Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 48 220K
2: EX-10.12 Material Contract 39± 143K
3: EX-23 Consent of Experts or Counsel 1 6K
4: EX-24.1 Power of Attorney 1 7K
5: EX-24.2 Power of Attorney 1 7K
6: EX-24.3 Power of Attorney 1 7K
7: EX-24.4 Power of Attorney 1 7K
8: EX-24.5 Power of Attorney 1 7K
9: EX-24.6 Power of Attorney 1 7K
10: EX-27 Financial Data Schedule (Pre-XBRL) 2 9K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
--------------------
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-25867
DIRECT FOCUS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 94-3002667
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 NE 65TH AVENUE, VANCOUVER, WA 98661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 360-694-7722
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
WITHOUT PAR VALUE
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. /x/
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $247,324,553 as of February 29, 2000 based upon the last
sales price as reported by the Nasdaq National Market System.
The number of shares outstanding of the Registrant's Common Stock as of
February 29, 2000 was 10,519,565 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for its 2000 Annual Meeting of
Stockholders.
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DIRECT FOCUS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
[Enlarge/Download Table]
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 19
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Consolidated Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
Signatures 47
2
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
Statements in this Form 10-K that Direct Focus, Inc. considers to be
forward-looking are denoted with an asterisk ("*"), and the following cautionary
language applies to all such statements, as well as any other statements in this
Form 10-K that the reader may consider to be forward-looking. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
and various factors could cause actual results to differ materially from those
in the forward-looking statements. From time to time and in this Form 10-K, we
may make forward-looking statements relating to our financial performance,
including the following:
- Anticipated revenues, expenses and gross margins;
- Anticipated earnings;
- New product introductions; and
- Future capital expenditures.
Numerous factors could affect our actual results, including the
following:
- Our reliance on a limited product line;
- Market acceptance of our existing and future products;
- Growth management challenges;
- Our limited experience in marketing Nautilus Sleep Systems;
- A decline in consumer spending due to unfavorable economic
conditions;
- Government regulatory action;
- Our ability to effectively identify and negotiate any future
strategic acquisitions, as well as to integrate any acquired
businesses into our operations; and
- Unpredictable events and circumstances relating to international
operations, including our use of foreign manufacturers.
We describe certain of these and other key risk factors elsewhere in
this Form 10-K. Readers are further cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this Form 10-K.
We undertake no obligation to update publicly any forward-looking statements to
reflect new information, events or circumstances after the date of this Form
10-K or to reflect the occurrence of unanticipated events.
INTRODUCTION
Direct Focus, Inc. is a direct marketing company that develops and
markets premium quality, premium priced, branded consumer products. We market
consumer products within our direct marketing segment directly to consumers
through a variety of direct marketing channels, including spot television
commercials, infomercials, print media, response mailings and the Internet.
Our principal and most successful directly marketed product to date has
been our Bowflex line of home fitness equipment, which generated $100.9 million,
or 83.3%, of our net sales in 1999. We also offer a line of premium quality
airbed mattresses under the name "Nautilus Sleep Systems," which we test
marketed throughout 1999 and began directly marketing on a nationwide basis late
in the fourth quarter of 1999.
3
Another significant component of our operations is our Nautilus
segment, which encompasses products and operations outside of our direct
marketing segment. Products within our Nautilus segment include Nautilus
commercial fitness equipment and Nautilus consumer fitness equipment and
accessories, both of which we added in January 1999 as part of our acquisition
of Nautilus International, Inc. We anticipate further leveraging our Nautilus
brand name through expanded marketing of new Nautilus home gyms and a new line
of Nautilus free weight home gym equipment which we recently introduced, as well
as any other Nautilus-branded home exercise products we may introduce in 2000.*
We market and sell our Nautilus commercial fitness equipment domestically
through a direct sales force and internationally through independent sales
representatives. We market our other Nautilus consumer products domestically
through non-exclusive independent sales representatives. We believe we have
effectively integrated the Nautilus commercial business into our operations and
stabilized its financial performance, as evidenced by its profitability during
the second half of 1999.*
For a discussion of financial information about our two business
segments, direct marketing and Nautilus, see Note 14 of the Notes to
Consolidated Financial Statements.
Direct Focus was incorporated in California in 1986 and became a
Washington corporation in 1993. Our principal executive offices are located at
2200 NE 65th Avenue, Vancouver, Washington 98661, and our telephone number is
(360) 694-7722. We maintain our corporate web site at www.directfocusinc.com.
None of the information on this web site or our other web sites is part of this
Form 10-K.
As used in this Form 10-K, the terms "we," "our," "us," "Direct
Focus" and "the Company" refer to Direct Focus, Inc. and its subsidiaries.
The names Bowflex-Registered Trademark-, Nautilus-Registered Trademark-,
Bowflex Power-Pro-Registered Trademark-, Motivator-Registered Trademark-,
Versatrainer-Registered Trademark-, Power Rod-Registered Trademark-, Direct
Focus-Registered Trademark-, Instant Comfort-Registered Trademark- and
Nautilus Sleep Systems-Registered Trademark- are registered trademarks of
Direct Focus, Inc.
DIRECT MARKETING
We directly market our Bowflex home fitness equipment and Nautilus
Sleep Systems principally through 30- and 60-second, or "spot," television
commercials, television infomercials, the Internet, response mailings and print
media. To date, we have been highly successful with what we refer to as a
"two-step" marketing approach. In general, our two-step approach focuses first
on spot commercials, which we air to generate consumer interest in our products
and requests for product information. The second step focuses on converting
inquiries into sales, which we accomplish through a combination of response
mailings and outbound telemarketing. We supplement our two-step approach with
infomercials, which generally are designed to provide potential customers with
sufficient product information to stimulate an immediate purchase.
ADVERTISING
SPOT COMMERCIALS AND INFOMERCIALS. Spot television commercials are a
key element of the marketing strategy for all of our directly marketed consumer
products. For directly marketed products that may require further explanation
and demonstration, television infomercials are an important additional marketing
tool. We have developed a variety of spot commercials and infomercials for our
Bowflex product line and several commercials and marketing videos for our
Nautilus Sleep Systems product line. We expect to use spot commercials and,
where appropriate, infomercials to market any Nautilus consumer products that we
determine are appropriate for direct marketing.
4
When we begin marketing a new product, we typically test and refine our
marketing concepts and selling practices while advertising the product in spot
television commercials. Production costs for these commercials can range from
$50,000 to $150,000. Based on market research and viewer response to our spot
commercials, we may produce additional spot commercials and, if appropriate for
the product, an infomercial. Production costs for infomercials can range from
$150,000 to $500,000, depending on the scope of the project. Generally, we
attempt to film several infomercial and commercial concepts at the same time in
order to maximize production efficiencies. From this footage we can then develop
several varieties of spot commercials and infomercials and introduce and refine
them over time. We typically generate our own scripts for spot commercials and
hire outside writers to assist with infomercial scripts. We also typically
contract with outside production companies to produce spot commercials and
infomercials.
Once produced, we test spot commercials and infomercials on a variety
of cable television networks that have a history of generating favorable
responses for our existing products. Our initial objective is to determine the
product's marketing appeal and what, if any, creative or product modifications
may be appropriate. If these initial tests are successful, we then air the spot
commercials and infomercials on an accelerating schedule on additional cable
networks.
MEDIA BUYING. An important component of our direct marketing success is
our ability to purchase quality media time at an affordable price. The cost of
airing spot commercials and infomercials varies significantly, depending on the
network, time slot and, for spot commercials, programming. Each spot commercial
typically costs between $50 and $5,000 to air, and each infomercial typically
costs between $2,500 and $40,000 to air. We currently purchase the majority of
our media time on cable networks, through which we reach more than 70 million
homes.
We track the success of each of our spot commercials and infomercials
by determining how many viewers respond to each airing of a spot commercial or
infomercial. We accumulate this information in a database that we use to
evaluate the cost-effectiveness of available media time. In addition, we believe
the database enables us to predict with reasonable accuracy how many product
sales and inquiries will result from each spot commercial and infomercial that
we air.* We also believe we can effectively track changing viewer patterns and
adjust our advertising accordingly.*
We do not currently purchase media time under long-term contracts.
Instead, we book most of our spot commercial time on a quarterly basis and most
of our infomercial time on a monthly or quarterly basis, as networks make time
available. Networks typically allow us to cancel booked time with two weeks'
advance notice, which enables us to adjust our advertising schedule if our
statistical tracking indicates that a particular network or time slot is no
longer cost effective. Generally, we can increase or decrease the frequency of
our spot commercial and infomercial airings at almost any time.
INTERNET. Our e-commerce sales have grown from 0% in the fourth quarter
of 1998 to 12.3% of direct sales in the fourth quarter of 1999, and we expect
the Internet to become an increasingly important part of our direct marketing
strategy.* For example, we are now promoting our web sites in spot commercials
and infomercials in an effort to further stimulate electronic product inquiries
and e-commerce transactions. We do not presently advertise our products on
third-party web sites, but may do so in the future.*
Our experience indicates that Internet-based inquiries are more likely
to be converted into sales than inquiries generated by other media forms, such
as television or print media. Consequently, we believe that consumers who visit
our web sites are more inclined to purchase our products than are the consumers
we target through other media.*
5
We currently operate two direct marketing-oriented web sites. The
first, www.bowflex.com, focuses on our Bowflex line of home exercise equipment.
The second, www.nautilussleepsystems.com, focuses on our Nautilus Sleep Systems.
In an effort to expand and enhance our web presence, we added dedicated web site
development and management personnel. Our immediate Internet-related goals
include improving the capabilities at our Bowflex web site and Nautilus Sleep
Systems web site. In 1998, we used our web sites to generate interest in our
products, but limited the information we provided to potential customers in an
effort to induce them to initiate a telephone inquiry. In 1999, we believe we
achieved a balance between our goals of finalizing sales and capturing consumer
information by strategically designing our web pages and carefully analyzing web
page hits, conversion rates, average sales prices and inquiry counts.*
PRINT MEDIA. We have advertised directly marketed products in health
and fitness-related consumer magazines and, to a limited extent, in
entertainment, leisure and specialty magazines. We recently determined that
television advertising and the Internet generate more immediate consumer
responses at a lower cost per inquiry and therefore have reduced the print media
advertising expenditures for our directly marketed products. We will evaluate
print media advertising expenditures for other directly marketed products on a
case-by-case basis.
CONVERSION OF INQUIRIES INTO SALES
CUSTOMER SERVICE CALL CENTER AND ORDER PROCESSING. We operate our own
customer service call center in Vancouver, Washington, which operates 16 hours
per day and receives and processes all infomercial-generated and customer
service-related inquiries regarding our Bowflex products and Nautilus Sleep
Systems. We have developed a skill-based call routing system that automatically
routes each incoming call to the most highly qualified inside sales agent or
customer service representative available. The appropriate representative then
answers product questions, pro-actively educates the potential customer about
the benefits of our product line, promotes financing through our private label
credit card, and typically upsells the benefits of higher priced models in our
product line. This sophisticated system allows us to better utilize our agents,
prioritize call types and improve customer service.
We employ two large telemarketing companies to receive and process
information requests generated by our spot television advertising 24 hours per
day. These companies also serve as overflow agents for our call center during
peak times. The telemarketing agents for these companies collect only names,
addresses and other basic information from callers and do not sell or promote
our products. Consequently, we do not need to train these telemarketing agents.
