Item 1. Business
Industry
The fitness equipment industry in the United States includes cardiovascular and other fitness equipment, and strength training equipment. Cardiovascular and other fitness equipment includes treadmills, ellipticals, exercise bikes, other equipment, such as trampolines and relaxation products such as spas. Strength training equipment includes multi-purpose home gyms, free weights and weight benches and cages. According to the NSGA 2003 annual report, total retail sales of exercise equipment on an industry-wide basis are estimated to total $4.6 billion in calendar year 2003.
Our Company
We market and distribute a broad line of products in the fitness equipment market. These fall into two segments, namely cardiovascular and other fitness equipment, and strength training equipment. We are one of the largest manufacturers and marketers of home fitness equipment in the United States. In addition, we manufacture and distribute an innovative line of cardiovascular and strength training products for the institutional fitness equipment market. Our brand names include ProForm, NordicTrack, Weslo, Image, JumpKing, Free Motion Fitness and, under license, Reebok, Weider and Gold's Gym.
Our Brands and Distribution Channels
We market a complete line of products using multiple brands through multiple distribution channels to reach a wide range of consumers at various price points. This approach is enabled by our strong portfolio of brands which are placed strategically to align consumer demographics with respective brand attributes. We market our products through each distribution channel in which home fitness equipment products are sold, including: department stores, mass retailers and warehouse clubs, sporting goods and specialty fitness retailers, home improvement stores, electronic retailers and direct-to-consumer sales through catalogs, infomercials, the Internet and our company-owned NordicTrack(TM) stores.
Products
Cardiovascular and Other Fitness Equipment
Our cardiovascular and other fitness equipment covers a broad range of technological sophistication and a variety of price points which include the following:
Treadmills. We design, innovate, manufacture, market and distribute motorized and manual treadmills, designed to promote cardiovascular fitness.
We are the leading producer of motorized treadmills. Our treadmills include proprietary technologies in the electronics console and drive train systems and overall frame design. In the June 2003 issue of Consumer Reports, six of our treadmills ranked among the top fifteen treadmills worldwide, based on criteria such as quality, durability, features and ease of use. Certain features offered by our motorized treadmills that enhance the home user's experience include bio-feedback electronics such as heart rate control, pulse, certain programmable speeds and inclines, electronic feedback on speed, elapsed time, distance traveled, calories/fat calories burned, and cross-training upper body exercise functions. The SpaceSaver(TM) feature for treadmills (introduced in 1996), for which we hold six United States patents, enables treadmills with this feature to fold vertically for easy storage. As of the fall of 2001, we have equipped all our brands of treadmills with a price point of $599 and above with iFIT(TM) technology, for which we hold two United States patents and have seven patents pending. iFIT(TM) technology allows us to control and program speed and incline of a treadmill from remote locations for virtual personal training or control the treadmill through CDs, VHS tapes, DVD, MP3 and the iFit.com website. Consumers can benefit from iFIT(TM) technology using streaming workouts from the iFIT(TM) website, music workouts on compact discs or MP3, or multi-media iFIT(TM) videos and DVDs. In addition, we also offer live personal training services via the Internet for consumers who choose to subscribe to our service.
Other popular features on our treadmill line of products include: cushioning technologies such as PRO SHOX(TM) adjustable leaf springs and soft belts for a quiet, shock-absorbent workout and the CrossWalk(TM) line of treadmills, which provides users with upper body exercise for a total body workout.
Ellipticals. Ellipticals are one of the fastest growing products in the home fitness industry, growing at a Compound Annual Growth Rate (CAGR) of 24.4% from 1997 to 2002. Ellipticals offer a low-impact, high-intensity aerobic workout which harnesses the momentum of a natural striding motion, and reduces the impact of typical running or walking. Our ellipticals typically provide an electronic display that provides heart rate control, programmed workouts and feedback on speed, time, distance and calories burned. Our iFIT(TM) technology, which automatically adjusts resistance and pace on elliptical trainers, is included on many elliptical trainers priced at $399 and above. Our ellipticals were rated the number one, two and three ellipticals, respectively, in the March 2002 Consumer Reports ranking of home exercise equipment.
Exercise Bikes. We offer exercise bikes featuring a variety of resistance mechanisms including electromagnetic, self-generating, flywheel and air; electronic monitors which display elapsed time, speed, distance and calories burned; and dual function design, which allows the user to exercise the upper body, lower body or both simultaneously. Certain units include heart rate control, motivational electronics and programmable resistance which allow users to design their own workouts. Our iFIT(TM) technology, which automatically adjusts pace and resistance, is included on several recumbent and upright bikes.
Recreational Sports Products. Through our JumpKing subsidiary, we manufacture and market trampolines that include both mini-trampolines for indoor home exercise use and full-sized trampolines for outdoor home recreational use.
Relaxation Products. In the spring of 1996, we introduced a full line of hydrotherapy spas. These hydrotherapy spas are currently distributed through various channels including department stores, mass retailers and warehouse clubs, home improvement stores, specialty dealers and direct-to-consumers through our own direct response marketing efforts.
Strength Training Equipment
We offer a complete line of anaerobic strength training equipment designed to develop muscle tone and strength. Strength training equipment includes the following:
Home Gyms. Our multi-purpose home gyms offer a range of resistance mechanisms, from selectorized weight stacks to plate-loaded gyms to our powerstroke leverage system and our CRS(TM) ("Compound Resistance System"(TM)). New products include our Crossbow by Weider(TM) home gym and our patented Free Motion(TM) equipment, which enables users to enjoy a full range of motion with "functional movement" versus the rigid "fixed path movement" of traditional equipment. Other products include our multi-purpose home gyms, which integrate aerobic functions for cross training. Selected units are designed to allow multiple users to use the equipment simultaneously, thereby allowing circuit training.
Weight Benches, Cages and Free Weights. We offer a range of weight benches and squat cages. We also offer a broad assortment of cast-iron weight plates, vinyl and neoprene dipped weights and dumbbells, in standard and Olympic size formats.
Exercise Accessories. We offer a line of back support belts, workout gloves and exercise accessories, including ankle and hand weights and grip devices.
Product and Design Innovation
Product and design innovation has contributed significantly to our growth. On an ongoing basis, we evaluate new product concepts and seek to respond to the desires and needs of consumers by frequently introducing new products and repositioning existing products. As of May 31, 2003, we had approximately 462 employees in our research and development group. We hold 178 United States patents, we have 79 United States and 494 foreign trademarks, we have 34 United States and 58 foreign patents pending and 21 United States and 78 foreign trademarks pending.
We conduct most of our research and development in 40,000 square feet of space in our Logan, Utah headquarters. This facility includes industrial design, mechanical and electrical engineering capabilities that are used in creating proprietary designs and features.
Customers
Our largest customer since 1985 has been Sears. In fiscal 2003, Sears accounted for approximately 39% of net sales, a 5% decrease from fiscal 2002. Other important customers include Sam's Club, Wal-Mart, The Sports Authority, Dick's Sporting Goods, Costco, Target, Gold's Gym and 24 Hour Fitness. Although Sears still accounts for a substantial portion of our sales, the percentage of net sales to Sears has decreased over the past decade from a high of approximately 68% in 1989. Nevertheless, the dollar amount of our net sales to Sears has increased during this time period. Several customers have
distinguished us with vendor awards for our commitment in providing quality and value to the consumer, including, among others, Sears' Vendor of the Year in 2000, Category Source of the Year in 2002 and their Partner in Progress award twelve times since 1985. Wal-Mart has named us Vendor of the Quarter once in each of fiscal 1999, 2000, 2001 and 2002. The Sports Authority named us Vendor of the Year in 2002, and iFIT.com(TM) received The Sports Authority Victor Award for the most innovative product. We have received the annual SPARC Award seven times including the last six years consecutively. This annual award is the only industry-wide vendor recognition program in mass-market retailing, and is awarded by Discount Store News, a magazine which employs a panel made up of key merchandising executives from the mass market retailing industry. This award honors those who excel in new product innovation, on-time delivery, advertising support and quality control.
We sell our products to customers representing over 7,600 consumer locations, excluding those consumers we sell to directly through our retail, direct response, television and Internet distribution channels. Consistent with industry practice, we generally do not have long-term purchase agreements or other commitments from our customers as to levels of future sales. The level of our sales to large customers depends in large part on our continuing commitment to home fitness products and the success of our efforts to market and promote our products, as well as our competitiveness in terms of price, quality, product innovation and customer service. We are not the exclusive supplier of home fitness equipment to any of our major customers. The loss of, or a substantial decrease in the amount of purchases by, or the uncollectibility of any significant receivable due from any of our major customers could have a material adverse effect on our business.
Competition
The fitness equipment market is highly competitive. It is characterized by frequent introduction of new products, often accompanied by major advertising and promotional programs. We believe that the principal competitive factors affecting our business include price, quality, brand name recognition, product innovation and customer service.
We compete with several domestic manufacturers and distributors such as Cybex International, Inc., Fitness Quest, Life Fitness (a division of Brunswick), Nautilus Group, Inc. and Precor (owned by Amer Group, PLC). We also compete with a number of United States and foreign importers in both the United States and global markets including Horizon, Impex and Stamina. In Europe, we principally compete with BH (Spain), CARE (France), Helmut Kettler, Tunturi, York (Great Britain) and other domestic competitors. The following table shows who may be the five largest competitors in the United States:
Distribution
We believe our distribution capabilities and post-sales support place us in a good position to service major retailers. This has been accomplished through the successful implementation of our integrated distribution and inventory management system that is used to ensure that the necessary components are available for manufacturing. This system is also capable of tracking finished goods through all levels of the distribution chain. Through the effective use of electronic data interchange, we are able to run manufacturing jobs to fill specific customer orders, arrange for shipping from many of our manufacturing facilities and make timely deliveries to our customer locations.
Manufacturing and Purchasing
In fiscal 2003, we manufactured or assembled our products at our company facilities in Utah, Texas and Canada; or through third parties, principally in Asia. We have long-standing supply relationships with several offshore vendors, many of which have exclusive relationships in the fitness industry with us. The combination of internal manufacturing and assembly capacity and our access to third-party vendors has helped us meet customer demand on a competitive basis. In addition, the third party vendors provide greater flexibility in manufacturing capacity to satisfy seasonal demands.
We utilize more than 1.1 million square feet for manufacturing, including a 300,000 square foot facility in Logan, Utah. We constructed our Logan, Utah, plant in 1990 and equipped the facility with modern manufacturing and assembly features, including fully integrated metal fabrication, powdercoat painting, robotic welding and injection molding equipment. In 1990, we purchased a trampoline manufacturing operation in Dallas, Texas. In 1991, we began operating our plant in Smithfield, Utah. In 1994, we began operating our Clearfield, Utah, manufacturing facility. In 1995, we opened our Smithfield North Plant. In 1996, we expanded our manufacturing capacity by 233,671 square feet through the acquisition of our Canadian manufacturing facility in St. Jerome, Canada. In 2003, we announced our plan to set up a manufacturing facility in Xiamen, China. This facility is expected to be operationally ready in 2004.
We apply a management system to control and monitor freight, labor, overhead and material cost components of our finished goods. In fiscal 1994, we received ISO 9001 certification for all of our non-retail facilities in Utah. ISO is a nonprofit association that monitors industrial companies' manufacturing processes, quality assurance controls, personnel management and customer service in order to improve plant efficiency, product quality, customer satisfaction and company profitability. ISO 9001 is a certification process used for companies whose business includes a range of activities from design and development to production, installation and servicing. ICON has been recertified by the ISO 9001 standards every year since 1994.
From fiscal 1996 to fiscal 2003, we have invested over $96.4 million in tooling, molding, production and computer equipment to develop state-of-the-art production, research and development, distribution and reporting systems. We have a fully implemented Enterprise Resource Planning ("ERP") system that integrates all manufacturing, planning, inventory, purchasing, order entry and financial functions. Our inventory management and manufacturing productivity are enhanced by our just-in-time system for purchasing materials and components. We have also invested in Electronic Data Interchange ("EDI") capabilities, including Wal-Mart's Retail Link system, which provides us and a substantial number of our primary customers a seamless flow from initial retailer orders to parts purchasing to product manufacturing to shipping.
Employees
As of May 31, 2003, we employed approximately 4,569 people, 105 of whom were and are represented by a Canadian labor union. We are party to a collective bargaining agreement with this union which expires on August 7, 2004. Factory employees are compensated through a targeted incentive system. Managerial employees receive bonuses tied to the achievement of performance targets. As of May 31, 2003, approximately 462 employees were engaged in research and development, 625 in sales and marketing, 2,956 in manufacturing and 526 in other areas, primarily administrative. We are also subject to three employment agreements with our senior executives.
