54,817 54,817 54,817 42,609 42,609 42,609
Finished goods 95,645 95,645 95,645 78,857 78,857 78,857
Deferred income taxes 11,262 11,262 11,262 11,177 11,177 11,177
Other current assets 9,464 9,464 9,464 6,202 6,202 6,202
Income tax receivable 687 687 687 781 781 781
------- ------- ------- ------- ------- -------
Total current assets 380,896 380,896 380,896 267,819 267,819 267,819
Property and equipment
Land 1,430 1,430 1,430 1,430 1,430 1,430
Building 16,258 16,258 16,258 16,675 16,675 16,675
Machinery and equipment 64,952 64,952 64,952 71,293 71,293 71,293
------ ------ ------ ------ ------ ------
Total 82,640 82,640 82,640 89,398 89,398 89,398
Less: accum depreciation (34,378) (34,378) (34,378) (40,579) (40,579) (40,579)
-------- -------- -------- ------- ------- -------
Property & equipment-net 48,262 48,262 48,262 48,819 48,819 48,819
Receivable from parent 2,362 2,362 2,362 2,362 2,362 2,362
Trademarks, net 16,720 16,720 16,720 17,244 17,244 17,244
Deferred income taxes 29,407 20,625 6,828 22,572 16,265 4,927
Other assets 25,592 22,511 19,719 29,057 25,585 21,958
-------- -------- -------- -------- -------- --------
Total assets $503,239 $491,376 $474,787 $387,873 $378,094 $363,129
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Continued)
(In Thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc.
November 28, November 28, November 28, May 31, May 31, May 31,
1998 1998 1998 1998 1998 1998
------------ ---------- ------------- ------------ --------- ------------
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities
Current portion of
long-term debt $228,694 $228,694 $228,694 $6,051 $6,051 $6,051
Accounts payable 125,626 125,626 125,626 83,965 83,965 83,965
Interest payable 6,467 6,467 6,467 6,596 6,596 6,596
Accrued expenses 19,174 19,174 19,174 18,090 18,090 18,090
Income taxes payable 839 839 839 249 249 249
------- ------- ------- ------- ------- -------
Total current liabilities 380,800 380,800 380,800 114,951 114,951 114,951
Long term-debt 323,149 215,892 116,660 460,707 360,413 268,495
Stockholders' equity (deficit)
Common stock & additional
paid-in capital 49,702 127,770 166,187 49,701 127,769 166,186
Receivable from officers
for purchase of equity (656) (656) (656) (656) (656) (656)
Cumulative translation
adjustment (1,091) (1,091) (1,091) (547) (547) (547)
Retained earnings(deficit) (248,665) (231,339) (187,113) (236,283) (223,836) (185,300)
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity (200,710) (105,316) (22,673) (187,785) (97,270) (20,317)
-------- -------- -------- -------- -------- --------
Total liabilities and
stockholders' equity $503,239 $491,376 $474,787 $387,873 $378,094 $363,129
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION> For The Three Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc.
November 28, November 28, November 28, November 29, November 29, November 29,
1998 1998 1998 1997 1997 1997
------------ ----------- ------------- ------------ --------- ------------
Net sales $214,288 $214,288 $214,288 $236,312 $236,312 $236,312
Cost of goods sold 153,444 153,444 153,444 168,428 168,428 168,428
Cost of goods sold-
revaluation of,
HealthRider, Weider
Sports and CanCo
inventory -- -- -- 4 4 4
-------- ------- ------- ------- ------- -------
Gross profit 60,844 60,844 60,844 67,880 67,880 67,880
Operating expenses:
Selling expenses 25,666 25,666 25,666 33,584 33,584 33,584
Research and development 1,885 1,885 1,885 2,074 2,074 2,074
General and administrative 13,544 13,544 13,544 16,485 16,483 16,483
-------- ------- ------- ------- ------- -------
Total operating expenses 41,095 41,095 41,095 52,143 52,141 52,141
-------- ------- ------- ------- ------- -------
Operating income 19,749 19,749 19,749 15,737 15,739 15,739
Interest expense 15,585 12,104 8,448 14,758 11,736 8,649
Amortization of deferred
financing fees 2,160 1,965 1,547 1,480 1,310 957
-------- ------- ------- ------- ------- -------
Income (loss) before income tax 2,004 5,680 9,754 (501) 2,693 6,133
Provision (benefit) for
income taxes 1,092 2,329 3,613 186 1,261 2,299
--------- -------- -------- -------- -------- --------
Net income (loss) $912 $3,351 $6,141 $(687) $1,432 $3,834
Other comprehensive income:
Foreign currency translation
adjustments (690) (690) (690) 381 381 381
--------- -------- -------- --------- --------- ---------
Comprehensive income (loss) $222 $2,661 $5,451 $(306) $1,813 $4,215
========= ======== ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION> For The Six Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc.