RESPONSE MAILINGS. We forward a "fulfillment kit" in response to each
inquiry regarding our directly marketed products. Each kit contains detailed
literature that describes the product line and available accessories, a
marketing video that demonstrates and highlights the key features of our premium
product in the line, and additional information about how to purchase the
product. If a potential customer does not respond within a certain time period,
we proceed with additional follow-up mailings that convey a different marketing
message and typically offer certain inducements to encourage a sale. The
specific marketing message and offer at each stage will vary on a case-by-case
basis, based on what our statistical tracking indicates is most likely to
trigger a sale.
CONSUMER FINANCE PROGRAMS. We believe that convenient consumer
financing is an important tool in our direct marketing sales efforts and induces
many of our customers to make purchases when they otherwise would not.
Currently, we offer "zero-down" financing to approved customers on all sales of
6
our Bowflex Products and Nautilus Sleep Systems. We arrange this financing
through a consumer credit company pursuant to a non-recourse consumer financing
agreement. Under this arrangement, our customer service agents can obtain
financing approval in a few minutes over the telephone and, if a customer is
approved, immediately ship product without the need for cumbersome paperwork.
The consumer finance company pays us promptly after submission of the required
documentation and subsequently sends to each approved customer a Direct Focus
private label credit card that can be used for future purchases of our products.
During 1999, approximately 34.4% of our net sales were financed in this manner,
and we believe this program will continue to be an effective marketing tool.*
NAUTILUS SALES AND MARKETING
We market and sell our Nautilus commercial fitness equipment
domestically through a direct sales force and internationally through
independent sales representatives. We market and sell our Nautilus fitness
accessories and consumer fitness equipment through non-exclusive independent
sales representatives.
DIRECT SALES FORCE
We have hired a new management team to oversee and revitalize the
sales and marketing operations of our Nautilus business. Each member of the
management team has significant industry experience and a history of sales
and marketing success. Our commercial direct sales force will focus on
strengthening the market position of our existing Nautilus product line,
which we sell principally to health clubs, large hotels, assisted living
facilities and the government. Additionally as we broaden our product line,
our direct sales force will target new market segments and, if successful,
broaden our customer base.* Internationally, we market and sell our Nautilus
commercial fitness products through a worldwide network of independent
distributors.
OTHER SELLING AND MARKETING CHANNELS
We have implemented additional sales and marketing strategies for our
Nautilus commercial equipment. These strategies include the following:
- We offer innovative financing, such as private label leasing that
allows pre-approved commercial customers to lease fitness
equipment;
- We implemented a targeted mailing program directed at our
commercial customers; and
- We expanded the Nautilus trade-in program to induce existing
commercial customers to upgrade their equipment.
PRODUCTS
BOWFLEX HOME FITNESS EQUIPMENT
We introduced the first Bowflex home exercise machine in 1986, and
since then have implemented several improvements to its design and
functionality. We now offer three different Bowflex machines and eight different
models. The key feature of each Bowflex machine is our patented "Power Rod"
resistance technology. Each Power Rod is made of a solid polymer material that
provides lineal progressive resistance in both the concentric and eccentric
movements of an exercise. When combined with a bilateral cable pulley system,
the machines provide excellent range and direction of motion for a
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large variety of strength-building exercises.
We currently offer the following Bowflex machines:
- The Power Pro, introduced in 1993, is our best selling product,
accounting for 95.8% of our Bowflex net sales in 1999. The
Power Pro is available in four different models: the basic
Power Pro, the XT, the XTL and the XTLU. Each model offers
over 60 different strength building exercises in one compact,
foldable and portable design and comes with a 210-pound resistance
pack that can be upgraded to 410 pounds. We have also incorporated
an aerobic rowing exercise feature into the Power Pro. Prices
currently range from $999 to $1,597, depending on the model and
add-on features.
- The Motivator, introduced in 1996, is our entry-level strength
training line. It is available in three different models: the
basic Motivator, the XT and the XTL. Each model offers over 40
different strength building exercises in one compact, foldable
design and comes standard with a 210-pound resistance pack that
can be upgraded to 410 pounds. Prices currently range from $699 to
$1,049, depending on the model and add-on features.
- The Versatrainer by Bowflex, introduced in 1988, is specifically
designed to accommodate wheelchair-bound users. The Versatrainer's
key advantage is that it permits users to exercise while remaining
in their wheelchair, which offers enhanced independence and
esteem. The Versatrainer can be found in many major rehabilitation
hospitals, universities and institutions. The Versatrainer is
currently priced at $1,699.
NAUTILUS COMMERCIAL FITNESS EQUIPMENT AND NAUTILUS FITNESS PRODUCTS
We currently offer the following Nautilus strength training equipment
for the commercial market:
- The Nautilus 2ST line of commercial strength equipment
offers 27 high quality, technologically advanced strength
building machines, each of which is specially designed to
focus on a particular strength building exercise, such as
leg presses, bench presses, super pullovers, hip abductors
and adductors and leg curls. The key component of each
Nautilus 2ST machine is either its "cam" or a four-bar
linkage mechanism, which builds and releases resistance
as a user moves through an exercise. The resistance is
at its minimum during the initial and final stages of an
exercise, and at its maximum in the middle of an exercise.
Each Nautilus machine includes a cam or four-bar linkage
mechanism that is designed to accommodate and maximize
the benefits associated with the motion required for that
machine.
- In 1999, we introduced a line of Nautilus free weight
equipment with new innovations in design and engineering
intended to help club owners better serve their customers.
The product line offers a sleeker look, tougher components
and increased versatility. This new free weight gear can be
coupled with the Nautilus 2ST circuit to give facility
managers a complete strength gym to serve all fitness tastes.
Our Nautilus business also distributes a line of quality consumer
fitness accessories. For example, we offer a full line of fitness
accessories, such as weight belts, jump ropes and
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ankle weights, which we market to specialty fitness retailers and the
sporting goods industry. The current line includes over 50 products, which we
selected after conducting a rigorous evaluation of sales potential, fitness
trends and functionality. We began offering two new Nautilus home gyms, the
Strength Station and an adjustable bench with chrome dumbbells, in late 1999.
In addition, we introduced a twelve piece line of quality strength equipment,
which included Nautilus free weight home gyms and Nautilus selectorized
weight stack home gyms at the 2000 Super Show(R), a fitness industry trade
show. We intend to continue building and developing our Nautilus consumer
fitness business and expand our offering of Nautilus brand consumer fitness
products, as appropriate, in 2000.*
NAUTILUS SLEEP SYSTEMS
In late 1998, we began test marketing a line of premium air sleep
systems under the brand name "Instant Comfort," which we have since renamed the
"Nautilus Sleep Systems." The key feature of each Nautilus Sleep System is its
variable firmness support chamber, an air chamber within each airbed that can be
electronically adjusted to regulate firmness. All queen and larger airbeds in
our Signature, Premier and Ultimate Premier Series are equipped with dual air
chambers that enable users to maintain different firmness settings on each side
of the bed. We believe that variable firmness and other comfort-oriented
features of our Nautilus Sleep Systems favorably differentiate them from
conventional innerspring mattresses.
We currently offer four models of our Nautilus Sleep System:
- The Ultimate Premier Series is our top-of-the-line Nautilus
Sleep System. It features dual patent pending interlocking
variable support chambers that permit users to maintain
separate firmness settings on each side of the airbed. The
interlocking chambers regulate airflow and pressure to more
effectively maintain support when a user changes position.
The Ultimate Premier Series comes with a removable wool
blend and silk blend pillow top sleeping surface, which
permits users to easily convert to a "tight top" surface
when they desire extra firmness. The Ultimate Premier
Series also has an upgraded comfort layer of visco-elastic
foam that conforms to a user's body. The Ultimate Premier
Series is available in seven sizes and currently ranges in
price from $1,199.99 for a twin to $1,799.99 for a
California king, excluding foundation.
- The Premier Series features dual patent pending
interlocking variable support chambers that permit users to
maintain separate firmness settings on each side of the
airbed. The interlocking chambers regulate airflow and
pressure to more effectively maintain support when a user
changes position. The Premier Series comes with a removable
wool blend pillow top sleeping surface, which permits users
to easily convert to a "tight top" surface when they desire
extra firmness. The Premier Series is available in seven
sizes and currently ranges in price from $699.99 for a twin
to $1,299.99 for a California king, excluding foundation.
- The Signature Series is designed to appeal to consumers who
desire the flexibility of dual variable firmness support
chambers, but at a more affordable price. Our customers can
choose between a tight top and a pillow top sleeping
surface over a one and one-half inch convoluted foam
comfort layer. The Signature Series is available in seven
sizes and currently ranges in price from $399.99 for a twin
to $999.99 for a California king, excluding foundation.
9
- The Basic Series is our entry-level Nautilus Sleep System,
which features a single, head-to-toe variable firmness
support chamber and a traditional tight top sleeping
surface over a one and one-half inch thick convoluted foam
comfort layer. The Basic Series is available in five sizes
and currently ranges in price from $249.99 for a twin to
$699.99 for a California king, excluding foundation.
We offer foundations that are specifically designed to support and
enhance the performance of our Nautilus Sleep Systems. We advise consumers to
use our foundations because conventional box springs tend to sag and wear over
time, causing an airbed to eventually mirror the worn box spring. We believe the
majority of our Nautilus Sleep System customers will order a complete sleep
system, which includes both a mattress and a foundation.* Our foundations
currently range in price from $199 for a twin to $399 for a California king.
NEW PRODUCT DEVELOPMENT AND INNOVATION
DIRECT MARKETING PRODUCTS
We develop direct marketing products either from internally generated
ideas or, as with its Bowflex technology, by acquiring or licensing patented
technology from outside inventors and then enhancing the technology. During the
evaluation phase of product development, we evaluate the suitability of the
product for direct marketing, whether the product can be developed and
manufactured in acceptable quantities and at an acceptable cost, and whether it
can be sold at a price that satisfies our profitability goals. More
specifically, we look for high-quality consumer products that:
- Have patented or patentable features*;
- Will have a retail price between $500 and $2,500*;
- Can be marketed as a line of products with materially
different features that facilitate upselling*; and
- Have the potential for mass consumer appeal, particularly
among members of the "baby-boom" generation, who are
accustomed to watching television and now have significant
disposable income.*
In addition, because of our relatively high retail price target, we
typically require that a product have a potential television advertising life
cycle of at least five years and the possibility of an extended life cycle in
retail stores.*
Once we determine that a product may satisfy our criteria, we
further assess the product's direct marketing potential by continuing to
research the product and its probable market and by conducting blind product
and focus group studies. If we develop the product internally, or if we
acquire or license the rights to the product, we will then proceed to develop
and test a direct marketing campaign for the product. In most cases, our
direct marketing campaigns will emphasize the use of spot commercials and
television infomercials, which we supplement with print media advertisements,
written materials, marketing videos and our web sites.*
Our growth strategy and financial performance depend in part on our
ability to develop or acquire the rights to, and then directly market, new
consumer products. Our net sales and profitability would be harmed if we are
unable to develop or acquire the rights to premium quality, premium priced
consumer products that satisfy our direct marketing criteria. In addition, any
new products that we directly market
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may not generate sufficient net sales or profits to justify their development
or acquisition costs.
