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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-25867
DIRECT FOCUS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 94-3002667
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 NE 65TH AVENUE, VANCOUVER, WA 98661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 360-694-7722
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
WITHOUT PAR VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. /x/
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $247,324,553 as of February 29, 2000 based upon the last
sales price as reported by the Nasdaq National Market System.
The number of shares outstanding of the Registrant's Common Stock as of
February 29, 2000 was 10,519,565 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for its 2000 Annual Meeting of
Stockholders.
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DIRECT FOCUS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
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Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 19
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Consolidated Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
Signatures 47
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
Statements in this Form 10-K that Direct Focus, Inc. considers to be
forward-looking are denoted with an asterisk ("*"), and the following cautionary
language applies to all such statements, as well as any other statements in this
Form 10-K that the reader may consider to be forward-looking. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
and various factors could cause actual results to differ materially from those
in the forward-looking statements. From time to time and in this Form 10-K, we
may make forward-looking statements relating to our financial performance,
including the following:
- Anticipated revenues, expenses and gross margins;
- Anticipated earnings;
- New product introductions; and
- Future capital expenditures.
Numerous factors could affect our actual results, including the
following:
- Our reliance on a limited product line;
- Market acceptance of our existing and future products;
- Growth management challenges;
- Our limited experience in marketing Nautilus Sleep Systems;
- A decline in consumer spending due to unfavorable economic
conditions;
- Government regulatory action;
- Our ability to effectively identify and negotiate any future
strategic acquisitions, as well as to integrate any acquired
businesses into our operations; and
- Unpredictable events and circumstances relating to international
operations, including our use of foreign manufacturers.
We describe certain of these and other key risk factors elsewhere in
this Form 10-K. Readers are further cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this Form 10-K.
We undertake no obligation to update publicly any forward-looking statements to
reflect new information, events or circumstances after the date of this Form
10-K or to reflect the occurrence of unanticipated events.
INTRODUCTION
Direct Focus, Inc. is a direct marketing company that develops and
markets premium quality, premium priced, branded consumer products. We market
consumer products within our direct marketing segment directly to consumers
through a variety of direct marketing channels, including spot television
commercials, infomercials, print media, response mailings and the Internet.
Our principal and most successful directly marketed product to date has
been our Bowflex line of home fitness equipment, which generated $100.9 million,
or 83.3%, of our net sales in 1999. We also offer a line of premium quality
airbed mattresses under the name "Nautilus Sleep Systems," which we test
marketed throughout 1999 and began directly marketing on a nationwide basis late
in the fourth quarter of 1999.
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Another significant component of our operations is our Nautilus
segment, which encompasses products and operations outside of our direct
marketing segment. Products within our Nautilus segment include Nautilus
commercial fitness equipment and Nautilus consumer fitness equipment and
accessories, both of which we added in January 1999 as part of our acquisition
of Nautilus International, Inc. We anticipate further leveraging our Nautilus
brand name through expanded marketing of new Nautilus home gyms and a new line
of Nautilus free weight home gym equipment which we recently introduced, as well
as any other Nautilus-branded home exercise products we may introduce in 2000.*
We market and sell our Nautilus commercial fitness equipment domestically
through a direct sales force and internationally through independent sales
representatives. We market our other Nautilus consumer products domestically
through non-exclusive independent sales representatives. We believe we have
effectively integrated the Nautilus commercial business into our operations and
stabilized its financial performance, as evidenced by its profitability during
the second half of 1999.*
For a discussion of financial information about our two business
segments, direct marketing and Nautilus, see Note 14 of the Notes to
Consolidated Financial Statements.
Direct Focus was incorporated in California in 1986 and became a
Washington corporation in 1993. Our principal executive offices are located at
2200 NE 65th Avenue, Vancouver, Washington 98661, and our telephone number is
(360) 694-7722. We maintain our corporate web site at www.directfocusinc.com.
None of the information on this web site or our other web sites is part of this
Form 10-K.
As used in this Form 10-K, the terms "we," "our," "us," "Direct
Focus" and "the Company" refer to Direct Focus, Inc. and its subsidiaries.
The names Bowflex-Registered Trademark-, Nautilus-Registered Trademark-,
Bowflex Power-Pro-Registered Trademark-, Motivator-Registered Trademark-,
Versatrainer-Registered Trademark-, Power Rod-Registered Trademark-, Direct
Focus-Registered Trademark-, Instant Comfort-Registered Trademark- and
Nautilus Sleep Systems-Registered Trademark- are registered trademarks of
Direct Focus, Inc.
DIRECT MARKETING
We directly market our Bowflex home fitness equipment and Nautilus
Sleep Systems principally through 30- and 60-second, or "spot," television
commercials, television infomercials, the Internet, response mailings and print
media. To date, we have been highly successful with what we refer to as a
"two-step" marketing approach. In general, our two-step approach focuses first
on spot commercials, which we air to generate consumer interest in our products
and requests for product information. The second step focuses on converting
inquiries into sales, which we accomplish through a combination of response
mailings and outbound telemarketing. We supplement our two-step approach with
infomercials, which generally are designed to provide potential customers with
sufficient product information to stimulate an immediate purchase.
ADVERTISING
SPOT COMMERCIALS AND INFOMERCIALS. Spot television commercials are a
key element of the marketing strategy for all of our directly marketed consumer
products. For directly marketed products that may require further explanation
and demonstration, television infomercials are an important additional marketing
tool. We have developed a variety of spot commercials and infomercials for our
Bowflex product line and several commercials and marketing videos for our
Nautilus Sleep Systems product line. We expect to use spot commercials and,
where appropriate, infomercials to market any Nautilus consumer products that we
determine are appropriate for direct marketing.
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When we begin marketing a new product, we typically test and refine our
marketing concepts and selling practices while advertising the product in spot
television commercials. Production costs for these commercials can range from
$50,000 to $150,000. Based on market research and viewer response to our spot
commercials, we may produce additional spot commercials and, if appropriate for
the product, an infomercial. Production costs for infomercials can range from
$150,000 to $500,000, depending on the scope of the project. Generally, we
attempt to film several infomercial and commercial concepts at the same time in
order to maximize production efficiencies. From this footage we can then develop
several varieties of spot commercials and infomercials and introduce and refine
them over time. We typically generate our own scripts for spot commercials and
hire outside writers to assist with infomercial scripts. We also typically
contract with outside production companies to produce spot commercials and
infomercials.
Once produced, we test spot commercials and infomercials on a variety
of cable television networks that have a history of generating favorable
responses for our existing products. Our initial objective is to determine the
product's marketing appeal and what, if any, creative or product modifications
may be appropriate. If these initial tests are successful, we then air the spot
commercials and infomercials on an accelerating schedule on additional cable
networks.
MEDIA BUYING. An important component of our direct marketing success is
our ability to purchase quality media time at an affordable price. The cost of
airing spot commercials and infomercials varies significantly, depending on the
network, time slot and, for spot commercials, programming. Each spot commercial
typically costs between $50 and $5,000 to air, and each infomercial typically
costs between $2,500 and $40,000 to air. We currently purchase the majority of
our media time on cable networks, through which we reach more than 70 million
homes.
We track the success of each of our spot commercials and infomercials
by determining how many viewers respond to each airing of a spot commercial or
infomercial. We accumulate this information in a database that we use to
evaluate the cost-effectiveness of available media time. In addition, we believe
the database enables us to predict with reasonable accuracy how many product
sales and inquiries will result from each spot commercial and infomercial that
we air.* We also believe we can effectively track changing viewer patterns and
adjust our advertising accordingly.*
We do not currently purchase media time under long-term contracts.
Instead, we book most of our spot commercial time on a quarterly basis and most
of our infomercial time on a monthly or quarterly basis, as networks make time
available. Networks typically allow us to cancel booked time with two weeks'
advance notice, which enables us to adjust our advertising schedule if our
statistical tracking indicates that a particular network or time slot is no
longer cost effective. Generally, we can increase or decrease the frequency of
our spot commercial and infomercial airings at almost any time.
INTERNET. Our e-commerce sales have grown from 0% in the fourth quarter
of 1998 to 12.3% of direct sales in the fourth quarter of 1999, and we expect
the Internet to become an increasingly important part of our direct marketing
strategy.* For example, we are now promoting our web sites in spot commercials
and infomercials in an effort to further stimulate electronic product inquiries
and e-commerce transactions. We do not presently advertise our products on
third-party web sites, but may do so in the future.*
Our experience indicates that Internet-based inquiries are more likely
to be converted into sales than inquiries generated by other media forms, such
as television or print media. Consequently, we believe that consumers who visit
our web sites are more inclined to purchase our products than are the consumers
we target through other media.*
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We currently operate two direct marketing-oriented web sites. The
first, www.bowflex.com, focuses on our Bowflex line of home exercise equipment.
The second, www.nautilussleepsystems.com, focuses on our Nautilus Sleep Systems.
In an effort to expand and enhance our web presence, we added dedicated web site
development and management personnel. Our immediate Internet-related goals
include improving the capabilities at our Bowflex web site and Nautilus Sleep
Systems web site. In 1998, we used our web sites to generate interest in our
products, but limited the information we provided to potential customers in an
effort to induce them to initiate a telephone inquiry. In 1999, we believe we
achieved a balance between our goals of finalizing sales and capturing consumer
information by strategically designing our web pages and carefully analyzing web
page hits, conversion rates, average sales prices and inquiry counts.*
PRINT MEDIA. We have advertised directly marketed products in health
and fitness-related consumer magazines and, to a limited extent, in
entertainment, leisure and specialty magazines. We recently determined that
television advertising and the Internet generate more immediate consumer
responses at a lower cost per inquiry and therefore have reduced the print media
advertising expenditures for our directly marketed products. We will evaluate
print media advertising expenditures for other directly marketed products on a
case-by-case basis.