November 28, November 28, November 28, November 29, November 29, November 29,
1998 1998 1998 1997 1997 1997
------------ ---------- ------------- ------------ --------- ------------
Net sales $331,495 $331,495 $331,495 $363,794 $363,794 $363,794
Cost of goods sold 238,969 238,969 238,969 260,762 260,762 260,762
Cost of goods sold-
revaluation of,
HealthRider, Weider
Sports and CanCo
inventory -- -- -- 330 330 330
-------- ------- ------- ------- ------- ------
Gross profit 92,526 92,526 92,526 102,702 102,702 102,702
Operating expenses:
Selling expenses 46,204 46,204 46,204 60,229 60,229 60,229
Research and development 3,569 3,569 3,569 3,994 3,994 3,994
General and administrative 26,366 26,366 26,366 30,322 30,320 30,320
-------- ------- ------- ------- ------- -------
Total operating expenses 76,139 76,139 76,139 94,545 94,543 94,543
-------- ------- ------- ------- ------- -------
Operating income 16,387 16,387 16,387 8,157 8,159 8,159
Interest expense 30,257 23,294 15,981 29,349 23,305 17,131
Amortization of deferred
financing fees 4,198 3,807 2,972 3,238 2,898 2,193
-------- ------- ------- ------- ------- ------
Loss before income tax (18,068) (10,714) (2,566) (24,430) (18,044) (11,165)
Benefit for income taxes (5,686) (3,211) (753) (8,301) (6,152) (4,080)
--------- -------- -------- -------- -------- --------
Net loss $(12,382) $(7,503) $(1,813) $(16,129) $(11,892) $(7,085)
Other comprehensive income:
Foreign currency translation
adjustments (544) (544) (544) 498 498 498
--------- -------- -------- --------- --------- ---------
Comprehensive income (loss) $(12,926) $(8,047) $(2,357) $(15,631) $(11,394) $(6,587)
========= ======== ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ICON Fitness Corporation and its wholly-owned subsidiary,
IHF Holdings, Inc. and its wholly-owned subsidiary,
ICON Health & Fitness, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION> For The Six Months Ended
<S> <C> <C> <C> <C> <C> <C>
ICON IHF ICON ICON IHF ICON
Fitness Holdings, Health & Fitness Holdings, Health &
Corporation Inc. Fitness, Inc. Corporation Inc. Fitness, Inc.