NAUTILUS COMMERCIAL FITNESS PRODUCTS
Our Nautilus commercial product development group develops and
refines our commercial fitness products. The group's members gather and
evaluate ideas from various areas, including existing and potential
customers, sales and marketing, manufacturing, engineering and finance, and
then determine which ideas will be incorporated into existing products or
will serve as the basis for new products. Based on these ideas, the group
designs new or enhanced products, develops prototypes, tests and modifies
products, develops a manufacturing plan, and finally brings products to
market. The group evaluates, designs and develops each new or enhanced
product, taking into consideration our marketing requirements, target price
points, target gross margin requirements and manufacturing constraints. In
addition, each new or enhanced product must maintain the Nautilus standard of
quality and reputation for excellence. We incorporate principles of
physiology, anatomy and biomechanics into all of our Nautilus machines in
order to match the movements of the human body throughout an exercise. Our
key objective is to produce products that minimize the stress on users'
skeletal systems and connective tissues and maximize the safety and
efficiency of each workout.
NAUTILUS CONSUMER FITNESS PRODUCTS
We have developed a line of Nautilus consumer strength training fitness
equipment and hand-held fitness accessories. Current products include free
weight home gym equipment, selectorized weight stack home gyms and a variety of
hand held fitness accessories, such as jump ropes, hand weights and other
similar devices. We are currently evaluating design and feature concepts for a
new line of aerobic Nautilus consumer products, such as stationary bicycles,
treadmills, and stair machines. If we elect to proceed with one or more of these
products, we intend to assess price points, develop a prototype and determine
the most appropriate manufacturing plan.* We do not anticipate introducing any
such aerobic products before 2001.*
MANUFACTURING AND DISTRIBUTION
BOWFLEX PRODUCTS AND NAUTILUS SLEEP SYSTEMS
Our primary manufacturing and distribution objectives for our
Bowflex products and Nautilus Sleep Systems are to maintain product quality,
reduce and control costs, maximize production flexibility and improve
delivery speed. We use a computerized inventory management system to forecast
our manufacturing requirements. In general, we attempt to use outside
suppliers to manufacture a majority of our raw materials and finished parts.
We select these suppliers based upon their production quality, cost and
flexibility. Whenever possible and in order to improve flexibility, we will
attempt to use at least two suppliers to manufacture each product component.
We currently use overseas suppliers to manufacture approximately 65% of our
Bowflex components, although we produce the main component of our Bowflex
products, the Power Rods, exclusively in the United States. We intend to
continue to use outside suppliers that meet our manufacturing criteria. All
components of our Nautilus Sleep Systems are currently manufactured
domestically, but in the second half of fiscal year 2000, we plan on
manufacturing some components overseas.
We inspect, package and ship our products from our Washington,
Virginia and Nevada facilities. We rely primarily on UPS to deliver our
Bowflex and our Nautilus Sleep Systems products.
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NAUTILUS COMMERCIAL FITNESS EQUIPMENT, CONSUMER FITNESS EQUIPMENT
AND ACCESSORIES
Our Nautilus manufacturing operations are vertically integrated and
include such functions as metal fabrication, powder coating, upholstery and
vacuum-formed plastics processes. By managing our own manufacturing
operations, we can control the quality of our Nautilus products and offer our
commercial customers the opportunity to order certain color variations. We
currently distribute Nautilus commercial fitness equipment from our Virginia
warehouse facilities directly to customers primarily through our own truck
fleet. This method of distribution allows us to effectively control the
set-up and inspection of equipment at the end-user's facilities. We outsource
the manufacturing of Nautilus consumer fitness equipment and fitness
accessories to outside foreign manufacturers. We currently distribute our
Nautilus fitness accessories from our Nevada facilities.
INDUSTRY OVERVIEW
FITNESS EQUIPMENT
We market our Bowflex home fitness equipment principally in the United
States, which we believe is a large and growing market. According to the
Sporting Goods Manufacturers' Association, United States consumers spent roughly
$5.5 billion on home exercise equipment in 1998, which represented an 5.8%
increase from roughly $5.2 billion in 1997.
We market our Nautilus commercial fitness equipment throughout the
world, including the United States, Europe, the United Kingdom, Asia, the
Middle-East, Latin America and Africa. Within these markets, we target the
following commercial customers, among others:
- Health clubs and gyms - Corporate fitness centers
- Rehabilitation clinics - Colleges and universities
- The military - Governmental agencies
- Hospitals - YMCA's and YWCA's
- Hotels and motels - Professional sports teams
According to the Sporting Goods Manufacturers' Association, which has
only tracked the commercial market since 1996, aggregate sales of fitness
equipment to commercial purchasers in the United States rose from $450 million
in 1996 to $500 million in 1997 and $575 million in 1998, a 15% increase from
1997 to 1998.
MATTRESSES
The United States mattress market is large and dominated by four major
manufacturers whose primary focus is the conventional innerspring mattress.
According to the International Sleep Products Association, United States
consumers purchased approximately 36.3 million mattress and foundation units in
1998, generating approximately $3.9 billion in wholesale sales. We believe this
equates to over $7.0 billion in retail sales. The International Sleep Products
Association (ISPA) estimates that innerspring mattresses accounted for
approximately 90% of total domestic mattress sales in 1998. The ISPA also
believes that less than 7% of all mattress sales are made through direct
marketing channels. According to the ISPA, the bedding industry has enjoyed
years of uninterrupted growth. In 1998, queen-sized mattresses became the
largest selling segment while king-sized mattresses picked up market share as
well.
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COMPETITION
BOWFLEX HOME FITNESS EQUIPMENT
The market for our Bowflex products is highly competitive. Our
competitors frequently introduce new and/or improved products, often accompanied
by major advertising and promotional programs. We believe the principal
competitive factors affecting this portion of our business are price, quality,
brand name recognition, product innovation and customer service.
We compete directly with a large number of companies that manufacture,
market and distribute home fitness equipment, and with the many health clubs
that offer exercise and recreational facilities. We also compete indirectly with
outdoor fitness, sporting goods and other recreational products. Our principal
direct competitors include ICON Health & Fitness, Inc. (through its Health
Rider, NordicTrak, Image, Proform, Weider and Weslo brands), Schwinn Fitness,
Precor and Total Gym.
We believe our Bowflex line of home exercise equipment is competitive
within the market for home fitness equipment and that our direct marketing
activities are effective in distinguishing our products from the competition. In
addition, we believe we can capitalize on the well-known Nautilus brand name by
directly marketing existing Nautilus consumer products and developing and
introducing new products.* However, some of our competitors have significantly
greater financial and marketing resources, which may give them and their
products an advantage in the marketplace.
NAUTILUS COMMERCIAL FITNESS EQUIPMENT
The market for commercial fitness equipment is highly competitive. Our
Nautilus products compete against the products of numerous other commercial
fitness equipment companies, including Life Fitness, Cybex and Precor. Many of
our competitors have greater financial and marketing resources, significantly
more experience in the commercial fitness equipment industry, and more extensive
experience manufacturing their products. We believe the key competitive factors
in this industry include price, product quality and durability, diversity of
features, financing options and warranties. Many commercial customers are also
interested in product-specific training programs that educate them regarding how
to safely maximize the benefits of a workout and achieve specific fitness
objectives. In addition, certain commercial customers, such as hotels and
corporate fitness centers, have limited floor space to devote to fitness
equipment. These customers tend to favor multi-function machines that require
less floor space.
Our Nautilus commercial fitness products carry a premium price, however
we believe their reputation for quality and durability appeals to a significant
portion of the market that strives for long-term product value. In addition, our
principal line of Nautilus commercial fitness equipment, the Nautilus 2ST,
possesses unique features that appeal to the commercial market, such as low
friction working parts, one-pound incremental weight stacks and hydraulic seat
adjustments. We also offer training programs that are responsive to marketplace
demands.
NAUTILUS SLEEP SYSTEMS
The mattress industry is also highly competitive, as evidenced by the
wide range of products available to consumers, such as innerspring mattresses,
waterbeds, futons and other air-supported mattresses. According to the
International Sleep Products Association, conventional innerspring mattresses
presently account for at least 90% of all domestic mattress sales, with
waterbeds, futons and other types of mattresses making up the remainder of the
market. We believe market participants
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compete primarily on the basis of price, product quality and durability,
brand name recognition, innovative features, warranties and return policies.
We believe our most significant competition is the conventional
mattress industry, which is dominated by four large, well-recognized
manufacturers: Sealy (which also owns the Stearns & Foster brand name), Serta,
Simmons and Spring Air. Although we believe our Nautilus Sleep Systems offer
consumers an appealing alternative to conventional mattresses, many of these
conventional manufacturers, including Sealy, Serta, Simmons and Spring Air,
possess significantly greater financial, marketing and manufacturing resources
and better brand name recognition.
Moreover, several manufacturers currently offer beds with firmness
technology similar to our Nautilus Sleep Systems. We believe the largest
manufacturer in this niche market is Select Comfort, Inc. Select Comfort offers
its airbeds at company-owned retail stores throughout the United States and
engages in a significant amount of direct marketing, including infomercials,
targeted mailings, print, radio and television advertising. Select Comfort has
an established brand name and has greater financial, marketing and manufacturing
resources. Select Comfort also has significantly greater experience in marketing
and distributing airbeds. Despite these advantages, we believe the market for
airbeds is large enough for both companies to be successful.* In addition, we
believe our Nautilus Sleep Systems possess features that will enable us to
effectively compete against Select Comfort and other airbed companies.*
We believe our success in the mattress business depends in part on
convincing consumers that variable firmness control and other features of our
sleep system favorably differentiate our products from those of our
competitors.* We also believe our experience with direct marketing will enable
us to successfully convey this message.* However, the intense competition in the
mattress industry, both from conventional mattress manufacturers and Select
Comfort, may adversely affect our efforts to market and sell our airbeds and,
consequently, may adversely affect our financial performance.
INTELLECTUAL PROPERTY
Protecting our intellectual property is an important factor in
maintaining our competitive position in the fitness and mattress industries. If
we do not, or are unable to, adequately protect our intellectual property, our
sales and profitability could be adversely affected. Accordingly, we have taken
the following protective measures:
- We hold 17 United States patents and have applied for three
additional United States patents with respect to our
Nautilus products;
- We hold four patents relating to our Bowflex home fitness
equipment;
- We have applied for one patent relating to our Nautilus
Sleep Systems;
- We have obtained United States trademark protection for
various names associated with our products, including
"Bowflex," "Nautilus," "Power Rod," "Bowflex Power Pro,"
"Motivator" and "Versatrainer";
- We have applied for United States trademark protection for
the names "Direct Focus," "Instant Comfort" and various
other names and slogans associated with our products;
- We have registered the name "Bowflex" in Canada and the
European Community, and have registered or applied to
register the "Nautilus" trademark in approximately 30
foreign countries;
- We have obtained trademark protection for the "look" of
our Bowflex Power Rods; and
- We hold eight United States copyright registrations
relating to our Nautilus products.
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Notwithstanding these measures, our efforts to protect our
proprietary rights may be inadequate, and applicable laws provide only
limited protection. For example, of our four Bowflex patents, the most
important covers our Power Rods, and this patent expires on April 27, 2004.
The other three patents expire on February 16, 2005, April 14, 2007, and
January 4, 2010. In addition, we may not be able to successfully prevent
others from claiming that we have violated their proprietary rights. We could
incur substantial costs in defending against such claims, even if they are
invalid, and we could become subject to judgments requiring us to pay
substantial damages.
