================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file number: 000-25867
THE NAUTILUS GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 94-3002667
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 NE 136th Avenue
Vancouver, Washington 98684
---------------------------
(Address of principal executive offices, including zip code)
(360) 694-7722
--------------
(Issuer's telephone number, including area code)
Direct Focus, Inc.
------------------
(Former name if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares of issuer's common stock outstanding as of August 7, 2002:
34,562,310
================================================================================
THE NAUTILUS GROUP, INC.
JUNE 30, 2002
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
THE NAUTILUS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
- -------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 30,685 $ 35,639
Short-term investments, at amortized cost 25,408 16,070
Trade receivables (less allowance for doubtful accounts of
$3,034 and $2,064 in 2002 and 2001, respectively) 22,072 24,858
Inventories, net 68,828 45,516
Prepaid expenses and other current assets 3,621 2,007
Notes receivable 2,808 2,672
Current deferred tax assets 1,333 1,425
--------- ---------
Total current assets 154,755 128,187
PROPERTY, PLANT AND EQUIPMENT, net 41,802 25,228
GOODWILL 31,156 29,625
OTHER ASSETS, net 16,920 10,865
--------- ---------
TOTAL ASSETS $ 244,633 $ 193,905
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 25,472 $ 25,256
Accrued liabilities 13,864 10,888
Income taxes payable 4,292 4,792
Royalty payable to stockholders 2,413 1,885
Customer deposits 1,142 1,000
--------- ---------
Total current liabilities 47,183 43,821
LONG-TERM DEFERRED TAX LIABILITIES 3,835 2,670
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock authorized, 75,000,000 shares of no par value;
issued and outstanding, 2002: 34,970,969 shares, 2001:
34,954,790 shares 601 4,900
Retained earnings 192,421 142,637
Accumulated other comprehensive income (loss) 593 (123)
--------- ---------
Total stockholders' equity 193,615 147,414
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 244,633 $ 193,905
========= =========
See notes to consolidated financial statements.
-3-
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET SALES $ 140,408 $ 75,009 $ 276,322 $ 149,864
COST OF SALES 56,639 25,772 115,392 51,076
----------- ----------- ----------- -----------
Gross profit 83,769 49,237 160,930 98,788
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling and marketing 34,091 22,634 65,691 45,785
General and administrative 7,376 3,413 13,640 6,616
Royalties 2,565 1,659 4,894 3,322
----------- ----------- ----------- -----------
Total operating expenses 44,032 27,706 84,225 55,723
----------- ----------- ----------- -----------
OPERATING INCOME 39,737 21,531 76,705 43,065
----------- ----------- ----------- -----------
OTHER INCOME:
Interest income 477 1,117 927 2,512
Other, net 139 86 158 187
----------- ----------- ----------- -----------
Total other income, net 616 1,203 1,085 2,699
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 40,353 22,734 77,790 45,764
INCOME TAX EXPENSE 14,527 8,184 28,006 16,475
----------- ----------- ----------- -----------
NET INCOME $ 25,826 $ 14,550 $ 49,784 $ 29,289
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.73 $ 0.41 $ 1.42 $ 0.83
DILUTED EARNINGS PER SHARE $ 0.72 $ 0.40 $ 1.39 $ 0.81
Basic shares outstanding 35,173,064 35,106,748 35,091,136 35,297,229
Diluted shares outstanding 36,060,891 36,004,062 35,921,542 36,122,757
See notes to consolidated financial statements.
-4-
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 49,784 $ 29,289
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,861 1,626
Tax benefit of exercise of nonqualified options 2,674 665
Deferred income taxes 1,257 (72)
Gain on sale of property, plant and equipment (25) --
Changes in assets and liabilities, net of the effect of acquisition:
Trade receivables 11,188 472
Inventories (16,581) (9,411)
Prepaid expenses and other current assets (958) (234)
Trade payables (248) 7,653
Income taxes payable (500) (835)
Accrued liabilities and royalty payable to stockholders 746 1,994
Customer deposits 142 (1,042)
---------- ----------
Net cash provided by operating activities 50,340 30,105
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (14,006) (2,077)
Increase in other assets (590) (14)
Proceeds from sale of property, plant and equipment 25 --
Acquisition cost of StairMaster, net of cash acquired (24,992) --
Purchases of short-term investments (25,674) (24,002)
Proceeds from maturities of short-term investments 16,336 --
Issuance of note receivable (136) (1,992)
---------- ----------
Net cash used in investing activities (49,037) (28,085)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,114 1,196
Funds used for stock repurchase (9,087) (9,720)
---------- ----------
Net cash used in financing activities (6,973) (8,524)
---------- ----------
Effect of exchange rate changes 716 --
---------- ----------
(Continued)
-5-
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (4,954) $ (6,504)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,639 77,181
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,685 $ 70,677
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ 24,500 $ 16,700
SUPPLEMENTAL DISCLOSURE OF OTHER NONCASH
INVESTING ACTIVITY:
Champion purchase option paid by restricted stock $ -- $ 250
(Concluded)
See notes to consolidated financial statements.
-6-
THE NAUTILUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The
Nautilus Group, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") and pursuant to Securities
and Exchange Commission rules and regulations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's annual
report for the fiscal year ended December 31, 2001.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for
the full year.