Environmental Matters
Our operations are subject to federal, state and local health and safety and environmental laws and regulations that impose workplace standards and limitations on the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials, substances and wastes. The nature of our manufacturing and assembly operations exposes us to the risk of claims with respect to environmental matters, and although compliance with local, state and federal requirements relating to the protection of the environment has not had a material adverse effect on our financial condition or results of operations, there can be no assurance that material costs or liabilities will not be incurred in connection with such environmental matters. Future events, such as changes in existing laws and regulations or enforcement policies or the discovery of contamination on sites owned or operated by us may give rise to additional compliance costs or operational interruptions which could have a material adverse effect on our financial condition. In addition, many but not all of our properties have been the subject of either Phase I or Phase II Environmental Site Assessments. While we are not aware of any existing conditions that are likely to result in material costs or liabilities to us, there can be no assurance that all potential instances of soil or ground water
contamination have been identified even where Environment Site Assessments have been conducted. Accordingly, there can be no assurance that previously unknown environmental conditions, or known conditions which have not been fully evaluated, will not be discovered at any of our properties, whether presently or formerly owned or leased, or that the cost of remediating such condition will not be material.
Seasonality
The market for exercise equipment is highly seasonal, with peak periods occurring from late fall through February. As a result, the first and fourth quarters of every year are generally the Company's weakest periods in terms of sales. During these periods, ICON builds product inventory to prepare for the heavy demand anticipated during the upcoming peak season. This operating strategy helps ICON to realize the efficiencies of a steady pace of year-round production.
Item 2.
Item 2. Properties
Our headquarters are located in Logan, Utah, and we own the related land and buildings. Additionally, we own land and buildings in Canada. The total square footage of our owned buildings is approximately 485,000 square feet.
We lease additional facilities for manufacturing, warehouses and offices in the United States and various foreign countries including the United Kingdom, Italy, France and Germany. We sublease certain of these facilities where space is not fully utilized.
We believe that these facilities are well maintained, in good operating condition and are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of our operations.
In addition, as of May 31, 2003 we operated under lease 69 NordicTrack(TM) retail stores in various cities in the United States.
Item 3.
Item 3. Legal Proceedings
We are party to a variety of non-product liability commercial lawsuits involving contract claims, arising in the ordinary course of our business. We believe that adverse resolution of these lawsuits would not have a material adverse effect on our results of operations or financial position.
We are party to a variety of product liability lawsuits, arising in the ordinary course of our business, as a result of injuries sustained by customers while using a variety of our products. These claims include injuries sustained by individuals using trampolines and treadmills. We vigorously defend any and all product liability claims brought against us and do not believe that any currently pending claim or series of claims will have a material adverse effect on our results of operations or financial position.
We are also involved in several intellectual property and patent infringement claims, arising in the ordinary course of our business. We believe that the ultimate outcome of these matters will not have a material adverse effect on our results of operations or financial position.
We are involved in litigation with Service Merchandise in connection with its filing for bankruptcy protection. Service Merchandise filed three separate adversarial proceedings against us in the United States Bankruptcy Court, Middle District of Tennessee, Nashville Division, alleging preferential transfer in Adversarial Proceedings Nos. 301-0738A and 301-0770A, and Breach of Contract in Adversarial Proceeding No. 301-0586A. The bankruptcy trustee has filed suit in connection with the foregoing seeking to recapture an aggregate amount of $1.7 million in payments made to us as a voidable preference. The summons was issued on April 16, 2001. The proposed claim is currently being vigorously defended by our counsel. At this time, we are unable to determine the likelihood of an unfavorable outcome or the amount or range of potential recovery or loss.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters
As of May 31, 2003, we had 1,000 shares of common stock outstanding all of which were held by HF Holdings, Inc. ("HF Holdings"). There is not an established trading market for the common stock of HF Holdings or us. Our ability to pay dividends is limited under an indenture dated as of April 9, 2002 between us and Bank of New York, as trustee, and by our Credit Agreement.
Item 6.
Item 6. Selected Financial Data
The selected financial data set forth below with respect to our statements of operations for the three years ended May 31, 2003 and the balance sheet data for May 31, 2003 and May 31, 2002 have been derived from our financial statements included elsewhere in this Form 10-K that have been audited by PricewaterhouseCoopers LLP, independent auditors, as indicated in their report included elsewhere in this Form 10-K. Our statement of operations data for the years ended May 31, 2000 and 1999, and our balance sheet data as of May 31, 2001, 2000 and 1999, have been derived from the financial statements audited by PricewaterhouseCoopers LLP but not included in this Form 10-K.
The data set forth should be read together with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements, and the related notes thereto appearing elsewhere in this Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with the financial statements and the related notes thereto appearing elsewhere in this Form 10-K. Our fiscal year ends on May 31 of the corresponding calendar year. For example, fiscal 2003 ended on May 31, 2003.
Recent Developments
In fiscal 2003, we formed a foreign subsidiary to build a manufacturing facility in Xiamen, China. The total project cost is anticipated to be approximately $12.0 million, with $7.0 million to be funded in the form of capital contributions, and approximately $5.0 million in the form of debt. Our share of the equity investment is expected to be approximately $5.0 million. We are in the process of arranging for the debt portion of the financing, which is expected to be provided by the Bank of China.
Overview
We manufacture and market a broad line of cardiovascular and other equipment and strength training equipment. We are one of the largest manufacturers and marketers of home fitness equipment in the United States. In addition, we manufacture and distribute an innovative line of cardiovascular and
other equipment and strength training equipment for the institutional fitness equipment market.
We sell our products under a wide variety of brand names and we use our portfolio of brands to tailor our product offerings to specific distribution channels. We sell our products to department stores, mass retailers and warehouse clubs, sporting goods and specialty fitness retailers, directly to consumers, and health clubs.
The following paragraphs provide a brief description of certain items that appear in our Consolidated Statements of Operations.
Net sales. Net sales primarily represent our gross sales adjusted for returns and allowances. We limit our customers' ability to return merchandise to us to products sold to their customers in which defects were discovered within the warranty coverage period (usually 90 days from the time of retail sale). We do not permit our customers to return unsold merchandise.
Cost of sales. Cost of sales primarily includes the cost of components that we purchase, direct manufacturing labor and overhead, inbound shipping and freight and depreciation expense related to our property, plant, equipment and tooling.
Selling expense. Selling expense primarily includes our direct advertising expense, advertising allowances provided to certain customers and the costs related to our sales and marketing staff for our home fitness and institutional fitness business.
Research and development expense. Research and development expense relates primarily to the activities of our product development group and external sources related to the development of new products and product enhancements.
General and administrative expense. General and administrative expense primarily includes expenses related to our senior management team, all accounting and finance functions, management information systems, legal and human resources expenses and unallocated overhead expenses.
Critical Accounting Policies
Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following accounting policies could be deemed to be critical.
Inventories - Inventories consist primarily of raw materials (principally parts and supplies) and finished goods, and are valued at the lower of cost or market. Cost is determined using standard costs which approximate the first-in, first-out (FIFO) method.
Intangible Assets - We adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" effective June 1, 2002. SFAS No. 142 no longer requires the amortization of goodwill and other indefinite lived intangibles. As a result, results for the year ended May 31, 2003 were positively impacted by a $0.4 million elimination of such amortization. As of May 31, 2003, we had approximately $5.6 million of unamortized goodwill. Under the provisions of SFAS No. 142, we are required to test these assets for impairment at least annually. The annual impairment tests have been completed and did not result in an impairment charge. To the extent an impairment is identified in the future, we will record the amount of the impairment as an operating expense in the period in which it is identified.
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset, which is generally based on discounted cash flows. As a result of our review, we do not believe that any impairment currently exists related to our long-lived assets.
Revenue Recognition - We recognize revenue upon the shipment of product to the customer. Allowances are recognized for estimated returns, discounts, advertising programs and warranty costs associated with these sales.
Income Taxes - We account for income taxes utilizing the asset and liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at currently enacted tax rates. If appropriate, deferred tax assets are reduced by a valuation allowance which reflects expectations of the extent to which such assets will be realized.
Contingencies - We account for contingencies in accordance with SFAS No. 5, "Accounting for Contingencies". SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset has been impaired or a liability can be reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different from the estimated loss, our results of operations will be affected in the period the contingency is resolved.
Results of Operations
The following table sets forth certain of our financial data, expressed as a percentage of net sales, for fiscal years ended May 31, 2003, 2002 and 2001:
Year Ended May 31, 2003 Compared to Year Ended May 31, 2002 - -----------------------------------------------------------
Net sales for fiscal 2003 increased $140.1 million, or 16.1%, to $1,011.5 million from $871.4 million in the comparable period in 2002. Sales increased primarily due to increased direct consumer sales and customer demand. Sales of our cardiovascular and other equipment in fiscal 2003 increased $80.5 million, to $825.6 million. Sales of our strength training equipment in fiscal 2003 increased $59.6 million, to $185.9 million.
Gross profit for fiscal 2003 was $298.1 million, or 29.5% of net sales, compared to $236.4 million, or 27.1% of net sales, in fiscal 2002. This 26.1% increase was largely due to increased direct consumer sales which have higher margins, changes in product mix and manufacturing efficiencies.
Selling expenses increased $32.7 million, or 32.2%, to $134.1 million in fiscal 2003. This increase reflected increased bad debt expense related to pre-bankruptcy receivables of Kmart of $9.1 million. Increased direct consumer advertising, commissions and freight also contributed to the increase. Expressed as a percentage of net sales, selling expenses were 13.3% in fiscal 2003 and 11.6% in fiscal 2002. Absent the Kmart bad debt expense, selling expenses were 12.4% in fiscal 2003.
Research and development expenses increased $1.2 million, or 11.5%, to $11.6 million in 2003. Expressed as a percentage of net sales, research and development expenses were 1.1% in fiscal 2003 and 1.2% in fiscal 2002.
General and administrative expenses increased $13.7 million, or 20.1%, to $81.8 million in fiscal 2003. This increase is a factor of normal salary increases, planned additions to staff, increased insurance costs and increases attributable to performance based bonus and incentive programs. Increased rent and lease expense also contributed to the increase. Expressed as a percentage of net sales, general and administrative expenses were 8.1% in fiscal 2003 compared with 7.8% in fiscal 2002.
As a result of the foregoing factors, operating income increased $14.1 million, or 25.0%, to $70.6 million in fiscal 2003. Expressed as a percentage of net sales, operating income was 7.0% in 2003 compared with 6.5% in fiscal 2002.
As a result of the foregoing factors, EBITDA increased $21.5 million, or 31.5%, to $89.8 million in fiscal 2003. Expressed as a percentage of net sales, EBITDA was 8.9% in fiscal 2003 compared with 7.8% in fiscal 2002.
Interest expense, including amortization of deferred financing fees, decreased $3.0 million, or 10.2%, to $26.3 million in fiscal 2003. This decrease reflects lower interest rates during fiscal 2003. In addition, deferred financing fees decreased as a result of the April 2002 debt refinancing. Expressed as a percentage of net sales, interest expense including amortization of deferred financing fees was 2.6% in fiscal 2003 compared with 3.4% in fiscal 2002.
The provision for income taxes increased $17.2 million, or 4300.0%, to $17.6 million in fiscal 2003. Our effective tax rate was 39.7% in 2003 compared to 1.9% in fiscal 2002. The lower effective tax rate in fiscal 2002 is the result of adjustments pursuant to an Internal Revenue Service audit. These adjustments created a deferred tax benefit of approximately $11.5 million. No valuation allowance was recorded against this asset because we believe that we will generate sufficient future taxable income through operations to realize the net deferred asset. However, there can be no assurance that we will generate any specific level of taxable earnings or that we will be able to realize any of the deferred tax asset in future periods. If we are unable to generate sufficient taxable income in the future, an additional valuation allowance against this deferred tax asset would result in a charge to earnings.
As a result of the foregoing factors, net income was $26.7 million in fiscal 2003 compared to net income in fiscal 2002 of $19.4 million.
Year Ended May 31, 2002 Compared to Year Ended May 31, 2001 - -----------------------------------------------------------
Net sales for fiscal 2002 increased $74.4 million, or 9.3%, to $871.4 million from $797.0 million in the comparable period in 2001. Sales increased primarily due to increased customer demand and the introduction of our new line of institutional fitness equipment which represented $11.0 million, or 14.8%, of the sales increase. Sales of our cardiovascular and other equipment in fiscal 2002 increased $57.9 million, to $745.1 million. Sales of our strength training equipment in fiscal 2002 increased $16.5 million, to $126.3 million.
Gross profit for fiscal 2002 was $236.4 million, or 27.1% of net sales, compared to $216.5 million, or 27.2% of net sales in fiscal 2001.
Selling expenses increased $15.1 million, or 17.5%, to $101.4 million in fiscal 2002. This increase was the result of higher selling costs associated with the increase in sales combined with the impact of the introduction of our new line of institutional fitness equipment as well as increased advertising expenses. Expressed as a percentage of net sales, selling expenses were 11.6% in fiscal 2002 compared to 10.8% in fiscal 2001.
Research and development expenses decreased $0.5 million, or 4.6%, to $10.4 million in fiscal 2002. Expressed as a percentage of net sales, research and development expenses were 1.2% in fiscal 2002 and 1.4% in fiscal 2001.