Each federally registered trademark is renewable indefinitely if the
mark is still in use at the time of renewal. We are not aware of any material
claims of infringement or other challenges to our right to use our marks.
ENVIRONMENTAL REGULATION
Environmental regulations most significantly affect our Nautilus
facilities in Independence, Virginia. The Virginia Department of Environmental
Quality has issued an air permit for several point sources at this facility. The
sources include boilers, flash ovens and high solids paint booths. The permit
imposes operation limits based on the length of time each piece of equipment is
operated each day, and we operate the plant within these limits. The town of
Independence, Virginia has issued an industrial user's wastewater permit that
governs our discharge of on-site generated wastewater and storm water. In
addition to the foregoing, in early 1999, we completed a Phase I Environmental
Site Assessment and a limited Phase II Soil Analysis Assessment at our Nautilus
facilities in Independence, Virginia. No significant deficiencies or violations
were noted. We do not believe that continued compliance with federal, state and
local environmental laws will have a material effect upon our capital
expenditures, earnings or competitive position.*
EMPLOYEES
As of December 31, 1999, we employed 378 full-time employees, including
3 executive officers and 58 part-time employees. None of our employees is
subject to any collective bargaining agreement.
ITEM 2. PROPERTIES
Our corporate headquarters and our principal warehouse facilities
occupy approximately 74,000 square feet in Vancouver, Washington. We also use
these facilities to house our customer call center and to assemble and
distribute our Bowflex products for the Northwestern part of the United States.
We lease these properties pursuant to operating leases that expire at various
times, from May 30, 2000, to April 30, 2002. The aggregate base rent is
approximately $28,379 per month and some of the leases are subject to annual
adjustments based upon changes in the consumer price index, but no adjustment
may exceed 6.0% in any calendar year.
We house our Nautilus commercial operations and our East Coast
distribution center for our Bowflex products in Independence, Virginia. The 54
acres of commercial real property include the following facilities:
- A 124,000 square foot building devoted to fabrication,
finishing, assembly, plastics, upholstery, warehousing and
shipping;
- A 100,000 square foot building devoted to fabrication and
warehousing;
- A 27,105 square foot building that houses our Nautilus
engineering, prototyping and
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customer service operations; and
- A 9,187 square foot building that houses our Nautilus
administrative operations.
We recently added a distribution center in Las Vegas, Nevada. We
distribute Bowflex equipment, Nautilus Sleep Systems and Nautilus fitness
products from this 53,657 square foot facility. The term of the lease is from
December 1, 1999, to November 30, 2002. The aggregate base rent is
approximately $12,878 per month for the first twelve months, and is subject
to an annual cost of living increase of 3.5%.
In general, our properties are well maintained, adequate and suitable
for their purposes, and we believe these properties will meet our operational
needs for the foreseeable future.* If we require additional warehouse or office
space, we believe we will be able to obtain such space on commercially
reasonable terms.*
ITEM 3. LEGAL PROCEEDINGS
As of March 22, 2000, there were no material, pending legal proceedings
to which we or our subsidiaries were a party. From time to time, we become
involved in ordinary, routine or regulatory legal proceedings incidental to our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF OUR COMMON STOCK
Since May 4, 1999, our common stock has been listed for trading
exclusively on The Nasdaq National Market System under the symbol DFXI. Prior to
such date, our common stock was listed for trading exclusively on the Toronto
Stock Exchange in the Province of Ontario, Canada, under the symbol DFX. The
following table summarizes the high and low sales prices for our common stock as
reported on the Toronto Stock Exchange and The Nasdaq National Market System, as
applicable, for the two years in the period ended December 31, 1999. The prices
below in Canadian dollars are listed in the currency they were quoted in until
May 4, 1999 and are translated into United States dollars based on the currency
exchange rate in effect on the date of each high and low quarterly price:
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CANADIAN DOLLARS UNITED STATES DOLLARS
------------------------ -----------------------
HIGH LOW HIGH LOW
---------- --------- --------- ---------
1998
Quarter 1................................. $ 10.05 $ 3.50 $ 7.07 $ 2.45
Quarter 2................................. 15.00 10.00 10.48 7.05
Quarter 3................................. 18.00 11.80 12.09 7.67
Quarter 4................................. $ 23.00 $ 10.50 $ 14.95 $ 6.80
1999
Quarter 1................................. $ 28.00 $ 18.55 $ 18.39 $ 12.09
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Quarter 2................................. N/A N/A 26.00 16.25
Quarter 3................................. N/A N/A 21.00 15.00
Quarter 4................................. N/A N/A $ 29.00 $ 18.25
As of February 29, 2000, 10,519,565 shares of our common stock were
issued and outstanding and held of record by 81 shareholders.
Payment of any future dividends is at the discretion of our board of
directors, which considers various factors, such as our financial condition,
operating results, current and anticipated cash needs and expansion plans. Our
credit lines do not restrict the payment of dividends. To date, we have never
declared or paid any cash dividends on our common stock and do not presently
intend to declare any cash dividends in the near future.* Instead, we intend to
retain and direct any future earnings to fund our anticipated expansion and
growth.*
USE OF PROCEEDS
We received approximately $17,938,000 in net proceeds from the sale of
975,000 shares of common stock in our May 1999 initial U.S. public offering,
which includes proceeds from the overallotment option exercised by the managing
underwriters. During 1999, we applied $3.7 million of the net proceeds toward
stock repurchases and $1.3 million toward computer and related technology
upgrades. We also used approximately $5.0 million of the net proceeds for
working capital purposes, including increased direct marketing expenditures and
increases in inventory and accounts receivable balances due to the growth of our
business. We have invested all unexpended net proceeds in an interest bearing
depository account with Bank of America, pending anticipated application of
proceeds in fiscal 2000 toward such purposes as further stock repurchases, the
purchase of a distribution center in Las Vegas, Nevada, the purchase of a
building in Vancouver, Washington to consolidate our Washington operations, and
any of the other purposes described in our registration statement on Form S-1.*
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each year
in the five-year period ended December 31, 1999 have been derived from our
audited financial statements. The data presented below should be read in
conjunction with our financial statements and notes thereto and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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IN THOUSANDS
(EXCEPT PER SHARE AMOUNTS) 1995 1996 1997 1998 1999
--------------------------------------- ---------- ---------- ----------- ---------- ----------
STATEMENT OF OPERATIONS DATA
Net Sales $4,772 $8,517 $19,886 $57,297 $121,019
Cost of sales 1,616 2,603 5,114 12,442 34,423
---------- ---------- ---------- ---------- ----------
Gross profit 3,156 5,914 14,772 44,855 86,596
Operating expenses:
Selling and marketing 2,644 4,712 9,600 22,643 44,630
General and administrative 370 473 975 1,701 4,237
Royalties 201 269 581 1,623 2,897
Litigation settlement - - - - 4,000
Total operating expenses ---------- ---------- ---------- ---------- ----------
3,215 5,454 11,156 25,967 55,764
---------- ---------- ---------- ---------- ----------
Operating income (loss) (59) 460 3,616 18,888 30,832
Other income (expense)
Interest income 26 37 119 527 1,003
Other-net (20) (53) (88) (222) 3
---------- ---------- ---------- ---------- ----------
Total other income (expense) 6 (16) 31 305 1,006
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (53) 444 3,647 19,193 31,838
Income tax expense (benefit) (68) (249) 1,226 6,708 11,495
---------- ---------- ---------- ---------- ----------
Net income $ 15 $ 693 $2,421 $12,485 $20,343
========== ========== ========== ========== ==========
Basic earnings per share(1) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 2.00
Diluted earnings per share(1) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.95
Basic shares outstanding 8,132 8,558 8,987 9,337 10,166
Diluted shares outstanding 8,132 8,943 9,511 9,726 10,425
BALANCE SHEET DATA
Cash and cash equivalents $756 $1,154 $4,790 $18,911 $35,703
Working Capital 1,063 1,973 4,100 15,682 38,209
Total assets 2,150 3,515 7,922 24,373 67,310
Current liabilities 858 1,281 3,330 6,655 14,091
Total stockholders' equity $1,274 $2,220 $4,592 $17,651 $53,031
(1) Basic earnings per share have been computed by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share have been computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents, such as stock options, outstanding during each period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
We believe that period-to-period comparisons of our operating results
are not necessarily indicative of future performance. You should consider our
prospects in light of the risks, expenses and difficulties frequently
encountered by companies experiencing rapid growth and, in particular, rapidly
growing companies that operate in evolving markets. We may not be able to
successfully address these risks and difficulties. Although we have experienced
net sales growth in recent years, our net sales growth may not continue, and we
cannot assure you of any future growth or profitability.
The following table presents certain financial data as a percentage of
total revenues:
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Year Ended December 31,
---------------------------------------------------------
1997 1998 1999
---------------- -------------- ---------------
STATEMENT OF OPERATIONS DATA
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 25.7 21.7 28.4
---------------- -------------- ---------------
Gross profit................................. 74.3 78.3 71.6
Operating expenses
Selling and marketing.................... 48.3 39.5 36.9
General and administrative............... 4.9 3.0 3.5
Royalties................................ 2.9 2.8 2.4
Litigation settlement.................... - - 3.3
---------------- -------------- ---------------
Total operating expenses..................... 56.1 45.3 46.1
Operating income............................. 18.2 33.0 25.5
Other income................................. 0.2 0.5 0.8
---------------- -------------- ---------------
Income before income taxes................... 18.4 33.5 26.3
Income tax expense........................... 6.2 11.7 9.5
---------------- -------------- ---------------
Net income................................... 12.2% 21.8% 16.8%
================ ============== ===============
COMPARISON OF THE YEARS ENDING DECEMBER 31, 1999, AND DECEMBER 31, 1998
NET SALES
Net sales grew by 111.2% to $121.0 million in 1999 from $57.3 million
in 1998. Sales within our direct marketing business increased by 77.8% over
prior year levels and accounted for $101.9 million, or 84.2%, of our aggregate
net sales in 1999. One product, our Bowflex Power Pro, generated 79.9% of our
aggregate net sales in 1999, compared to 93.3% in 1998. The principal reason for
this decrease was the addition of our Nautilus business. Net sales within our
Nautilus business generated $19.1 million of our aggregate net sales and
accounted for 33.4% of the aggregate increase.
Sales growth in 1999 primarily resulted from expanded direct marketing
of our Bowflex products and the addition of our Nautilus business. Within our
direct marketing business, with respect to both our Bowflex products and our
Nautilus Sleep Systems, we intend to further expand our use of spot television
commercials and infomercials during 2000 by increasing our presence in existing
television markets and
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entering new television markets.* We intend to increase Nautilus sales by
developing new products and expanding our direct sales efforts both
domestically and internationally.*
Notwithstanding our product diversification efforts, we anticipate that
sales of our Bowflex Power Pro will continue to account for a substantial
portion of our net sales for the foreseeable future.* Any significant diminished
consumer interest in this product line would sharply reduce our net sales and
profitability. In addition, the success of each of our products depends
substantially on how consumers decide to spend their money. Unfavorable economic
conditions may depress consumer spending, especially for premium priced products
like ours.