November 28, November 28, November 28, November 29, November 29, November 29,
1998 1998 1998 1997 1997 1997
------------ ---------- ------------- ------------ --------- ------------
OPERATING ACTIVITIES:
Net loss (12,382) (7,503) (1,813) (16,129) (11,892) (7,085)
Adjustments to reconcile net
income to net cash provided
by operating activity:
Benefit for deferred taxes (6,920) (4,445) (1,986) (9,983) (7,834) (5,762)
Amortization of debt
discount and deferred
financing fees 18,615 11,261 3,112 15,576 9,192 2,313
Depreciation & amortization 8,791 8,791 8,791 7,874 7,874 7,874
Inventory revaluation -- -- -- 330 330 330
Changes in operating assets and liabilities:
Accounts receivable (79,972) (79,972) (79,972) (31,147) (31,147) (31,147)
Inventory (28,996) (28,996) (28,996) (19,120) (19,120) (19,120)
Other assets (4,798) (4,798) (4,798) (2,073) (2,252) (2,252)
Account payable and
accrued expenses 43,206 43,206 43,206 32,264 32,441 32,441
------- ------- ------- -------- -------- --------
Net cash received from/(used
in) operating activities (62,456) (62,456) (62,456) (22,408) (22,408) (22,408)
INVESTING ACTIVITIES:
Purchases of property
and equipment (6,812) (6,812) (6,812) (6,748) (6,748) (6,748)
------- ------- ------- -------- -------- --------
Net cash received from /(used
in) investing activities (6,812) (6,812) (6,812) (6,748) (6,748) (6,748)
FINANCING ACTIVITIES:
Proceeds from long-term debt,
net of payments 70,668 70,668 70,668 27,799 27,799 27,799
------ ------ ------ ------ ------ ------
Net cash received from
financing activities 70,668 70,668 70,668 27,799 27,799 27,799
Effect of exchange rate
change on cash (544) (544) (544) 497 497 497
------- ------- ------- -------- -------- -------
Net increase in cash 856 856 856 (860) (860) (860)
Cash at beginning of period 3,892 3,892 3,892 5,560 5,560 5,560
------- ------- ------- -------- -------- --------
Cash at end of period $4,748 $4,748 $4,748 $4,700 $4,700 $4,700
======= ======= ======= ====== ====== ======
SUPPLEMENTAL DISCLOSURES:
Cash paid (received)
during the year for:
Interest $15,601 $15,601 $15,601 $17,773 $17,773 $17,773
Income taxes $21 $21 $21 $58 $58 $58
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ICON Fitness Corp. 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.
In June 1997, the Financial Accounting Standards Board (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" (SAS 131).
The Company adopted SFAS 130 and 131 on June 1, 1998. SFAS 130 establishes
standards for reporting comprehensive income and its components in the
consolidated condensed financial statements. SFAS 131 establishes standards for
reporting information on operating segments and will first be applicable to the
May 31, 1999-year end consolidated financial statements.
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 and are subject to a number of risks, including risks identified in
this quarterly report and the Company's annual report on Form 10-K. See "Recent
Developments" and "Liquidity and Capital Resources."
<PAGE>
Recent Developments
Possible Debt Restructuring
The Company has discussed restructuring approaches with certain holders of
its notes. While these discussions are continuing, to date the Company has not
been able to reach agreement on a viable plan. The Company's ability to meet its
obligations as they become due will in a large measure be dependent upon its
entering into such a restructuring. There can be no assurance that any such
restructuring will be entered into or consummated.
NordicTrack Transaction
On December 23, 1998, the Company purchased inventory, trademarks and
certain other assets of NordicTrack, Inc., a debtor under Chapter 11 of the
Bankruptcy Code. The terms of the purchase provided for payment of (i)
$6,050,000 in cash at and after closing, subject to adjustment based on the
quantity and quality of inventory delivered, (ii)$3,500,000 payable 60 days
after closing, and (iii) up to $3,000,000 payable over time as royalties based
upon the sale of goods bearing trademarks of NordicTrack, Inc. and other
trademark related revenues, as follows: 2% of the first $50,000,000 of revenues,
1% of the next $100,000,000 of revenues, and .5% of the next $200,000,000 of
revenues. The Company must pay the $3,500,000 deferred portion of the purchase
price in order to obtain the release of NordicTrack related trademarks from
escrow. In a related transaction, the Company obtained leases of 18 NordicTrack
retail store locations for no additional consideration.
In connection with the NordicTrack transactions, the Company and Sears
Roebuck & Co. executed a letter of intent that provides for the Company and
Sears to negotiate the terms of an agreement that would provide that Sears be
the exclusive retailer of NordicTrack branded fitness equipment outside of the
Company's own retail and direct marketing channels of distribution. In addition,
under the agreement as contemplated, the Company would also grant Sears a
royalty-bearing exclusive license to market fitness apparel and certain
categories of sporting goods under the NordicTrack brand. The agreement would
run for a term of twelve (12) years subject to certain early termination
provisions in 2005. Upon execution of the agreement, the Company would receive a
one-time fee for the rights granted to Sears under the agreement. At this time,
the Company and Sears are continuing to negotiate the terms of the definitive
agreement. However, there can be no assurance that the definitive agreement will
be executed on the terms described above or at all.
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 are run on in-house computer systems. The
Company has reviewed and assessed all hardware and software to confirm that it
will function properly in the Year 2000. With respect to internal systems, the
results of the evaluation to date have not revealed any Year 2000 issues that,
in the Company's opinion, create a material risk of disruption of operations.
