<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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
incorporation or organization) Identification No.)
2200 NE 65th Avenue
Vancouver, Washington 98661
(Address of principal executive offices, including zip code)
(360) 694-7722
(Issuer's telephone number, including area code)
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 September 30, 2000:
15,688,558
Page 1 of 18
Exhibit Index on Page 18
<PAGE>
DIRECT FOCUS, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIRECT FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 57,589,567 $ 35,703,457
Trade receivables (less allowance for doubtful accounts of:
2000, $429,672 and 1999, $304,727) 5,026,423 4,744,213
Inventories 14,310,893 9,167,554
Prepaid expenses and other assets 2,007,303 1,863,951
Current deferred tax asset 2,654,254 820,789
------------------ ------------------
Total current assets 81,588,440 52,299,964
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT (less accumulated
depreciation of: 2000, $2,744,881 and 1999, $1,088,239) 15,997,528 10,644,838
LONG-TERM DEFERRED TAX ASSETS 116,431 0
OTHER ASSETS (less accumulated amortization of:
2000, $450,827 and 1999, $272,183) 4,195,535 4,364,963
------------------ ------------------
TOTAL ASSETS $ 101,897,934 $ 67,309,765
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 10,325,074 $ 5,871,369
Accrued liabilities 5,444,631 4,051,540
Income taxes payable 4,212,557 2,177,236
Royalty payable to stockholders 1,211,974 893,563
Customer deposits 1,458,907 1,097,748
------------------ ------------------
Total current liabilities 22,653,143 14,091,456
------------------ -----------------
LONG-TERM DEFERRED TAX LIABILITY 0 187,484
------------------ -----------------
STOCKHOLDERS' EQUITY:
Common stock - authorized, 75,000,000 shares of no par value;
Outstanding, 2000: 15,688,558 shares, 1999: 15,666,222 shares 16,647,297 18,602,420
Retained earnings 62,597,494 34,428,405
------------------ -----------------
Total stockholders' equity 79,244,791 53,030,825
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,897,934 $ 67,309,765
================== =================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 52,661,035 $ 31,772,893 $ 139,249,552 $ 83,129,639
COST OF SALES 13,597,600 8,790,565 36,847,663 23,541,777
---------------- ---------------- ---------------- ----------------
Gross profit 39,063,435 22,982,328 102,401,889 59,587,862
---------------- ---------------- ---------------- ----------------
EXPENSES:
Selling and marketing 19,054,085 13,029,343 51,270,420 33,038,869
General and administrative 2,459,320 1,124,363 6,241,623 3,552,143
Royalties 1,288,811 730,012 3,454,124 1,991,941
Litigation settlement -- -- -- 4,000,000
---------------- ---------------- ---------------- ----------------
Total operating expenses 22,802,216 14,883,718 60,966,167 42,582,953
---------------- ---------------- ---------------- ----------------
INCOME FROM OPERATIONS 16,261,219 8,098,610 41,435,722 17,004,909
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 969,872 343,730 2,409,584 580,898
State business tax and other - net 83,866 (24,379) 168,897 (122,901)
---------------- ---------------- ---------------- ----------------
Total other income - net 1,053,738 319,351 2,578,481 457,997
---------------- ---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 17,314,957 8,417,961 44,014,203 17,462,906
INCOME TAX EXPENSE 6,233,387 2,922,640 15,845,114 6,089,313
---------------- ---------------- ---------------- ----------------
NET INCOME $ 11,081,570 $ 5,495,321 $ 28,169,089 $ 11,373,593
================ ================ ================ ================
BASIC EARNINGS PER SHARE $ 0.71 $ 0.35 $ 1.80 $ 0.75
================ ================ ================ ================
DILUTED EARNINGS PER SHARE $ 0.69 $ 0.34 $ 1.76 $ 0.73
================ ================ ================ ================
Basic shares outstanding 15,681,453 15,816,858 15,680,125 15,115,785
Diluted shares outstanding 16,082,743 16,222,231 16,013,776 15,518,637
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,169,089 $ 11,373,593
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,936,371 883,991
Deferred income taxes (1,335,483) (837,066)
Changes in:
Trade receivables (282,210) (726,219)
Inventories (5,143,339) (3,106,755)
Prepaid expenses and other current assets (143,352) 46,774
Trade payables 4,453,705 2,942,251
Income taxes payable 2,035,321 305,847
Accrued liabilities and royalty payable to stockholders 1,711,502 3,370,175
Customer deposits 361,159 447,109
---------------- ----------------
Net cash provided by operating activities 31,762,763 14,699,700
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (7,170,418) (1,306,849)
Proceeds from sale of property, plant and equipment 60,000 --
Additions to other assets (9,215) (29,468)
Acquisition cost of Nautilus -- (16,747,241)
---------------- ----------------
Net cash used in investing activities (7,119,633) (18,083,558)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering -- 17,919,146