Except for the fourth quarter, fiscal 1999 sales of our Bowflex
products appear to have been consistent with historic trends. As in prior years,
first and third quarter sales of our Bowflex products were strong, while the
second quarter reflected seasonal weakness. Our direct marketing business is
largely dependent upon national cable television advertising, and we are finding
that second quarter influences on television viewership, such as the broadcast
of national network season finales and seasonal weather factors, are causing our
spot television commercials on national cable television to be marginally less
effective than in other periods of the year.* During the fourth quarter of 1999,
we experienced unusually strong consumer demand compared to the third quarter
for our Bowflex products, which we believe is a trend that will not continue for
the fourth quarter in future periods.*
Sales within our Nautilus business were, and we believe will
continue to be, strongest in the third and fourth quarters.* We believe the
principal reason for this trend is the commercial fitness industry's
preparation for the impact of New Year fitness resolutions and seasonal
weather factors in the fourth quarter, and retail fitness store purchases of
fitness equipment in preparation for the Christmas buying season and New Year
fitness resolutions in the third and fourth quarters.*
GROSS PROFIT
Gross profit grew 92.9% to $86.6 million in 1999, from $44.9 million in
1998. Our gross profit margin decreased 6.7% to 71.6% in 1999, from 78.3% in
1998. The decrease in gross profit margin was mainly attributable to our
Nautilus operations, which had a gross profit margin in 1999 of 38.5%.
We expect a lower percentage gross profit margin contribution from our
Nautilus Sleep Systems as we continue our direct marketing campaign for this
product.* At least initially, we expect the domestic production and relatively
lower sales volume of our Nautilus Sleep Systems will result in lower gross
profit margins than our Bowflex products.* Similar to our Bowflex products, with
the anticipated future higher sales volume of Nautilus Sleep Systems, we expect
to take advantage of overseas production to strengthen the margins for these
products.*
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $44.6 million in 1999 from $22.6
million in 1998, an increase of 97.3%. This increase in selling and marketing
expenses resulted primarily from the continued expansion of our Bowflex direct
marketing campaign and variable costs associated with our sales growth. The
addition of our Nautilus business accounted for $5.1 million of the increase.
As a percentage of net sales, selling and marketing expenses decreased
by 2.6% in 1999 to 36.9%, compared to 39.5% in 1998. Selling and marketing
expenses within our direct marketing business
20
were $39.5 million, a 0.7% decrease as a percentage of net sales compared to
1998. Selling and marketing expenses within our Nautilus business
traditionally have been a lower percentage of net sales than we have
experienced in direct marketing. In real dollar terms, we expect our
aggregate selling and marketing expenses will continue to increase, but not
materially as a percentage of net sales,* as we:
- Continue to expand our Bowflex direct marketing campaign;*
- Continue rolling out the direct marketing campaign for our
Nautilus Sleep Systems;*
- Continue integrating the marketing and distribution
infrastructure for our Nautilus line of commercial fitness
equipment;* and
- Begin marketing new home fitness equipment products and
fitness accessories under the Nautilus brand name.*
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $4.2 million in 1999 from
$1.7 in 1998, an increase of 147.1%. Our direct marketing business accounted for
$1.3 million of the increase in general and administrative expenses, due
primarily to increased staffing levels in our accounting and information systems
departments necessitated by our continued growth and the implementation of our
new information system. Nautilus operations accounted for the remaining increase
of $1.2 million. As a percentage of net sales, general and administrative
expenses increased to 3.5% in 1999 from 3.0% in 1998. We believe our general and
administrative expenses, in real dollar terms and as a percentage of net sales,
will increase in future periods as we continue to integrate the Nautilus
business into our operations and expand our administrative staff and other
resources to manage anticipated growth.*
ROYALTY
Royalty expense grew to $2.9 million in 1999 from $1.6 million in 1998,
an increase of 81.3%. The increase in our royalty expense is attributable to
increased sales of our Bowflex products in 1999. Our royalty expenses will
increase if sales of our Bowflex products continue to increase.*
OTHER INCOME
In 1999, other income increased to $1.0 million from $0.3 million in
1998. The $0.7 million increase resulted primarily from interest income
generated by higher cash investments accumulated from a combination of results
from operations and our public offering completed during the second quarter of
1999.
INCOME TAX EXPENSE
Income tax expense increased by $4.8 million in 1999 compared to 1998.
We expect our income tax expense to increase in line with increases of our
income before taxes.* Our effective tax rate increased by 1.2% to 36.1% due to
state tax liability. We believe this higher rate is indicative of our future
effective tax rate.*
NET INCOME
For the reasons discussed above, net income increased 62.4% to $20.3
million in 1999 compared to $12.5 million in 1998.
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COMPARISON OF YEARS ENDING DECEMBER 31, 1998, AND DECEMBER 31, 1997
NET SALES
Net sales grew by 187.9% to $57.3 million in 1998, from $19.9 million
in 1997. Sales of our Bowflex Power Pro grew by 199.0% and accounted for 93.3%
of our aggregate net sales in 1998. Sales of our Bowflex Motivator increased by
73.0% and sales of our Bowflex accessories increased by 148.0% in 1998, and
accounted for 1.8% and 4.5% of our aggregate net sales, respectively. We
introduced and began test marketing our airbeds in late 1998, but this product
did not materially contribute to our net sales in 1998.
Our sales growth in 1998 primarily resulted from expanded direct
marketing of our Bowflex products. In 1998, we increased our advertising
expenditures by 196.1%, focusing principally on expanded broadcasts of our
Bowflex spot television commercials and television infomercials. Both of these
direct marketing techniques generated strong sales in 1998.
GROSS PROFIT
Our gross profit grew 203.4% to $44.9 million in 1998, from $14.8
million in 1997. Our gross profit as a percentage of net sales increased by 4.0%
to 78.3% in fiscal 1998, from 74.3% in 1997. We believe that our improved
percentage gross profit in 1998 resulted primarily from a March 1998 increase in
the shipping charge for our Bowflex products, as well as reduced component costs
for our Bowflex products and improved labor and overhead efficiencies. We
benefited from reduced component costs principally through volume discounts. Our
improved labor and overhead efficiencies resulted primarily from improved
manufacturing methods and the implementation of a second work shift.
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $22.6 million in 1998 from $9.6
million in 1997, an increase of 135.4%. This increase in selling and marketing
expenses resulted primarily from the expansion of our Bowflex direct marketing
campaign and variable costs associated with our sales growth.
As a percentage of net sales, selling and marketing expenses decreased
to 39.5% in 1998 from 48.3% in 1997. This decrease in selling and marketing
expenses as a percentage of net sales reflects the improved efficiency of our
Bowflex direct marketing campaign. As we refined our spot commercial and
infomercial advertising policies and our customer response techniques, we were
able to stimulate sales growth at a more rapid rate than the growth in our
selling and marketing expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $1.7 million in 1998 from
$975,000 in 1997, an increase of 74.3%. This increase in general and
administrative expenses was due primarily to increased staffing and
infrastructure expenses necessary to support our continued growth. As a
percentage of net sales, general and administrative expenses decreased to 3.0%
in 1998 from 4.9% in 1997. The decline in general and administrative expenses as
a percentage of our net sales resulted primarily from our substantial increase
in net sales.
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ROYALTY
Royalty expense grew to $1.6 million in 1998 from $581,000 in 1997, an
increase of 175.4%. The increase in our royalty expenses is attributable to the
increased sales of our Bowflex products in 1998. Our royalty expenses will
increase if sales of our Bowflex products continue to increase.
OTHER INCOME
In 1998, other income increased to $305,000 from $31,000 in 1997. The
$274,000 increase resulted primarily from interest income generated by our cash
investments, which was partially offset by a $135,000 increase in our state
business tax expense.
INCOME TAX EXPENSE
Income tax expense increased by $5.5 million in 1998 because of the
growth in our income before taxes. We expect our income tax expense to increase
in line with increases in our income before taxes.
NET INCOME
For the reasons discussed above, net income grew to $12.5 million in
1998 from $2.4 million in 1997, an increase of 420.8%.
23
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the
eight quarters in the period ended December 31, 1999. The information for each
of these quarters is unaudited and has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Annual Report on Form
10-K. In the opinion of management, all necessary adjustments, consisting only
of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read together with our audited financial
statements and the related notes. These operating results are not necessarily
indicative of the results of any future period.
SELECTED QUARTERLY INFORMATION
[Download Table]
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Fiscal 1999:
Net sales 26,113 25,244 31,773 37,889
Gross profit 18,723 17,882 22,982 27,008
Operating income 6,907 1,999 (1) 8,099 13,827
Net income 4,479 1,399 (1) 5,495 8,969
Earnings per share
Basic .47 .14 (1) .52 .86
Diluted .45 .13 (1) .51 .84
Fiscal 1998:
Net sales 11,051 12,236 15,200 18,809
Gross profit 8,497 9,584 11,766 15,007
Operating income 3,852 3,014 4,370 7,653
Net income 2,571 1,982 2,910 5,023
Earnings per share
Basic .28 .21 .31 .54
Diluted .27 .20 .30 .52
(1) Includes a $4 million litigation settlement expense. Net income and
earnings per share amounts also reflect $1.4 million of income tax benefit
related to the litigation settlement.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our growth primarily from cash generated
by our operating activities. During 1999, our operating activities generated
$20.8 million in net cash, which contributed to an aggregate $35.7 million in
cash and cash equivalents on hand as of December 31, 1999. We used $16.6 million
in cash to fund the Nautilus acquisition in January 1999. Our public offering on
May 5, 1999 generated $15.1 million in cash and the underwriters' exercise of
their over-allotment option on June 10, 1999 generated an additional $2.8
million in cash, bringing the total net offering proceeds to $17.9 million.
Through a stock repurchase program, we bought back $3.7 million in common stock
on the open market. These activities contributed to a $16.8 million, or 88.9%
increase in our cash and cash equivalents during 1999.
24
We anticipate our working capital requirements will increase as a
result of increased inventory and accounts receivable related to our Nautilus
operations.* We also expect to increase our cash expenditures on spot
commercials and infomercials as we continue to expand the direct marketing
campaigns for our Bowflex products and Nautilus Sleep Systems.*
We maintain a $5.0 million line of credit with Bank of America. The
line of credit is secured by our general assets and contains certain financial
covenants. As of the date of these financial statements, we are in compliance
with all material covenants applicable to the line of credit and there is no
outstanding balance under the line.
We believe our existing cash balances, combined with our line of
credit, will be sufficient to meet our capital requirements for at least the
next twelve months.*
INFLATION AND PRICE INCREASES
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had or is likely in the
foreseeable future to materially adversely affect our results of operations,
cash flows or our financial position.* However, increases in inflation over
historical levels or uncertainty in the general economy could decrease
discretionary consumer spending for products like ours. We have not raised the
prices on our Bowflex products since 1997. Consequently, none of our revenue
growth is attributable to price increases.
YEAR 2000
We did not experience any material year 2000 problems with respect to
our products, information systems, suppliers or resellers. To help ensure a
smooth transition into 2000, we did the following:
- Upgraded all computer hardware and equipment determined to have
potential Year 2000 problems;
- Stockpiled certain inventory components;
- Acquired and prepared to use back-up power generators;
- Developed manual workarounds for all critical automated processes;
- Downloaded and printed critical data and reports by December 30, 1999;
- Created specific plans of action for dealing with critical
non-compliant suppliers and resellers; and
- Executed critical operations, such as payroll, prior to December 31,
1999.
We estimate that, as of December 31, 1999, the cost of remediating
and/or replacing our internal systems was approximately $1.3 million. We funded
this effort through normal working capital.