CONSOLIDATION - The consolidated financial statements include The Nautilus
Group, Inc. and its wholly-owned subsidiaries (collectively the
"Company"). On May 21, 2002, the Company changed its corporate name to The
Nautilus Group, Inc. from Direct Focus, Inc. All intercompany transactions
and balances have been eliminated.
SHORT-TERM INVESTMENTS - Debt securities with maturities greater than
three months and remaining maturities less than one year are classified as
short-term investments. Short-term investments in debt securities are
classified as held-to-maturity and valued at amortized cost with gains and
losses recognized upon the sale of the security.
INVENTORIES - During the current quarter, the Company's direct segment
began valuing inventories at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market in
connection with the implementation of a new enterprise resource planning
system. Previously, inventories were valued at the lower of average cost
or market. There is no material effect on the Company's financial position
or results of operations as a result of this change in accounting method.
RECENT ACCOUNTING PRONOUNCEMENTS - Effective July 1, 2001, the company
adopted certain provisions of Statement of Financial Accounting Standards
("SFAS") No. 141, BUSINESS COMBINATIONS, and effective January 1, 2002,
the Company adopted the full provisions of SFAS No. 141 and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets apart from goodwill. SFAS No. 142 requires that
purchased goodwill and certain indefinite-lived intangibles no longer be
amortized but instead be tested for impairment at least annually. In
connection with the adoption of SFAS No. 142 on January 1, 2002, the
Company evaluated its identified intangible assets and determined that the
Nautilus trademark has an indefinite useful life.
-7-
SFAS No. 142 prescribes a two-phase process for testing the impairment of
goodwill and indefinite life intangibles. The first phase, required to be
completed by June 30, 2002, screens for impairment. If impairment exists,
the second phase, required to be completed by December 31, 2002, measures
the impairment. The Company completed its first phase impairment analysis
during the second quarter and found no instances of impairment of its
recorded goodwill or indefinite life intangibles. Accordingly, no
impairment charge will be recorded as a result of adopting SFAS No. 142.
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF. SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and expands on the guidance
provided by SFAS No. 121 with respect to cash flow estimations. SFAS No.
144 was effective for the Company's fiscal year beginning January 1, 2002.
The adoption of SFAS No. 144 has not had a material effect on the
Company's financial position, results of operations, or cash flows.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. The
standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Costs covered by the standard
include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. This statement is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company is evaluating the impact of adopting the
provisions of this statement and does not believe it will have a material
effect on the Company's financial position, results of operations, or cash
flows.
RECLASSIFICATIONS - Certain amounts from 2001 have been reclassified to
conform to the 2002 presentation.
2. ACQUISITIONS
Effective February 8, 2002, the Company acquired the trade receivables,
inventories, property, plant and equipment, certain intangible assets, and
the foreign subsidiaries of StairMaster Sports/Medical, Inc.
("StairMaster") for a cash purchase price of approximately $25,785
including acquisition costs. StairMaster was acquired through a bankruptcy
auction in the United States Bankruptcy Court for the Western District of
Washington, which auction was completed on January 17, 2002.
The acquired assets include property, plant and equipment used to
manufacture, assemble, distribute, and sell fitness equipment, including
steppers, stepmills, treadmills, and exercise bicycles. The Company
intends to continue to use the acquired assets for these purposes.
The purchase price for StairMaster was determined in the court auction.
The Company's bid was formulated on the basis of historical and projected
financial performance, which resulted in goodwill that has been recorded
in the Company's commercial/retail segment along with the acquired assets
and liabilities. The Company financed the acquisition with cash-on-hand.
The Company has determined that the intangible asset associated with the
StairMaster acquisition (a trademark valued at $6.2 million) has an
indefinite useful life and thus will not be amortized. The Company will
evaluate the useful life of the trademark each reporting period to
determine whether events or circumstances warrant a revision to the
indefinite useful life assumption or if the asset should be tested for
impairment.
-8-
The total cost of the acquisition has been allocated to the assets
acquired and liabilities assumed as follows:
Cash and cash equivalents $ 793
Trade receivables 8,402
Inventories 6,731
Property, plant and equipment 5,249
Prepaid and other current assets 656
Trademark 6,200
Goodwill 976
Liabilities assumed (3,222)
-------
Total acquisition cost $25,785
=======
Effective September 20, 2001, the Company acquired the trade receivables,
inventories, property, plant and equipment, certain intangible assets, and
the foreign subsidiaries of the Fitness Division of Schwinn/GT Corp.
("Schwinn Fitness") for a cash purchase price of approximately $69,843
including acquisition costs.
The Company has determined that the intangible asset associated with the
Schwinn Fitness acquisition (a trademark valued at $6.8 million) has an
indefinite useful life. However, as the expected use and cash flows from
the trademark are expected to be approximately 20 years, the Company will
amortize the trademark using the straight-line method over this period.
The Company will evaluate the remaining useful life of the trademark that
is being amortized each reporting period to determine whether events or
circumstances warrant a revision to the remaining period of amortization
or if the asset should be tested for impairment.
The unaudited pro forma financial information below for the three months
and six months ended June 30, 2002 and 2001 was prepared as if the
transactions involving the acquisitions of StairMaster and Schwinn Fitness
had occurred at the beginning of each period presented:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- --------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
Net sales $ 140,408 $ 106,387 $ 282,601 $ 231,151
Net income 25,826 12,740 50,008 25,105
Basic earnings per share 0.73 0.36 1.43 0.71
Diluted earnings per share 0.72 0.35 1.39 0.69
The unaudited pro forma financial information is not necessarily
indicative of what actual results would have been had the transactions
occurred at the beginning of the respective year, nor does it purport to
indicate the results of future operations of the Company.