Proceeds from exercise of stock options 494,910 274,368
Funds used for stock repurchase (3,251,931) (3,698,793)
---------------- ----------------
Net cash (used in) provided by financing activities (2,757,020) 14,494,721
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,886,110 11,110,863
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,703,457 18,910,675
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 57,589,567 $ 30,021,538
================ ================
SUPPLEMENTAL DISCLOSURE OF INFORMATION:
Cash paid for interest $ -- $ 986
Cash paid for income taxes $ 14,907,800 $ 6,510,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS:
Tax benefit of exercise of nonqualified options $ 801,897 $ 0
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
DIRECT FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Direct
Focus, Inc. (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America and pursuant to
Securities and Exchange Commission rules and regulations. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America 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, 1999.
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 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 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 intercompany transactions have been eliminated.
RECENT ACCOUNTING PRONOUNCEMENTS - In December of 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements." The effective date of the bulletin was
delayed according to SAB No. 101A and SAB No. 101B and will not be effective
until the Company's fourth quarter of fiscal year 2000. Management has not yet
completed an evaluation of the effects this bulletin will have on the Company's
consolidated financial statements.
2. INVENTORIES
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ ------------------
<S> <C> <C>
Finished goods $ 10,365,161 $ 4,682,659
Work in process 1,053,701 1,141,803
Parts and components 2,892,031 3,343,092
------------------ ------------------
Total $ 14,310,893 $ 9,167,554
================== ==================
</TABLE>
3. STOCK OPTIONS
There were 207,155 options exercised at prices ranging from $0.16 to $13.67
per share during the nine months ended September 30, 2000. There were 73,500 new
options at an exercise price of $15.71 and 251,400 options at an exercise price
of $30.50 granted during the
6
<PAGE>
nine months ended September 30, 2000. There were 82,000 options cancelled at
prices ranging from $3.08 to $30.50 per share during the nine months ended
September 30, 2000.
4. OPERATING SEGMENTS
The following table presents information about the Company's two operating
segments (in thousands):
<TABLE>
<CAPTION>
DIRECT PRODUCTS NAUTILUS PRODUCTS TOTAL
------------------- ------------------- -------------------
THREE NINE THREE NINE THREE NINE
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PERIOD ENDED SEPTEMBER 30, 2000
Revenues from external customers $ 46,258 $123,105 $ 6,403 $ 16,145 $ 52,661 $139,250
======== ======== ======== ======== ======== ========
Segment net income 10,855 27,974 227 195 11,082 28,169
======== ======== ======== ======== ======== ========
PERIOD ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 26,416 $ 70,092 $ 5,357 $ 13,038 $ 31,773 $ 83,130
======== ======== ======== ======== ======== ========
Segment net income (loss) 5,279 11,511 216 (137) 5,495 11,374
======== ======== ======== ======== ======== ========
</TABLE>
5. EARNINGS PER SHARE
Basic and diluted earnings per share are reconciled as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------------- ---------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $ 11,081,570 15,681,453 $ 0.71 $ 5,495,321 15,816,858 $ 0.35
=========== ===========
Effect of dilutive securities:
Stock options -- 401,290 -- 405,373 --
------------- ---------- ----------- ----------
Diluted EPS:
Income available to common
shareholders plus assumed stock
options $ 11,081,570 16,082,743 $ 0.69 $ 5,495,321 16,222,231 $ 0.34
============= =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------------- ---------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $ 28,169,089 15,680,125 $ 1.80 $11,373,593 15,115,785 $ 0.75
=========== ===========
Effect of dilutive securities:
Stock options -- 333,651 -- 402,852
------------- ---------- ----------- ----------
Diluted EPS:
Income available to common
shareholders plus assumed stock
options $ 28,169,089 16,013,776 $ 1.76 $11,373,593 15,518,637 $ 0.73
============= ========== =========== =========== ========== ===========
</TABLE>
7
<PAGE>
6. STOCK REPURCHASE PROGRAM
Three times during fiscal 2000, the Board of Directors authorized the
expenditure of up to $8 million to purchase shares of Direct Focus, Inc. common
stock in open market transactions. During the nine months ended September 30,
2000, the Company repurchased a total of 185,550 shares of common stock in open
market transactions for an aggregate purchase price of $3.3 million. The one
authorization that was unexpired at September 30, 2000 will expire on November
30, 2000.