General and administrative expenses increased $3.6 million, or 5.6%, to $68.1 million in fiscal 2002. This increase was the result of higher costs associated with our increase in sales combined with the impact of the introduction of our new line of institutional fitness equipment. Expressed as a percentage of net sales, general and administrative expenses were 7.8% in fiscal 2002 and 8.1% in fiscal 2001.
As a result of the foregoing factors, operating income increased $1.7 million, or 3.1%, to $56.5 million in fiscal 2002. Expressed as a percentage of net sales, operating income was 6.5% in fiscal 2002 compared with 6.9% in fiscal 2001.
As a result of the foregoing factors, EBITDA decreased $3.8 million, or 5.3%, to $68.3 million in fiscal 2002. Expressed as a percentage of net sales, EBITDA was 7.8% in fiscal 2002 compared with 9.0% in fiscal 2001.
Interest expense, including amortization of deferred financing fees, decreased $8.7 million, or 22.9%, to $29.3 million in fiscal 2002. This decrease reflects our lower borrowing levels during the period combined with lower interest rates on our borrowings.
A loss of $7.4 million was recorded on the extinguishment of the existing credit facility and the 12% Notes.
The provision for income taxes decreased $3.0 million, or 88.2%, to $0.4 million in fiscal 2002. Our effective tax rate was 1.9% in fiscal 2002 compared to 20.7% in fiscal 2001. The lower effective tax rate in fiscal 2002 was the result of adjustments pursuant to an Internal Revenue Service audit. These adjustments created a deferred tax benefit of approximately $11.5 million.
As a result of the foregoing factors, our net income was $19.4 million in fiscal 2002 compared to net income in fiscal 2001 of $13.3 million.
Seasonality
The market for exercise equipment is highly seasonal, with peak periods occurring from late fall through February. As a result, the first and fourth quarters of every year are generally the Company's weakest periods in terms of sales. During these periods, ICON builds product inventory to prepare for the heavy demand anticipated during the upcoming peak season. This operating strategy helps ICON to realize the efficiencies of a steady pace of year-round
production.
The following are the net sales, operating income (loss) and net income (loss) of our Company by quarter for fiscal years 2003, 2002 and 2001:
The following is a reconciliation of net income (loss) to EBITDA by quarter (6):
Liquidity and Capital Resources
Net cash provided by operating activities was $31.6 million in fiscal 2003, as compared to $37.5 million of cash provided by operating activities in fiscal 2002. In fiscal 2003, major sources of funds were net income of $26.7 million, non-cash provisions of $19.2 million for depreciation and amortization and an increase in accounts payable and accrued expenses of $18.5 million. These changes were offset by increases in accounts receivable of $22.0 million, due partially to increased direct response receivables, and inventories of $28.0 million, due primarily to building inventory levels to meet anticipated sales levels. In fiscal 2002, major sources of funds were net income of $19.4 million, non-cash provisions of $19.2 million for depreciation and amortization, and a decrease in inventories of $12.2 million. These changes were offset by an increase in accounts receivable of $20.0 million.
Net cash used in investing activities was $21.8 million in fiscal 2003, compared to $17.1 million of cash used in investing activities in fiscal 2002. Investing activities in fiscal 2003 consisted primarily of capital expenditures of $17.0 million related to upgrades in plant and tooling and purchases of additional manufacturing equipment and purchases of intangible assets of $4.9 million. Cash used in investing activities in fiscal 2002 consisted primarily of capital expenditures of $11.6 million related to upgrades in plant and tooling and purchases of additional manufacturing equipment and purchases of intangible assets of $5.2 million.
Net cash used in financing activities was $12.3 million in fiscal 2003, compared to $19.3 million of cash used in financing activities in fiscal 2002. Cash used in financing activities in fiscal 2003 resulted from payments on the revolving credit facility, payments on the April 2002 term notes, payment of debt issuance fees and payments on other long-term debt. Cash used in financing activities in fiscal 2002 resulted from the issuance in April 2002 of the 11.25% Senior Subordinated Notes, borrowings on our new credit facility, repayment of our old credit facility and the redemption of our 12% subordinated notes.
Net cash provided by operating activities was $37.5 million in fiscal 2002, as compared to $12.4 million of cash provided by operations in fiscal 2001. In fiscal 2002, major sources of funds were net income of $19.4 million, non-cash provisions of $19.2 million for depreciation and amortization, and a decrease in inventories of $12.2 million. These changes were offset by increases in accounts receivable of $20.0 million. In fiscal 2001, major sources of funds were net
income of $13.3 million, non-cash provisions of $17.4 million for depreciation and amortization, and increases in accounts payable and accrued expenses of $10.0 million. These increases were offset by increases in accounts receivable of $14.1 million and inventories of $14.8 million. Such increases were due to the aforementioned factors relating to sales increases.
Net cash used in investing activities was $17.1 million in fiscal 2002, compared to $22.8 million in fiscal 2001. Investing activities in fiscal 2002 consisted primarily of capital expenditures of $11.6 million related to upgrades in plant and tooling and purchases of additional manufacturing equipment and purchases of intangible assets of $5.2 million. Cash used in investing activities in fiscal 2001 was primarily for capital expenditures of $16.1 million, acquisitions of $4.0 million and purchases of intangible assets of $2.7 million.
Net cash used in financing activities was $19.3 million in fiscal 2002, compared to $8.7 million of cash provided by financing activities in fiscal 2001. Cash used in financing activities in fiscal 2002 resulted from the issuance in April 2002 of the 11.25% Senior Subordinated Notes, borrowings on our new credit facility, repayment of our old credit facility and the redemption of our 12% subordinated notes. Cash provided by financing activities in fiscal 2001 resulted from borrowings on the revolving credit facility, payments on the September 1999 term notes, payments of debt issuance fees and payments on other long-term debt.
We made capital expenditures of approximately $17.0 million during fiscal 2003 and expect to make capital expenditures of approximately $15.0 million in fiscal 2004. Capital expenditures are primarily for expansion of physical plant, purchases of additional or replacement manufacturing equipment and revisions and upgrades in plant tooling.
On January 22, 2002, Kmart, a customer for over a decade, filed for bankruptcy protection. At the time of the bankruptcy filing, we had $12.1 million of unsecured accounts receivable outstanding with Kmart. We disposed of the remaining balance of the pre-bankruptcy receivable in the third quarter of fiscal 2003. We had net sales to Kmart of $26.7 million in fiscal 2003, representing approximately 2.6% of total net sales for that period. In fiscal 2002, we had net sales to Kmart of approximately $28.9 million, representing approximately 3.3% of total net sales for that period. We resumed shipments to Kmart on February 5, 2002 and continue with payment terms of 30 days. Kmart emerged from Chapter 11 protection on May 6, 2003.
Our primary short-term liquidity needs consist of financing seasonal merchandise inventory buildups and paying cash interest expense under our existing credit facilities and on the 11.25% subordinated notes due in April 2012. Our principal source of financing for our seasonal merchandise inventory buildup and increased accounts receivable is revolving credit borrowings under the existing credit facilities. At May 31, 2003, we had $110.7 million of availability under these facilities. Our working capital borrowing needs are typically at their lowest level from April through June, increase somewhat through the summer and sharply increase from September through November to finance accounts receivable and purchases of inventory in advance of the Christmas and post-holiday selling season. Generally, in the period from November through February, our working capital borrowings remain at their highest level and then are paid down to their lowest annual levels from April through August.
In connection with our debt refinancing in April 2002, we entered into our existing credit facility totaling $235.0 million of revolving and term loans with a syndicate of banks and financial services companies. The revolving and term loans are due in 2007.
Proceeds of our existing credit facility were used to refinance our then existing credit facility and 12% senior subordinated notes due 2005, to fund transaction fees and expenses and to provide general working capital.
As of May 31, 2003 the balance outstanding under the existing credit facility consisted of (in millions):
Revolver $ 72.6 Term Loan 18.7 ------ $ 91.3 ======
As of May 31, 2003, our consolidated indebtedness was approximately $244.2 million, of which approximately $91.3 million was senior indebtedness.
Based on our current level of operations, management believes that cash flow from operations and available cash, together with available borrowings under our existing credit facility, will be adequate to meet future liquidity needs for at least the next few years. We may, however, need to refinance all or a portion of the principal amount of the notes on or prior to maturity.
As of May 31, 2003, our contractual cash obligations and commercial commitments were as follows:
As part of our cash management activities, we seek to manage accounts receivable credit risk, collections and accounts payable and payments thereof to maximize our free cash at any given time.
Careful management of credit risk has allowed us to avoid (except for Kmart, as discussed above) significant accounts receivable losses in light of the poor financial condition of many of our potential and existing customers. In light of current and prospective global regional economic conditions, we cannot assure you that we will not be materially adversely affected by accounts receivable losses in the future.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 effective June 1, 2003 did not have a material effect on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 also broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritative pronouncements to make various technical corrections, clarify meaning or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 and resulted in the 2002 loss on debt extinguishment being reclassified from an extraordinary item to income from continuing operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses significant issues relating to the recognition, measurement and reporting of costs associated with exit and disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and is not expected to have a material effect on our financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB 123". This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends disclosure requirements of SFAS No. 123 to ensure that fair value disclosures are prominent in both annual and interim financial statements. We have adopted the disclosure provisions of SFAS No. 148, but will continue to account for our stock-based compensation plans in accordance with APB 25.
In November 2001, the Emerging Issues Task Force issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer". EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. The Company has adopted EITF 01-09 effective June 1, 2002 which reduced net sales for the fiscal year ended May 31, 2003 by approximately $31.5 million with a corresponding reduction of selling, general and administrative expenses. This change has no effect on income from operations or net income. For comparative purposes, net sales for fiscal years ended May 31, 2002 and 2001 have been reduced by approximately $24.7 million and $23.5 million, respectively, with a corresponding reduction of selling, general and administrative expenses.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the Company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We do not expect FIN 45 to have a material effect on our consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities", which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. We do not expect FIN 46 to have a material effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. We are currently evaluating the effects SFAS No. 150 may have on our financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations expose us to market risk. We are vulnerable to significant fluctuations in interest rates on our variable rate debt and on any future repricing or refinancing of our fixed rate debt and on future debt.
We use long-term and medium-term debt as a source of capital. At May 31, 2003, we had approximately $152.9 million in outstanding fixed rate debt, consisting of 11.25% subordinated notes maturing in April 2012. When debt instruments of this type mature, we typically refinance such debt at the then-existing market interest rates, which may be more or less than the interest rates on the maturing debt.
Our credit facility has variable interest rates and any fluctuation in interest rates could increase or decrease our interest expense. At May 31, 2003, we had approximately $91.3 million in outstanding variable rate debt. The
weighted average rate of interest on the variable interest rate debt was approximately 4.8% for the fiscal year ended May 31, 2003. If the interest rate for our variable rate debt increased or decreased by 1% during fiscal year 2003, our interest expense on outstanding variable rate debt would increase or decrease by approximately $1.5 million.
Due to the uncertainty of fluctuations in interest rates and the specific actions that might be taken by us to mitigate the impact of such fluctuations and their possible effects, the foregoing sensitivity analysis assumes no changes in our financial structure.
In addition to the United States, we have operations or transact business in Canada, United Kingdom, France, Italy, Germany, and Asia. The operations in these foreign countries conduct business in their local currencies as well as other regional currencies. To mitigate our exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into forward exchange contracts from time to time to protect our margin on a portion of our forecast foreign currency sales. As of May 31, 2003 and 2002, no forecast sales were hedged by forward exchange contracts. Because of the variety of currencies in which purchases and sales are transacted, it is not possible to predict the impact of a movement in foreign currency exchange rates on future operating results. However, we intend to continue to mitigate our exposure to foreign exchange gains or losses.
Assessment of the Euro
On January 1, 1999, eleven of the member countries of the European Union established fixed conversion rates between their existing currencies (called "LEGACY CURRENCIES") and one common currency called the euro. The euro trades on currency exchanges and may be used in business transactions. In January 2002, the legacy currencies began being withdrawn from circulation. Our subsidiaries affected by the conversion have established plans to address issues raised by the conversion. We believe that, under current conditions, the conversion of legacy currencies to the euro will not have a material adverse effect on our results of operations or financial position.
Item 8.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Schedule Page ----
Report of Independent Auditors 46
Consolidated Financial Statements:
Consolidated Balance Sheets as of May 31, 2003 and 2002 47
Consolidated Statements of Operations and Comprehensive Income for the Years Ended May 31, 2003, 2002 and 2001 48
Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended May 31, 2003, 2002 and 2001 49
Consolidated Statements of Cash Flows for the Years Ended May 31, 2003, 2002 and 2001 50
Notes to Consolidated Financial Statements 51
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Three Years Ended May 31, 2003 79
Item 9.