CONVERSION OF INQUIRIES INTO SALES
CUSTOMER SERVICE CALL CENTER AND ORDER PROCESSING. We operate our own
customer service call center in Vancouver, Washington, which operates 16 hours
per day and receives and processes all infomercial-generated and customer
service-related inquiries regarding our Bowflex products and Nautilus Sleep
Systems. We have developed a skill-based call routing system that automatically
routes each incoming call to the most highly qualified inside sales agent or
customer service representative available. The appropriate representative then
answers product questions, pro-actively educates the potential customer about
the benefits of our product line, promotes financing through our private label
credit card, and typically upsells the benefits of higher priced models in our
product line. This sophisticated system allows us to better utilize our agents,
prioritize call types and improve customer service.
We employ two large telemarketing companies to receive and process
information requests generated by our spot television advertising 24 hours per
day. These companies also serve as overflow agents for our call center during
peak times. The telemarketing agents for these companies collect only names,
addresses and other basic information from callers and do not sell or promote
our products. Consequently, we do not need to train these telemarketing agents.
RESPONSE MAILINGS. We forward a "fulfillment kit" in response to each
inquiry regarding our directly marketed products. Each kit contains detailed
literature that describes the product line and available accessories, a
marketing video that demonstrates and highlights the key features of our premium
product in the line, and additional information about how to purchase the
product. If a potential customer does not respond within a certain time period,
we proceed with additional follow-up mailings that convey a different marketing
message and typically offer certain inducements to encourage a sale. The
specific marketing message and offer at each stage will vary on a case-by-case
basis, based on what our statistical tracking indicates is most likely to
trigger a sale.
CONSUMER FINANCE PROGRAMS. We believe that convenient consumer
financing is an important tool in our direct marketing sales efforts and induces
many of our customers to make purchases when they otherwise would not.
Currently, we offer "zero-down" financing to approved customers on all sales of
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our Bowflex Products and Nautilus Sleep Systems. We arrange this financing
through a consumer credit company pursuant to a non-recourse consumer financing
agreement. Under this arrangement, our customer service agents can obtain
financing approval in a few minutes over the telephone and, if a customer is
approved, immediately ship product without the need for cumbersome paperwork.
The consumer finance company pays us promptly after submission of the required
documentation and subsequently sends to each approved customer a Direct Focus
private label credit card that can be used for future purchases of our products.
During 1999, approximately 34.4% of our net sales were financed in this manner,
and we believe this program will continue to be an effective marketing tool.*
NAUTILUS SALES AND MARKETING
We market and sell our Nautilus commercial fitness equipment
domestically through a direct sales force and internationally through
independent sales representatives. We market and sell our Nautilus fitness
accessories and consumer fitness equipment through non-exclusive independent
sales representatives.
DIRECT SALES FORCE
We have hired a new management team to oversee and revitalize the
sales and marketing operations of our Nautilus business. Each member of the
management team has significant industry experience and a history of sales
and marketing success. Our commercial direct sales force will focus on
strengthening the market position of our existing Nautilus product line,
which we sell principally to health clubs, large hotels, assisted living
facilities and the government. Additionally as we broaden our product line,
our direct sales force will target new market segments and, if successful,
broaden our customer base.* Internationally, we market and sell our Nautilus
commercial fitness products through a worldwide network of independent
distributors.
OTHER SELLING AND MARKETING CHANNELS
We have implemented additional sales and marketing strategies for our
Nautilus commercial equipment. These strategies include the following:
- We offer innovative financing, such as private label leasing that
allows pre-approved commercial customers to lease fitness
equipment;
- We implemented a targeted mailing program directed at our
commercial customers; and
- We expanded the Nautilus trade-in program to induce existing
commercial customers to upgrade their equipment.
PRODUCTS
BOWFLEX HOME FITNESS EQUIPMENT
We introduced the first Bowflex home exercise machine in 1986, and
since then have implemented several improvements to its design and
functionality. We now offer three different Bowflex machines and eight different
models. The key feature of each Bowflex machine is our patented "Power Rod"
resistance technology. Each Power Rod is made of a solid polymer material that
provides lineal progressive resistance in both the concentric and eccentric
movements of an exercise. When combined with a bilateral cable pulley system,
the machines provide excellent range and direction of motion for a
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large variety of strength-building exercises.
We currently offer the following Bowflex machines:
- The Power Pro, introduced in 1993, is our best selling product,
accounting for 95.8% of our Bowflex net sales in 1999. The
Power Pro is available in four different models: the basic
Power Pro, the XT, the XTL and the XTLU. Each model offers
over 60 different strength building exercises in one compact,
foldable and portable design and comes with a 210-pound resistance
pack that can be upgraded to 410 pounds. We have also incorporated
an aerobic rowing exercise feature into the Power Pro. Prices
currently range from $999 to $1,597, depending on the model and
add-on features.
- The Motivator, introduced in 1996, is our entry-level strength
training line. It is available in three different models: the
basic Motivator, the XT and the XTL. Each model offers over 40
different strength building exercises in one compact, foldable
design and comes standard with a 210-pound resistance pack that
can be upgraded to 410 pounds. Prices currently range from $699 to
$1,049, depending on the model and add-on features.
- The Versatrainer by Bowflex, introduced in 1988, is specifically
designed to accommodate wheelchair-bound users. The Versatrainer's
key advantage is that it permits users to exercise while remaining
in their wheelchair, which offers enhanced independence and
esteem. The Versatrainer can be found in many major rehabilitation
hospitals, universities and institutions. The Versatrainer is
currently priced at $1,699.
NAUTILUS COMMERCIAL FITNESS EQUIPMENT AND NAUTILUS FITNESS PRODUCTS
We currently offer the following Nautilus strength training equipment
for the commercial market:
- The Nautilus 2ST line of commercial strength equipment
offers 27 high quality, technologically advanced strength
building machines, each of which is specially designed to
focus on a particular strength building exercise, such as
leg presses, bench presses, super pullovers, hip abductors
and adductors and leg curls. The key component of each
Nautilus 2ST machine is either its "cam" or a four-bar
linkage mechanism, which builds and releases resistance
as a user moves through an exercise. The resistance is
at its minimum during the initial and final stages of an
exercise, and at its maximum in the middle of an exercise.
Each Nautilus machine includes a cam or four-bar linkage
mechanism that is designed to accommodate and maximize
the benefits associated with the motion required for that
machine.
- In 1999, we introduced a line of Nautilus free weight
equipment with new innovations in design and engineering
intended to help club owners better serve their customers.
The product line offers a sleeker look, tougher components
and increased versatility. This new free weight gear can be
coupled with the Nautilus 2ST circuit to give facility
managers a complete strength gym to serve all fitness tastes.
Our Nautilus business also distributes a line of quality consumer
fitness accessories. For example, we offer a full line of fitness
accessories, such as weight belts, jump ropes and
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ankle weights, which we market to specialty fitness retailers and the
sporting goods industry. The current line includes over 50 products, which we
selected after conducting a rigorous evaluation of sales potential, fitness
trends and functionality. We began offering two new Nautilus home gyms, the
Strength Station and an adjustable bench with chrome dumbbells, in late 1999.
In addition, we introduced a twelve piece line of quality strength equipment,
which included Nautilus free weight home gyms and Nautilus selectorized
weight stack home gyms at the 2000 Super Show(R), a fitness industry trade
show. We intend to continue building and developing our Nautilus consumer
fitness business and expand our offering of Nautilus brand consumer fitness
products, as appropriate, in 2000.*
NAUTILUS SLEEP SYSTEMS
In late 1998, we began test marketing a line of premium air sleep
systems under the brand name "Instant Comfort," which we have since renamed the
"Nautilus Sleep Systems." The key feature of each Nautilus Sleep System is its
variable firmness support chamber, an air chamber within each airbed that can be
electronically adjusted to regulate firmness. All queen and larger airbeds in
our Signature, Premier and Ultimate Premier Series are equipped with dual air
chambers that enable users to maintain different firmness settings on each side
of the bed. We believe that variable firmness and other comfort-oriented
features of our Nautilus Sleep Systems favorably differentiate them from
conventional innerspring mattresses.
We currently offer four models of our Nautilus Sleep System:
- The Ultimate Premier Series is our top-of-the-line Nautilus
Sleep System. It features dual patent pending interlocking
variable support chambers that permit users to maintain
separate firmness settings on each side of the airbed. The
interlocking chambers regulate airflow and pressure to more
effectively maintain support when a user changes position.
The Ultimate Premier Series comes with a removable wool
blend and silk blend pillow top sleeping surface, which
permits users to easily convert to a "tight top" surface
when they desire extra firmness. The Ultimate Premier
Series also has an upgraded comfort layer of visco-elastic
foam that conforms to a user's body. The Ultimate Premier
Series is available in seven sizes and currently ranges in
price from $1,199.99 for a twin to $1,799.99 for a
California king, excluding foundation.
- The Premier Series features dual patent pending
interlocking variable support chambers that permit users to
maintain separate firmness settings on each side of the
airbed. The interlocking chambers regulate airflow and
pressure to more effectively maintain support when a user
changes position. The Premier Series comes with a removable
wool blend pillow top sleeping surface, which permits users
to easily convert to a "tight top" surface when they desire
extra firmness. The Premier Series is available in seven
sizes and currently ranges in price from $699.99 for a twin
to $1,299.99 for a California king, excluding foundation.
- The Signature Series is designed to appeal to consumers who
desire the flexibility of dual variable firmness support
chambers, but at a more affordable price. Our customers can
choose between a tight top and a pillow top sleeping
surface over a one and one-half inch convoluted foam
comfort layer. The Signature Series is available in seven
sizes and currently ranges in price from $399.99 for a twin
to $999.99 for a California king, excluding foundation.