7. STOCK SPLIT
On June 26, 2000, the Board of Directors approved a three-for-two stock
split in the form of a share dividend, payable to the Company's stockholders of
record as of July 31, 2000. Shares resulting from the split were distributed by
the transfer agent on August 14, 2000. All share and per-share numbers contained
herein reflect this stock split.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Form 10-Q that Direct Focus 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-Q 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. Direct Focus, from time to time, may make
forward-looking statements relating to its 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-Q. Readers are further cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this form 10-Q.
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.
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.
9
<PAGE>
STATEMENT OF OPERATIONS DATA - THREE MONTHS ENDED SEPTEMBER 30, 2000
The following table presents certain financial data regarding our third
quarter operations in 2000 and 1999, as a percentage of total revenues:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales 100.0% 100.0%
Cost of sales 25.8 27.7
---------- ----------
Gross profit 74.2 72.3
Operating expenses
Selling and marketing 36.2 41.0
General and administrative 4.7 3.5
Royalties 2.4 2.3
Litigation settlement -- --
---------- ----------
Total operating expenses 43.3 46.8
Operating income 30.9 25.5
Other income 2.0 1.0
---------- ----------
Income before income taxes 32.9 26.5
Income tax expense 11.9 9.2
---------- ----------
Net income 21.0% 17.3%
========== ==========
</TABLE>
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
NET SALES
Net sales grew by 65.7% to $52.7 million in the third quarter of 2000 from
$31.8 million in the third quarter of 1999. Sales within our direct products
segment increased by 75.1% over prior year third quarter levels and accounted
for $46.3 million, or 87.8%, of our aggregate net sales in the quarter. Sales
within our Nautilus products segment increased by 19.5% over prior year third
quarter levels and accounted for $6.4 million, or 12.2%, of our net sales.
Sales growth in the third quarter of 2000 primarily resulted from expanded
direct marketing of our Bowflex and Nautilus Sleep system products and the
growth we experienced in e-Commerce sales, as well as the ongoing positive
impact of the strong domestic economy. Within our direct products segment, 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
the remainder of 2000 by increasing our presence in existing television markets
and entering new television markets.* We intend to increase sales within our
Nautilus
10
<PAGE>
products segment by continuing to develop new products and expanding our sales
efforts both domestically and internationally.*
Third quarter sales of our Bowflex product line have been consistent with
the historical trend of stronger sales in the second half of the year.* Our
e-Commerce sales grew 342% to $11.5 million in the third quarter of 2000,
compared with $2.6 million in the third quarter of 1999. Sales within our
Nautilus business appear to be strongest in the first and fourth quarters of
each year, as the commercial fitness industry prepares for the impact of the
public's New Year fitness resolutions.*
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.
GROSS PROFIT
Gross profit grew 70.0% to $39.1 million in the third quarter of 2000, from
$23.0 million in the same period a year ago. Our gross profit margin increased
1.9% to 74.2% in the third quarter of 2000, from 72.3% in the third quarter of
1999. This increase was mainly attributable to the net sales of direct products
as a percentage of total net sales. The margin within our direct products
segment was 79.6% in the third quarter of 2000, while there was a 34.8% margin
within our Nautilus products segment for the third quarter of 2000. Sales of our
direct products generated 87.8% of net sales in the third quarter of 2000
compared with 83.1% in the third quarter of 1999. This increase in percentage of
direct products sold, along with strong e-Commerce sales at higher margins,
resulted in the higher profit margin for the third quarter of 2000.