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Year 2000 Project is $2.5 million. The total
amount expended on the Project through November 28, 1998, was $1.8 million,
which leaves the estimated future cost of completing the Year 2000
<PAGE>
Project at approximately $0.7 million. The entire project is expected to be
complete by the Company's fiscal fourth quarter of 1999.
With respect to outside vendors, shippers and customers that have responded
to our request for information, 24.8% have indicated that their hardware or
software is Year 2000 compliant. 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.
The Company's assessment of the risks associated with Year 2000 issues is
forward-looking. Actual results may vary for a variety of reasons including
those described above.
Seasonality
Financial results for the fitness industry are generally seasonal. Based on
the Company's historical experience, the Company would expect greater sales in
the second and third quarters than in the fourth and first quarters. The actual
results could differ materially depending upon consumer preferences,
availability of product, competition, and the Company's customers continuing to
carry and promote its various product lines, among other risks and
uncertainties. The following table reflects the Company's consolidated net sales
for the first and second quarters of fiscal 1999 and for each quarter in fiscal
1998 and fiscal 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1999 $117.2 $214.3 -- --
Fiscal 1998 $127.5 $236.3 $252.0 $133.5
Fiscal 1997 $125.8 $249.5 $248.7 $212.2
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net sales or
profitability.
Three Months Ended November 28, 1998 Compared to Three Months Ended November
29, 1997
Net sales decreased by $22.0 million, or 9.3%, between the three months
ended November 28, 1998 and November 29, 1997. Domestic sales of treadmills
decreased to $127.7 million for the three months ended November 28, 1998 from
$143.0 million for the three months ended November 29, 1997, a 10.7% decrease.
Sales of treadmills represented 59.6% and 60.5% of net sales in the three months
ended November 28, 1998 and 1997, respectively. Other decreases include
decreases in airwalkers of $4.3 million, benches of $2.1 million, elliptical
products of $1.9 million, upright rowers of $1.7 million, steppers of $1.1
million, and a decline in international sales of $2.3 million. The sale of
stationary bikes increased $5.4 million and home spas and other relaxation
product sales increased $1.3 million during the second quarter of fiscal 1999.
Gross profit decreased by $7.1 million, or 10.5%, to $60.8 million for the
three months ended November 28, 1998 from $67.9 million for the three months
ended November 29, 1997 and decreased as a percentage of net sales to 28.4% from
28.7%. This decrease was largely due to the changes in product mix.
<PAGE>
Selling expenses totaled $25.7 million, or 12.0% of net sales in the second
quarter of fiscal 1999, compared to $33.6 million, or 14.2% of net sales for the
second quarter of fiscal 1998. This decrease is attributable primarily to a
reduction in advertising expenses that have decreased by approximately $4.6
million for the second quarter of fiscal 1999, versus the second quarter of
fiscal 1998. Other selling expense decreases included reductions in salaries and
wages of approximately $1.0 million, freight expense of approximately $0.8
million, commission expense of $0.5 million, and approximately a $1.0 million
reduction in trade show and other related expenses.
Research and development expenses totaled $1.9 million, or 0.9% of net
sales for the second quarter of fiscal 1999, compared to $2.1 million, or 0.9%
of net sales for the second quarter of fiscal 1998. This $0.2 million decrease
is attributable to management's efforts to reduce costs in the current year.
General and administrative expenses totaled $13.5 million, or 6.3% of net
sales for the second quarter of fiscal 1999, compared to $16.5 million, or 7.0%
of net sales for the second quarter of fiscal 1998. This decrease of
approximately $3.0 million in general and administrative expenses for the second
quarter of fiscal 1999, was attributable to a decrease in insurance claims of
$1.3 million, distribution expenses of $0.7 million, legal expense of $0.7
million and aggregate other expenses of approximately $1.0 million. These
decreased expenses were offset by an increase in depreciation expense of $0.7
million.
As a result of the foregoing factors, operating income is $19.7 million in
the second quarter of fiscal 1999, compared to operating income of $15.7 million
in the second quarter of fiscal 1998. The Company has initiated cost reduction
programs in the current fiscal year. These cost reduction efforts have resulted
in increased second quarter profits reported by the Company.