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- The Basic Series is our entry-level Nautilus Sleep System,
which features a single, head-to-toe variable firmness
support chamber and a traditional tight top sleeping
surface over a one and one-half inch thick convoluted foam
comfort layer. The Basic Series is available in five sizes
and currently ranges in price from $249.99 for a twin to
$699.99 for a California king, excluding foundation.
We offer foundations that are specifically designed to support and
enhance the performance of our Nautilus Sleep Systems. We advise consumers to
use our foundations because conventional box springs tend to sag and wear over
time, causing an airbed to eventually mirror the worn box spring. We believe the
majority of our Nautilus Sleep System customers will order a complete sleep
system, which includes both a mattress and a foundation.* Our foundations
currently range in price from $199 for a twin to $399 for a California king.
NEW PRODUCT DEVELOPMENT AND INNOVATION
DIRECT MARKETING PRODUCTS
We develop direct marketing products either from internally generated
ideas or, as with its Bowflex technology, by acquiring or licensing patented
technology from outside inventors and then enhancing the technology. During the
evaluation phase of product development, we evaluate the suitability of the
product for direct marketing, whether the product can be developed and
manufactured in acceptable quantities and at an acceptable cost, and whether it
can be sold at a price that satisfies our profitability goals. More
specifically, we look for high-quality consumer products that:
- Have patented or patentable features*;
- Will have a retail price between $500 and $2,500*;
- Can be marketed as a line of products with materially
different features that facilitate upselling*; and
- Have the potential for mass consumer appeal, particularly
among members of the "baby-boom" generation, who are
accustomed to watching television and now have significant
disposable income.*
In addition, because of our relatively high retail price target, we
typically require that a product have a potential television advertising life
cycle of at least five years and the possibility of an extended life cycle in
retail stores.*
Once we determine that a product may satisfy our criteria, we
further assess the product's direct marketing potential by continuing to
research the product and its probable market and by conducting blind product
and focus group studies. If we develop the product internally, or if we
acquire or license the rights to the product, we will then proceed to develop
and test a direct marketing campaign for the product. In most cases, our
direct marketing campaigns will emphasize the use of spot commercials and
television infomercials, which we supplement with print media advertisements,
written materials, marketing videos and our web sites.*
Our growth strategy and financial performance depend in part on our
ability to develop or acquire the rights to, and then directly market, new
consumer products. Our net sales and profitability would be harmed if we are
unable to develop or acquire the rights to premium quality, premium priced
consumer products that satisfy our direct marketing criteria. In addition, any
new products that we directly market
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may not generate sufficient net sales or profits to justify their development
or acquisition costs.
NAUTILUS COMMERCIAL FITNESS PRODUCTS
Our Nautilus commercial product development group develops and
refines our commercial fitness products. The group's members gather and
evaluate ideas from various areas, including existing and potential
customers, sales and marketing, manufacturing, engineering and finance, and
then determine which ideas will be incorporated into existing products or
will serve as the basis for new products. Based on these ideas, the group
designs new or enhanced products, develops prototypes, tests and modifies
products, develops a manufacturing plan, and finally brings products to
market. The group evaluates, designs and develops each new or enhanced
product, taking into consideration our marketing requirements, target price
points, target gross margin requirements and manufacturing constraints. In
addition, each new or enhanced product must maintain the Nautilus standard of
quality and reputation for excellence. We incorporate principles of
physiology, anatomy and biomechanics into all of our Nautilus machines in
order to match the movements of the human body throughout an exercise. Our
key objective is to produce products that minimize the stress on users'
skeletal systems and connective tissues and maximize the safety and
efficiency of each workout.
NAUTILUS CONSUMER FITNESS PRODUCTS
We have developed a line of Nautilus consumer strength training fitness
equipment and hand-held fitness accessories. Current products include free
weight home gym equipment, selectorized weight stack home gyms and a variety of
hand held fitness accessories, such as jump ropes, hand weights and other
similar devices. We are currently evaluating design and feature concepts for a
new line of aerobic Nautilus consumer products, such as stationary bicycles,
treadmills, and stair machines. If we elect to proceed with one or more of these
products, we intend to assess price points, develop a prototype and determine
the most appropriate manufacturing plan.* We do not anticipate introducing any
such aerobic products before 2001.*
MANUFACTURING AND DISTRIBUTION
BOWFLEX PRODUCTS AND NAUTILUS SLEEP SYSTEMS
Our primary manufacturing and distribution objectives for our
Bowflex products and Nautilus Sleep Systems are to maintain product quality,
reduce and control costs, maximize production flexibility and improve
delivery speed. We use a computerized inventory management system to forecast
our manufacturing requirements. In general, we attempt to use outside
suppliers to manufacture a majority of our raw materials and finished parts.
We select these suppliers based upon their production quality, cost and
flexibility. Whenever possible and in order to improve flexibility, we will
attempt to use at least two suppliers to manufacture each product component.
We currently use overseas suppliers to manufacture approximately 65% of our
Bowflex components, although we produce the main component of our Bowflex
products, the Power Rods, exclusively in the United States. We intend to
continue to use outside suppliers that meet our manufacturing criteria. All
components of our Nautilus Sleep Systems are currently manufactured
domestically, but in the second half of fiscal year 2000, we plan on
manufacturing some components overseas.
We inspect, package and ship our products from our Washington,
Virginia and Nevada facilities. We rely primarily on UPS to deliver our
Bowflex and our Nautilus Sleep Systems products.
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NAUTILUS COMMERCIAL FITNESS EQUIPMENT, CONSUMER FITNESS EQUIPMENT
AND ACCESSORIES
Our Nautilus manufacturing operations are vertically integrated and
include such functions as metal fabrication, powder coating, upholstery and
vacuum-formed plastics processes. By managing our own manufacturing
operations, we can control the quality of our Nautilus products and offer our
commercial customers the opportunity to order certain color variations. We
currently distribute Nautilus commercial fitness equipment from our Virginia
warehouse facilities directly to customers primarily through our own truck
fleet. This method of distribution allows us to effectively control the
set-up and inspection of equipment at the end-user's facilities. We outsource
the manufacturing of Nautilus consumer fitness equipment and fitness
accessories to outside foreign manufacturers. We currently distribute our
Nautilus fitness accessories from our Nevada facilities.
INDUSTRY OVERVIEW
FITNESS EQUIPMENT
We market our Bowflex home fitness equipment principally in the United
States, which we believe is a large and growing market. According to the
Sporting Goods Manufacturers' Association, United States consumers spent roughly
$5.5 billion on home exercise equipment in 1998, which represented an 5.8%
increase from roughly $5.2 billion in 1997.
We market our Nautilus commercial fitness equipment throughout the
world, including the United States, Europe, the United Kingdom, Asia, the
Middle-East, Latin America and Africa. Within these markets, we target the
following commercial customers, among others:
- - Health clubs and gyms - Corporate fitness centers
- - Rehabilitation clinics - Colleges and universities
- - The military - Governmental agencies
- - Hospitals - YMCA's and YWCA's
- - Hotels and motels - Professional sports teams
According to the Sporting Goods Manufacturers' Association, which has
only tracked the commercial market since 1996, aggregate sales of fitness
equipment to commercial purchasers in the United States rose from $450 million
in 1996 to $500 million in 1997 and $575 million in 1998, a 15% increase from
1997 to 1998.
MATTRESSES
The United States mattress market is large and dominated by four major
manufacturers whose primary focus is the conventional innerspring mattress.
According to the International Sleep Products Association, United States
consumers purchased approximately 36.3 million mattress and foundation units in
1998, generating approximately $3.9 billion in wholesale sales. We believe this
equates to over $7.0 billion in retail sales. The International Sleep Products
Association (ISPA) estimates that innerspring mattresses accounted for
approximately 90% of total domestic mattress sales in 1998. The ISPA also
believes that less than 7% of all mattress sales are made through direct
marketing channels. According to the ISPA, the bedding industry has enjoyed
years of uninterrupted growth. In 1998, queen-sized mattresses became the
largest selling segment while king-sized mattresses picked up market share as
well.
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COMPETITION
BOWFLEX HOME FITNESS EQUIPMENT
The market for our Bowflex products is highly competitive. Our
competitors frequently introduce new and/or improved products, often accompanied
by major advertising and promotional programs. We believe the principal
competitive factors affecting this portion of our business are price, quality,
brand name recognition, product innovation and customer service.
We compete directly with a large number of companies that manufacture,
market and distribute home fitness equipment, and with the many health clubs
that offer exercise and recreational facilities. We also compete indirectly with
outdoor fitness, sporting goods and other recreational products. Our principal
direct competitors include ICON Health & Fitness, Inc. (through its Health
Rider, NordicTrak, Image, Proform, Weider and Weslo brands), Schwinn Fitness,
Precor and Total Gym.
We believe our Bowflex line of home exercise equipment is competitive
within the market for home fitness equipment and that our direct marketing
activities are effective in distinguishing our products from the competition. In
addition, we believe we can capitalize on the well-known Nautilus brand name by
directly marketing existing Nautilus consumer products and developing and
introducing new products.* However, some of our competitors have significantly
greater financial and marketing resources, which may give them and their
products an advantage in the marketplace.
NAUTILUS COMMERCIAL FITNESS EQUIPMENT
The market for commercial fitness equipment is highly competitive. Our
Nautilus products compete against the products of numerous other commercial
fitness equipment companies, including Life Fitness, Cybex and Precor. Many of
our competitors have greater financial and marketing resources, significantly
more experience in the commercial fitness equipment industry, and more extensive
experience manufacturing their products. We believe the key competitive factors
in this industry include price, product quality and durability, diversity of
features, financing options and warranties. Many commercial customers are also
interested in product-specific training programs that educate them regarding how
to safely maximize the benefits of a workout and achieve specific fitness
objectives. In addition, certain commercial customers, such as hotels and
corporate fitness centers, have limited floor space to devote to fitness
equipment. These customers tend to favor multi-function machines that require
less floor space.