We expect a lower percentage gross profit margin contribution from our
Nautilus Sleep Systems, compared to our Bowflex products, as we continue our
direct marketing campaign for this product.* Similar to our Bowflex products,
with the anticipated future higher sales volume of Nautilus Sleep Systems, we
expect to take advantage of overseas production and new vendor relationships to
strengthen the margins for these products.*
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $19.1 million in the third quarter
of 2000 from $13.0 million in the same period a year ago, an increase of 46.2%.
This increase in selling and marketing expenses resulted primarily from the
expansion of our direct marketing campaign for Bowflex products and Nautilus
Sleep Systems and variable costs associated with our sales growth.
As a percentage of net sales, selling and marketing expenses decreased to
36.2% in the third quarter of 2000 from 41.0% in the third quarter of 1999. We
believe the percentage for the third quarter of 1999 is more typical of the
results we will experience.* Overall, we expect that
11
<PAGE>
our selling and marketing expenses will increase in real dollar terms, but also
will increase as a percentage of net sales,* as we:
- Continue to expand our Bowflex direct marketing campaign;*
- Expand the direct marketing campaign for our Nautilus Sleep Systems;*
- Integrate the marketing and distribution infrastructure for our
Nautilus line of fitness equipment;* and
- Expand marketing for our new home fitness equipment products and
fitness accessories under the Nautilus brand name.*
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $2.5 million in the third
quarter of 2000 from $1.1 million in the same period a year ago, an increase of
119.7%. As a percentage of net sales, general and administrative expenses
increased to 4.7% in the third quarter of 2000 from 3.5% in the same period a
year ago. Our direct marketing business accounted for $1.3 million of the
increase, due primarily to increased staffing and infrastructure expenses
necessary to support our anticipated growth. Our Nautilus operations accounted
for the remaining increase of $0.1 million. We believe that our general and
administrative expenses will continue to increase in future periods in real
dollar terms, and also as a percentage of net sales.*
ROYALTY
Royalty expense grew to $1.3 million in the third quarter of 2000 from $0.7
million in the same period a year ago, an increase of 76.5%. The increase in our
royalty expenses is attributable to the increased sales of our Bowflex products
in the quarter plus new royalty agreements related to the development of
additional products.* Our royalty expenses will increase if sales of our Bowflex
products continue to increase.*
OTHER INCOME
In the third quarter of 2000, other income was $1.1 million compared to
$0.3 million for the same period a year ago. The increase resulted primarily
from interest earned on invested cash and cash equivalents. We expect other
income to increase if invested cash balances increase.*
INCOME TAX EXPENSE
Income tax expense increased by $3.3 million for the third quarter of 2000
because of the growth in our income before taxes. We expect our income tax
expense to increase in line with increases of our income before taxes.*
NET INCOME
For the reasons discussed above, net income grew to $11.1 million in the
third quarter of 2000 from $5.5 million in the same period a year ago.
STATEMENT OF OPERATIONS DATA - NINE MONTHS ENDED SEPTEMBER 30, 2000
12
<PAGE>
The following table presents certain financial data regarding operations
for the first nine months of 2000 and 1999, as a percentage of total revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 26.5 28.3
----------- -----------
Gross profit 73.5 71.7
Operating expenses
Selling and marketing 36.8 39.7
General and administrative 4.5 4.3
Royalties 2.5 2.4
Litigation settlement -- 4.8
----------- -----------
Total operating expenses 43.8 51.2
Operating income 29.7 20.5
Other income 1.9 0.5
----------- -----------
Income before income taxes 31.6 21.0
Income tax expense 11.4 7.3
----------- -----------
Net income 20.2% 13.7%
=========== ===========
</TABLE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
NET SALES
Net sales for the first nine months of 2000 increased 67.5% to $139.2
million, from $83.1 million in the same period in 1999. Direct marketing sales
for the first nine months increased by 75.6% to $123.1 million. Sales within our
Nautilus segment accounted for $16.1 million of our net sales. Sales growth in
the first nine months of 2000 primarily resulted from expanded direct marketing
of our Bowflex and Nautilus Sleep System products and the growth we experienced
in e-Commerce sales, as well as the ongoing positive impact of the strong
domestic economy.