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Management Directors and Officers
The directors and executive officers of the Company, their ages and number of years with ICON Health & Fitness are as follows:
Scott R. Watterson. Mr. Watterson has served as Chairman of the Board of Directors and CEO since 1988. Prior to 1988, Mr. Watterson co-founded Weslo, Inc., a predecessor entity of the Company, in 1977. In addition, Mr. Watterson is a director of the Utah State University Foundation. He is also on the Board of Trustees for the Utah Foundation and the Make-A-Wish Foundation of Utah. Mr. Watterson graduated from Utah State University College of Business, Cum Laude, in 1979 with a B.S. in Business Marketing and a minor in Chinese.
Gary E. Stevenson. Mr. Stevenson has served as President, COO and as one of the Company's directors since 1988. Prior to 1988, Mr. Stevenson co-founded Weslo, Inc., the predecessor entity of the Company, in 1977. Mr. Stevenson's current and past affiliations include: Utah State University President's National Advisory Council, Utah State University College of Business and Engineering Advisory Board, Marriott School, Brigham Young University National Advisory Council, among others. Mr. Stevenson graduated from Utah State
University College of Business in 1979 with a B.S. in Business Administration and a minor in Japanese.
S. Fred Beck. Mr. Beck has served as the Company's CFO and Accounting Officer, VP and Treasurer since 1989. Mr. Beck is a CPA and a member of the AICPA (national chapter of CPAs) and the UACPA (the Utah chapter of CPAs). Mr. Beck is also a member of the Board of Directors of Regence BlueCross BlueShield of Utah and a member of The Regence Group Board of Directors. Mr. Beck graduated from Utah State University with a B.S. in Accounting.
David J. Watterson. Mr. Watterson was recently named President of North America. Prior to his role as President of North America, Mr. Watterson served as SVP of Marketing and Research and Development since November 1992. Prior to 1992, Mr. Watterson served as ICON's Sales Manager and VP of Sales since joining the Company in 1980. Mr. Watterson is Scott R. Watterson's brother. Mr. Watterson graduated from Utah State University with a B.S. in Marketing.
Jon M. White. Mr. White has served as SVP and VP of Manufacturing since 1988. Mr. White is responsible for all domestic manufacturing operations in the Logan, Clearfield and Smithfield plants in Utah and product distribution at the Clearfield distribution center. Prior to 1988, Mr. White served as Plant Manager of Weathershield Manufacturing Inc.'s, Nibley, Utah plant and production control manager for the Wurlitzer Co.'s, Logan, Utah, manufacturing plant.
William T. Dalebout. Mr. Dalebout has served as VP of Design since 1987. Prior to working for ICON, Mr. Dalebout was President and founder of Ziba Design Inc., an industrial design consultancy. Prior to founding and managing Ziba Design Inc., Mr. Dalebout worked for Hewlett-Packard, Tektronix Inc. and Smith Corona Marchant. Mr. Dalebout graduated with a B.A. in Industrial Design from Brigham Young University.
M. Joseph Brough. Mr. Brough joined the Company in 1989 and has served as VP of Operations and Information Technology since 1995. Prior to working for ICON, Mr. Brough worked for Andersen Consulting. Mr. Brough graduated with a M.B.A from the University of Utah in 1987 where he was ranked number one in his graduating class.
Matthew N. Allen. Mr. Allen joined the Company in 1984 and has served as VP of Product Development since 1999. He served as VP of Sales from 1996-1999. Between 1984 and 1996, Mr. Allen served in various roles in sales, quality control and production. Mr. Allen graduated with B.S. in Business Marketing from Utah State University.
Douglas L. Clausen. Mr. Clausen has served as VP of Purchasing since joining the Company in 1992. Prior to working for ICON, Mr. Clausen worked for the Jacobsen Division of Textron as a Purchasing Manager/Materials Manager from 1987 to 1992. Prior to working for Textron, Mr. Clausen worked for Lunar Radiation, Spring Mills and the U.S. Air Force. Mr. Clausen has a M.B.A. from Capital University in Columbus, Ohio and has a Bachelor's degree in Business Administration from the University of Wisconsin-Madison.
Brad A. Bearnson. Mr. Bearnson joined the Company in 1995 and presently serves as General Counsel and Secretary. Mr. Bearnson is a CPA and was admitted to the Utah State Bar in 1982. Mr. Bearnson has also served as a Member of the
Legislative Affairs Committee of the Utah State Bar from 1997-2000. Mr. Bearnson graduated with a B.S. from Utah State University and then earned his Juris Doctorate degree from the University of Utah.
Wallace J. Smith. Mr. Smith joined the Company in 1989 and has served as VP in the Business Development Division. Prior to this, Mr. Smith was the Chief Operating Officer of IMAGE, Inc., which was a wholly owned business of ICON Health and Fitness, Inc. IMAGE supplied fitness products primarily to specialty fitness dealers. Prior to managing IMAGE, Inc., Mr. Smith was responsible for the planning, development and construction of ICON's main office and manufacturing facility in Logan, Utah. Mr. Smith is Scott R. Watterson's brother-in-law. Mr. Smith earned a B.S. degree in Psychology and Chemistry at the University of Utah. He then completed his M.B.A. degree at the same university.
Jeff Carmignani. Mr. Carmignani joined the Company in 1983 and has served as VP of Imports, Transportation and New Business Development from 1987 to present. Prior to joining ICON, Mr. Carmignani served as VP of Operations of Exectech Inc.
Giovanni Lato. Mr. Lato has served as the President of ICON Europe since 1999. Mr. Lato joined Weider, Inc. in 1993. Previously, Mr. Lato served as VP of Sales for Gianni Versace SpA since 1989. Mr. Lato graduated in 1981 with a B.S. in Business Administration from Luiss University in Rome, Italy.
Richard Hebert. Mr. Hebert has served as President of ICON Canada since 1994. Mr. Hebert founded his first manufacturing company in 1967 named Athletimonde, Inc. In 1980, Mr. Hebert established his second manufacturing company named Rickbend Industries, Inc. In 1990, Mr. Hebert began a third company called Fitquip, Inc. These three companies were consolidated into one entity in an acquisition by ICON Health & Fitness Inc. in 1994.
Colleen Logan. Ms. Logan has served as Director of Marketing since 1996. Prior to working for ICON, Ms. Logan was VP, Management Supervisor at Oglivy & Mather in Chicago, working in their Public Relations, Advertising, and Direct Response divisions. During her nearly 10 years at Ogilvy, she created marketing plans for such diverse clients as Sears, Roebuck and Co., Equal sweetener, and various brands of Kraft General Foods. Her prior experience also includes William Cook Advertising in Jacksonville, Florida as part of the team that launched the Mayo Clinic Florida. Ms. Logan holds a B.S. in Journalism from the University of Florida with a minor in Microbiology & Cell Science.
David Packham. Mr. Packham has served as the head of the retail group since 1996. Prior to working for ICON, Mr. Packham spent three years in strategic marketing at the Walt Disney Company and three years at General Mills in national brand management. Mr. Packham has also served on the Fitness Institute Board since 1999. Mr. Packham earned his Masters of Management from Kellogg Business School in 1990 with majors in Marketing, Finance and International Business.
Jace Jergensen. Mr. Jergensen has served as the VP and General Manager of ICON's JumpKing operation since 1999. From 1994 to 1999, Mr. Jergensen served as the Director of New Product Development for ICON. Prior to joining ICON, Mr.
Jergensen held various positions with Black & Decker, First Interstate Bank and Ernst & Whinney. Mr. Jergensen earned an M.B.A. in 1989 and B.S. in Accounting in 1987 from Brigham Young University.
Lynn C. Brenchley. Mr. Brenchley joined the Company in 1989 and has served as VP of Business Development since 1992. Mr. Brenchley has been involved with Mergers and Acquisitions since joining the Company. Prior to working for ICON, Mr. Brenchley worked for a regional meat processing company where he was Chief Financial Officer for nine years and President and Chief Executive Officer for 8 years. Mr. Brenchley served as an officer in the Army Reserves for 12 years. Mr. Brenchley graduated from Utah State University with a B.S. degree in Accounting and minor in Business Administration.
Robert C. Gay. Mr. Gay became Vice Chairman of our Board of Directors in November 1994. Mr. Gay has been a Managing Director of Bain Capital, a private investment firm, since April 1993 and has been a General Partner of Bain Venture Capital, the venture capital arm of Bain Capital, which focuses on first and second institutional round investing in software, technology-driven business services, hardware and information companies, since February 1989. In addition, Mr. Gay serves as a director of Nutraceutical, GS Technologies Corporation, Anthony Crane and Alliance Laundry and Buhrmann.
Ronald P. Mika. Mr. Mika became one of our directors in November 1994. Mr. Mika is a principal at Sorenson Capital Partners. Prior to joining Sorenson Capital, Mr. Mika was a managing director at Bain Capital. In addition, Mr. Mika serves as a director of Professional Services Industries.
Gregory Benson. Mr. Benson became one of our directors in September 1999. Mr. Benson has been an executive vice president of Bain Capital since 1996. Prior to joining Bain Capital, Mr. Benson was an executive vice president of American Pad and Paper Company.
Stanley C. Tuttleman. Mr. Tuttleman became one of our directors in September 1999. Mr. Tuttleman has been the Chief Executive Officer and President of Tuttson Capital Corp., a financial services corporation, since 1983. Mr. Tuttleman also serves as the Chief Executive Officer of Telepartners International, a wireless program company. In addition, Mr. Tuttleman is a director of Mothers Work, Inc., and a trustee of the Franklin Institute, the Philadelphia Orchestra, the Philadelphia Museum of Art, Graduate Hospital, Gratz College and the Harrison Foundation.
Alan H. Freudenstein. Mr. Freudenstein became one of our directors in November 2002. Mr. Freudenstein is a Managing Director in the Private Equity Group of Credit Suisse First Boston, LLC. He is also a Vice President of Credit Suisse First Boston Management Corporation and Special Situations Holdings, Inc. - - Westbridge. From 1992 through July 2000, Mr. Freudenstein was a Managing Director at Bankers Trust Company, where he was responsible for incubation and venture investments within the New World Ventures Group. Mr. Freudenstein is also on the board of directors of Ascent Assurance, Inc. (OTCBB:AASR).
Dr. W. Steve Albrecht. Dr. Albrecht became one of our directors in November 2002. Dr. Albrecht serves as the Associate Dean of the Marriott School of Management and Arthur Andersen Professor at Brigham Young University. Prior to becoming Associate Dean, Dr. Albrecht served as director of the School of Accountancy and Information Systems at Brigham Young University for eight years.
Dr. Albrecht is a certified public accountant, a certified internal auditor and a certified fraud examiner. Dr. Albrecht is also on the board of directors of Cypress Semiconductor Corp. (NYSE:CY), SkyWest, Inc. (NASDAQ:SKYW) and Red Hat, Inc. (NASDAQ:RHAT).
Board Committees
Compensation Committee
We maintained a compensation committee during fiscal 2003. The Compensation Committee consists of the following non-employee directors: Messrs. Gay, Benson and Tuttleman. The Compensation Committee of the Board of Directors, composed of Messrs. Gay, Benson and Tuttleman, has the authority to administer the executive compensation for Scott R. Watterson, our Chief Executive Officer. Messrs. Watterson and Stevenson participated in the deliberations concerning the compensation of other officers other than their own, and Mr. Beck participated in the deliberations concerning the compensation of officers other than himself and Messrs. Watterson and Stevenson.
Audit Committee
The Audit Committee includes Messrs. Albrecht, Tuttleman, and Mika. This committee reviews the professional services provided by the Company's independent auditors and the independence of such firm from the management of the Company. This committee also reviews the scope of the audit by the Company's independent auditors, the annual and interim financial statements of the Company, the Company's systems of internal accounting controls, and such other matters with respect to the accounting, auditing, and financial reporting practice and procedures of the Company as it may find appropriate.
Item 11.
Item 11. Executive Compensation
The following table sets forth information concerning the compensation for fiscal 2003, 2002, and 2001 for Mr. Scott Watterson and our other four most highly compensated executive officers (collectively, the "Named Executive Officers"):
The following table sets forth information as of May 31, 2003, concerning options of HF Holdings, Inc. exercised by each of the named executive officers in 2003 and year-end option values:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
1999 Junior Management Stock Option Plan
In September 1999, HF Holdings adopted its 1999 Junior Management Stock Option Plan (the "1999 Stock Option Plan") which provides for the grant of nonstatutory options to eligible employees. A total of 333,300 shares of common stock of HF Holdings were reserved and issued under the 1999 Stock Option Plan, which is administered by the Board of Directors or a committee thereof.
Committee Interlocks and Insider Participation
We maintained a compensation committee during fiscal 2003. The Compensation Committee consists of the following non-employee directors: Messrs. Gay, Benson and Tuttleman.
Report of the Compensation Committee
The Compensation Committee of the Board of Directors, composed of Messrs. Gay, Benson and Tuttleman, has the authority to administer the executive compensation for Scott R. Watterson, our Chief Executive Officer. Messrs. Watterson and Stevenson participated in the deliberations concerning the compensation of other officers other than their own, and Mr. Beck participated in the deliberations concerning the compensation of officers other than himself and Messrs. Watterson and Stevenson.