Our Nautilus commercial fitness products carry a premium price, however
we believe their reputation for quality and durability appeals to a significant
portion of the market that strives for long-term product value. In addition, our
principal line of Nautilus commercial fitness equipment, the Nautilus 2ST,
possesses unique features that appeal to the commercial market, such as low
friction working parts, one-pound incremental weight stacks and hydraulic seat
adjustments. We also offer training programs that are responsive to marketplace
demands.
NAUTILUS SLEEP SYSTEMS
The mattress industry is also highly competitive, as evidenced by the
wide range of products available to consumers, such as innerspring mattresses,
waterbeds, futons and other air-supported mattresses. According to the
International Sleep Products Association, conventional innerspring mattresses
presently account for at least 90% of all domestic mattress sales, with
waterbeds, futons and other types of mattresses making up the remainder of the
market. We believe market participants
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compete primarily on the basis of price, product quality and durability,
brand name recognition, innovative features, warranties and return policies.
We believe our most significant competition is the conventional
mattress industry, which is dominated by four large, well-recognized
manufacturers: Sealy (which also owns the Stearns & Foster brand name), Serta,
Simmons and Spring Air. Although we believe our Nautilus Sleep Systems offer
consumers an appealing alternative to conventional mattresses, many of these
conventional manufacturers, including Sealy, Serta, Simmons and Spring Air,
possess significantly greater financial, marketing and manufacturing resources
and better brand name recognition.
Moreover, several manufacturers currently offer beds with firmness
technology similar to our Nautilus Sleep Systems. We believe the largest
manufacturer in this niche market is Select Comfort, Inc. Select Comfort offers
its airbeds at company-owned retail stores throughout the United States and
engages in a significant amount of direct marketing, including infomercials,
targeted mailings, print, radio and television advertising. Select Comfort has
an established brand name and has greater financial, marketing and manufacturing
resources. Select Comfort also has significantly greater experience in marketing
and distributing airbeds. Despite these advantages, we believe the market for
airbeds is large enough for both companies to be successful.* In addition, we
believe our Nautilus Sleep Systems possess features that will enable us to
effectively compete against Select Comfort and other airbed companies.*
We believe our success in the mattress business depends in part on
convincing consumers that variable firmness control and other features of our
sleep system favorably differentiate our products from those of our
competitors.* We also believe our experience with direct marketing will enable
us to successfully convey this message.* However, the intense competition in the
mattress industry, both from conventional mattress manufacturers and Select
Comfort, may adversely affect our efforts to market and sell our airbeds and,
consequently, may adversely affect our financial performance.
INTELLECTUAL PROPERTY
Protecting our intellectual property is an important factor in
maintaining our competitive position in the fitness and mattress industries. If
we do not, or are unable to, adequately protect our intellectual property, our
sales and profitability could be adversely affected. Accordingly, we have taken
the following protective measures:
- We hold 17 United States patents and have applied for three
additional United States patents with respect to our
Nautilus products;
- We hold four patents relating to our Bowflex home fitness
equipment;
- We have applied for one patent relating to our Nautilus
Sleep Systems;
- We have obtained United States trademark protection for
various names associated with our products, including
"Bowflex," "Nautilus," "Power Rod," "Bowflex Power Pro,"
"Motivator" and "Versatrainer";
- We have applied for United States trademark protection for
the names "Direct Focus," "Instant Comfort" and various
other names and slogans associated with our products;
- We have registered the name "Bowflex" in Canada and the
European Community, and have registered or applied to
register the "Nautilus" trademark in approximately 30
foreign countries;
- We have obtained trademark protection for the "look" of
our Bowflex Power Rods; and
- We hold eight United States copyright registrations
relating to our Nautilus products.
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Notwithstanding these measures, our efforts to protect our
proprietary rights may be inadequate, and applicable laws provide only
limited protection. For example, of our four Bowflex patents, the most
important covers our Power Rods, and this patent expires on April 27, 2004.
The other three patents expire on February 16, 2005, April 14, 2007, and
January 4, 2010. In addition, we may not be able to successfully prevent
others from claiming that we have violated their proprietary rights. We could
incur substantial costs in defending against such claims, even if they are
invalid, and we could become subject to judgments requiring us to pay
substantial damages.
Each federally registered trademark is renewable indefinitely if the
mark is still in use at the time of renewal. We are not aware of any material
claims of infringement or other challenges to our right to use our marks.
ENVIRONMENTAL REGULATION
Environmental regulations most significantly affect our Nautilus
facilities in Independence, Virginia. The Virginia Department of Environmental
Quality has issued an air permit for several point sources at this facility. The
sources include boilers, flash ovens and high solids paint booths. The permit
imposes operation limits based on the length of time each piece of equipment is
operated each day, and we operate the plant within these limits. The town of
Independence, Virginia has issued an industrial user's wastewater permit that
governs our discharge of on-site generated wastewater and storm water. In
addition to the foregoing, in early 1999, we completed a Phase I Environmental
Site Assessment and a limited Phase II Soil Analysis Assessment at our Nautilus
facilities in Independence, Virginia. No significant deficiencies or violations
were noted. We do not believe that continued compliance with federal, state and
local environmental laws will have a material effect upon our capital
expenditures, earnings or competitive position.*
EMPLOYEES
As of December 31, 1999, we employed 378 full-time employees, including
3 executive officers and 58 part-time employees. None of our employees is
subject to any collective bargaining agreement.
ITEM 2. PROPERTIES
Our corporate headquarters and our principal warehouse facilities
occupy approximately 74,000 square feet in Vancouver, Washington. We also use
these facilities to house our customer call center and to assemble and
distribute our Bowflex products for the Northwestern part of the United States.
We lease these properties pursuant to operating leases that expire at various
times, from May 30, 2000, to April 30, 2002. The aggregate base rent is
approximately $28,379 per month and some of the leases are subject to annual
adjustments based upon changes in the consumer price index, but no adjustment
may exceed 6.0% in any calendar year.
We house our Nautilus commercial operations and our East Coast
distribution center for our Bowflex products in Independence, Virginia. The 54
acres of commercial real property include the following facilities:
- A 124,000 square foot building devoted to fabrication,
finishing, assembly, plastics, upholstery, warehousing and
shipping;
- A 100,000 square foot building devoted to fabrication and
warehousing;
- A 27,105 square foot building that houses our Nautilus
engineering, prototyping and
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<PAGE>
customer service operations; and
- A 9,187 square foot building that houses our Nautilus
administrative operations.
We recently added a distribution center in Las Vegas, Nevada. We
distribute Bowflex equipment, Nautilus Sleep Systems and Nautilus fitness
products from this 53,657 square foot facility. The term of the lease is from
December 1, 1999, to November 30, 2002. The aggregate base rent is
approximately $12,878 per month for the first twelve months, and is subject
to an annual cost of living increase of 3.5%.
In general, our properties are well maintained, adequate and suitable
for their purposes, and we believe these properties will meet our operational
needs for the foreseeable future.* If we require additional warehouse or office
space, we believe we will be able to obtain such space on commercially
reasonable terms.*
ITEM 3. LEGAL PROCEEDINGS
As of March 22, 2000, there were no material, pending legal proceedings
to which we or our subsidiaries were a party. From time to time, we become
involved in ordinary, routine or regulatory legal proceedings incidental to our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF OUR COMMON STOCK
Since May 4, 1999, our common stock has been listed for trading
exclusively on The Nasdaq National Market System under the symbol DFXI. Prior to
such date, our common stock was listed for trading exclusively on the Toronto
Stock Exchange in the Province of Ontario, Canada, under the symbol DFX. The
following table summarizes the high and low sales prices for our common stock as
reported on the Toronto Stock Exchange and The Nasdaq National Market System, as
applicable, for the two years in the period ended December 31, 1999. The prices
below in Canadian dollars are listed in the currency they were quoted in until
May 4, 1999 and are translated into United States dollars based on the currency
exchange rate in effect on the date of each high and low quarterly price:
<TABLE>
<CAPTION>
CANADIAN DOLLARS UNITED STATES DOLLARS
------------------------ -----------------------
HIGH LOW HIGH LOW
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998
Quarter 1................................. $ 10.05 $ 3.50 $ 7.07 $ 2.45
Quarter 2................................. 15.00 10.00 10.48 7.05
Quarter 3................................. 18.00 11.80 12.09 7.67
Quarter 4................................. $ 23.00 $ 10.50 $ 14.95 $ 6.80
1999
Quarter 1................................. $ 28.00 $ 18.55 $ 18.39 $ 12.09
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Quarter 2................................. N/A N/A 26.00 16.25
Quarter 3................................. N/A N/A 21.00 15.00
Quarter 4................................. N/A N/A $ 29.00 $ 18.25
</TABLE>
As of February 29, 2000, 10,519,565 shares of our common stock were
issued and outstanding and held of record by 81 shareholders.