The 2001 net income for Schwinn Fitness in the pro forma calculation is
not presented in the same manner as the June 2001 pro forma net income
number in the Form 8-K/A filed with the SEC on December 3, 2001. This
presentation difference is due to the pro forma rules applicable to the
Form 8-K/A differing from the pro forma rules applicable to financial
statements prepared in accordance with generally accepted accounting
principles. Only Schwinn Fitness Division direct costs were included in
the Form 8-K/A calculation, while corporate cost allocations and income
taxes are included in the calculation above.
-9-
3. INVENTORIES, net
Inventories consisted of the following:
June 30, December 31,
2002 2001
------- -------
Finished goods $48,064 $34,862
Work-in-process 1,314 1,148
Parts and components 19,450 9,506
------- -------
Total inventories, net $68,828 $45,516
======= =======
4. PROPERTY, PLANT AND EQUIPMENT, net
Property, plant and equipment consisted of the following:
Estimated
Useful Life June 30, December 31,
(in years) 2002 2001
----------- ------- -------
Land N/A $ 1,986 $ 1,780
Buildings 31.5 20,292 11,785
Computer equipment 2-5 15,195 10,088
Production equipment 5 11,515 6,567
Furniture and fixtures 5 1,852 1,464
Automobiles and trucks 7 470 349
------- -------
Total property, plant and equipment 51,310 32,033
Accumulated depreciation (9,508) (6,805)
------- -------
Total property, plant and equipment, net $41,802 $25,228
======= =======
5. GOODWILL AND OTHER ASSETS, net
Other assets consisted of the following:
June 30, December 31,
2002 2001
--------------- ---------------
Trademarks and patents $17,595 $11,395
Other assets 339 303
------- -------
Total other assets 17,934 11,698
Accumulated amortization (1,014) (833)
------- -------
Total other assets, net $16,920 $10,865
======= =======
-10-
The Company evaluates goodwill and intangible assets with indefinite lives
for impairment annually or more frequently if events or changes in
circumstance indicate that such assets might be impaired. Intangible
assets with finite useful lives are tested for impairment whenever events
or changes in circumstance indicate that such assets might be impaired.
The remaining useful lives of intangible assets with finite useful lives
are evaluated annually to determine whether events or circumstances
warrant changes in the estimated useful lives of such assets.
As discussed in Note 1, the Company adopted SFAS No. 142 on January 1,
2002. In accordance with SFAS No. 142, the effect of this accounting
change is reflected prospectively. Supplemental comparative disclosure as
if the change had been retroactively applied to the three months and six
months ended June 30, 2001 is as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2001
---------- ----------
Reported net income $ 14,550 $ 29,289
Amortization expense, net of tax 35 70
---------- ----------
Adjusted net income $ 14,585 $ 29,359
========== ==========
Basic earnings per share:
Reported net income $ 0.41 $ 0.83
Adjusted net income $ 0.42 $ 0.83
Diluted earnings per share:
Reported net income $ 0.40 $ 0.81
Adjusted net income $ 0.41 $ 0.81
Amortization of intangible assets for the three months and six months
ended June 30, 2002 was $90 and $181, respectively. The estimated
amortization expense for the next five years is $362 per year. Such
estimated amortization will change if businesses or portions thereof are
either acquired or disposed, or if changes in events or circumstances
warrant the revision of estimated useful lives.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
June 30, December 31,
2002 2001
--------------- ---------------
Accrued warranty expense $ 4,382 $ 2,413
Accrued payroll 4,973 4,852
Sales return reserve 2,175 2,100
Other 2,334 1,523
------- -------
Total accrued liabilities $13,864 $10,888
======= =======
-11-
7. COMPREHENSIVE INCOME
Comprehensive income and its components are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
Net income $25,826 $14,550 $49,784 $29,289
Foreign currency translation
adjustments 789 - 716 -
------- ------- ------- -------
Comprehensive income $26,615 $14,550 $50,500 $29,289
======= ======= ======= =======
8. RESEARCH AND DEVELOPMENT
Internal research and development costs are expensed as incurred and
included in cost of sales. Third party research and development costs are
expensed when the contracted work has been performed.
Research and development expense was $1,088 and $492 for the three months
ended June 30, 2002 and 2001, respectively. Research and development
expense was $1,861 and $899 for the first six months of 2002 and 2001,
respectively.
9. STOCK OPTIONS
There were 303,779 options exercised at prices ranging from $0.24 to
$23.02 per share during the six months ended June 30, 2002. There were
249,075 new options granted at exercise prices ranging from $32.80 to
$37.70 per share during that period. There were 11,875 options canceled at
prices ranging from $6.07 to $24.28 per share during the six months ended
June 30, 2002. As of June 30, 2002, there were 249,075 options outstanding
with exercise prices that exceeded the closing market price of the
Company's common stock as listed on the New York Stock Exchange.