Compensation of Directors
Our directors do not receive any compensation for serving on the Board of Directors except for Mr. Tuttleman and Mr. Albrecht. Mr. Tuttleman is paid $35,000 annually for his services as a director. Mr. Albrecht is paid $40,000 annually plus $1,000 for each meeting attended for his services as a director. Directors are reimbursed for their out-of-pocket expenses incurred in connection with their service as directors. We also maintain liability insurance policies for our directors.
Performance Bonus
In fiscal 2003 and 2002, the Board of Directors approved the establishment of a bonus pool of $1.0 million and $1.5 million, respectively. The Board gave discretion to Gary Stevenson and Scott Watterson to determine eligible employees and the amounts payable to each employee. These bonuses were paid in August of each year and accrued in our May 31, 2003 and May 31, 2002 financial statements.
Employment Agreements
In May of 2003, we renegotiated the September 27, 1999 employment agreements ("second amendment") with each of Mr. Watterson and Mr. Stevenson. The second amendment extends these agreements to September 27, 2005. The employment agreements provide for the continued employment of Mr. Watterson as Chairman and Chief Executive Officer with an increase in base salary from $525,000 to $625,000, and Mr. Stevenson as President and Chief Operating Officer with an increase in base salary from $475,000 to $575,000. Except as set forth below, in all other material respects the agreements are substantially identical to the September 1999 agreement.
The second amendment provides for a one-time retention bonus for each of Mr. Watterson and Mr. Stevenson of $300,000. Each executive is also entitled to participate in a bonus program providing for a bonus equal to a percentage of our consolidated EBITDA (as defined in our credit facility) and our subsidiaries (our "EBITDA") which percentage shall equal 1.50% for Mr. Watterson and 1.32% for Mr. Stevenson. The executives will not be entitled to a bonus, however, unless our Profits exceed 5.5% of net sales.
We may terminate each executive's employment (1) for cause as provided in each agreement, (2) upon six months' disability, or (3) without cause. Each executive may similarly terminate his employment immediately for cause as provided in his employment agreement, upon three months notice to perform full-time church service or for any reason upon six months' notice. In the event we terminate either executive's employment for cause, or such employment terminates as a result of the death of the executive, as the case may be, the executive will not be entitled to further salary, benefits or bonus. If we terminate the executive's employment without cause, or the executive terminates his employment with or without cause, we will be obligated to pay the executive his salary and bonus for a period of three years from the date of termination. If we terminate the executive's employment upon the executive's disability, we are obligated to pay as severance an amount equal to one month's base salary
then in effect for each calendar year or part thereof elapsed since January 1, 1988, provided that such severance pay is reduced by payments under applicable disability insurance.
The employment agreements prohibit the executives from engaging in outside business activity during the term, subject to exceptions. The employment agreements provide for customary confidentiality obligations and, in addition, a non-competition obligation for a period of four years following termination (two years if the executive quits with cause or without cause or is terminated without cause, except that we may, at our option, extend such period for up to two additional years by paying the executive his salary and bonus during the extended period).
Under the employment agreements, the executives (and their affiliates) shall be entitled to indemnification to the fullest extent allowed by Delaware law with respect to all losses, costs, expenses and other damages in connection with any lawsuits or other claims brought against them in their capacity as officers or directors or shareholders (or affiliates thereof) of HF Holdings or any of its past or present parent or subsidiary or other affiliated companies.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
HF Holdings owns all of our outstanding common stock. The following table and related notes set forth information with respect to the beneficial ownership of HF Holdings' 7,771,613 outstanding shares of common stock as of May 31, 2003 by (i) each person known to HF Holdings to beneficially own more than 5.0% of the outstanding shares of common stock of HF Holdings, and (ii) each director and executive officer of HF Holdings individually and (iii) all directors and executive officers of HF Holdings as a group.
Item 13.
Item 13. Certain Relationships and Related Party Transactions
Management Equity Grant. On September 27, 1999, HF Holdings issued to Scott Watterson and Gary Stevenson, without cost, an aggregate of 666,700 shares of the common stock of HF Holdings (or approximately 6.7% of its common stock outstanding on a fully diluted basis upon the consummation of the September recapitalization). Mr. Watterson received 375,000 of these shares, while Mr. Stevenson received 291,700 shares.
Stockholders Agreement. On September 27, 1999, we entered into a stockholders agreement (the "Stockholders Agreement") with HF Holdings, HF Investment Holdings, Bain, Credit Suisse First Boston Corporation ("CFSB") and Scott Watterson and Gary Stevenson.
Under the Stockholders Agreement, holders of HF Holdings' common stock, who received such common stock in the exchange offer, are subject to transfer restrictions with respect to their common stock. In addition, these holders received customary tag along and drag along rights with respect to sales of common stock of HF Holdings (including sales by any Bain Holder) and pre-emptive rights with respect to any issuances of common stock by HF Holdings to HF Investment Holdings. The tag along, drag along and registration rights of our management are subject to the condition that our senior management own at least 25% of the common stock held by all management holders and the junior management own at least 15% of the common stock of HF Holdings held by all management holders, provided such person is still employed by us or has been employed within the 12 preceding months and the purchaser of the common stock is a financial buyer.
Holders of warrants to purchase common stock of HF Holdings issued in the exchange offer received registration rights with respect to the common stock issuable upon exercise of such warrants.
Pursuant to the Stockholders Agreement, HF Investment Holdings granted to CSFB an option to purchase a certain percentage (based on the date of exercise of such option) of the common stock of HF Holdings held by HF Investment Holdings. HF Investment Holdings also granted to members of our junior management an option to purchase 216,700 shares of common stock of HF Holdings held by HF Investment Holdings. Each of these options is exercisable only upon the occurrence of a Liquidity Event (as defined in the Stockholders Agreement).
In addition, HF Investment Holdings is entitled to appoint seven directors and CSFB is entitled to appoint two directors to our Board of Directors. Upon a liquidation of HF Investment Holdings, Bain will be entitled to appoint five directors and Scott Watterson and Gary Stevenson shall have the right to be directors, provided they remain employed by us.
Management Agreements. On September 27, 1999, our Company and HF Holdings also entered into a new management agreement with Bain which provides an annual management fee not to exceed $366,500 in exchange for management consulting services including providing advice on strategic planning, development and acquisitions. In addition, if we enter into any acquisition transactions involving a gross purchase price of at least $10.0 million, Bain will receive a fee in an amount which will approximate 1% of the gross purchase price of the transaction (including assumed debt). In the event of a Liquidity Event (as defined in the Stockholders Agreement), Bain will also receive a fee in an amount which will approximate 1% of the gross purchase price of the transaction.
Additionally, HF Holdings entered into a management arrangement with CSFB which provides for an annual management fee of $366,500 in exchange for consulting services. In addition, if we enter into transactions which will constitute a Liquidity Event (as defined in the Stockholders Agreement), CSFB will receive a fee in an amount which will approximate 50% of the fee payable under the management agreement with Bain in connection with such transaction.
On September 27, 1999, our Company and HF Holdings also entered into management agreements with each of Mr. Watterson and Mr. Stevenson which provide, so long as Bain is receiving a management fee under its management agreement, an annual management fee of $67,000 in the aggregate shall be paid to Mr. Watterson and Mr. Stevenson.
The respective management agreements include full indemnification and expense reimbursement provisions in favor of Bain, CSFB, Mr. Watterson and Mr. Stevenson, respectively.
Loans to Senior Management
On September 27, 1999 we made non-recourse loans to Scott Watterson and Gary Stevenson in the principal amounts of $1,209,340 and $990,660 respectively. The loans were made in connection with stock grants made to Messrs. Watterson and Stevenson at the time of our September 1999 recapitalization. The notes bear interest only to the extent that we have taxable net income less than zero in any given fiscal year. The notes are secured by shares of ICON and shares of HF Investment Holdings LCC held by Messrs. Watterson and Stevenson. The notes have a maturity of 10 years and may be accelerated upon specified events of default and liquidity events.
Aircraft Lease
In June 1996, we entered into an agreement with FG Aviation, Inc. ("FG"), a company which is jointly owned by our officers, whereby we committed to lease an airplane from FG. Minimum rentals under the lease, which expires in May 2005, are $56,610 per month.
In February 2002, we entered into a new agreement with FG whereby we terminated the original airplane lease and committed to lease a new airplane from FG. Minimum lease rentals under the lease, which expires February 2009, are $120,000 per month. We are responsible for scheduled maintenance and fuel costs; however, these costs reduce the monthly rental. In addition, we are responsible for payment of the aircraft crew and any unscheduled maintenance of the aircraft. In connection with its airplane lease commitments, we recorded $809,000, $695,000 and $903,000 of rental expense for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. In addition, in February 2002, we advanced $280,000 to FG as a security deposit on the aircraft lease.
Item 14.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of May 31, 2003 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them, on a timely basis, to material information relating to our Company (including our consolidated subsidiaries) required to be included in our periodic filings under the Exchange Act.
Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this report:
Consolidated Financial Statements (See Item 8)
Consolidated Balance Sheets at May 31, 2003 and 2002
Consolidated Statements of Operations and Comprehensive Income for the Years Ended May 31, 2003, 2002, and 2001
Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended May 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended May 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Financial Statement Schedule (See Item 8)
Schedule II - Valuation and Qualifying Accounts for the three Years Ended May 31, 2003
All other schedules are omitted as the required information is not applicable or is included in the financial statements or related notes, or can be derived from information contained in the consolidated financial statements and related notes.
Exhibits
The following designated exhibits have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 and are referred to and incorporated herein by reference to the correspondingly numbered exhibit filed as part of the Registrants' Registration Statement on Form S-1 of IHF Capital, as amended (No. 33- 87930/87930-1) and on Form S-4 of ICON Fitness, as amended (No. 333-18475).
1.1 Purchase Agreement dated November 15, 1996 regarding the issuance and sale of the Senior Discount Notes between ICON Fitness and Donaldson, Lufkin & Jenrette Securities Corporation. 3.1 Certificate of Incorporation. 3.1A Amendment to Certificate of Incorporation. 3.2 By-laws. 4.2 Indenture dated as of November 20, 1996 between ICON Fitness as Issuer, and Fleet National Bank as Trustee, with respect to the $162,000,000 in aggregate principal amount at maturity of Senior Discount Notes due 2006, including the form of the Senior Discount Note. 4.2A Supplemental Indenture dated as of March 20, 1995 between IHF Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the $123,700,000 in aggregate principal amount at maturity of Discount Notes due 2004.
4.3 Registration Rights Agreement dated as of November 20, 1996 by and between ICON Fitness and Donaldson, Lufkin & Jenrette Securities Corporation. 4.4 Registration rights Agreement dated November 14, 1994 between ICON Health and Weider Health and Fitness with respect to the Senior Subordinated Notes due 2004. 10.1 Amended and Restated Credit Agreement dated as of November 14, 1994 among ICON Health, the lenders named therein, and General Electric Capital Corporation. 10.1A Agreement of IHF Holdings, Inc. and IHF Capital, dated November 14, 1994 in favor of General Electric Capital Corporation, as agent. 10.1B Amended and Restated Credit Agreement dated as of July 15, 1998 among ICON Health & Fitness, Inc., the lenders named therein, and General Electric Capital Corporation. 10.1C Amended and Restated Credit Agreement dated as of April 15, 1999 among ICON Health & Fitness, Inc., the lenders named therein, and General Electric Capital Corporation. 10.1D Amended and Restated Credit Agreement dated as of April 16, 1999 among ICON Health & Fitness, Inc., the lenders named therein, and General Electric Capital Corporation. 10.2 First Amended and Restated Master Transaction Agreement dated as of October 12, 1994 among ICON Health and each of Weider Health and Fitness and Weider Sporting Goods, Inc. and each of Hornchurch Investments Limited, Bayonne Settlement, The Joe Weider Foundation, Ronald Corey, Jon White, William Dalebout, David Watterson, S. Fred Beck, Gary Stevenson and Scott Watterson. 10.3 Adjustment Agreement dated as of November 14, 1994 between Weider Health and Fitness and Health & Fitness. 10.4 Stockholder Agreement dated as of November 14, 1994 by and among ICON Health, IHF Holdings each of the Bain Funds named therein and certain other persons named therein. 10.4A Registration Rights Agreement dated November 14, 1994 among ICON Health and IHF Holdings and Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co. 10.5 Non-Competition Agreement dated as of November 14, 1994 among ICON Health, Weider Health and Fitness, Gary E. Stevenson and Scott R. Watterson. 10.6 Management and Advisory Agreement dated as of November 14, 1994 among ICON Health, IHF Holdings, the Company, and Bain Capital Partners IV, L.P. 10.7 Distribution Agreement dated as of September 26, 1994, as amended by letter of Ben Weider dated October 12,1994 between ICON Health and Weider Sports Equipment Co., Ltd. 10.8 Exclusive License Agreement dated as of November 14, 1994 among Weider Health and Fitness, Weider Sporting Goods, Inc., Weider Europe B.V., and Health & Fitness. 10.9 Canada Exclusive License Agreement dated as of November 14, 1994 between Weider Sports Equipment Co., Ltd. and Health & Fitness. 10.10 Employment Agreement dated as of November 14, 1994 among the Company, ICON Health, IHF Holdings and Gary E. Stevenson. 10.10B Second Amendment to Employment Agreement dated as of May 17, 2003 among the Company, ICON Health, and HF Holdings and Gary E. Stevenson. 10.11 Employment Agreement dated as of November 14, 1994 among the Company, ICON Health, IHF Holdings and Scott R. Watterson. 10.11B Second Amendment to Employment Agreement dated as of May 17, 2003 among the Company, ICON Health, and HF Holdings and Scott R. Watterson. 10.12 Asset Option Agreement dated as of November 14, 1994 among Health & Fitness, Weider Sporting Goods, Inc. and Weider Europe B.V., including ICON Health's assignment of its rights thereunder.