Payment of any future dividends is at the discretion of our board of
directors, which considers various factors, such as our financial condition,
operating results, current and anticipated cash needs and expansion plans. Our
credit lines do not restrict the payment of dividends. To date, we have never
declared or paid any cash dividends on our common stock and do not presently
intend to declare any cash dividends in the near future.* Instead, we intend to
retain and direct any future earnings to fund our anticipated expansion and
growth.*
USE OF PROCEEDS
We received approximately $17,938,000 in net proceeds from the sale of
975,000 shares of common stock in our May 1999 initial U.S. public offering,
which includes proceeds from the overallotment option exercised by the managing
underwriters. During 1999, we applied $3.7 million of the net proceeds toward
stock repurchases and $1.3 million toward computer and related technology
upgrades. We also used approximately $5.0 million of the net proceeds for
working capital purposes, including increased direct marketing expenditures and
increases in inventory and accounts receivable balances due to the growth of our
business. We have invested all unexpended net proceeds in an interest bearing
depository account with Bank of America, pending anticipated application of
proceeds in fiscal 2000 toward such purposes as further stock repurchases, the
purchase of a distribution center in Las Vegas, Nevada, the purchase of a
building in Vancouver, Washington to consolidate our Washington operations, and
any of the other purposes described in our registration statement on Form S-1.*
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each year
in the five-year period ended December 31, 1999 have been derived from our
audited financial statements. The data presented below should be read in
conjunction with our financial statements and notes thereto and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
IN THOUSANDS
(EXCEPT PER SHARE AMOUNTS) 1995 1996 1997 1998 1999
- --------------------------------------- ---------- ---------- ----------- ---------- ----------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Net Sales $4,772 $8,517 $19,886 $57,297 $121,019
Cost of sales 1,616 2,603 5,114 12,442 34,423
---------- ---------- ---------- ---------- ----------
Gross profit 3,156 5,914 14,772 44,855 86,596
Operating expenses:
Selling and marketing 2,644 4,712 9,600 22,643 44,630
General and administrative 370 473 975 1,701 4,237
Royalties 201 269 581 1,623 2,897
Litigation settlement - - - - 4,000
Total operating expenses ---------- ---------- ---------- ---------- ----------
3,215 5,454 11,156 25,967 55,764
---------- ---------- ---------- ---------- ----------
Operating income (loss) (59) 460 3,616 18,888 30,832
Other income (expense)
Interest income 26 37 119 527 1,003
Other-net (20) (53) (88) (222) 3
---------- ---------- ---------- ---------- ----------
Total other income (expense) 6 (16) 31 305 1,006
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (53) 444 3,647 19,193 31,838
Income tax expense (benefit) (68) (249) 1,226 6,708 11,495
---------- ---------- ---------- ---------- ----------
Net income $ 15 $ 693 $2,421 $12,485 $20,343
========== ========== ========== ========== ==========
Basic earnings per share(1) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 2.00
Diluted earnings per share(1) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.95
Basic shares outstanding 8,132 8,558 8,987 9,337 10,166
Diluted shares outstanding 8,132 8,943 9,511 9,726 10,425
BALANCE SHEET DATA
Cash and cash equivalents $756 $1,154 $4,790 $18,911 $35,703
Working Capital 1,063 1,973 4,100 15,682 38,209
Total assets 2,150 3,515 7,922 24,373 67,310
Current liabilities 858 1,281 3,330 6,655 14,091
Total stockholders' equity $1,274 $2,220 $4,592 $17,651 $53,031
</TABLE>
(1) Basic earnings per share have been computed by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share have been computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents, such as stock options, outstanding during each period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
We believe that period-to-period comparisons of our operating results
are not necessarily indicative of future performance. You should consider our
prospects in light of the risks, expenses and difficulties frequently
encountered by companies experiencing rapid growth and, in particular, rapidly
growing companies that operate in evolving markets. We may not be able to
successfully address these risks and difficulties. Although we have experienced
net sales growth in recent years, our net sales growth may not continue, and we
cannot assure you of any future growth or profitability.
The following table presents certain financial data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1998 1999
---------------- -------------- ---------------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 25.7 21.7 28.4
---------------- -------------- ---------------
Gross profit................................. 74.3 78.3 71.6
Operating expenses
Selling and marketing.................... 48.3 39.5 36.9
General and administrative............... 4.9 3.0 3.5
Royalties................................ 2.9 2.8 2.4
Litigation settlement.................... - - 3.3
---------------- -------------- ---------------
Total operating expenses..................... 56.1 45.3 46.1
Operating income............................. 18.2 33.0 25.5
Other income................................. 0.2 0.5 0.8
---------------- -------------- ---------------
Income before income taxes................... 18.4 33.5 26.3
Income tax expense........................... 6.2 11.7 9.5
---------------- -------------- ---------------
Net income................................... 12.2% 21.8% 16.8%
================ ============== ===============
</TABLE>
COMPARISON OF THE YEARS ENDING DECEMBER 31, 1999, AND DECEMBER 31, 1998
NET SALES
Net sales grew by 111.2% to $121.0 million in 1999 from $57.3 million
in 1998. Sales within our direct marketing business increased by 77.8% over
prior year levels and accounted for $101.9 million, or 84.2%, of our aggregate
net sales in 1999. One product, our Bowflex Power Pro, generated 79.9% of our
aggregate net sales in 1999, compared to 93.3% in 1998. The principal reason for
this decrease was the addition of our Nautilus business. Net sales within our
Nautilus business generated $19.1 million of our aggregate net sales and
accounted for 33.4% of the aggregate increase.
Sales growth in 1999 primarily resulted from expanded direct marketing
of our Bowflex products and the addition of our Nautilus business. Within our
direct marketing business, with respect to both our Bowflex products and our
Nautilus Sleep Systems, we intend to further expand our use of spot television
commercials and infomercials during 2000 by increasing our presence in existing
television markets and
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entering new television markets.* We intend to increase Nautilus sales by
developing new products and expanding our direct sales efforts both
domestically and internationally.*
Notwithstanding our product diversification efforts, we anticipate that
sales of our Bowflex Power Pro will continue to account for a substantial
portion of our net sales for the foreseeable future.* Any significant diminished
consumer interest in this product line would sharply reduce our net sales and
profitability. In addition, the success of each of our products depends
substantially on how consumers decide to spend their money. Unfavorable economic
conditions may depress consumer spending, especially for premium priced products
like ours.
Except for the fourth quarter, fiscal 1999 sales of our Bowflex
products appear to have been consistent with historic trends. As in prior years,
first and third quarter sales of our Bowflex products were strong, while the
second quarter reflected seasonal weakness. Our direct marketing business is
largely dependent upon national cable television advertising, and we are finding
that second quarter influences on television viewership, such as the broadcast
of national network season finales and seasonal weather factors, are causing our
spot television commercials on national cable television to be marginally less
effective than in other periods of the year.* During the fourth quarter of 1999,
we experienced unusually strong consumer demand compared to the third quarter
for our Bowflex products, which we believe is a trend that will not continue for
the fourth quarter in future periods.*
Sales within our Nautilus business were, and we believe will
continue to be, strongest in the third and fourth quarters.* We believe the
principal reason for this trend is the commercial fitness industry's
preparation for the impact of New Year fitness resolutions and seasonal
weather factors in the fourth quarter, and retail fitness store purchases of
fitness equipment in preparation for the Christmas buying season and New Year
fitness resolutions in the third and fourth quarters.*
GROSS PROFIT
Gross profit grew 92.9% to $86.6 million in 1999, from $44.9 million in
1998. Our gross profit margin decreased 6.7% to 71.6% in 1999, from 78.3% in
1998. The decrease in gross profit margin was mainly attributable to our
Nautilus operations, which had a gross profit margin in 1999 of 38.5%.
We expect a lower percentage gross profit margin contribution from our
Nautilus Sleep Systems as we continue our direct marketing campaign for this
product.* At least initially, we expect the domestic production and relatively
lower sales volume of our Nautilus Sleep Systems will result in lower gross
profit margins than our Bowflex products.* Similar to our Bowflex products, with
the anticipated future higher sales volume of Nautilus Sleep Systems, we expect
to take advantage of overseas production to strengthen the margins for these
products.*
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $44.6 million in 1999 from $22.6
million in 1998, an increase of 97.3%. This increase in selling and marketing
expenses resulted primarily from the continued expansion of our Bowflex direct
marketing campaign and variable costs associated with our sales growth. The
addition of our Nautilus business accounted for $5.1 million of the increase.
As a percentage of net sales, selling and marketing expenses decreased
by 2.6% in 1999 to 36.9%, compared to 39.5% in 1998. Selling and marketing
expenses within our direct marketing business
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were $39.5 million, a 0.7% decrease as a percentage of net sales compared to
1998. Selling and marketing expenses within our Nautilus business
traditionally have been a lower percentage of net sales than we have
experienced in direct marketing. In real dollar terms, we expect our
aggregate selling and marketing expenses will continue to increase, but not
materially as a percentage of net sales,* as we:
- Continue to expand our Bowflex direct marketing campaign;*
- Continue rolling out the direct marketing campaign for our
Nautilus Sleep Systems;*
- Continue integrating the marketing and distribution
infrastructure for our Nautilus line of commercial fitness
equipment;* and
- Begin marketing new home fitness equipment products and
fitness accessories under the Nautilus brand name.*
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $4.2 million in 1999 from
$1.7 in 1998, an increase of 147.1%. Our direct marketing business accounted for
$1.3 million of the increase in general and administrative expenses, due
primarily to increased staffing levels in our accounting and information systems
departments necessitated by our continued growth and the implementation of our
new information system. Nautilus operations accounted for the remaining increase
of $1.2 million. As a percentage of net sales, general and administrative
expenses increased to 3.5% in 1999 from 3.0% in 1998. We believe our general and
administrative expenses, in real dollar terms and as a percentage of net sales,
will increase in future periods as we continue to integrate the Nautilus
business into our operations and expand our administrative staff and other
resources to manage anticipated growth.*
ROYALTY
Royalty expense grew to $2.9 million in 1999 from $1.6 million in 1998,
an increase of 81.3%. The increase in our royalty expense is attributable to
increased sales of our Bowflex products in 1999. Our royalty expenses will
increase if sales of our Bowflex products continue to increase.*
OTHER INCOME
In 1999, other income increased to $1.0 million from $0.3 million in
1998. The $0.7 million increase resulted primarily from interest income
generated by higher cash investments accumulated from a combination of results
from operations and our public offering completed during the second quarter of
1999.