Interest expense was $8.4 million for ICON Health, $12.1 million for IHF
Holdings and $15.6 million for ICON Fitness for the three months ended November
28, 1998, compared with interest expense of $8.6 million for ICON Health, $11.7
million for IHF Holdings and $14.8 million for ICON Fitness for the three months
ended November 29, 1997. The decrease in interest expense for ICON Health is the
result of decreased borrowings under the amended Credit Agreement. The increased
level of interest expense for IHF Holdings and ICON Fitness is due to the
accretion of the principal balances from their respective outstanding
indentures.
The income tax expense was $3.6 million for ICON Health, $2.3 million for
IHF Holdings and $1.1 million for ICON Fitness for the second quarter of fiscal
1999, compared with a tax expense of $2.3 million for ICON Health, $1.3 million
for IHF Holdings and $0.2 for ICON Fitness during the second quarter of fiscal
1998. The increase in tax expense for the second quarter of fiscal 1999,
compared to the second quarter of fiscal 1998, was a result of increased
earnings for the Company.
As a result of the foregoing factors, net income was $6.1 million for ICON
Health, $3.4 million for IHF Holdings and $0.9 million for ICON Fitness for the
second quarter of fiscal 1999, compared to net income in the second quarter of
fiscal 1998 of $3.8 million for ICON Health, $1.4 million for IHF Holdings and a
net loss of $0.7 million for ICON Fitness.
<PAGE>
Operating Results for the Six Months Ended November 28, 1998 and November 29,
1997
During the first six months of fiscal 1999, net sales decreased $32.3
million, or 8.9%, to $331.5 million from $363.8 million in the first six months
of fiscal 1998. Domestic treadmill sales for the first six months of fiscal 1999
accounted for approximately 57.9% of total net sales, versus 57.8% in the first
six months of fiscal 1998. For the first six months of fiscal 1999, domestic
treadmill sales were $191.9 million compared to $210.3 million for the same
period a year ago, which represents a $18.4 million decrease. Other decreases
include a decrease in the sale of airwalkers of $9.7 million, upright rowers of
$3.0 million, benches of $2.8 million, steppers of $1.8 million, elliptical
products of $1.3 million, ab shapers and miscellaneous products of $1.3 million,
gyms and systems of $0.3 million and international sales declines of $4.8
million. Sale of stationary bikes increased $6.5 million, home spas and other
relaxation product sales increased $2.6 million, soft good sales increased $1.2
million and trampoline sales increased $0.8 million during the first six months
of fiscal 1999.
Gross profit for the first six months of fiscal 1999 was $92.5 million, or
27.9% of net sales, compared to $102.7 million, or 28.2% of net sales for the
first six months of fiscal 1998. The decrease of 0.3% in profit margin was
attributable to the changes in product mix.
Selling expenses totaled $46.2 million, or 13.9% of net sales, in the first
six months of fiscal 1999, compared to $60.2 million, or 16.5% of net sales for
the first six months of fiscal 1998. This decrease, both in dollars and as a
percentage of sales, was attributable primarily to a reduction in advertising
expenses that decreased by approximately $7.7 million for the first six months
of fiscal 1999, versus the first six months of fiscal 1998. Other selling
expense decreases included reductions in salaries and wages of approximately
$1.7 million, freight expense of approximately $1.4 million, bad debt expense of
$1.0 million, commission expense of $0.7 million, and trade show and other
related expenses of approximately $1.5 million.
Research and development expenses totaled $3.6 million, or 1.1% of net
sales, for the first six months of fiscal 1999, compared to $4.0 million, or
1.1% of net sales for the first six months of fiscal 1998. This $0.4 million
decrease is attributable to management's efforts to reduce costs in the current
year, consisting mainly of contract labor and supplies associated with research
and development.
General and administrative expenses totaled $26.4 million, or 8.0% of net
sales, for the first six months of fiscal 1999, compared to $30.3 million, or
8.3% of net sales for the first six months of fiscal 1998. This decrease of
approximately $3.9 million in general and administrative expenses for the first
six months of fiscal 1999, was attributable to a decrease in insurance claims of
$1.6 million, distribution expenses of $1.1 million, legal expense of $1.1
million and aggregate other expenses of approximately $1.0 million. These
decreased expenses were offset by an increase in depreciation expense of $0.9
million.