10. OPERATING SEGMENTS
The following table presents information about the Company's two operating
segments:
Commercial/
Direct Retail Total
--------------------- ---------------------- ----------------------
Three Months Six Months Three Months Six Months Three Months Six Months
-------- -------- -------- -------- -------- --------
Period Ended June 30, 2002
Net sales $103,088 $194,170 $ 37,320 $ 82,152 $140,408 $276,322
======== ======== ======== ======== ======== ========
Segment net income $ 25,552 $ 47,623 $ 274 $ 2,161 $ 25,826 $ 49,784
======== ======== ======== ======== ======== ========
Period Ended June 30, 2001
Net sales $ 68,959 $136,520 $ 6,050 $ 13,344 $ 75,009 $149,864
======== ======== ======== ======== ======== ========
Segment net income $ 14,605 $ 29,111 $ (55) $ 178 $ 14,550 $ 29,289
======== ======== ======== ======== ======== ========
-12-
11. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are reconciled as follows:
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
-------------------------------------- --------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ---------- -------- ---------- ---------- --------
Basic EPS:
Net income $ 25,826 35,173,064 $ 0.73 $ 14,550 35,106,748 $ 0.41
Effect of dilutive securities:
Stock options - 887,827 (0.01) - 897,314 (0.01)
---------- ---------- -------- ---------- ---------- --------
Diluted EPS:
Net income $ 25,826 36,060,891 $ 0.72 $ 14,550 36,004,062 $ 0.40
========== ========== ======== ========== ========== ========
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
-------------------------------------- --------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ---------- -------- ---------- ---------- --------
Basic EPS:
Net income $ 49,784 35,091,136 $ 1.42 $ 29,289 35,297,229 $ 0.83
Effect of dilutive securities:
Stock options - 830,406 (0.03) - 825,528 (0.02)
---------- ---------- -------- ---------- ---------- --------
Diluted EPS:
Net income $ 49,784 35,921,542 $ 1.39 $ 29,289 36,122,757 $ 0.81
========== ========== ======== ========== ========== ========
12. STOCK REPURCHASE PROGRAM
In June 2002, the Board of Directors authorized the expenditure of up to
$20,000 to purchase shares of The Nautilus Group, Inc. common stock in
open market transactions. During the six months ended June 30, 2002, the
Company repurchased a total of 287,600 shares of common stock in open
market transactions for an aggregate purchase price of $9,087. The
authorization is set to expire on August 31, 2002.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to litigation, claims and assessments in the
ordinary course of business, many of which are covered in whole or in part
by insurance. Management believes that any liability resulting from such
matters will not have any material adverse effect on the Company's
financial position, results of operations, or cash flows.
* * * * * *
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Certain statements contained in this Form 10-Q, including, without limitation,
statements containing the words "could," "may," "will," "should," "plan,"
"believes," "anticipates," "estimates," "predicts," "expects," "projections,"
"potential," or "continue," and words of similar import, constitute
"forward-looking statements." 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-Q, we may make forward-looking
statements relating to our financial performance, including the following:
o Anticipated revenues, expenses, and gross margins;
o Seasonal patterns;
o Expense as a percentage of revenue;
o Anticipated earnings;
o New product introductions; and
o Future capital expenditures.
Numerous factors could affect our actual results, including the following:
o Our reliance on a limited product line;
o Expiration of important patents;
o Our ability to effectively develop, market, and sell future products;
o Growth management challenges, including the growth resulting from the
acquisition of the assets of the Fitness Division of Schwinn/GT Corp.
("Schwinn Fitness") in September 2001, and the acquisition of the assets
of StairMaster Sports/Medical, Inc. ("StairMaster") in February 2002;
o Our ability to integrate the StairMaster business, and any other acquired
businesses into our operations;
o A decline in consumer spending due to unfavorable economic conditions;
o The availability of media time and fluctuating advertising rates;
o Our reliance on the consumer finance market;
o Our ability to adequately protect our intellectual property;
o Our reliance on third-party manufacturers;
o Government regulatory action;
o Changes in global political, regulatory, or economic conditions; and
o Economic impacts from currency fluctuations in the Company's international
operations.
We describe certain of these and other key risk factors elsewhere in more detail
in this Form 10-Q. Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. 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-Q or to reflect the
occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES
We have identified the most critical accounting policies for our Company. These
critical policies involve the most complex or subjective decisions or
assessments and include warranty reserves, sales return reserves, and the
allowance for doubtful accounts.
-14-
WARRANTY RESERVES
The costs for product warranties included in our warranty reserve are for the
cost to manufacture (raw materials, labor and overhead) or purchase warranty
parts from our suppliers and the cost to ship those parts to our customers. In
addition, the cost of a technician to install a warranted part on our
manufactured commercial equipment is also included.
The warranty reserve is based on past historical experience with each product. A
warranty reserve is established for new products based on historical experience
with similar products, adjusted for any technological advances in manufacturing
or materials used. Thorough testing of new products in the development stage
helps to identify and correct potential warranty issues prior to manufacturing.
Continuing quality control efforts during manufacturing limit our exposure to
warranty claims. We track all warranty claims by part and reason for claim in
order to identify any potential warranty trends.
If our quality control efforts were to fail in detecting a fault in one of our
products, we could experience increased warranty claims resulting in increasing
the warranty reserve, which could have a significant impact on current and
future financial position, results of operations and cash flows.