GROSS PROFIT
Gross profit grew 71.9% to $102.4 million in the first nine months of 2000,
from $59.6 million in the same period a year ago. Our gross profit margin
increased by 1.8% to 73.5% in the first nine months of 2000, from 71.7% in the
first nine months of 1999. The primary reason for this improvement was the
increase in net sales of our direct products, which carry substantially higher
margins than our Nautilus products, as a percentage of net sales.
13
<PAGE>
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $51.3 million in the first nine
months of 2000 from $33.0 million in the same period a year ago, an increase of
55.2%. This increase in selling and marketing expenses resulted primarily from
the continued expansion of our direct marketing campaign and variable costs
associated with our sales growth. As a percentage of net sales, selling and
marketing expenses decreased by 2.9% to 36.8% for the first nine months of 2000
compared to 39.7% for the same period in the prior year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $6.2 million for the first nine
months of 2000 from $3.6 million in the same period a year ago, a 75.7%
increase. Our direct marketing business accounted for $2.4 million of the
increase in the first nine months of the year due primarily to increased
staffing and infrastructure expenses necessary to support our anticipated
growth. Nautilus operations accounted for the remaining increase of $0.2
million. As a percentage of net sales, general and administrative expenses
increased to 4.5% for the first nine months of 2000 from 4.3% in same period a
year ago.
ROYALTY
Royalty expense grew by 73.4% to $3.5 million during the first nine months
of 2000 from $2.0 million for the same period a year ago. The increase in
royalty expense is due to the increase in sales of our Bowflex products plus new
royalty agreements related to the development of additional products.
LITIGATION SETTLEMENT
In the second quarter of 1999, we incurred a one-time charge of $4.0
million relating to the settlement of pending litigation with a competitor in
the home fitness market. The settlement did not affect the ongoing direct
marketing campaign for our Bowflex home fitness equipment. We determined that it
was in the best interest of our shareholders to settle the case on terms that
had no negative long-term impact on Direct Focus.*
OTHER INCOME
In the first nine months of 2000, other income increased to $2.6 million
from $0.5 million over the same period a year ago, due to higher average cash
balances during the period that increased our interest income.
14
<PAGE>
INCOME TAX EXPENSE
Income tax expense increased by $9.8 million for the first nine months of
2000 due to the Company's growth in income before taxes.
NET INCOME
For the reasons discussed above, net income for the first nine months of
2000 grew to $28.2 million from $11.4 million ($14.0 million before a 1999
litigation charge) in the same period a year ago. The percentage increase in net
income over first nine months of 1999, excluding the 1999 litigation settlement
expense, was 101.6%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our growth primarily from cash generated by
our operating activities. During the first nine months of 2000, our operating
activities generated over $31.8 million in net cash, which contributed to an
aggregate $57.6 million balance in cash and cash equivalents. We anticipate that
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 expand the direct marketing campaigns for our Bowflex products and Nautilus
Sleep Systems.* To accommodate our anticipated growth, we purchased a building
in Washington in the third quarter of 2000 for $4.2 million to consolidate our
corporate headquarters.
On April 1, 2000, we increased our line of credit with Bank of America to
$10.0 million. The line of credit is secured by our general assets and contains
certain financial covenants. As of the date of this filing 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 12
months.*
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We received approximately $17.9 million 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. During the first nine months of 2000, we used the remaining net
proceeds as follows: $3.3 million for additional stock repurchases, $1.1 million
to purchase land in Nevada, and $4.2 million to purchase a building in
Washington. We also used approximately $4.3 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.
15
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
16
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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.
DIRECT FOCUS, INC.
(Registrant)
November 10, 2000 By: /s/ Brian R. Cook
----------------- -----------------------------
Date Brian R. Cook, President and Chief
Executive Officer
November 10, 2000 By: /s/ Rod W. Rice
----------------- -----------------------
Date Rod W. Rice, Chief Financial Officer,
Treasurer and Secretary (Principal
Financial and Accounting Officer)
17
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EXHIBIT INDEX
Exhibit Number Title
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27 Financial Data Schedule
18