10.13 Asset Option Agreement dated as of November 14, 1994 between ICON Health and each of Athletimonde Inc., Les Industries Rickbend Inc. and Fitquip International Inc., including ICON Health's assignment of its rights thereunder. 10.14 CanCo Management and Advisory Agreement dated as of November 14, by and among ICON Health, Scott Watterson, Gary E. Stevenson and Les Industries Rickbend Inc., Althletimonde Inc., and Fitquip International Inc., including Health & Fitness' assignment of rights thereunder. 10.15 Weider Europe Management Agreement dated as of November 14, 1994 among ICON Health and Weider Europe B.V., including Health & Fitness' assignment of its rights thereunder. 10.16 Amended and Restated WSG Management Agreement dated as of June 1, 1994 among ICON Health, Weider Health and Fitness and Weider Sporting Goods, Inc. 10.17 Advertising Space Contract dated as of November 14, 1994 between ICON Health and Weider Publications, Inc. 10.18 Trade Payables Agreement dated as of November 14, 1994 between ICON Health and IHF Holdings. 10.19 Tax Agreement dated as of November 14, 1994 among the Company and its subsidiaries. 10.20 The Company's Stock Subscription and Exchange Agreement dated as of November 14, 1994 among the Company and each of the Existing Stockholders named therein. 10.21 Warrant Agreement dated as of November 14, 1994 among IHF Capital, Weider Health and Fitness, Scott Watterson and Gary Stevenson. 10.22 Bain Stock Subscription Agreement dated as of November 14, 1994 among the Company and each of the Bain Funds and other subscribers named therein. 10.23 IHF Capital's Stock Subscription and Purchase Agreement dated as of November 14, 1994 among IHF Capital and the Subscribers named therein. 10.24 IHF Holdings Stock Subscription and Exchange Agreement dated as of November 14, 1994 among IHF Holdings and each of the persons named therein. 10.25 IHF Capital's Option Exchange Agreement dated as of November 14, 1994, among the Company, Scott Watterson and Gary Stevenson. 10.26 IHF Holdings Option Exchange Agreement dated as of November 14, 1994, among IHF Holdings, Scott Watterson and Gary Stevenson. 10.27 IHF Capital's Employee Stock Option Plan dated as of November 14, 1994. 10.27.1 Form of Option Certificate for Management Options. 10.27.2 Form of Option Certificate for Performance Options. 10.28 Agreement and Plan of Merger dated as of November 14, 1994 among ICON Health, American Physical Therapy, Inc., Weslo, Inc. and ProForm Fitness Products, Inc. 10.29 Promissory Note dated December 30, 1993 and a loan made by David Watterson in favor of ProForm Fitness Products, Inc. in the amount of $60,000. 10.30 Promissory Note dated December 30, 1993 and a loan, made by William Dalebout in favor of ProForm Fitness Products, Inc. in the amount of $57,000. 10.31 Promissory Note dated December 30, 1993 and a loan, made by Fred Beck in favor of ProForm Fitness Products, Inc. in the amount of $60,000. 10.32 Promissory Note dated December 30, 1993 and a loan, made by Jon White in favor of ProForm Fitness Products, Inc. in the amount of $57,000.
10.33 Sublease dated as of June 1, 1994 between Weider Health and Fitness and ProForm Fitness Products, Inc. 10.34 Indenture dated as of November 14, 1994 between ICON Health, as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the $101,250,000 in aggregate principal amount of Senior Subordinated Notes due 2002, including the form of Senior Subordinated Note. 10.34A Supplemental Indenture dated as of March 20, 1995 between ICON Health, as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the $101,250,000 in aggregate principal amount of Senior Subordinated Notes due 2002. 10.35 Indenture dated as of November 14, 1994 between IHF Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the $123,700,000 in aggregate principal amount at maturity of Discount Notes due 2004, including the form of Discount Note. 10.35A Supplemental Indenture dated as of March 20, 1995 between IHF Holdings, as Issuer, and Fleet Bank of Massachusetts, N.A., as Trustee, with respect to the $123,700,000 in aggregate principal amount at maturity of Discount Notes due 2004. 10.36 Registration Rights Agreement dated November 14, 1994 between ICON Health and Weider Health and Fitness with respect to the Senior Subordinated Notes due 2002. 10.37 Asset Purchase Agreement dated as of July 3, 1996 by and among IHF Capital, Inc. HealthRider Acquisition Corp. and HealthRider, Inc. 10.38 Asset Purchase Agreement for the purchase of certain assets of Parkway Manufacturing, Inc. dated July 3, 1996. 10.39 Buy-Out Agreement between HealthRider Acquisition Corp. and Parkway Manufacturing, Inc. dated August 26, 1996. 10.40 IHF Capital's 1996 Stock Option Plan. 10.41 WSE Asset Purchase Agreement dated September 6, 1996 between Weider Sports Equipment Co. Ltd. and ICON Health. 10.42 CanCo Asset Purchase Agreement, dated September 6, 1996 among ICON of Canada Inc., ICON Health, ALLFITNESS, Inc., Scott Watterson and Gary Stevenson. 10.43 Stock and Warrants Purchase Agreement, dated September 6, 1996 among IHF Capital, Inc., IHF Holdings, Inc., Weider Health & Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch Investments Limited, Ronald Corey, Bernard Cartoon, Ronald Novak, Eric Weider, Richard Bizarro, Robert Reynolds, Michael Carr, Thomas Deters, Barbara Harries and Zbigniew Kindella. 10.44 Amendment No. 1 to Stockholders Agreement, dated September 6, 1996 among IHF Holdings, Inc., Weider Health & Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch Investments Limited, the Fund Investors, DLJ Capital Corporation, General Electric Capital Corporation, and certain other signatories named therein. 10.45 Amendment and Restatement of Stockholders Agreement, dated as of September 6, 1996 among IHF Holdings, Inc., Weider Health & Fitness, Greyfriars Limited, Bayonne Settlement, Hornchurch Investments Limited, the Fund Investors, DLJ Capital Corporation, General Electric Capital Corporation, and certain other signatories named therein. 10.46 Key Executive Preferred Stock Option Purchase Agreement, dated September 6, 1996 among IHF Capital, Inc., Gary Stevenson and Scott Watterson. 10.47 First Amendment to Stevenson Employment Agreement, dated September 6, 1996 to the Employment Agreement dated November 14, 1994 among ICON Health & Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Gary Stevenson.
10.48 First Amendment to Watterson Employment Agreement, dated September 6, 1996 to the Employment Agreement dated November 14, 1994 among ICON Health & Fitness, IHF Capital, Inc., IHF Holdings, Inc. and Scott Watterson. 10.49 Weider Release, dated September 6, 1996 by Weider Health & Fitness, Weider Sports Equipment Co., Ltd., Weider Sporting Goods, Inc., Weider Europe, B.V., CANCO, Ben Weider, Eric Weider, Richard Renaud and the Weider Releasors. 10.50 ICON Release, dated September 6, 1996 made by ICON Health, IHF Capital, Inc., IHF Holdings, Inc., Scott Watterson, Gary Stevenson and the ICON Releasors. 10.51 Settlement Agreement, dated September 6, 1996 among ICON Health, IHF Capital, Inc., the Fund Investors, IHF Holdings, Inc., Weider Health & Fitness, Weider Sports Equipment, CANCO, Weider Sporting Goods, Inc., Weider Europe, B.V., and each of Ben Weider, Eric Weider, Richard Renaud, Gary Stevenson and Scott Watterson. 10.52 Escrow Agreement, dated September 6, 1996 among ICON Health, ICON of Canada, Inc., CANCO, Lapointe Rosenstein and Goodman Phillips of Vineberg. 10.53 Representation Agreement, dated September 6, 1996 between ICON Health and Ben Weider. 10.54 Letter Agreement regarding advertising space, dated September 6, 1996 between Weider Publications, Inc., and ICON Health. 10.55 Letters of Credit issued by Royal Bank of Canada to ICON Health dated September 5, 1996. 10.56 Letters of Credit issued by Royal Bank of Canada to ICON Health and ICON of Canada, Inc., dated September 5, 1996. 10.57 Letter from Royal Bank of Canada to ICON of Canada, Inc., dated September 5, 1996, outlining terms of financing by Royal Bank of Canada in favor of ICON of Canada, Inc. 10.58 Letter Agreement dated September 6, 1996 among ICON Health, Ben Weider and Eric Weider regarding charitable contributions. 10.59 Deed of Sale. 21 Subsidiaries of the Company. 24 Powers of Attorney (included on signature page). 25 Statement of Eligibility of Fleet National Bank, Trustee. 27 Financial Data Schedules. 99.1 Form of Letter of Transmittal used in connection with the Exchange Offer. 99.2 Form of Notice of Guaranteed Delivery used in connection with the Exchange Offer.
Reports on Form 8-K
Report on Form 8-K dated April 14, 2003 containing ICON's press release dated April 14, 2003 announcing earnings for the third quarter of fiscal 2003 which ended March 1, 2003.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Pursuant to Section 12 of the Act:
No annual report covering the Registrants' last fiscal year or any proxy material with respect to a meeting of security holders has been sent to any of the Registrants' security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ICON Health & Fitness, Inc. has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
ICON HEALTH & FITNESS, INC. By: /s/ Scott R. Watterson ---------------------------- Name: Scott R. Watterson Title: Chairman of the Board and Chief Executive Officer Date: August 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Signatures Capacity Date - ---------- -------- ---- /s/ Scott R. Watterson - -----------------------Chairman of the Board of August 29, 2003 Scott R. Watterson Directors and Chief Executive Officer (principal Executive Officer)
/s/ Gary E. Stevenson - -----------------------President and Chief Operating August 29, 2003 Gary E. Stevenson Officer
/s/ S. Fred Beck - -----------------------Vice President, Chief Financial August 29, 2003 S. Fred Beck and Accounting Officer, and Treasurer /s/ Robert C. Gay - -----------------------Vice Chairman of the Board of August 29, 2003 Robert C. Gay Directors
/s/ W. Steve Albrecht - -----------------------Director August 29, 2003 W. Steve Albrecht
/s/ Stan Tuttleman - -----------------------Director August 29, 2003 Stan Tuttleman
Report of Independent Auditors
To the Board of Directors and Shareholder of ICON Health & Fitness, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of stockholder's equity (deficit) and of cash flows present fairly, in all material respects, the financial position of ICON Health & Fitness, Inc. and its subsidiaries at May 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the accompanying financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective June 1, 2002, the Company adopted the provisions of EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer", Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", and Statement of Financial Accounting Standards No. 145, "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002".
Salt Lake City, Utah July 17, 2003
ICON Health & Fitness, Inc. CONSOLIDATED BALANCE SHEETS (In Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
ICON Health & Fitness, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
ICON Health & Fitness, Inc. CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT) (In Thousands, except share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
ICON Health & Fitness, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
ICON Health & Fitness, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
Basis of Presentation - The consolidated financial statements include the accounts of ICON Health & Fitness, Inc., and its wholly owned subsidiaries ("the Company"). At May 31, 2003 and 2002, the Company was a wholly owned subsidiary of HF Holdings, Inc. ("HF Holdings" or the "Parent").
Description of Business - The Company is principally involved in the development, manufacturing and distribution of home fitness equipment. The Company's revenues are derived from the sale of various aerobic and anaerobic fitness product lines in domestic and foreign markets. Because product life cycles can be short in the fitness industry, the Company emphasizes new product innovation and product repositioning. The Company primarily sells its products to retailers and, to a limited extent, to end-users through direct response advertising efforts and retail outlets.
2. Significant Accounting Policies
Principles of Consolidation - All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Cash - At May 31, 2003, substantially all of the Company's cash is held by two banks located in Illinois and Massachusetts. The Company does not believe that as a result of this concentration it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
Inventories - Inventories consist primarily of raw materials (principally parts and supplies) and finished goods, and are valued at the lower of cost or market. Cost is determined using standard costs which approximate the first-in, first-out (FIFO) method.