SALES RETURN RESERVES
The sales return reserve is based on past historical experience of product
returns during the trial period in which a customer can return a product for the
full purchase price, less shipping and handling in most instances. The trial
periods for Bowflex, Champion Nutrition, and Nautilus Sleep Systems product
lines are six weeks, 30 days, and 90 days, respectively. Trial periods are not
offered on our other product lines. We track all product returns in order to
identify any potential customer satisfaction trends. Our return reserve may be
sensitive to a change in our customers' ability to pay during the trial period
due to unforeseen economic circumstances and to different product introductions
that might fulfill the customers' needs at a perceived better value. A change in
our sales return reserve could have a significant impact on current and future
financial position, results of operations and cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on past historical experience
adjusted for any known uncollectible amounts. We periodically review the
creditworthiness of our customers to help ensure collectibility. Our allowance
is sensitive to changes in our customers' ability to pay due to unforeseen
changes in the economy, including the bankruptcy of a major customer, our
efforts to actively pursue collections, and increases in chargebacks. Any major
change in the aforementioned factors may result in increasing the allowance for
doubtful accounts, which could have a significant impact on current and future
financial position, results of operations and cash flows.
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.
-15-
STATEMENT OF OPERATIONS DATA - THREE MONTHS ENDED JUNE 30
The following table presents certain financial data regarding our second quarter
operations in 2002 and 2001, as a percentage of total revenues:
Quarter Ended June 30,
----------------------
Statement of Operations Data 2002 2001
-------- --------
Net sales 100.0 % 100.0 %
Cost of sales 40.3 34.4
-------- --------
Gross profit 59.7 65.6
-------- --------
Operating expenses:
Selling and marketing 24.3 30.2
General and administrative 5.3 4.5
Royalties 1.8 2.2
-------- --------
Total operating expenses 31.4 36.9
-------- --------
Operating income 28.3 28.7
Other income 0.4 1.6
-------- --------
Income before income taxes 28.7 30.3
Income tax expense 10.3 10.9
-------- --------
Net income 18.4 % 19.4 %
======== ========
COMPARISON OF THE QUARTERS ENDED JUNE 30, 2002 AND 2001
NET SALES
Net sales increased by 87.2% to $140.4 million in the second quarter of 2002
from $75.0 million in the second quarter of 2001. Sales were driven by the
growth in our direct segment and continued expansion of our commercial/retail
business. Excluding our acquisitions of Schwinn Fitness and StairMaster, sales
grew 47.0% on a consolidated basis compared to the same period a year ago.
During the second quarter of 2002, we capitalized on favorable advertising costs
and availability to increase the consumer awareness of our Bowflex and Nautilus
Sleep System product lines. Meanwhile, we have continued to expand our market
share in the commercial/retail segment, where we have grown the Nautilus brand,
integrated the acquisition of the Schwinn Fitness business, and continue to
integrate StairMaster which we acquired in the first quarter of 2002.
Direct segment sales in the second quarter of 2002 were stronger than they have
historically been in the second quarter. Sales in our direct segment are
comprised primarily of sales from our Bowflex product line. However, as sales
from our Nautilus Sleep Systems product line continue to grow, they have become
an increasingly important component of our direct segment business. Sales within
our direct segment were $103.1 million in the second quarter of 2002, an
increase of 49.5% over the second quarter of 2001. Our direct segment accounted
for 73.4% of our aggregate net sales in the quarter, down from 91.9% in the
second quarter of 2001, as we continued our strategy of diversification into the
commercial and retail markets.
-16-
Demand for our new high-end Bowflex "Ultimate" model was strong coming into the
quarter ended June 30, 2002. We believe there is still a "nesting effect" from
the slower economy and events of September 11, where more people are staying at
home and buying products for their home. Historically, the second quarter has
been our slowest quarter of the year for our direct segment sales. Our direct
segment business is largely dependent upon national cable television
advertising. We have found that influences on television viewership during the
second quarter, such as the broadcast of national network season finales and
seasonal weather factors, cause our spot television commercials to be marginally
less effective. We believe consumers tend to watch less television and spend
more time outdoors when the weather improves, and consequently, tend to purchase
less indoor fitness equipment and related products during the second quarter. We
believe this year's strong second quarter, which is contrary to our historical
trend of second quarter weakness, will not be experienced in the second quarter
of future years.
Sales within our commercial/retail segment were $37.3 million in the second
quarter of 2002, an increase of 516.9% over second quarter of 2001. Excluding
our acquisitions of Schwinn Fitness and StairMaster, sales grew 18.3% in the
commercial/retail segment. Our commercial/retail segment now accounts for 26.6%
of our net sales, up from 8.1% in the second quarter of 2001 as we continued to
execute our strategy of expanding our presence, product lines, and brands across
all our channels, especially within the commercial/retail segment. In 2002, with
a full year of results from Schwinn Fitness and with the acquisition of
StairMaster, we expect our commercial/retail segment will account for
approximately 35% of total sales.
We believe that sales within our commercial/retail segment are considerably
lower in the second quarter of the year compared to the other quarters. Our
strongest quarter for the commercial/retail segment should be the fourth
quarter, followed by the first and third quarters. We believe the principle
reason for this trend is the commercial/retail fitness industry's preparation
for the impact of New Year's fitness resolutions and seasonal weather patterns
related to colder winter months.
GROSS PROFIT
Gross profits continued to be strong, growing 70.1% to $83.8 million in the
second quarter of 2002 from $49.2 million in the same period a year ago.