INCOME TAX EXPENSE
Income tax expense increased by $4.8 million in 1999 compared to 1998.
We expect our income tax expense to increase in line with increases of our
income before taxes.* Our effective tax rate increased by 1.2% to 36.1% due to
state tax liability. We believe this higher rate is indicative of our future
effective tax rate.*
NET INCOME
For the reasons discussed above, net income increased 62.4% to $20.3
million in 1999 compared to $12.5 million in 1998.
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COMPARISON OF YEARS ENDING DECEMBER 31, 1998, AND DECEMBER 31, 1997
NET SALES
Net sales grew by 187.9% to $57.3 million in 1998, from $19.9 million
in 1997. Sales of our Bowflex Power Pro grew by 199.0% and accounted for 93.3%
of our aggregate net sales in 1998. Sales of our Bowflex Motivator increased by
73.0% and sales of our Bowflex accessories increased by 148.0% in 1998, and
accounted for 1.8% and 4.5% of our aggregate net sales, respectively. We
introduced and began test marketing our airbeds in late 1998, but this product
did not materially contribute to our net sales in 1998.
Our sales growth in 1998 primarily resulted from expanded direct
marketing of our Bowflex products. In 1998, we increased our advertising
expenditures by 196.1%, focusing principally on expanded broadcasts of our
Bowflex spot television commercials and television infomercials. Both of these
direct marketing techniques generated strong sales in 1998.
GROSS PROFIT
Our gross profit grew 203.4% to $44.9 million in 1998, from $14.8
million in 1997. Our gross profit as a percentage of net sales increased by 4.0%
to 78.3% in fiscal 1998, from 74.3% in 1997. We believe that our improved
percentage gross profit in 1998 resulted primarily from a March 1998 increase in
the shipping charge for our Bowflex products, as well as reduced component costs
for our Bowflex products and improved labor and overhead efficiencies. We
benefited from reduced component costs principally through volume discounts. Our
improved labor and overhead efficiencies resulted primarily from improved
manufacturing methods and the implementation of a second work shift.
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $22.6 million in 1998 from $9.6
million in 1997, an increase of 135.4%. This increase in selling and marketing
expenses resulted primarily from the expansion of our Bowflex direct marketing
campaign and variable costs associated with our sales growth.
As a percentage of net sales, selling and marketing expenses decreased
to 39.5% in 1998 from 48.3% in 1997. This decrease in selling and marketing
expenses as a percentage of net sales reflects the improved efficiency of our
Bowflex direct marketing campaign. As we refined our spot commercial and
infomercial advertising policies and our customer response techniques, we were
able to stimulate sales growth at a more rapid rate than the growth in our
selling and marketing expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $1.7 million in 1998 from
$975,000 in 1997, an increase of 74.3%. This increase in general and
administrative expenses was due primarily to increased staffing and
infrastructure expenses necessary to support our continued growth. As a
percentage of net sales, general and administrative expenses decreased to 3.0%
in 1998 from 4.9% in 1997. The decline in general and administrative expenses as
a percentage of our net sales resulted primarily from our substantial increase
in net sales.
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ROYALTY
Royalty expense grew to $1.6 million in 1998 from $581,000 in 1997, an
increase of 175.4%. The increase in our royalty expenses is attributable to the
increased sales of our Bowflex products in 1998. Our royalty expenses will
increase if sales of our Bowflex products continue to increase.
OTHER INCOME
In 1998, other income increased to $305,000 from $31,000 in 1997. The
$274,000 increase resulted primarily from interest income generated by our cash
investments, which was partially offset by a $135,000 increase in our state
business tax expense.
INCOME TAX EXPENSE
Income tax expense increased by $5.5 million in 1998 because of the
growth in our income before taxes. We expect our income tax expense to increase
in line with increases in our income before taxes.
NET INCOME
For the reasons discussed above, net income grew to $12.5 million in
1998 from $2.4 million in 1997, an increase of 420.8%.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the
eight quarters in the period ended December 31, 1999. The information for each
of these quarters is unaudited and has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Annual Report on Form
10-K. In the opinion of management, all necessary adjustments, consisting only
of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read together with our audited financial
statements and the related notes. These operating results are not necessarily
indicative of the results of any future period.
SELECTED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1999:
Net sales 26,113 25,244 31,773 37,889
Gross profit 18,723 17,882 22,982 27,008
Operating income 6,907 1,999 (1) 8,099 13,827
Net income 4,479 1,399 (1) 5,495 8,969
Earnings per share
Basic .47 .14 (1) .52 .86
Diluted .45 .13 (1) .51 .84
Fiscal 1998:
Net sales 11,051 12,236 15,200 18,809
Gross profit 8,497 9,584 11,766 15,007
Operating income 3,852 3,014 4,370 7,653
Net income 2,571 1,982 2,910 5,023
Earnings per share
Basic .28 .21 .31 .54
Diluted .27 .20 .30 .52
</TABLE>
(1) Includes a $4 million litigation settlement expense. Net income and
earnings per share amounts also reflect $1.4 million of income tax benefit
related to the litigation settlement.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our growth primarily from cash generated
by our operating activities. During 1999, our operating activities generated
$20.8 million in net cash, which contributed to an aggregate $35.7 million in
cash and cash equivalents on hand as of December 31, 1999. We used $16.6 million
in cash to fund the Nautilus acquisition in January 1999. Our public offering on
May 5, 1999 generated $15.1 million in cash and the underwriters' exercise of
their over-allotment option on June 10, 1999 generated an additional $2.8
million in cash, bringing the total net offering proceeds to $17.9 million.
Through a stock repurchase program, we bought back $3.7 million in common stock
on the open market. These activities contributed to a $16.8 million, or 88.9%
increase in our cash and cash equivalents during 1999.
24
<PAGE>
We anticipate our working capital requirements will increase as a
result of increased inventory and accounts receivable related to our Nautilus
operations.* We also expect to increase our cash expenditures on spot
commercials and infomercials as we continue to expand the direct marketing
campaigns for our Bowflex products and Nautilus Sleep Systems.*
We maintain a $5.0 million line of credit with Bank of America. The
line of credit is secured by our general assets and contains certain financial
covenants. As of the date of these financial statements, we are in compliance
with all material covenants applicable to the line of credit and there is no
outstanding balance under the line.
We believe our existing cash balances, combined with our line of
credit, will be sufficient to meet our capital requirements for at least the
next twelve months.*
INFLATION AND PRICE INCREASES
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had or is likely in the
foreseeable future to materially adversely affect our results of operations,
cash flows or our financial position.* However, increases in inflation over
historical levels or uncertainty in the general economy could decrease
discretionary consumer spending for products like ours. We have not raised the
prices on our Bowflex products since 1997. Consequently, none of our revenue
growth is attributable to price increases.
YEAR 2000
We did not experience any material year 2000 problems with respect to
our products, information systems, suppliers or resellers. To help ensure a
smooth transition into 2000, we did the following:
- Upgraded all computer hardware and equipment determined to have
potential Year 2000 problems;
- Stockpiled certain inventory components;
- Acquired and prepared to use back-up power generators;
- Developed manual workarounds for all critical automated processes;
- Downloaded and printed critical data and reports by December 30, 1999;
- Created specific plans of action for dealing with critical
non-compliant suppliers and resellers; and
- Executed critical operations, such as payroll, prior to December 31,
1999.
We estimate that, as of December 31, 1999, the cost of remediating
and/or replacing our internal systems was approximately $1.3 million. We funded
this effort through normal working capital.
Because we experienced no major Year 2000-related issues internally or
externally over the Year 2000 transition, we do not currently believe that we
will incur material costs or experience material disruptions in our business
associated with the year 2000. However, there can be no assurance that our
computer systems or those of our suppliers do not contain undetected errors or
defects associated with Year 2000 date functions. These could give rise to
increased customer satisfaction costs related to Year 2000 and to litigation
over Year 2000 compliance issues.