Property and Equipment - Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Expenditures for renewals and improvements are capitalized, and maintenance and repairs are charged to expense as incurred.
Intangible Assets - In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 specifies criteria that must be met in order for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized; but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company adopted the provisions of SFAS No. 141 immediately and SFAS No. 142 effective June 1, 2002. The Company completed an impairment evaluation of its goodwill as of June 1, 2002 and May 31, 2003. No impairment was identified.
At June 1, 2002, goodwill totaled $5,624,000, net of accumulated amortization of $1,919,000. The following table presents what reported net income would have been for the years ended May 31, 2002 and 2001 under SFAS No. 142:
Intangible assets other than goodwill are recorded at cost and are amortized on a straight-line basis over the following estimated useful lives:
Trademarks 20 years Other 5 years
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows from that asset are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset, which is generally based on discounted cash flows. As a result of its review, the Company does not believe that as of May 31, 2003 and 2002, any impairment exists related to its long-lived assets.
Deferred Financing Costs - The Company deferred certain debt issuance costs relating to the establishment of the New 2002 Credit Facilities and the issuance of the 11.25% Notes as part of the April 2002 Refinancing (see Note 8). These costs are capitalized in other long-term assets and are being amortized using the effective interest method. Deferred costs relating to the 12% Notes and existing bank credit agreement were written off as part of the April 2002 Refinancing.
Advertising Costs - The Company expenses the costs of advertising as incurred, except for the cost of direct response advertising, which is capitalized and amortized over its expected period of future benefit, generally twelve months. Direct response advertising costs consist primarily of costs to produce infomercials for the Company's products. At May 31, 2003 and 2002, $1,792,000 and $1,586,000, respectively, of capitalized advertising costs were included in other current assets. For the fiscal years ended May 31, 2003, 2002 and 2001, total advertising expense was approximately $30,743,000, $17,169,000 and $13,011,000, respectively.
Revenue Recognition - The Company recognizes revenue upon the shipment of product to the customer. Allowances are recognized for estimated returns, discounts, advertising programs and warranty costs associated with these sales.
Concentration of Credit Risk - The primary financial instruments which potentially expose the Company to concentration of credit risk include trade accounts receivable. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed and reserves are maintained; however, collateral is not required. A significant portion of the Company's sales are made to Sears Roebuck ("Sears"). Sears accounted for approximately 39%, 44% and 44% of the total net sales for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. Accounts receivable from Sears accounted for approximately 31% and 35% of gross accounts receivable at May 31, 2003 and 2002, respectively. The Company is not the exclusive supplier of home fitness equipment to any of its major customers. The loss of, or a substantial decrease in the amount of purchases by, or a write-off of any significant receivable due from, any of its major customers would have a material adverse effect on the Company's business.
Research and Development Costs - Research and product development costs are expensed as incurred. Research and development activities include the design of new products and product enhancements, and are performed by both internal and external sources.
Income Taxes - The Company accounts for income taxes utilizing the asset and liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at currently enacted tax rates. If appropriate, deferred tax assets are reduced by a valuation allowance which reflects expectations of the extent to which such assets will be realized.
As of May 31, 2003 and 2002, the Company was included as part of the consolidated tax return filed by HF Holdings, Inc. The income tax provision for the Company has been prepared on a separate company basis.
Foreign Operations - Assets and liabilities of the Company's European and Canadian subsidiaries are translated into U.S. dollars at the applicable rates of exchange at each period end. The Company's foreign transactions are primarily denominated in Canadian dollars and the Euro and transactions with foreign entities that result in income and expense for the Company are translated at the weighted average rate of exchange during the period. Translation gains and losses are reflected as a separate component of other comprehensive income (loss). Transaction gains and losses are recorded in the consolidated statements of operations and comprehensive income (loss) and were not material in the fiscal years ended May 31, 2003, 2002 and 2001. For the fiscal years ended May 31, 2003, 2002 and 2001, the Company's foreign operations represented less than 10% of the Company's net sales and effects of exchange rate changes did not have a material impact on the Company's earnings.
Warranty Reserves - The Company maintains a warranty accrual for estimated future warranty obligations based upon the relationship between historical and anticipated costs and sales volumes. If actual warranty expenses are greater than those projected, additional reserves and other charges against earnings may be required. If actual warranty expenses are less than projected, prior reserves could be reduced providing a positive impact on the Company's reported results. The following table provides a reconciliation of the changes in the Company's product warranty reserve (table in thousands):
The reduction in the warranty reserve in the fiscal year ended May 31, 2002 resulted primarily from the reclassification of the accrued warranty reserve on long-term maintenance contracts to deferred revenue. Revenue from these contracts is recognized ratably over the term of the contract.
Fair Value of Financial Instruments - The following methods and assumptions were used to estimate the fair value disclosures for financial instruments:
11.25% Notes - fair value equals quoted market price.
Other long-term debt - fair value approximates carrying value since such debt is primarily variable rate debt.
The carrying amounts and fair values of long-term debt at May 31, 2003 and 2002 were as follows (table in thousands):
Stock-Based Compensation Plans - The Company accounts for employee stock-based compensation arrangements in accordance with provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for options granted to employees under its fixed stock option plan.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation, which the Company has adopted for the period ending May 31, 2003. As permitted by SFAS No. 148, the Company will continue to account for its stock based compensation according to the provisions of APB No. 25.
Had compensation cost for the Company's stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, the Company's net earnings would have been as follows (table in thousands):
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. Actual results could differ from those estimates.
New Accounting Standards - In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 effective June 1, 2003 did not have a material effect on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 also broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material effect on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritative pronouncements to make various technical corrections, clarify meaning or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 and resulted in the 2002 loss on debt extinguishment being reclassified from an extraordinary item to income from continuing operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses significant issues relating to the recognition, measurement and report of costs associated with exit or disposal activities initiated after December 31, 2002 and is not
expected to have a material effect on the Company's financial position or results of operations.
In November 2001, the Emerging Issues Task Force issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer". EITF 01-09 provides guidance on the accounting treatment of various types of consideration given by a vendor to a customer. The Company has adopted EITF 01-09 effective June 1, 2002, which reduced net sales for the fiscal year ended May 31, 2003 by approximately $31.5 million with a corresponding reduction of selling, general and administrative expenses. This change has no effect on income from operations or net income. For comparative purposes, net sales for fiscal years ended May 31, 2002 and 2001 have been reduced by approximately $24,7 million and $23.5 million respectively, with a corresponding reduction of selling, general and administrative expenses.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the Company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company does not expect FIN 45 to have a material effect on its consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities", which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. The Company does not expect FIN 46 to have a material effect on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The Company does not expect SFAS No. 150 to have a material effect on its consolidated financial statements.
Reclassifications - Certain balances of the prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on net income or total assets.
3. Accounts Receivable
Accounts receivable, net, consist of the following (table in thousands):
4. Inventories
Inventories, net, consist of the following (table in thousands):
Inventories are net of allowances (primarily for finished goods) of $3,900,000 and $3,275,000 at May 31, 2003 and 2002, respectively. These allowances are established based on management's estimates of inventory held at fiscal year end that is potentially obsolete or for which its market value is below cost.
5. Property and Equipment
Property and equipment, net, consist of the following (table in thousands):
For the fiscal years ended May 31, 2003, 2002 and 2001, the Company recorded depreciation expense of $13,166,000, $13,398,000 and $13,619,000, respectively.
6. Intangible Assets
Intangible assets, net, consist of the following (table in thousands):
Amortization expense related to intangible assets for the fiscal years ended May 31, 2003, 2002 and 2001 was $6,004,000, $5,764,000 and $3,753,000, respectively. Approximately $5,624,000 of the net goodwill at May 31, 2003 is tax deductible in future periods. Estimated amortization expense for years ending after May 31, 2003 is as follows (table in thousands):
7. Other Assets
Other assets, net, consist of the following (table in thousands):
At May 31, 2003 and 2002, deferred financing costs are net of accumulated amortization of $1,438,000 and $171,000, respectively.
Long-term receivables consist of receivables whose collection is not considered to be current because the customer is in bankruptcy and whose carrying values have been written down to net realizable value. At May 31, 2003 and 2002, long-term receivables are net of an allowance for doubtful accounts of $70,000 and $2,434,000, respectively.
As of May 31, 2003, long-term portion of trade receivables consists of the long-term portion of receivables from direct response sales. The allowance for doubtful accounts related to the long-term portion of these receivables is not significant.
8. Long-Term Debt
Long-term debt consists of the following (table in thousands):
April 2002 Refinancing
In April 2002, the Company entered into new credit facilities and issued new 11.25% senior subordinated notes ("11.25% notes") (the "April 2002 Refinancing"). The Company used the net proceeds of the 11.25% Notes and the New 2002 Credit Facilities to repay all outstanding indebtedness under the existing credit agreement, to redeem in full all of the outstanding 12% subordinated notes due 2005, to pay accrued interest and premiums thereon, and pay certain transaction fees and expenses.
New Credit Facilities
In connection with the April 2002 Refinancing, the Company entered into new credit facilities (the "New 2002 Credit Facilities") of $235 million with a syndicate of banks and financial services companies.
The New 2002 Credit Facilities include a $210 million revolving credit line (the "2002 Revolver"), which includes a letter of credit sub-facility of up to $10 million and a swing line sub-facility of up to $10 million. The term is five years. Borrowing availability is limited to certain percentages of qualified assets as specified in the agreement. The letter of credit margin of 2% and an unused facility fee of .50% per annum of the average unused daily balance of the 2002 Revolver are due monthly.
In addition, the New 2002 Credit Facilities include a $25 million Term Loan ("2002 Term Loan") with a 58-month term. The 2002 Term Loan amortizes quarterly at a rate of $1,250,000. At the Company's option, the 2002 Revolver and 2002 Term Loan bear interest at either (a) a floating rate equal to the Index Rate plus the applicable margin of 1.25% and 1.75%, respectively, or (b) a floating rate equal to the LIBOR rate plus the applicable margin of 2.625% and 3.125%, respectively. If the 2002 Revolver is terminated or if the 2002 Term Loan is prepaid, certain prepayment premiums will apply.
All loans under the New 2002 Credit Facilities are collateralized by a first priority security interest in all of the existing and subsequently acquired assets of the Company and its domestic and Canadian subsidiaries, subject to specified exceptions, and a pledge of 65% of the stock of the Company's first-tier foreign subsidiaries. All loans are cross-collateralized and contain cross default provisions.
All of the outstanding common stock of the Company, owned by HF Holdings, has been pledged to the lenders under the New 2002 Credit Facilities. If the Company were to default under these New 2002 Credit Facilities, the lenders would foreclose on the pledge and take control of the Company.
The new credit agreement contains a number of restrictive covenants that, among other things, limit or restrict the Company's and its subsidiaries' ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make restricted payments, create liens, make equity or debt investments, make certain acquisitions, modify terms of the indenture, engage in mergers or consolidations, enter into operating leases or engage in transactions with affiliates. In addition, the Company is expected to comply with various financial ratios and tests, including a maximum capital expenditures test, minimum debt service coverage ratio, minimum EBITDA, maximum senior leverage ratio and minimum revenue. At May 31, 2003, the Company was in compliance with all of its debt covenants.
11.25% Senior Subordinated Notes
The new 11.25% Notes are due April 2012. The 11.25% Notes were issued with a face principal amount of $155 million at a price of 98.589%. Interest is due January 1 and July 1 of each year, beginning on July 1, 2003. The 11.25% Notes are redeemable for a premium of between 1% and 5.625% anytime after April 2007, as outlined in the indenture. Up to 35% of the 11.25% Notes can be redeemed prior to April 1, 2005 at an 11.25% premium. The 11.25% Notes are guaranteed on an unsecured, senior subordinated basis by the Company's existing and future domestic subsidiaries.
The 11.25% Notes contain certain restrictive covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional debt, pay dividends or make other distributions, make investments, dispose of assets, issue capital stock of subsidiaries, enter into mergers or consolidations or sell all, or substantially all, of their assets.
The table below reflects the scheduled principal payment terms of the Company's long-term debt (table in thousands):
For the fiscal year ended May 31, 2002, a loss of approximately $7.4 million was recorded on the extinguishment of the Company's Old 1999 Credit Facilities and the 12% Notes.
9. Stockholder's Equity
The Company has 3,000 shares of $.01 par value common stock authorized and 1,000 shares issued and outstanding.
During the fiscal year ended May 31, 2000, the Company established a new Junior Management stock option plan (the "Plan") and issued 333,300 options to purchase common stock of HF Holdings with an exercise price of $5.83 to members of the Plan. These options have a ten-year life, 25% vested immediately and the balance vests in 25% increments on each anniversary of the grant date. The following table summarizes activity under the Plan for the fiscal years ended May 31, 2003, 2002 and 2001:
The following table summarizes information about stock options outstanding at May 31, 2003:
The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) risk-free interest rate of 6.00%; (2) expected life of five years; (3) dividend yield of zero; and (4) a volatility of zero.