However, due to our product diversification strategy, which has increased sales
of inherently lower margin products in the commercial/retail segment, our
overall gross profit margin as a percentage of sales decreased 5.9 percentage
points to 59.7% in the second quarter of 2002, compared to 65.6% in the second
quarter of 2001. We expect this trend to continue as we increase sales in the
commercial and retail segments of the market relative to our total sales. For
the remainder of 2002, as commercial/retail segment sales increase, we expect
our combined gross margin to be in the range of 54% to 56%.
The gross profit margin within our direct segment was 72.3% in the second
quarter of 2002 and 68.7% in the second quarter of 2001. Gross margins on our
Bowflex product line continue to be very strong as we gain cost concessions from
vendors and shipping cost savings. The decrease in gross margins within our
commercial/retail segment to 24.8% in the second quarter of 2002, compared with
30.9% in the second quarter of 2001, was largely due to the Schwinn Fitness and
StairMaster acquisitions. We expect the gross profit margin for the
commercial/retail segment to improve modestly during the second half of 2002 as
we achieve seasonally higher sales levels. Sales levels impact margin as certain
costs are fixed.
-17-
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $34.1 million in the second quarter of
2002 from $22.6 million in the same period a year ago, an increase of 50.6%.
This increase in selling and marketing expenses resulted primarily from the
expansion of our direct marketing campaign for Bowflex products and Nautilus
Sleep Systems, as well as the addition of Schwinn Fitness and StairMaster.
As a percentage of net sales, overall selling and marketing expenses decreased
to 24.3% in the second quarter of 2002 from 30.2% in the second quarter of 2001.
The decrease was a result of our planned product diversification efforts leading
to a higher proportion of commercial/retail segment sales. Selling and marketing
expenses within our direct segment were 27.7% of net sales in the second quarter
of 2002, compared to 30.8% in the second quarter of 2001. We continue to benefit
from a favorable advertising environment in our direct segment that may not
continue in future periods, resulting in upward pressure on selling and
marketing expenses. Overall, we expect that our selling and marketing expenses
will increase in real dollar terms, but not as a percentage of net sales, as we
continue to expand our Bowflex and Nautilus Sleep systems direct-marketing
campaign and expand our product diversification efforts in the commercial/retail
segment.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $7.4 million in the second quarter
of 2002 from $3.4 million in the same period a year ago, an increase of $4.0
million, or 116.1%. Our direct segment accounted for $1.3 million of the
increase, due primarily to increased staffing and infrastructure expenses
necessary to support our continuing growth. Our commercial/retail operations
accounted for the remaining increase of $2.7 million due primarily to our
Schwinn Fitness and StairMaster acquisitions. As a percentage of net sales,
general and administrative expenses increased to 5.3% in the second quarter of
2002 from 4.5% in the same period a year ago. While we have experienced some
increases in overhead related to our acquisitions, we continue to work to
control costs as our business grows. We believe that our general and
administrative expenses will increase in future periods in real dollar terms,
but decrease marginally as a percentage of sales as seasonal sales increases are
experienced in our commercial/retail segment.
ROYALTIES
Royalty expense grew to $2.6 million in the second quarter of 2002 from $1.7
million in the same period a year ago, an increase of 54.6%. Our direct and
commercial/retail segments have several agreements under which we are obligated
to pay royalty fees on certain products. The increase in our royalty expense is
primarily attributable to the increased sales of our Bowflex products in the
quarter, along with sales of other products under royalty agreements that have
been added as part of our product diversification strategy. Our royalty expenses
will increase if sales of our Bowflex products continue to increase and as we
sell other products which have royalty agreements associated with them.
OTHER INCOME
In the second quarter of 2002, other income was $0.6 million compared to $1.2
million for the same period a year ago. The decrease resulted primarily from
lower interest earned on invested cash and cash equivalents due to lower average
interest rates in 2002 coupled with lower invested cash balances.
-18-
INCOME TAX EXPENSE
Income tax expense increased by $6.3 million for the second quarter of 2002
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 $25.8 million in the second
quarter of 2002 from $14.6 million in the same period a year ago, an increase of
77.5%. We have raised our expectation for earnings growth in 2002 from 40% to
approximately 50%. This revision in earnings guidance is predominately
attributed to greater than anticipated internal sales growth. Very little of
this increased expectation is due to the StairMaster acquisition, which is
expected to provide only a slight increase in net income during 2002.
STATEMENT OF OPERATIONS DATA - SIX MONTHS ENDED JUNE 30
The following table presents certain financial data regarding operations for the
first six months in 2002 and 2001, as a percentage of total revenues:
Six Months Ended June 30,
------------------------
Statement of Operations Data 2002 2001
-------- --------
Net sales 100.0 % 100.0 %
Cost of sales 41.8 34.1
-------- --------
Gross profit 58.2 65.9
-------- --------
Operating expenses:
Selling and marketing 23.8 30.6
General and administrative 4.9 4.4
Royalties 1.8 2.2
-------- --------
Total operating expenses 30.5 37.2
-------- --------
Operating income 27.7 28.7
Other income 0.4 1.8
-------- --------
Income before income taxes 28.1 30.5
Income tax expense 10.1 11.0
-------- --------
Net income 18.0 % 19.5 %
======== ========
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NET SALES
Net sales grew by 84.4% to $276.3 million in the first six months of 2002 from
$149.9 million in the same period in 2001. Sales were driven by the growth in
our direct segment and the continued expansion into the commercial/retail market
segment. Excluding our acquisitions of Schwinn Fitness and StairMaster, sales
grew 40.6% on a consolidated basis compared to the same period a year ago.