As a result of the foregoing factors, operating income was $16.4 million in
the first six months of fiscal 1999, compared to operating income of $8.2
million in the first six months of fiscal 1998. The higher operating income was
the result of reduced costs and expenses, primarily advertising, provision for
doubtful accounts, freight and insurance claims.
<PAGE>
Interest expense was $16.0 million for ICON Health, $23.3 million for IHF
Holdings and $30.3 million for ICON Fitness in the first six months of fiscal
1999, compared to $17.1 million for ICON Health, $23.3 million for IHF Holdings
and $29.3 million for ICON Fitness for the first six months of fiscal 1998. The
decrease in interest expense for the operating company was due to a lower level
of outstanding indebtedness in fiscal 1999 as a result of decreased borrowings
under the amended Credit Agreement. However, in IHF Holdings and ICON Fitness,
there is an additional level of borrowings with respect to accretion of the
principal balances of the Company's outstanding indentures.
The income tax benefit was $0.8 million for ICON Health, $3.2 million for
IHF Holdings and $5.7 million for ICON Fitness for the first six months of
fiscal 1999, compared with a tax benefit of $4.1 million for ICON Health, $6.2
million for IHF Holdings and $8.3 for ICON Fitness during the first six months
of fiscal 1998. The decrease in tax benefit for the first six months of fiscal
1999, compared to the first six months of fiscal 1998, was a result of decreased
losses before taxes incurred by the Company.
As a result of the foregoing factors, net losses were $1.8 million for ICON
Health, $7.5 million for IHF Holdings and $12.4 million for ICON Fitness for the
first six months of fiscal 1999, compared to net losses in the first six months
of fiscal 1998 of $7.1 million for ICON Health, $11.9 million for IHF Holdings
and $16.1 million for ICON Fitness.
Liquidity and Capital Resources
The Company's liquidity consists of cash, trade accounts receivable,
inventories and a revolving credit facility. At November 28, 1998, working
capital was $0.1 million, including $4.7 million of cash. Cash used by operating
activities aggregated $62.5 million for the six months ended November 28, 1998.
Trade accounts receivable increased 64.3% from May 31, 1998 to November 28,
1998, and inventory levels increased 23.9% from May 31, 1998 to November 28,
1998, largely due to the normal seasonality of the business. There can be no
assurance that the Company will have the liquidity to meet its obligations as
they become due.
ICON Health had $221.9 million of revolving credit borrowings under the
amended Credit Agreement at November 28, 1998 compared to $233.4 million at
November 29, 1997. The revolving credit borrowings have increased by $73.4
million from $148.5 million reported at the end of fiscal 1998. 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 long-term portion of the term loans have decreased from $19.5
million reported at the end of fiscal 1998 to $16.2 million at November 28,
1998. This decrease is a result of scheduled debt payments.
Anticipated Reduction in Liquidity
As of January 15, 1999, the Company had outstanding revolving credit
borrowings of $224.5 million and unused availability under its amended Credit
Agreement of $11.8 million. The amount of availability under the Company's
amended Credit Agreement is determined under a borrowing base formula which was
amended as of July 31, 1998 to increase temporarily the amount that could be
borrowed by the Company. After January 31, 1999, the Company will be able to
borrow under the amended Credit Agreement only the amounts that could be
borrowed under the borrowing base formula that was in effect prior to the July
31, 1998 amendment plus $5 million. Had this reduced formula been in place on
January 15, 1999, the Company would have had unused availability under its
amended Credit Agreement of $5.1 million.
<PAGE>
The Company is highly leveraged. The Company's need for advances under the
amended Credit Agreement is affected by a number of factors, including the
Company's operating performance, the Company's level of capital expenditures,
scheduled debt payments, and the willingness of the Company's suppliers to
extend credit to the Company. Many of these factors are beyond the Company's
control.
The revolving credit portion of the Company's amended Credit Agreement will
be due and payable on November 14, 1999. As a result, the revolving credit
portion of the amended Credit Agreement is now classified as a current
liability, which has resulted in a significant decrease in working capital when
compared to the May 31, 1998 balance sheet. There can be no assurance that the
Company will be able to enter into arrangements to replace that borrowing
facility.