10. Income Taxes
The provision for income taxes consists of the following (table in thousands):
The components of the Company's income before income taxes are as follows (table in thousands):
The provision for income tax differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows:
At May 31, 2003 and 2002, the net deferred tax asset consists of the following (table in thousands):
In February 2002, the Internal Revenue Service ("IRS") completed an examination of the Company's taxable years ended May 31, 1997, 1996 and 1995. In May 2003, the examination report was approved by the Congressional Joint Committee. As a result of this examination, approximately $35.0 million of previously deducted expenses for tax purposes were capitalized during the fiscal year ended May 31, 2002 and are currently being amortized over fifteen years. These adjustments created a long-term deferred tax asset of approximately $11.5 million.
During the fiscal year ended May 31, 2002, the valuation allowance increased by $624,000 due to additional foreign net operating loss carryforwards that may not be utilized in future years. During the fiscal year ended May 31, 2001, the valuation allowance decreased by $16,466,000 due to the elimination of net operating loss carryforwards that would provide no future benefit to the Company.
Management believes that it is more likely than not that the Company will generate sufficient future taxable income to realize the balance of the net deferred tax asset as of May 31, 2003. However, there can be no assurance that the Company will generate any specific level of taxable income or that it will be able to realize any of the remaining deferred tax assets in future periods. If the Company were unable to generate sufficient taxable income in the future, an additional valuation allowance against this deferred tax asset would result in a charge to earnings.
During the fiscal year ended May 31, 2001, the Company utilized approximately $9.5 million in net operating loss carryforwards generated during the period from September 1999 to May 2000.
At May 31, 2003, the Company had approximately $21.2 million of foreign net operating loss carryforwards which may be carried forward indefinitely. The Company has provided a full valuation allowance against the deferred tax asset related to these carryforwards.
11. Supplemental Disclosures of Cash Flow Information
Non-cash investing and financing activities:
During the fiscal year ended May 31, 2001, the Company added interest of $2.9 million to long-term debt principal.
12. Commitments and Contingencies
Leases - The Company has noncancellable operating leases, primarily for warehouse and production facilities and computer and production equipment, that expire over the next five years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Future minimum payments under noncancellable operating leases consist of the following (table in thousands):
Year ending May 31: ------------------ 2004 $ 9,131 2005 10,917 2006 7,818 2007 4,715 2008 1,456 Thereafter 2,324 ------------------ $ 36,361 ==================
Rental expense under noncancellable operating leases was approximately $14,650,000, $15,060,000 and $15,282,000 for the fiscal years ended May 31, 2003, 2002 and 2001, respectively.
Environmental Issues - The Company's operations are subject to federal, state and local health, safety and environmental laws and regulations that impose workplace standards and limitations on the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials, substances and wastes. As of July 17, 2003, the Company was unaware of any environmental, health or safety violations.
Product Liability - Due to the nature of the Company's products, the Company is subject to product liability claims involving personal injuries allegedly related to the Company's products. These claims include injuries sustained by individuals using the Company's products. The Company currently carries an occurrence-based product liability insurance policy. The current policy provides coverage for the period from October 1, 2002 to October 1, 2003 of up to $5.0 million per occurrence and $5.0 million in the aggregate. The
policy has a deductible on each claim of up to $1,000,000. For occurrences prior to October 1, 2002, the policy provides coverage of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $500,000. For occurrences prior to October 1, 2001, the policy provides coverage of up to $5.0 million per occurrence and $25.0 million in the aggregate. The policy has a deductible on each claim ranging from $100,000 to $250,000. The Company believes that its insurance is generally adequate to cover product liability claims. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation, and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to uncertainty with respect to the nature and extent of manufacturers' and distributors' liability for personal injuries, the Company cannot guarantee that its product liability insurance is or will be adequate to cover such claims. The Company vigorously defends any and all product liability claims brought against it and does not believe that any currently pending claim or series of claims will have a material adverse effect on its results of operations, liquidity or financial position.
Other Litigation - The Company is party to a variety of non-product liability commercial suits involving contract claims. The Company believes that adverse resolution of these lawsuits would not have a material adverse effect on its results of operations or financial position.
In December 2001, a claim was made against the Company alleging the Company received $1.7 million of preferential transfers in connection with the 1999 Service Merchandise bankruptcy proceedings. The proposed claim is currently being vigorously defended by the Company's counsel. At this time, the Company and its counsel are unable to determine the likelihood of an unfavorable outcome or the amount or range of potential recovery or loss.
The Company is involved in litigation with Vectra Fitness, Inc. ("Vectra"). Vectra filed a civil action in the United States District Court, for the Western District of Washington in Seattle, Washington. Vectra is alleging one claim of patent infringement by the Company on one of its patents. The complaint seeks monetary damages and other relief. This case is currently being vigorously defended by the Company's counsel; however, it is not possible for the Company to quantify with any certainty the extent of any potential liability.
The Company is also involved in several intellectual property and patent infringement claims, arising in the ordinary course of its business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect upon its results of operations or financial position.
Retirement Plans - All employees who have met minimum age and service requirements are eligible to participate in the 401(k) savings plan. Company contributions to the plan for the fiscal years ended May 31, 2003, 2002 and 2001 were $630,000, $610,000 and $540,000, respectively.
In September 2001, the Company established a nonqualified deferred compensation plan that permits certain employees to annually elect to defer a portion of their compensation for their retirement. The amount of compensation deferred and related investment earnings have been placed in an irrevocable rabbi trust and recorded within other assets in the Company's consolidated balance sheet, as this trust will be available to the Company's general
creditors in the event of insolvency. An offsetting deferred compensation liability, which equals the total value of the trust at May 31, 2003 and 2002 of $4,015,000 and $1,238,000, respectively, and which is recorded within other liabilities in the Company's consolidated balance sheet, reflects amounts due to employees who contributed to the plan. The Company's contributions to the deferred compensation plan for the fiscal years ended May 31, 2003 and 2002 were $1,293,000 and $120,000, respectively.
Employment Agreements - In May of 2003, the Company renegotiated the September 27, 1999 employment agreements ("second amendment") with each of the Chairman and Chief Executive Officer and the President and Chief Operating Officer. The second amendment extends these agreements to September 27, 2005. The employment agreements provide for the continued employment of Chairman and Chief Executive Officer with an increase in base salary from $525,000 to $625,000, and President and Chief Operating Officer with an increase in base salary from $475,000 to $575,000. Except as set forth below, in all other material respects the agreements are substantially identical to the September 1999 agreement.
The second amendment provides for a one-time retention bonus for each of Chairman and Chief Executive Officer and President and Chief Operating Officer of $300,000. Each executive is also entitled to participate in a bonus program providing for a bonus equal to a percentage of the Company's consolidated EBITDA (as defined in the Company's credit facility) and the Company's subsidiaries (the Company's "EBITDA") which percentage shall equal 1.50% for Chairman and Chief Executive Officer and 1.32% for President and Chief Operating Officer. The executives will not be entitled to a bonus, however, unless the Company's Profits exceed 5.5% of net sales.
The Company may terminate each executive's employment (1) for cause as provided in each agreement, (2) upon six months' disability, or (3) without cause. Each executive may similarly terminate his employment immediately for cause as provided in his employment agreement, upon three months notice to perform full-time church service or for any reason upon six months' notice.
The employment agreements prohibit the executives from engaging in outside business activity during the term, subject to certain exceptions. The employment agreements provide for customary confidentiality obligations and, in addition, a non-competition obligation for a period of four years following termination (two years if the executive quits with cause or without cause or is terminated without cause, except that the Company may, at the Company's option, extend such period for up to two additional years by paying the executive his salary and bonus during the extended period).
In fiscal 2003, the Company formed a foreign subsidiary to build a manufacturing facility in Xiamen, China. The total project cost is anticipated to be approximately $12.0 million, with $7.0 million to be funded in the form of equity by the subsidiary, and approximately $5.0 million in the form of debt. The Company's share of the equity investment is expected to be approximately $5.0 million. The Company is in the process of arranging for the debt portion of the financing, which is expected to be provided by the Bank of China.
13. Related Party Transactions
Management Fees
The Company has an agreement with major stockholders of HF Holdings who provide management and advisory services to the Company. Total annual fees due under this agreement are $800,000, for the fiscal years ended May 31, 2003, 2002 and 2001. The Company recorded management fee expense of $800,000 each year. If the Company enters into any acquisition transaction involving at least $10 million, the Company must pay a fee of approximately 1% of the gross purchase price, including liabilities assumed, of the transaction to these stockholders. In addition, in the event of a Liquidity Event (as defined in the Stockholder's Agreement), the Company will pay a fee in an amount which will approximate 1% of the purchase price of the transaction to another major stockholder.
Airplane Lease
In June 1996, the Company entered into an agreement with FG Aviation, Inc. ("FG"), a company which is jointly owned by officers of the Company, whereby the Company committed to lease an airplane from FG. Minimum rentals under the lease, which expires in May 2005, are $56,610 per month.
In February 2002, the Company entered into a new agreement with FG whereby the Company terminated the original airplane lease and committed to lease a new airplane from FG. Minimum lease rentals under the lease, which expires February 2009, are $120,000 per month. The Company is responsible for scheduled maintenance and fuel costs; however, these costs reduce the monthly rental. In addition, the Company is responsible for payment of the aircraft crew and any unscheduled maintenance of the aircraft. In connection with its airplane lease commitments, the Company recorded $809,000, $695,000 and $903,000 of rental expense for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. In addition, in February 2002, the Company advanced $280,000 to FG as a security deposit on the aircraft lease.
Receivable from Parent
As part of the September 1999 Restructuring, HF Holdings loaned to senior management an aggregate of $2.2 million against non-recourse notes with a maturity of 10 years. HF Holdings used funds advanced from the Company to make the loans. The notes bear interest at a rate equal to that of the New Credit Facilities, payable in cash until the first date as of which the cumulative net taxable income of the Company arising on or after the date of consummation of the September 1999 Restructuring exceeds zero. As of May 31, 2003 and 2002, these notes are non-interest bearing. The notes may be accelerated upon specified defaults and liquidity events, and are collateralized by shares of HF Holdings common stock.
14. Acquisition of Business
On December 20, 2000, the Company acquired certain assets of a corporation. The aggregate purchase price was $3,997,000, net of cash acquired of $3,438. The acquisition was accounted for under the purchase method of accounting.
The costs of the acquisition have been allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed
as reflected in the following table (in thousands). The results of the operations of the acquired business have been included in the accompanying consolidated financial statements since the date of acquisition. The acquired corporation's historical revenue and net income for the period preceding the acquisition date was not significant to the Company.
As a result of a contingent purchase price agreement, the Company paid $306,000 of additional consideration during the fiscal year ended May 31, 2002, which was classified as goodwill.
15. Geographic Segment Information
Based on the Company's method of internal reporting, the Company operates and reports as a single industry segment, which is, development, manufacturing and distribution of home fitness equipment.
Revenue and long-lived asset information by geographic area as of and for the fiscal years ended May 31 is as follows (table in thousands):
Foreign revenue is based on the country in which the sales originate (i.e. where the legal subsidiary is domiciled). Revenue from no single foreign country was material to the consolidated revenues of the Company.
16. Condensed Consolidating Financial Statements
The Company's subsidiaries JumpKing, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc. and Free Motion Fitness, Inc. ("Subsidiary Guarantors") have fully and unconditionally guaranteed on a joint and several basis, the obligation to pay principal and interest with respect to the 11.25% Notes. A significant portion of the Company's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Company's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company's subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 11.25% Notes. Although holders of the 11.25% Notes will be direct creditors of the Company's principal direct subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the 11.25% Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Company, including the holders of the 11.25% Notes.
The following supplemental consolidating condensed financial statements are presented (in thousands):
1. Consolidating condensed balance sheets as of May 31, 2003 and 2002 and consolidating condensed statements of operations and cash flows for each of the years in the three year period ended May 31, 2003.
2. The Company's combined Subsidiary Guarantors and combined Non- Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method.
3. Elimination entries necessary to consolidate the Company and all of its subsidiaries.
Valuation and Qualifying Accounts Financial Statement Schedule II (in thousands)
CERTIFICATION --------------
I, Scott R. Watterson, certify that:
1. I have reviewed this annual report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 29, 2003
/s/ Scott R. Watterson - ---------------------- Scott R. Watterson Chief Executive Officer
CERTIFICATION --------------
I, Gary E. Stevenson, certify that:
1. I have reviewed this annual report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 29, 2003
/s/ Gary E. Stevenson - --------------------- Gary E. Stevenson Chief Operating Officer
CERTIFICATION --------------
I, S. Fred Beck, certify that:
1. I have reviewed this annual report of ICON Health & Fitness, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 29, 2003
/s/ S. Fred Beck - ---------------- S. Fred Beck Chief Financial Officer