-19-
During the first half of 2002, we took advantage of favorable advertising costs
and availability to increase the consumer awareness of our Bowflex and Nautilus
Sleep System product lines. Meanwhile, we have continued to expand our market
share in the commercial/retail segment.
Sales within our direct segment were $194.2 million in the first six months of
2002, an increase of 42.2% over the same period of 2001. Our direct segment
accounted for 70.3% of our aggregate net sales in the first half of 2002 down
from 91.1% in the same period of 2001, as we continued our strategy of
diversification in the commercial/retail segment.
Sales within our commercial/retail segment were $82.2 million in the first half
of 2002, an increase of 515.6% over the same period of 2001. Excluding our
acquisitions of Schwinn Fitness and StairMaster, sales grew 23.8% in the
commercial/retail segment. Our commercial/retail segment now accounts for 29.7%
of our net sales, up from 8.9% in the first half of 2001 as we continued to
execute our strategy of expanding our presence, product lines, and brands across
all our channels, especially within the commercial/retail segment.
GROSS PROFIT
Gross profits grew 62.9% to $160.9 million in the first half of 2002 from $98.8
million in the same period a year ago. However, due to our product
diversification strategy, which has increased sales of inherently lower margin
products in the commercial/retail segment, our overall gross profit margin as a
percentage of sales decreased 7.7 percentage points to 58.2% in the first half
of 2002, from 65.9% in the first half of 2001. We expect this trend to continue
as we further expand our business in the commercial/retail segment. The gross
profit margin within our direct segment was 72.2% in the first half of 2002 and
69.1% in the first half of 2001. The decrease in gross margins within our
commercial/retail segment to 25.2% in the first half of 2002, compared with
33.5% in the first half of 2001, was largely due to the Schwinn Fitness and
StairMaster acquisitions.
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $65.7 million in the first half of 2002
from $45.8 million in the same period a year ago, an increase of 43.5%. This
increase in selling and marketing expenses resulted primarily from the expansion
of our direct marketing campaign for Bowflex products and Nautilus Sleep
Systems, variable costs associated with our sales growth, as well as the
addition of Schwinn Fitness and StairMaster. As a percentage of net sales,
overall selling and marketing expenses decreased to 23.8% in the first half of
2002 from 30.6% in the first half of 2001. The decrease was a result of
executing our product diversification strategy leading to a higher proportion of
commercial/retail segment sales. Selling and marketing expenses within our
direct segment were 28.2% of net sales in the first half of 2002, compared to
31.3% in the first half of 2001.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $13.6 million in the first half of
2002 from $6.6 million in the same period a year ago, an increase of $7.0
million, or 106.2%. Our direct segment accounted for $1.9 million of the
increase, due primarily to increased staffing and infrastructure expenses
necessary to support our continuing growth. Our commercial/retail operations
accounted for the remaining increase of $5.1 million due primarily to our
Schwinn Fitness and StairMaster acquisitions. As a percentage of net sales,
general and administrative expenses increased to 4.9% in the first half of 2002
from 4.4% in the same period a year ago.
-20-
ROYALTIES
Royalty expense grew to $4.9 million in the first half of 2002 from $3.3 million
in the same period a year ago, an increase of 47.3%. The increase in our royalty
expenses is primarily attributable to the increased sales of our Bowflex
products.
OTHER INCOME
In the first half of 2002, other income was $1.1 million compared to $2.7
million for the same period a year ago. The decrease resulted primarily from
lower interest earned on invested cash and cash equivalents due to lower average
interest rates in 2002 coupled with lower invested cash balances.
INCOME TAX EXPENSE
Income tax expense increased by $11.5 million for the first half of 2002 because
of the growth in our income before taxes.
NET INCOME
For the reasons discussed above, net income grew to $49.8 million in the first
half of 2002 from $29.3 million in the same period a year ago, an increase of
70.0%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our growth and acquisitions primarily from cash
generated by our operating activities. During the first half of 2002, our
operating activities generated approximately $50.3 million in net cash, which
contributed to an aggregate $30.7 million balance in cash and cash equivalents
and $25.4 million of short-term investments, compared with $30.1 million net
cash generated by our operating activities in the first half of 2001.
Net cash used in our investing activities increased substantially in the first
half of 2002 to $49.0 million from $28.1 million in the first six months of
2001. This was primarily due to the acquisition of StairMaster in February of
2002 for $25.0 million, net of cash acquired. Additionally, we used $14.0
million for capital expenditures primarily for buildings and computer equipment.
We purchased land and a building in Colorado for $6.7 million, including
improvements, which will serve as the commercial/retail segment headquarters. We
invested $1.4 million at our corporate headquarters in Washington to expand our
call center in response to our direct segment growth. Approximately $4.6 million
in capital expenditures were also made for computer equipment to support the
growth of the business. Finally, we invested $9.3 million in net purchases of
short-term investments due to our strong cash flows generated from operations.
Net cash used in financing activities was $7.0 million in the first six months
of 2002 attributed to Company stock repurchases of $9.1 million offset by $2.1
million in stock option exercises. We used $8.5 million of net cash for
financing activities during the first half of 2001 for Company stock repurchases
offset by stock option exercises.
Our working capital needs have increased as we continue to implement our growth
strategy. Working capital was $107.6 million at June 30, 2002 compared to $84.4
million at December 31, 2001, largely due to increased inventory levels. The
$23.3 million increase in inventories was primarily due to several factors
including the building of safety stock in response to the possibility of a west
coast longshoremen strike due to the effect it could have on inventory shipments
from Asian suppliers.