Because we experienced no major Year 2000-related issues internally or
externally over the Year 2000 transition, we do not currently believe that we
will incur material costs or experience material disruptions in our business
associated with the year 2000. However, there can be no assurance that our
computer systems or those of our suppliers do not contain undetected errors or
defects associated with Year 2000 date functions. These could give rise to
increased customer satisfaction costs related to Year 2000 and to litigation
over Year 2000 compliance issues.
25
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for all derivative instruments. SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. We do not currently have any
derivative instruments and, accordingly, do not expect the adoption of SFAS 133
to have an impact on our financial position, results of operations, or cash
flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required under this item.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
Direct Focus, Inc. Consolidated Financial Statements PAGE
----
Independent Auditor's Report 27
Consolidated Balance Sheets as of December 31, 1998 and 1999 28
Consolidated Statements of Income for the three years ended December 31, 1999 29
Consolidated Statements of Stockholders' Equity for the three years ended December
31, 1999 30
Consolidated Statements of Cash Flows for the three years ended December 31, 1999 31
Notes to Consolidated Financial Statements 32
Schedule II - Valuation and Qualifying Accounts 43
26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
of Direct Focus, Inc.:
We have audited the accompanying consolidated balance sheets of Direct
Focus, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule at Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Direct Focus, Inc. and
subsidiaries at December 31, 1998 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 21, 2000
27
DIRECT FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
[Enlarge/Download Table]
December 31, December 31,
1998 1999
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,910,675 $ 35,703,457
Trade receivables (less allowance for doubtful accounts of:
1998, $40,000 and 1999, $304,727) 218,207 4,744,213
Inventories 2,614,673 9,167,554
Prepaid expenses and other current assets 378,409 1,863,951
Current deferred tax asset 215,737 820,789
------------------ -----------------
Total current assets 22,337,701 52,299,964
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT (less accumulated
Depreciation of: 1998, $438,790 and 1999, $1,100,255) 1,842,712 10,644,838
------------------ -----------------
OTHER ASSETS (less accumulated amortization of:
1998, $49,967 and 1999, $272,183) 192,859 4,364,963
------------------ -----------------
TOTAL ASSETS $ 24,373,272 $ 67,309,765
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 3,602,074 $ 5,871,369
Accrued liabilities 1,851,253 4,051,540
Income taxes payable 504,775 2,177,236
Royalty payable to stockholders 548,211 893,563
Customer deposits 148,937 1,097,748
------------------ -----------------
Total current liabilities 6,655,250 14,091,456
------------------ -----------------
LONG-TERM DEFERRED TAX LIABILITY 66,880 187,484
------------------ -----------------
COMMITMENTS AND CONTINGENCIES (Note 7) - -
STOCKHOLDERS' EQUITY:
Common stock - authorized, 50,000,000 shares of no par value;
Outstanding, 1998: 9,448,523 shares, 1999: 10,444,148 shares 3,565,628 18,602,420
Retained earnings 14,085,514 34,428,405
------------------ -----------------
Total stockholders' equity 17,651,142 53,030,825
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,373,272 $ 67,309,765
================== =================
See notes to consolidated financial statements.
28
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1999
[Enlarge/Download Table]
1997 1998 1999
----------------- -------------- -----------------
NET SALES $ 19,886,354 $ 57,296,880 $121,018,477
COST OF SALES 5,113,980 12,442,307 34,422,577
----------------- -------------- -----------------
Gross profit 14,772,374 44,854,573 86,595,900
----------------- -------------- -----------------
EXPENSES:
Selling and marketing 9,600,076 22,642,885 44,629,825
General and administrative 974,887 1,700,956 4,236,804
Royalties 580,677 1,622,726 2,897,278
Litigation settlement - - 4,000,000
----------------- -------------- -----------------
Total operating expenses 11,155,640 25,966,567 55,763,907
----------------- -------------- -----------------
INCOME FROM OPERATIONS 3,616,734 18,888,006 30,831,993
----------------- -------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 118,541 526,961 1,003,586
Other - net (88,041) (221,889) 2,737
----------------- --------------- -----------------
Total other income - net 30,500 305,072 1,006,323
----------------- --------------- -----------------
INCOME BEFORE INCOME TAXES 3,647,234 19,193,078 31,838,316
INCOME TAX EXPENSE 1,226,068 6,707,584 11,495,425
----------------- --------------- -----------------
NET INCOME $ 2,421,166 $ 12,485,494 $ 20,342,891
================= =============== =================
BASIC EARNINGS PER SHARE $ .27 $ 1.34 $ 2.00
================= =============== =================
DILUTED EARNINGS PER SHARE $ .25 $ 1.28 $ 1.95
================= =============== =================
Basic shares outstanding 8,986,655 9,336,525 10,165,617
Diluted shares outstanding 9,510,868 9,725,958 10,425,208
See notes to consolidated financial statements.
29
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
[Enlarge/Download Table]
COMMON STOCK
------------- RETAINED EARNINGS
SHARES AMOUNT (ACCUM. DEF.) TOTAL
------------ ------------ ------------- -----------
BALANCES, JANUARY 1, 1997 8,921,541 $3,040,425 $ (821,146) $2,219,279
Options exercised 129,887 15,586 - 15,586
Stock repurchased (46,100) (98,120) - (98,120)
Tax benefit of exercise of nonqualified
options - 34,281 - 34,281
Net income - - 2,421,166 2,421,166
------------ ------------ ------------- ------------
BALANCES, DECEMBER 31, 1997 9,005,328 $2,992,172 $1,600,020 $4,592,192
============ ============ ============= ============
Options exercised 443,195 134,004 - 134,004
Tax benefit of exercise of nonqualified
options - 439,452 - 439,452
Net income - - 12,485,494 12,485,494
------------ ------------ ------------- ------------
BALANCES, DECEMBER 31, 1998 9,448,523 $3,565,628 $14,085,514 $17,651,142
============ ============ ============= ============
Public offering 975,000 17,937,691 - 17,937,691
Options exercised 231,825 300,482 - 300,482
Stock repurchased (211,200) (3,698,793) - (3,698,793)
Tax benefit of exercise of nonqualified
options - 497,412 - 497,412
Net income - - 20,342,891 20,342,891
------------ ------------ ------------- ------------
BALANCES, DECEMBER 31, 1999 10,444,148 $18,602,420 $34,428,405 $53,030,825
============ ============ ============= ============
See notes to consolidated financial statements
30
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
[Enlarge/Download Table]
1997 1998 1999
-------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,421,166 $ 12,485,494 $ 20,342,891
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 96,133 301,913 1,183,412
Loss on equipment disposal - - 1,262
Deferred income taxes 140,659 99,484 (484,448)
Changes in:
Trade receivables (29,128) 41,336 (1,519,116)
Inventories (1,156,643) (668,900) (3,448,750)
Prepaid expenses and other current assets 373,807 (166,027) (1,377,336)
Trade payables 277,909 2,423,819 2,001,235
Income taxes payable 835,409 143,099 2,169,873
Accrued liabilities and royalty payable to
Stockholders 944,547 1,099,819 988,414
Customer deposits 25,473 107,084 948,811
-------------- ------------- ------------
Net cash provided by operating activities 3,929,332 15,867,121 20,806,248
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment (278,886) (1,738,836) (1,929,137)
Proceeds from sale of property, plant and equip. - - 159,238
Additions to other assets (22,514) (12,309) (167,935)
Acquisition cost of Nautilus - (120,454) (16,615,012)
Sale of certificate of deposit 100,000 - -
-------------- ------------- ------------
Net cash used in investing activities (201,400) (1,871,599) (18,552,846)
-------------- ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments under capital lease obligations (9,113) (9,167) -
Proceeds from public offering - - 17,937,691
Funds used for stock repurchase (98,120) - (3,698,793)
Proceeds from exercise of stock options, net 15,586 134,004 300,482
-------------- ------------- ------------
Net cash provided by (used in) financing activities (91,647) 124,837 14,539,380
-------------- ------------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 3,636,285 14,120,359 16,792,782
31
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,154,031 4,790,316 18,910,675
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 4,790,316 $18,910,675 $35,703,457
============== ============= ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest 1,381 455 -
Cash paid for income taxes 250,000 6,465,006 9,835,000
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING TRANSACTIONS:
Tax benefit of exercise of nonqualified options 34,281 439,452 497,412
See notes to consolidated financial statements
DIRECT FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Direct Focus Inc. (the "Company," a Washington corporation) is a
direct marketing company that develops and markets premium quality, premium
priced, branded consumer products. The Company has two operating segments.
One is the direct business through which they market consumer products
directly through a variety of direct marketing channels, including spot
television commercials, infomercials, print media, response mailings, and the
Internet. The Company's principal products are the Bowflex line of home
fitness equipment and a line of premium quality airbeds (Nautilus Sleep
Systems). As a result of the acquisition in January 1999 of Nautilus
International, Inc., the Company added a second business segment which
comprises a significant component of the Company's operations and includes
Nautilus commercial and home fitness equipment.
CONSOLIDATION
The consolidated financial statements of the Company include Direct
Focus, Inc., Nautilus HPS, Inc., Nautilus, Inc., DFI Properties, LLC, BFI
Advertising, Inc., DFI Sales, Inc., and Nautilus Fitness Products, Inc. All
inter-company transactions have been eliminated.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 during the
reporting period. Actual results could differ from those estimates.
32
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash deposited with
banks and financial institutions and highly liquid debt instruments purchased
with maturity dates of three months or less at date of acquisition. The
Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts.
INVENTORIES
Inventories are stated at the lower of average cost or market.
ADVERTISING
The Company expenses the production costs of advertising the first
time the advertising takes place.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the assets.
Management reviews investment in long-lived assets for possible
impairment whenever events or circumstances indicate the carrying amount of
an asset may not be recoverable. There have been no such events or
circumstances in the three years ended December 31, 1999. If there were an
indication of impairment, management would prepare an estimate of future cash
flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition. If these cash flows were less
than the carrying amount of the asset, an impairment loss would be recognized
to write down the asset to its estimated fair value.
OTHER ASSETS
Other assets consist of acquisition costs, license agreements,
patents and trademarks. Amortization is computed using the straight-line
method over estimated useful lives of three to twenty years. The trademark
associated with the Nautilus acquisition was valued at $4,349,839 and is
being amortized over twenty years.
WARRANTY COSTS
The Company's warranty policy provides for coverage for defects in
material and workmanship. Warranty periods on the Company's products range
from two to five years on the Bowflex lines of fitness products and twenty
years on airbeds. The Nautilus commercial line of fitness products includes a
lifetime warranty on the structural frame, welded moving parts and weight
stacks, a 120-day warranty on upholstery and padded items, and a one-year
warranty on all other parts. A provision for estimated warranty costs of
$70,000 and $383,356 is included in accrued liabilities at December 31, 1998
and 1999, respectively.
REVENUE RECOGNITION
Revenue from product sales is generally recognized at the time of
shipment. Revenue is recognized upon installation for the Nautilus commercial
equipment, if the Company's truck fleet is used for delivery of the products.
The Company has established reserves for potential sales returns for 1998 and
1999 of $600,704 and $786,921, respectively, based upon historical experience.
33
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "REPORTING COMPREHENSIVE
INCOME," which requires presentation of comprehensive income within an
entity's primary financial statements. Comprehensive income is defined as net
income as adjusted for changes to equity resulting from events other than net
income or transactions related to an entity's capital structure.