25
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for all derivative instruments. SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. We do not currently have any
derivative instruments and, accordingly, do not expect the adoption of SFAS 133
to have an impact on our financial position, results of operations, or cash
flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required under this item.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Direct Focus, Inc. Consolidated Financial Statements PAGE
----
<S> <C>
Independent Auditor's Report 27
Consolidated Balance Sheets as of December 31, 1998 and 1999 28
Consolidated Statements of Income for the three years ended December 31, 1999 29
Consolidated Statements of Stockholders' Equity for the three years ended December
31, 1999 30
Consolidated Statements of Cash Flows for the three years ended December 31, 1999 31
Notes to Consolidated Financial Statements 32
Schedule II - Valuation and Qualifying Accounts 43
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
of Direct Focus, Inc.:
We have audited the accompanying consolidated balance sheets of Direct
Focus, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule at Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Direct Focus, Inc. and
subsidiaries at December 31, 1998 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 21, 2000
27
<PAGE>
DIRECT FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,910,675 $ 35,703,457
Trade receivables (less allowance for doubtful accounts of:
1998, $40,000 and 1999, $304,727) 218,207 4,744,213
Inventories 2,614,673 9,167,554
Prepaid expenses and other current assets 378,409 1,863,951
Current deferred tax asset 215,737 820,789
------------------ -----------------
Total current assets 22,337,701 52,299,964
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT (less accumulated
Depreciation of: 1998, $438,790 and 1999, $1,100,255) 1,842,712 10,644,838
------------------ -----------------
OTHER ASSETS (less accumulated amortization of:
1998, $49,967 and 1999, $272,183) 192,859 4,364,963
------------------ -----------------
TOTAL ASSETS $ 24,373,272 $ 67,309,765
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 3,602,074 $ 5,871,369
Accrued liabilities 1,851,253 4,051,540
Income taxes payable 504,775 2,177,236
Royalty payable to stockholders 548,211 893,563
Customer deposits 148,937 1,097,748
------------------ -----------------
Total current liabilities 6,655,250 14,091,456
------------------ -----------------
LONG-TERM DEFERRED TAX LIABILITY 66,880 187,484
------------------ -----------------
COMMITMENTS AND CONTINGENCIES (Note 7) - -
STOCKHOLDERS' EQUITY:
Common stock - authorized, 50,000,000 shares of no par value;
Outstanding, 1998: 9,448,523 shares, 1999: 10,444,148 shares 3,565,628 18,602,420
Retained earnings 14,085,514 34,428,405
------------------ -----------------
Total stockholders' equity 17,651,142 53,030,825
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,373,272 $ 67,309,765
================== =================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------------- -------------- -----------------
<S> <C> <C> <C>
NET SALES $ 19,886,354 $ 57,296,880 $121,018,477
COST OF SALES 5,113,980 12,442,307 34,422,577
----------------- -------------- -----------------
Gross profit 14,772,374 44,854,573 86,595,900
----------------- -------------- -----------------
EXPENSES:
Selling and marketing 9,600,076 22,642,885 44,629,825
General and administrative 974,887 1,700,956 4,236,804
Royalties 580,677 1,622,726 2,897,278
Litigation settlement - - 4,000,000
----------------- -------------- -----------------
Total operating expenses 11,155,640 25,966,567 55,763,907
----------------- -------------- -----------------
INCOME FROM OPERATIONS 3,616,734 18,888,006 30,831,993
----------------- -------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 118,541 526,961 1,003,586
Other - net (88,041) (221,889) 2,737
----------------- --------------- -----------------
Total other income - net 30,500 305,072 1,006,323
----------------- --------------- -----------------
INCOME BEFORE INCOME TAXES 3,647,234 19,193,078 31,838,316
INCOME TAX EXPENSE 1,226,068 6,707,584 11,495,425
----------------- --------------- -----------------
NET INCOME $ 2,421,166 $ 12,485,494 $ 20,342,891
================= =============== =================
BASIC EARNINGS PER SHARE $ .27 $ 1.34 $ 2.00
================= =============== =================
DILUTED EARNINGS PER SHARE $ .25 $ 1.28 $ 1.95
================= =============== =================
Basic shares outstanding 8,986,655 9,336,525 10,165,617
Diluted shares outstanding 9,510,868 9,725,958 10,425,208
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
------------- RETAINED EARNINGS
SHARES AMOUNT (ACCUM. DEF.) TOTAL
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 8,921,541 $3,040,425 $ (821,146) $2,219,279
Options exercised 129,887 15,586 - 15,586
Stock repurchased (46,100) (98,120) - (98,120)
Tax benefit of exercise of nonqualified
options - 34,281 - 34,281
Net income - - 2,421,166 2,421,166
------------ ------------ ------------- ------------
BALANCES, DECEMBER 31, 1997 9,005,328 $2,992,172 $1,600,020 $4,592,192
============ ============ ============= ============
Options exercised 443,195 134,004 - 134,004
Tax benefit of exercise of nonqualified
options - 439,452 - 439,452
Net income - - 12,485,494 12,485,494
------------ ------------ ------------- ------------
BALANCES, DECEMBER 31, 1998 9,448,523 $3,565,628 $14,085,514 $17,651,142
============ ============ ============= ============
Public offering 975,000 17,937,691 - 17,937,691
Options exercised 231,825 300,482 - 300,482
Stock repurchased (211,200) (3,698,793) - (3,698,793)
Tax benefit of exercise of nonqualified
options - 497,412 - 497,412
Net income - - 20,342,891 20,342,891
------------ ------------ ------------- ------------
BALANCES, DECEMBER 31, 1999 10,444,148 $18,602,420 $34,428,405 $53,030,825
============ ============ ============= ============
</TABLE>
See notes to consolidated financial statements
30
<PAGE>
DIRECT FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,421,166 $ 12,485,494 $ 20,342,891
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 96,133 301,913 1,183,412
Loss on equipment disposal - - 1,262
Deferred income taxes 140,659 99,484 (484,448)
Changes in:
Trade receivables (29,128) 41,336 (1,519,116)
Inventories (1,156,643) (668,900) (3,448,750)
Prepaid expenses and other current assets 373,807 (166,027) (1,377,336)
Trade payables 277,909 2,423,819 2,001,235
Income taxes payable 835,409 143,099 2,169,873
Accrued liabilities and royalty payable to
Stockholders 944,547 1,099,819 988,414
Customer deposits 25,473 107,084 948,811
-------------- ------------- ------------
Net cash provided by operating activities 3,929,332 15,867,121 20,806,248
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment (278,886) (1,738,836) (1,929,137)
Proceeds from sale of property, plant and equip. - - 159,238
Additions to other assets (22,514) (12,309) (167,935)
Acquisition cost of Nautilus - (120,454) (16,615,012)
Sale of certificate of deposit 100,000 - -
-------------- ------------- ------------
Net cash used in investing activities (201,400) (1,871,599) (18,552,846)
-------------- ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments under capital lease obligations (9,113) (9,167) -
Proceeds from public offering - - 17,937,691
Funds used for stock repurchase (98,120) - (3,698,793)
Proceeds from exercise of stock options, net 15,586 134,004 300,482
-------------- ------------- ------------
Net cash provided by (used in) financing activities (91,647) 124,837 14,539,380
-------------- ------------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 3,636,285 14,120,359 16,792,782
31
<PAGE>
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,154,031 4,790,316 18,910,675
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 4,790,316 $18,910,675 $35,703,457
============== ============= ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest 1,381 455 -
Cash paid for income taxes 250,000 6,465,006 9,835,000
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING TRANSACTIONS:
Tax benefit of exercise of nonqualified options 34,281 439,452 497,412
</TABLE>
See notes to consolidated financial statements
DIRECT FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Direct Focus Inc. (the "Company," a Washington corporation) is a
direct marketing company that develops and markets premium quality, premium
priced, branded consumer products. The Company has two operating segments.
One is the direct business through which they market consumer products
directly through a variety of direct marketing channels, including spot
television commercials, infomercials, print media, response mailings, and the
Internet. The Company's principal products are the Bowflex line of home
fitness equipment and a line of premium quality airbeds (Nautilus Sleep
Systems). As a result of the acquisition in January 1999 of Nautilus
International, Inc., the Company added a second business segment which
comprises a significant component of the Company's operations and includes
Nautilus commercial and home fitness equipment.
CONSOLIDATION
The consolidated financial statements of the Company include Direct
Focus, Inc., Nautilus HPS, Inc., Nautilus, Inc., DFI Properties, LLC, BFI
Advertising, Inc., DFI Sales, Inc., and Nautilus Fitness Products, Inc. All
inter-company transactions have been eliminated.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
32
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash deposited with
banks and financial institutions and highly liquid debt instruments purchased
with maturity dates of three months or less at date of acquisition. The
Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts.
INVENTORIES
Inventories are stated at the lower of average cost or market.
ADVERTISING
The Company expenses the production costs of advertising the first
time the advertising takes place.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the assets.
Management reviews investment in long-lived assets for possible
impairment whenever events or circumstances indicate the carrying amount of
an asset may not be recoverable. There have been no such events or
circumstances in the three years ended December 31, 1999. If there were an
indication of impairment, management would prepare an estimate of future cash
flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition. If these cash flows were less
than the carrying amount of the asset, an impairment loss would be recognized
to write down the asset to its estimated fair value.
OTHER ASSETS
Other assets consist of acquisition costs, license agreements,
patents and trademarks. Amortization is computed using the straight-line
method over estimated useful lives of three to twenty years. The trademark
associated with the Nautilus acquisition was valued at $4,349,839 and is
being amortized over twenty years.
WARRANTY COSTS
The Company's warranty policy provides for coverage for defects in
material and workmanship. Warranty periods on the Company's products range
from two to five years on the Bowflex lines of fitness products and twenty
years on airbeds. The Nautilus commercial line of fitness products includes a
lifetime warranty on the structural frame, welded moving parts and weight
stacks, a 120-day warranty on upholstery and padded items, and a one-year
warranty on all other parts. A provision for estimated warranty costs of
$70,000 and $383,356 is included in accrued liabilities at December 31, 1998
and 1999, respectively.
REVENUE RECOGNITION
Revenue from product sales is generally recognized at the time of
shipment. Revenue is recognized upon installation for the Nautilus commercial
equipment, if the Company's truck fleet is used for delivery of the products.
The Company has established reserves for potential sales returns for 1998 and
1999 of $600,704 and $786,921, respectively, based upon historical experience.
33
<PAGE>
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "REPORTING COMPREHENSIVE
INCOME," which requires presentation of comprehensive income within an
entity's primary financial statements. Comprehensive income is defined as net
income as adjusted for changes to equity resulting from events other than net
income or transactions related to an entity's capital structure.
Comprehensive income equaled net income for all periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash, trade receivables, trade
payables, royalty payables, and accrued liabilities approximates their
estimated fair values due to the short-term maturities of those financial
instruments.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for all derivative instruments. SFAS 133, as amended, is effective
for fiscal years beginning after June 15, 2000. We do not currently have any
derivative instruments and, accordingly, do not expect the adoption of SFAS
133 to have an impact on our financial position or results of operations.
RECLASSIFICATIONS
Certain amounts from 1997 and 1998 have been reclassified to conform
to the 1999 presentation.