-21-
Additionally, the anticipation of increased sales for the commercial/retail
segment during the second half of 2002 and the addition of inventories
associated with the acquisition of StairMaster also contributed to higher
inventory levels. We anticipate that our working capital requirements will
increase going forward as a result of growing our commercial/retail segment
through our acquisition strategy and internal growth. We also expect to
materially increase our cash expenditures on spot commercials and infomercials
as we expand the direct marketing campaigns for our Bowflex and Nautilus Sleep
Systems products.
We maintain a $10 million line of credit with a bank. The line of credit is
secured by certain assets and contains certain financial covenants. As of the
date of this filing, we are in compliance with the covenants applicable to the
line of credit, and there is no outstanding balance under the line.
As of June 30, 2002, the Company had no contractual capital obligations or
commercial commitments other than operating leases.
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 12 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 have, a material adverse effect on our financial position,
results of operations or cash flows. However, increases in inflation over
historical levels or uncertainty in the general economy could decrease
discretionary consumer spending for products like ours. Very little of our
revenue growth is attributable to price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2001, the company adopted certain provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS, and
effective January 1, 2002, the Company adopted the full provisions of SFAS No.
141 and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for recording
intangible assets apart from goodwill. SFAS No. 142 requires that purchased
goodwill and certain indefinite-lived intangibles no longer be amortized but
instead be tested for impairment at least annually. In connection with the
adoption of SFAS No. 142 on January 1, 2002, the Company evaluated its
identified intangible assets and determined that the Nautilus trademark has an
indefinite useful life.
SFAS No. 142 prescribes a two-phase process for testing the impairment of
goodwill and indefinite life intangibles. The first phase, required to be
completed by June 30, 2002, screens for impairment. If impairment exists, the
second phase, required to be completed by December 31, 2002, measures the
impairment. The Company completed its first phase impairment analysis during the
current quarter and found no instances of impairment of its recorded goodwill or
indefinite life intangibles. Accordingly, no impairment charge will be recorded
as a result of adopting SFAS No. 142.
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,
addresses accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale and expands on the guidance provided by SFAS No. 121 with respect to cash
flow estimations.
-22-
SFAS No. 144 was effective for the Company's fiscal year beginning January 1,
2002. The adoption of SFAS No. 144 has not had a material effect on the
Company's financial position, results of operations, or cash flows.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or disposal
activity. This statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is evaluating the
impact of adopting the provisions of this statement and does not believe it will
have a material effect on the Company's financial position, results of
operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------
We have primarily invested cash with banks and in liquid debt instruments
purchased with maturity dates of less than one year. Our bank deposits may
exceed federally insured limits, and there is risk of loss of the entire
principal with any debt instrument. To reduce risk of loss, we limit our
exposure to any one debt issuer and require certain minimum ratings for debt
instruments that we purchase.
FOREIGN EXCHANGE RISK
The Company is exposed to foreign exchange risk to the extent of currency
fluctuations mainly in Europe and Asia. Based on the relative size of the
Company's foreign operations, management believes that its exposure to foreign
exchange risk is not material, and that any possible near-term changes in the
related exchange rates would not have a material impact on the Company's
financial position, results of operations, or cash flows.
INTEREST RATE RISK
The Company has financed its growth through cash generated from operations. At
June 30, 2002, the Company had no outstanding borrowings and was not subject to
any related interest rate risk.
The Company invests in liquid debt instruments purchased with maturity dates of
less than one year. Due to the short-term nature of those investments,
management believes that any possible near-term changes in related interest
rates would not have a material impact on the Company's financial position,
results of operations, or cash flows.
-23-
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
The annual meeting of stockholders of The Nautilus Group, Inc. was held on June
10, 2002, at which the following actions were taken:
1. The stockholders elected a seven-person board of directors. The seven
directors elected, together with the voting results for such directors,
are as follows:
NAME FOR WITHHELD
---- --- --------
Peter A. Allen 31,177,312 1,808
Kirkland C. Aly 31,178,130 990
Brian R. Cook 28,883,488 2,295,632
C. Rowland Hanson 31,177,325 1,795
Frederick T. Hull 31,178,844 276
Paul F. Little 31,178,800 320
James M. Weber 31,178,112 1,008
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------
(a) Exhibits
The following exhibits are filed herewith and this list constitutes the
exhibit index:
EXHIBIT NO. DOCUMENT DESCRIPTION
---------- --------------------
3.1 Amendment to Articles of Incorporation, dated May 8, 2002
10.1 Revolving Credit Agreement, with Addendum, dated June 27,
2002, by and between The Nautilus Group, Inc. and U.S.
Bank National Association
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K/A dated April 24, 2002, reporting
the acquisition of the assets of StairMaster Sports/Medical, Inc.
-24-
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.
THE NAUTILUS GROUP, INC.
(Registrant)
August 12, 2002 By: /s/ Brian R. Cook
- --------------- ----------------------------
Date Brian R. Cook, Chief Executive Officer
(Principal Executive Officer)
August 12, 2002 By: /s/ Rod W. Rice
- --------------- ----------------------------
Date Rod W. Rice, Chief Financial Officer,
Treasurer and Secretary (Principal
Financial and Accounting Officer)
-25-