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Rating Action:

MOODY'S DOWNGRADES INTERACTIVE HEALTH LLC's LONG TERM RATINGS TO Caa1 AND LIQUIDITY RATING TO SGL-4; OUTLOOK CHANGED TO NEGATIVE FROM STABLE

15 Dec 2005
MOODY'S DOWNGRADES INTERACTIVE HEALTH LLC's LONG TERM RATINGS TO Caa1 AND LIQUIDITY RATING TO SGL-4; OUTLOOK CHANGED TO NEGATIVE FROM STABLE

Approximately $100M of Rated Debt Affected

New York, December 15, 2005 -- Moody's Investors Service downgraded the senior notes and corporate family ratings of Interactive Health LLC to Caa1 from B3 and changed the ratings outlook to negative from stable. At the same time, Moody's also downgraded Interactive Health's speculative grade liquidity rating to SGL 4 from SGL 3. The downgrades of the senior notes rating and corporate family rating reflect the recent softening in profitability together with the uncertainties created by the recent acquisition of Brookstone, a major customer, and the expected continued weakness in profitability and cash flow from both Brookstone and The Sharper Image, the company's largest customer. The change in ratings outlook reflects Moody's belief that Interactive's profitability and operating cash flow will be challenged as it attempts to broaden its distribution channels amid uncertainty with Brookstone and moderating business with The Sharper Image.

Moody's is concerned about the company's future business relationship with Brookstone, which accounted for 11% of the company's revenue in the nine months ended September 30, 2005. Brookstone was recently acquired by Osim International, which is believed to own approximately 30% of Daito, the company's major supplier. Moody's believes that Brookstone may significantly reduce its business with Interactive Health as Brookstone increases the prominence of robotic chairs made by other companies going forward. Along these lines, Interactive disclosed that its Q4 2005 and Q1 2006 revenue and net income are expected to be materially lower due to the Brookstone acquisition and excess inventory levels at The Sharper Image. Moody's believes these issues may extend beyond Q1 2006.

Operating margins softened for the LTM ended September 30, 2005, due to increased sales to distributors in the lower-margin international channels and because of increased costs associated with the recently launched infomercials. The company is highly leveraged at over 7x adjusted debt/EBITDA with over $130 million of lease-adjusted debt outstanding, including $47 million of redeemable convertible preferred stock at its parent holding company. The company's high leverage could limit its ability to respond to the uncertainties created by the Brookstone situation.

In addition to its significant customer concentration with Brookstone and The Sharper Image, the company's ratings are also constrained by the company's modest size compared to its main competitor, and its reliance on one overseas vendor, Daito, for its main massage chair product line.

The ratings are supported by the company's low-cost flexible operations, and strong, albeit moderating, operating margins. The company's ratings are also supported by management's focus on new product development at lower price points as demonstrated by the introduction of its iJoy chair in 2003 and new distribution channel opportunities at select mass retail centers as well as direct sales.

The SGL downgrade reflects Moody's belief that, despite Interactive's $14 million of cash at September 30, 2005 and availability under its $30 million revolver, Interactive's liquidity over the next twelve months will be weak due to the potential moderation of operating cash flow following the expected loss of business with Brookstone, weakness in its business with The Sharper Image and the uncertainties surrounding the introduction of new distribution channels. The SGL downgrade also reflects Moody's belief that the company may have to modify its interest coverage covenant because of likely EBITDA moderation.

The negative ratings outlook reflects Moody's belief that Interactive Health's profitability and cash flow generation could further moderate over the next 12 to 18 months if the company's new strategic initiatives do not replace the lost Brookstone business and moderating business with The Sharper Image.

Moody's will consider stabilizing Interactive Health's ratings if profitability and cash flow generation improve through a likely combination of i) resolution of the Brookstone relationship, ii) improved traction of its new sales initiatives and iii) enhanced adjusted operating metrics to previous levels (EBIT margins in the high teens, adjusted leverage of about 5x and interest coverage in the 2x to 3x range).

Ratings could be pressured if Interactive Health's operating results decline more than expected in the fourth quarter of 2005 or in 2006 resulting in EBIT margins of less than 10%, leverage increases to 8x or higher, or interest coverage falls below 1.5x.

The following ratings have been downgraded:

Corporate family rating to Caa1 from B3;

$100 million senior discount notes due 2011, to Caa1 from B3;

Speculative grade liquidity rating to SGL-4 from SGL-3.

Interactive Health LLC, located in Long Beach, CA, is a leading producer and marketer of technologically advanced, branded robotic massage chairs and zero-gravity chairs, and also produces a variety of complementary massage products. Sales for the LTM ended September 30, 2005 approximated $120 million.

New York
Kevin Cassidy
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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