Comprehensive income equaled net income for all periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash, trade receivables, trade
payables, royalty payables, and accrued liabilities approximates their
estimated fair values due to the short-term maturities of those financial
instruments.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for all derivative instruments. SFAS 133, as amended, is effective
for fiscal years beginning after June 15, 2000. We do not currently have any
derivative instruments and, accordingly, do not expect the adoption of SFAS
133 to have an impact on our financial position or results of operations.
RECLASSIFICATIONS
Certain amounts from 1997 and 1998 have been reclassified to conform
to the 1999 presentation.
2. PUBLIC OFFERING
On May 5, 1999, the Company completed its initial U.S. public
offering of common stock listed on the Nasdaq exchange. The initial offering
consisted of one million total shares at $20.50 per share, of which 825,000
shares were offered by the Company, with an additional 175,000 shares offered
by selling shareholders. On June 10, 1999, the underwriting group exercised a
150,000 share over-allotment. Total net proceeds realized by Direct Focus,
Inc. from the offerings were $17.9 million. The Company was listed on the
Toronto Stock Exchange from January 1993 to May 1999.
3. ACQUISITION OF NAUTILUS
Effective January 4, 1999, the Company acquired substantially all of
the net assets of Nautilus International, Inc. ("Nautilus"). Nautilus was a
manufacturer and distributor of commercial fitness equipment and, to a
limited extent, consumer fitness equipment and accessories. The acquisition
has been
34
accounted for under the purchase method of accounting and, accordingly, the
assets acquired, liabilities assumed, and results of operations have been
included in the accompanying financial statements since the date of
acquisition. The Company paid approximately $16.7 million, including
acquisition costs of approximately $500,000, for the assets and intellectual
property of Nautilus and assumed $1.8 million of current liabilities.
The total cost of the acquisition has been allocated to the assets
acquired and liabilities assumed as follows:
[Download Table]
Cash $ 8,512
Trade receivables 3,006,890
Inventories 3,104,131
Prepaid expenses and other current assets 108,206
Furniture and equipment 7,991,685
Other assets 4,349,839
Liabilities assumed (1,825,285)
--------------
Total $ 16,743,978
==============
The unaudited pro forma financial information below for the year
ended December 31, 1998 was prepared as if the transaction had occurred on
January 1, 1998:
[Download Table]
Revenue $76,600,696
Net income $ 9,868,213
Basic earnings per share $ 1.06
Diluted earnings per share $ 1.01
The unaudited pro forma information is not necessarily indicative of
what actual results would have been had the transaction occurred at the
beginning of the respective year, nor does it purport to indicate the results
of future operations of the Company.
4. INVENTORIES
Inventories at December 31 consisted of the following:
[Download Table]
1998 1999
---- ----
Finished goods............................... $1,758,171 $1,145,848
Work in process.............................. - 1,141,803
Parts and components......................... 856,502 6,879,903
------------ -------------
$2,614,673 $9,167,554
============ =============
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on
the straight-line method over the estimated useful lives of the assets.
Details of property, plant and equipment are summarized as follows at
December 31:
35
[Enlarge/Download Table]
Estimated
Useful Life 1998 1999
------------ -------------- ----------------
Land.................................................... N/A $ - $ 140,000
Buildings............................................... 31.5 - 5,870,592
Computer equipment...................................... 3 - 5 1,411,523 2,737,488
Production equipment.................................... 10 410,682 2,481,839
Furniture and fixtures.................................. 5 459,297 462,174
Automobiles............................................. 7 - 53,000
-------------- ---------------
2,281,502 11,745,093
Less accumulated depreciation........................... 438,790 1,100,255
-------------- ---------------
Property, plant and equipment, net...................... $ 1,842,712 $ 10,644,838
============== ===============
6. ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of the following:
[Enlarge/Download Table]
1998 1999
---- ----
Accrued payroll......................................... $ 660,888 $ 2,318,771
Accrued warranty expense................................ 70,000 383,356
Sales return reserve.................................... 600,704 786,921
Accrued advertising..................................... 275,298 137,742
Accrued other........................................... 244,363 424,750
------------- --------------
Total................................................ $ 1,851,253 $ 4,051,540
============= ==============
7. COMMITMENTS AND CONTINGENCIES
LINES OF CREDIT
During 1999, the Company obtained a line of credit for $5 million
with a bank. The line is secured by the Company's general assets, and
interest is payable on outstanding borrowings under the line at the bank's
prime rate (8.5% at December 31, 1999). There were no outstanding borrowings
on the line of credit at December 31, 1999.
OPERATING LEASES
The Company leases its Vancouver, Washington office and warehouse
facilities under an operating lease which expires April 30, 2002. The lease
commitment is subject to an annual rent adjustment based upon changes in the
consumer price index, limited to a 6.0% annual change. The agreement provides
for an annual cancellation provision by the Company upon proper notification.
Under a separate agreement in 1997, which was amended in 1998, the Company
leased additional warehouse facilities. This operating lease expires May 21,
2000.
In December 1999, the Company leased a distribution center in Las
Vegas, Nevada to service the Southwestern part of the United States. This
operating lease expires November 30, 2002.
36
Nautilus HPS, Inc. leases trucks and trailers and other equipment used in
the Nautilus commercial business. These leases expire over various terms through
December 2002.
Rent expense under all leases was $107,361 in 1997, $239,197 in 1998,
and $664,922 in 1999.
OBLIGATIONS
Future minimum lease payments under the operating leases during the
years ending December 31 are as follows:
[Download Table]
2000.......................................... $ 609,677
2001.......................................... 427,906
2002.......................................... 245,973
-----------
Total minimum lease payments.................. $1,283,556
===========
8. STOCK OPTIONS
The Company's stock-based compensation plan was adopted in June
1995. The Company can issue both nonqualified stock options to the Company's
officers and directors and qualified options to the Company's employees. The
plan was amended in June 1998 so the Company may grant options up to
1,857,961 shares of common stock. At December 31, 1999, 561,215 shares are
available for future issuance under the plan. The plan is administered by the
Company's Board of Directors which determines the terms and conditions of the
various grants awarded under these plans. Stock options granted generally
have an exercise price equal to the closing market price of the Company's
stock on the date of the grant, and vesting periods vary by option granted,
generally no longer than four years.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," which encouraged
(but did not require) that stock-based compensation cost be recognized and
measured by the fair value of the equity instrument awarded. The Company did
not change its method of accounting for its stock-based compensation plans
and will continue to apply Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS ISSUED TO EMPLOYEES," and
related interpretations in accounting for these plans. Accordingly, no
compensation cost has been recognized for these plans in the financial
statements. If compensation cost on stock options granted in 1997, 1998 and
1999 under these plans had been determined based on the fair value of the
options consistent with that described in SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below for the years ended December 31, 1997, 1998 and 1999.
[Enlarge/Download Table]
1997 1998 1999
---------- ------------ -----------
Net income, as reported............................. $2,421,166 $12,485,494 $20,342,891
Net income, pro forma............................... 2,334,082 12,274,208 19,958,204
Diluted earnings per share, as reported............. $ 0.25 $ 1.28 $ 1.95
Diluted earnings per share, pro forma............... $ 0.25 $ 1.26 $ 1.91
The pro forma amounts may not be indicative of the effects on
reported net income for future years due to the effect of options vesting
over a period of years and the granting of stock compensation awards in
future years.
37
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999,
respectively; all options granted will vest as scheduled; no dividend yield
for all three years; risk-free interest rate of 5.5%, 5% and 6.4%; expected
volatility of 93%, 76% and 60%; and expected lives of five years for all
three years.
A summary of the status of the Company's stock option plans as of
December 31, 1997, 1998 and 1999, and changes during the years ended on those
dates is presented below.
[Enlarge/Download Table]
1997 1998 1999
-------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- ------- ------- -------- -----------
Outstanding at beginning of year.... 646,500 $0.18 813,113 $0.47 550,618 $2.39
Granted............................. 386,500 0.96 188,000 5.70 169,680 20.21
Forfeited or cancelled.............. (90,000) 0.98 (7,300) 0.96 (21,334) 10.71
Exercised........................... (129,887) 0.12 (443,195) 0.30 (231,825) 1.30
------------ ----------- ------------- -------------- -------------- -------------
Outstanding at end of year.......... 813,113 $0.47 550,618 $2.39 467,139 $9.03
============ =========== ============= ============== ============== =============
Options exercisable at end of 504,779 309,199 214,502
year................................ ============ ============= ==============
The following table summarizes information about stock options
outstanding as of December 31, 1999:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
------------------- -------------------
Average Weighted Number Weighted
Remaining Average of Average
Number Contractual Exercise Shares Exercise
RANGE OF EXERCISE PRICES Outstanding Life (Years) Price Exercisable Price
------------------------ ----------- ------------ ----- ----------- -----
$0.12 - $0.98 159,451 2.3 $0.90 138,951 $0.89
$4.62 - $9.75 143,008 3.2 5.23 65,671 4.65
$18.50 - $20.69 164,680 4.6 20.20 9,880 19.84
-------------------------------------------- ----------------- ------------- -------------- -------------- -------------
$0.12 - $20.69 467,139 3.4 $9.03 214,502 $3.39
================= ============= ============== ============== =============
9. INCOME TAXES
The Company realizes income tax benefits as a result of the exercise
of non-qualified stock options and the exercise and subsequent sale of certain
incentive stock options (disqualifying dispositions). For financial statement
purposes, any reduction in income tax obligations as a result of these tax
benefits is credited to common stock.
The provision for (benefit from) income taxes consists of the following
for the three years ended December 31, 1999:
38
[Enlarge/Download Table]
1997 1998 1999
---------------- -------------- ---------------
Current:
Federal.......................................................... $ 1,085,409 $ 6,608,100 $11,634,863
State............................................................ - - 345,010
---------------- -------------- ---------------
Total Current............................................... 1,085,409 6,608,100 11,979,873
---------------- -------------- ---------------
Deferred:
Federal.......................................................... 140,659 99,484 (484,448)
State............................................................ - - -
-------------- --------------- ---------------
Total Deferred.............................................. 140,659 99,484 (484,448)
---------------- -------------- ---------------
Total Provision.................................................... $1,226,068 $ 6,707,584 $11,495,425
================ ============== ===============
The components of the net deferred tax asset/liability at
December 31, 1998 and 1999 are as follows:
[Enlarge/Download Table]
1998 1999
---------------- ----------------
Current:
Assets:
Accrued vacation..................................................... $ 12,468 $ 124,933
Allowance for doubtful accounts...................................... 14,000 106,633
Inventory reserve.................................................... 17,500 107,083
Uniform capitalization............................................... 20,114 43,750
Accrued reserves..................................................... 195,216 442,847
Customer deposits.................................................... 52,128 384,034
Other................................................................ - 202,205
Liabilities:
Prepaid advertising...................................................... (82,984) (440,476)
Other prepaids........................................................... (12,705) (150,220)
---------------- ----------------
Net current deferred tax asset.............................................. $ 215,737 $ 820,789
================ ================
Non Current
Liabilities:
Other.................................................................... $ - $ (39,908)
Depreciation............................................................. (66,880) (147,576)
---------------- ----------------
Net long-term deferred tax liability........................................ $ (66,880) $ (187,484)
================ ================
A reconciliation of the statutory income tax rate with the company's
effective income tax rate is as follows:
[Enlarge/Download Table]
1998 1999
--------------- --------------
Federal.................................................................. 35.00% 35.00%
State.................................................................... - 1.08%
Other.................................................................... (.05%) 0.03%
--------------- --------------
Total................................................................. 34.95% 36.11%
=============== ==============
39
10. EARNINGS PER SHARE
The per share amounts are based on the weighted average number of basic
and dilutive common equivalent shares assumed to be outstanding during the
period of computation. Net income for the calculation of both basic and diluted
earnings per share is the same for all periods.