The Company is required to pay $6.5 million of interest on ICON Health's
13% Senior Subordinated Notes semiannually each January 15 and July 15, and will
be required to repay $101.25 million of principal on those notes on July 15,
2002.
In fiscal 1999, the Company will be required to repay $1.65 million of
principal under the term loan portion of its amended Credit Agreement each
quarter on the last day of March, June, September and December. The amount of
such quarterly principal payments will decrease to $1.56 million in 2000 and
will continue at that rate until a final payment of $5.6 million is due in
December 2002. Once repaid, borrowings under the Company's term loan cannot be
borrowed again.
The first payment of cash interest on IHF Holdings' 15% Senior Secured
Discount Notes will be due May 15, 2000. Commencing on that date, the Company
will be required to pay $9.3 million of interest on those notes semiannually
each May 15 and November 15. The Company will be required to repay $132.2
million of accreted principal on those notes on November 14, 2004.
The first payment of cash interest on ICON Fitness' 14% Senior Discount
Notes will be due May 15, 2002. Commencing on that date, the Company will be
required to pay $11.3 million of interest on those notes semiannually each May
15 and November 15. The Company will be required to repay $162.0 million of
accreted principal on those notes on November 15, 2007.
The Company will require substantial additional cash flow to meet all of
these obligations. See "Recent Developments-Possible Debt Restructuring."
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party to a variety of non product liability commercial suits
involving contract 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 business. The Company
believes that the ultimate outcome of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
Item two. Changes in Securities.
None.
<PAGE>
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: /s/ Gary Stevenson Date: January 19,1999
------------------------- ---------------------
Gary Stevenson
President
By: /s/ S. Fred Beck Date: January 19, 1999
------------------------- ---------------------
S. Fred Beck
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 27.1
This schedule contains summary financial information extracted from the November
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> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-28-1998
<CASH> 4748
<SECURITIES> 0
<RECEIVABLES> 217356
<ALLOWANCES> (13083)
<INVENTORY> 150462
<CURRENT-ASSETS> 380896
<PP&E> 82640
<DEPRECIATION> 34378
<TOTAL-ASSETS> 503239
<CURRENT-LIABILITIES> 380800
<BONDS> 323149
0
0
<COMMON> 49702
<OTHER-SE> (250412)
<TOTAL-LIABILITY-AND-EQUITY> 503239
<SALES> 331495
<TOTAL-REVENUES> 331495
<CGS> 238969
<TOTAL-COSTS> 76139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30257
<INCOME-PRETAX> (18068)
<INCOME-TAX> (5686)
<INCOME-CONTINUING> (12382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12382)
<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
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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-28-1998
<CASH> 4748
<SECURITIES> 0
<RECEIVABLES> 217356
<ALLOWANCES> (13083)
<INVENTORY> 150462
<CURRENT-ASSETS> 380896
<PP&E> 82640
<DEPRECIATION> 34378
<TOTAL-ASSETS> 491376
<CURRENT-LIABILITIES> 380800
<BONDS> 215892
0
0
<COMMON> 127770
<OTHER-SE> (233086)
<TOTAL-LIABILITY-AND-EQUITY> (491376)
<SALES> 331495
<TOTAL-REVENUES> 331495
<CGS> 238969
<TOTAL-COSTS> 76139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23294
<INCOME-PRETAX> (10714)
<INCOME-TAX> (3211)
<INCOME-CONTINUING> (7503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7503)
<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
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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-28-1998
<CASH> 4748
<SECURITIES> 0
<RECEIVABLES> 217356
<ALLOWANCES> (13083)
<INVENTORY> 150462
<CURRENT-ASSETS> 380896
<PP&E> 82640
<DEPRECIATION> 34378
<TOTAL-ASSETS> 474787
<CURRENT-LIABILITIES> 380800
<BONDS> 116660
0
0
<COMMON> 166187
<OTHER-SE> (188860)
<TOTAL-LIABILITY-AND-EQUITY> 474787
<SALES> 331495
<TOTAL-REVENUES> 331495
<CGS> 238969
<TOTAL-COSTS> 76139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15981
<INCOME-PRETAX> (2566)
<INCOME-TAX> (753)
<INCOME-CONTINUING> (1813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1813)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