The calculation of weighted average outstanding shares is as follows:
[Enlarge/Download Table]
Average Shares
------------------------------------------------------
1997 1998 1999
----------------- ------------------ -----------------
Basic shares outstanding...................................... 8,986,655 9,336,525 10,165,617
Common stock equivalents...................................... 524,213 389,433 259,591
----------------- ------------------ -----------------
Diluted shares outstanding.................................... 9,510,868 9,725,958 10,425,208
================= ================== =================
11. STOCK REPURCHASE PROGRAM
In the third quarter, the Board of Directors authorized the
expenditures of up to $8 million to purchase shares of Direct Focus, Inc. common
stock in open market transactions until December 31, 1999. During the third
quarter, the Company bought back $3.7 million, or 211,200 common shares in the
open market.
12. RELATED-PARTY TRANSACTIONS
The Company incurred royalty expense under an agreement with a
stockholder of the Company of $530,805 in 1997, $1,603,821 in 1998, and
$2,815,116 in 1999, of which $548,211 and $893,563 was payable at December 31,
1998 and 1999, respectively.
The Company incurred investment consulting expense under an agreement
with a director of the Company of $30,000 in 1997, all of which was paid in
1997. This agreement expired in 1997.
13. LITIGATION SETTLEMENT
On July 17, 1999, the Company reached an agreement with a competitor to
settle pending litigation. As a result of the settlement, the Company took a
one-time, after-tax charge of $2.6 million in the second quarter. The Company
made an $8 million cash payment to the competitor, of which $4 million was paid
by insurance.
The Company made no admission of guilt in the settlement and continues
to believe that the competitor's claims were without merit. However, when the
court denied the Company's motions to have the case dismissed before trial, the
Company was faced with a lengthy jury trial and the possibility of a large jury
verdict, including multiple damages as allowed under federal law. Under those
circumstances, the Company determined that it was in the best interest of its
shareholders to settle the case on terms that will have no negative long-term
impact on the Company.
This settlement does not affect the ongoing direct marketing campaign
for the Company's Bowflex home fitness equipment Additionally, in the normal
course of business, the Company is a party to various other legal claims,
actions and complaints. Although it is not possible to predict with certainty
whether the Company will ultimately be successful in any of these legal matters,
or what the impact might be, the
40
Company believes that disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
14. OPERATING SEGMENTS
The Company's operating segments include its direct products segment
which includes all products marketed directly to consumers through a variety
of direct marketing channels. The Bowflex line of fitness equipment and the
Nautilus Sleep Systems are the principal products in the Company's direct
products segment. The other operating segment is the Nautilus products line
which includes products and operations that are not directly marketed to
consumers. Products in the segment include Nautilus commercial fitness
equipment and Nautilus fitness accessories. Accounting policies used by the
segments are the same as those disclosed in Note 1.
The following table presents information about the Company's two
operating segments (in thousands):
[Enlarge/Download Table]
Direct Products Nautilus Products Total
------------------- --------------------- -----------------
YEAR ENDED DECEMBER 31, 1999
Revenues from external customers $101,927 $ 19,091 $121,018
Interest income 1,002 2 1,004
Depreciation and amortization expense 565 618 1,183
Income tax expense 11,084 411 11,495
Segment net income 19,715 628 20,343
Segment assets 47,753 19,557 67,310
Additions to property, plant and equipment 1,379 550 1,929
YEAR ENDED DECEMBER 31, 1998
Revenues from external customers $ 57,297 - $ 57,297
Interest income 527 - 527
Depreciation and amortization expense 302 - 302
Income tax expense 6,708 - 6,708
Segment net income 12,485 12,485
Segment assets 24,373 - 24,373
Additions to property, plant and equipment 1,739 - 1,739
YEAR ENDED DECEMBER 31, 1997
Revenues from external customers $ 19,886 - $ 19,886
Interest income 119 - 119
Depreciation and amortization expense 96 - 96
Income tax expense 1,226 - 1,226
Segment net income 2,421 2,421
Segment assets 7,922 - 7,922
Additions to property, plant and equipment 279 - 279
15. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) profit sharing Plan in 1999 covering all
employees over the age of 18, who also have three months of service. Each
participant in the 401(k) Plan may contribute up to 15% of eligible compensation
during any calendar year, subject to certain limitations. The 401(k) Plan
provides for Company matching contributions of up to 50% for eligible
contributions for participants who have one year of service. In addition, the
Company may make discretionary contributions. Employees are 100% vested in
41
the matching and discretionary contributions after four years of service.
Expense for the Plan was $103,793 for the year ended December 31, 1999.
42
[Enlarge/Download Table]
DIRECT FOCUS, INC.
Schedule II
Valuation and Qualifying Accounts
Three years ended December 31, 1999
(in thousands)
---------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
-------------------------------------------- ------------------ ---------------- -------------- --------------------
Allowance for doubtful accounts:
1997....................................... 12,000 73,000 - 85,000
1998....................................... 85,000 - 45,000 40,000
1999....................................... 40,000 264,727 - 304,727
Sales returns and allowances:
1997....................................... 37,000 248,000 - 285,000
1998....................................... 285,000 315,704 - 600,704
1999....................................... 600,704 186,217 - 786,921
Warranty reserves
1997....................................... 10,000 10,000 - 20,000
1998....................................... 20,000 50,000 - 70,000
1999....................................... 70,000 313,356 - 383,356
All other financial statement schedules have been omitted since they
are not required, not applicable, or the information is included in the
consolidated financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE," respectively, in the Company's Proxy Statement
for its 2000 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement for its 2000 Annual
Meeting of Shareholders and is incorporated herein by reference.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the
caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Proxy
Statement for its 2000 Annual Meeting of shareholders and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See the Consolidated Financial Statements in Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULE
See Schedule II - Valuation and Qualifying Accounts in Item 8.
(a)(3) EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
[Download Table]
Exhibit No.
-----------
3.1 Articles of Incorporation, as Amended - Incorporated by reference
to Exhibits 3.1, 3.2 and 3.3 of the Company's Registration
Statement on Form S-1, as filed with the Securities and Exchange
Commission (the "Commission") on March 3, 1999.
3.2 Amended and Restated Bylaws - Incorporated by reference to
Exhibit 3.4 of Amendment No. 2 to the Company's Registration
Statement on Form S-1, as filed with the Commission on April 30,
1999.
10.1 Direct Focus, Inc. Stock Option Plan, as amended - Incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, as filed with the Commission on March 3,
1999.
10.2 Lease Agreement dated September 16, 1992, between Bow-Flex of
America, Inc. and Christensen Group, Inc. - Incorporated by
reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1, as filed with the Commission on March 3, 1999.
10.3 First Amendment to Lease dated September 16, 1992, between
Bow-Flex of America, Inc. and Christensen Group, Inc. -
Incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1, as filed with the Commission
on March 3, 1999.
44
10.4 Amendment to Bowflex, Inc. Lease Extension, dated August 27,
1996, between Bowflex, Inc. and Ogden Business Park Partnership -
Incorporated by reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-1, as filed with the Commission
on March 3, 1999.
10.5 First Amendment to Lease, dated December 10, 1996, between
Bowflex, Inc. and Ogden Business Park Partnership - Incorporated
by reference to Exhibit 10.5 of the Company's Registration
Statement on Form S-1, as filed with the Commission on March 3,
1999.
10.6 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc.
and Hart Enterprises - Incorporated by reference to Exhibit 10.6
of the Company's Registration Statement on Form S-1, as filed
with the Commission on March 3, 1999.
10.7 Amendment to Lease, dated as of October 20, 1998, between Direct
Focus, Inc. and LeRoy Hart Rentals. Incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form S-1,
as filed with the Commission on March 3, 1999.
10.8 Borrowing Agreement, dated December 16, 1998, between Direct
Focus, Inc. and Seafirst Bank - Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form S-1,
as filed with the Commission on March 3, 1999.
10.9 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of
America, Inc. and Tessema D. Shifferaw - Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-1, as filed with the Commission on March 3, 1999.
10.10 Royalty Payment Agreement, dated as of June 18, 1992, between
Tessema D. Shifferaw, Brian R. Cook and R.E. "Sandy" Wheeler -
Incorporated by reference to Exhibit 10.10 of the Company's
Registration Statement on Form S-1, as filed with the Commission
on March 3, 1999.
10.11 First Amended and Restated Merchant Agreement dated as January
27, 1999, between Direct Focus, Inc. and Household Bank (SB),
N.A. - Incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1, as filed with the
Commission on March 3, 1999.
10.12 Lease Agreement, dated July 19, 1999, between Direct Focus, Inc.
and Las Vegas Motor Speedway, LLC.
21 Subsidiaries of Direct Focus, Inc. - Incorporated by reference to
Exhibit 21 of the Company's Registration Statement on Form S-1,
as filed with the Commission on March 3, 1999.
23 Consent of Deloitte & Touche LLP
45
24.1 Power of Attorney for Kirkland C. Aly
24.2 Power of Attorney for C. Reed Brown
24.3 Power of Attorney for C. Rowland Hanson
24.4 Power of Attorney for Paul F. Little
24.5 Power of Attorney for Roger J. Sharp
24.6 Power of Attorney for Roland E. "Sandy" Wheeler
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000 DIRECT FOCUS, INC.
By______________________
Brian R. Cook, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2000:
SIGNATURE TITLE
---------- ------
-------------- President (Principal Executive Officer)
Brian R. Cook
-------------- Chief Financial Officer and Secretary
Rod W. Rice (Principal Financial and Accounting Officer)
Kirkland C. Aly* Director
----------------
Kirkland C. Aly
C. Reed Brown* Director
-----------------
C. Reed Brown
C. Rowland Hanson* Director
------------------
C. Rowland Hanson
Paul F. Little* Director
-------------------
Paul F. Little
Roger J. Sharp* Director
-------------------
Roger J. Sharp
Roland E. "Sandy" Wheeler* Director
-------------------------
Roland E. "Sandy" Wheeler
*By: ________________________ March 29, 2000
Rod W. Rice
ATTORNEY-IN-FACT
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000 DIRECT FOCUS, INC.
By: ______________________________
Brian R. Cook, President
SIGNATURE TITLE
---------- -------
/s/ BRIAN R. COOK President (Principal Executive Officer)
-----------------
Brian R. Cook
/s/ ROD W. RICE Chief Financial Officer and Secretary
------------------ (Principal Financial and Accounting
Rod W. Rice Officer)
/s/ KIRKLAND C. ALY Director
-------------------
Kirkland C. Aly
/s/ C. REED BROWN Director
-------------------
C. Reed Brown
/s/ C. ROWLAND HANSON Director
--------------------
C. Rowland Hanson
/s/ PAUL F. LITTLE Director
------------------
Paul F. Little
/s/ ROGER J. SHARP Director
-------------------
Roger J. Sharp
/s/ ROLAND E. "SANDY" WHEELER Director
----------------------------
Roland E. "Sandy" Wheeler
Dates Referenced Herein and Documents Incorporated by Reference
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