2. PUBLIC OFFERING
On May 5, 1999, the Company completed its initial U.S. public
offering of common stock listed on the Nasdaq exchange. The initial offering
consisted of one million total shares at $20.50 per share, of which 825,000
shares were offered by the Company, with an additional 175,000 shares offered
by selling shareholders. On June 10, 1999, the underwriting group exercised a
150,000 share over-allotment. Total net proceeds realized by Direct Focus,
Inc. from the offerings were $17.9 million. The Company was listed on the
Toronto Stock Exchange from January 1993 to May 1999.
3. ACQUISITION OF NAUTILUS
Effective January 4, 1999, the Company acquired substantially all of
the net assets of Nautilus International, Inc. ("Nautilus"). Nautilus was a
manufacturer and distributor of commercial fitness equipment and, to a
limited extent, consumer fitness equipment and accessories. The acquisition
has been
34
<PAGE>
accounted for under the purchase method of accounting and, accordingly, the
assets acquired, liabilities assumed, and results of operations have been
included in the accompanying financial statements since the date of
acquisition. The Company paid approximately $16.7 million, including
acquisition costs of approximately $500,000, for the assets and intellectual
property of Nautilus and assumed $1.8 million of current liabilities.
The total cost of the acquisition has been allocated to the assets
acquired and liabilities assumed as follows:
<TABLE>
<S> <C>
Cash $ 8,512
Trade receivables 3,006,890
Inventories 3,104,131
Prepaid expenses and other current assets 108,206
Furniture and equipment 7,991,685
Other assets 4,349,839
Liabilities assumed (1,825,285)
--------------
Total $ 16,743,978
==============
</TABLE>
The unaudited pro forma financial information below for the year
ended December 31, 1998 was prepared as if the transaction had occurred on
January 1, 1998:
<TABLE>
<S> <C>
Revenue $76,600,696
Net income $ 9,868,213
Basic earnings per share $ 1.06
Diluted earnings per share $ 1.01
</TABLE>
The unaudited pro forma information is not necessarily indicative of
what actual results would have been had the transaction occurred at the
beginning of the respective year, nor does it purport to indicate the results
of future operations of the Company.
4. INVENTORIES
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Finished goods............................... $1,758,171 $1,145,848
Work in process.............................. - 1,141,803
Parts and components......................... 856,502 6,879,903
------------ -------------
$2,614,673 $9,167,554
============ =============
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on
the straight-line method over the estimated useful lives of the assets.
Details of property, plant and equipment are summarized as follows at
December 31:
35
<PAGE>
<TABLE>
<CAPTION>
Estimated
Useful Life 1998 1999
------------ -------------- ----------------
<S> <C> <C> <C>
Land.................................................... N/A $ - $ 140,000
Buildings............................................... 31.5 - 5,870,592
Computer equipment...................................... 3 - 5 1,411,523 2,737,488
Production equipment.................................... 10 410,682 2,481,839
Furniture and fixtures.................................. 5 459,297 462,174
Automobiles............................................. 7 - 53,000
-------------- ---------------
2,281,502 11,745,093
Less accumulated depreciation........................... 438,790 1,100,255
-------------- ---------------
Property, plant and equipment, net...................... $ 1,842,712 $ 10,644,838
============== ===============
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accrued payroll......................................... $ 660,888 $ 2,318,771
Accrued warranty expense................................ 70,000 383,356
Sales return reserve.................................... 600,704 786,921
Accrued advertising..................................... 275,298 137,742
Accrued other........................................... 244,363 424,750
------------- --------------
Total................................................ $ 1,851,253 $ 4,051,540
============= ==============
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LINES OF CREDIT
During 1999, the Company obtained a line of credit for $5 million
with a bank. The line is secured by the Company's general assets, and
interest is payable on outstanding borrowings under the line at the bank's
prime rate (8.5% at December 31, 1999). There were no outstanding borrowings
on the line of credit at December 31, 1999.
OPERATING LEASES
The Company leases its Vancouver, Washington office and warehouse
facilities under an operating lease which expires April 30, 2002. The lease
commitment is subject to an annual rent adjustment based upon changes in the
consumer price index, limited to a 6.0% annual change. The agreement provides
for an annual cancellation provision by the Company upon proper notification.
Under a separate agreement in 1997, which was amended in 1998, the Company
leased additional warehouse facilities. This operating lease expires May 21,
2000.
In December 1999, the Company leased a distribution center in Las
Vegas, Nevada to service the Southwestern part of the United States. This
operating lease expires November 30, 2002.
36
<PAGE>
Nautilus HPS, Inc. leases trucks and trailers and other equipment used in
the Nautilus commercial business. These leases expire over various terms through
December 2002.
Rent expense under all leases was $107,361 in 1997, $239,197 in 1998,
and $664,922 in 1999.
OBLIGATIONS
Future minimum lease payments under the operating leases during the
years ending December 31 are as follows:
<TABLE>
<S> <C>
2000.......................................... $ 609,677
2001.......................................... 427,906
2002.......................................... 245,973
-----------
Total minimum lease payments.................. $1,283,556
===========
</TABLE>
8. STOCK OPTIONS
The Company's stock-based compensation plan was adopted in June
1995. The Company can issue both nonqualified stock options to the Company's
officers and directors and qualified options to the Company's employees. The
plan was amended in June 1998 so the Company may grant options up to
1,857,961 shares of common stock. At December 31, 1999, 561,215 shares are
available for future issuance under the plan. The plan is administered by the
Company's Board of Directors which determines the terms and conditions of the
various grants awarded under these plans. Stock options granted generally
have an exercise price equal to the closing market price of the Company's
stock on the date of the grant, and vesting periods vary by option granted,
generally no longer than four years.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," which encouraged
(but did not require) that stock-based compensation cost be recognized and
measured by the fair value of the equity instrument awarded. The Company did
not change its method of accounting for its stock-based compensation plans
and will continue to apply Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS ISSUED TO EMPLOYEES," and
related interpretations in accounting for these plans. Accordingly, no
compensation cost has been recognized for these plans in the financial
statements. If compensation cost on stock options granted in 1997, 1998 and
1999 under these plans had been determined based on the fair value of the
options consistent with that described in SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below for the years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
---------- ------------ -----------
<S> <C> <C> <C>
Net income, as reported............................. $2,421,166 $12,485,494 $20,342,891
Net income, pro forma............................... 2,334,082 12,274,208 19,958,204
Diluted earnings per share, as reported............. $ 0.25 $ 1.28 $ 1.95
Diluted earnings per share, pro forma............... $ 0.25 $ 1.26 $ 1.91
</TABLE>
The pro forma amounts may not be indicative of the effects on
reported net income for future years due to the effect of options vesting
over a period of years and the granting of stock compensation awards in
future years.
37
<PAGE>
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999,
respectively; all options granted will vest as scheduled; no dividend yield
for all three years; risk-free interest rate of 5.5%, 5% and 6.4%; expected
volatility of 93%, 76% and 60%; and expected lives of five years for all
three years.
A summary of the status of the Company's stock option plans as of
December 31, 1997, 1998 and 1999, and changes during the years ended on those
dates is presented below.
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 646,500 $0.18 813,113 $0.47 550,618 $2.39
Granted............................. 386,500 0.96 188,000 5.70 169,680 20.21
Forfeited or cancelled.............. (90,000) 0.98 (7,300) 0.96 (21,334) 10.71
Exercised........................... (129,887) 0.12 (443,195) 0.30 (231,825) 1.30
------------ ----------- ------------- -------------- -------------- -------------
Outstanding at end of year.......... 813,113 $0.47 550,618 $2.39 467,139 $9.03
============ =========== ============= ============== ============== =============
Options exercisable at end of 504,779 309,199 214,502
year................................ ============ ============= ==============
</TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Average Weighted Number Weighted
Remaining Average of Average
Number Contractual Exercise Shares Exercise
RANGE OF EXERCISE PRICES Outstanding Life (Years) Price Exercisable Price
------------------------ ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.12 - $0.98 159,451 2.3 $0.90 138,951 $0.89
$4.62 - $9.75 143,008 3.2 5.23 65,671 4.65
$18.50 - $20.69 164,680 4.6 20.20 9,880 19.84
- -------------------------------------------- ----------------- ------------- -------------- -------------- -------------
$0.12 - $20.69 467,139 3.4 $9.03 214,502 $3.39
================= ============= ============== ============== =============
</TABLE>
9. INCOME TAXES
The Company realizes income tax benefits as a result of the exercise
of non-qualified stock options and the exercise and subsequent sale of certain
incentive stock options (disqualifying dispositions). For financial statement
purposes, any reduction in income tax obligations as a result of these tax
benefits is credited to common stock.
The provision for (benefit from) income taxes consists of the following
for the three years ended December 31, 1999:
38
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
---------------- -------------- ---------------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 1,085,409 $ 6,608,100 $11,634,863
State............................................................ - - 345,010
---------------- -------------- ---------------
Total Current............................................... 1,085,409 6,608,100 11,979,873
---------------- -------------- ---------------
Deferred:
Federal.......................................................... 140,659 99,484 (484,448)
State............................................................ - - -
-------------- --------------- ---------------
Total Deferred.............................................. 140,659 99,484 (484,448)
---------------- -------------- ---------------
Total Provision.................................................... $1,226,068 $ 6,707,584 $11,495,425
================ ============== ===============
</TABLE>
The components of the net deferred tax asset/liability at
December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------------- ----------------
<S> <C> <C>
Current:
Assets:
Accrued vacation..................................................... $ 12,468 $ 124,933
Allowance for doubtful accounts...................................... 14,000 106,633
Inventory reserve.................................................... 17,500 107,083
Uniform capitalization............................................... 20,114 43,750
Accrued reserves..................................................... 195,216 442,847
Customer deposits.................................................... 52,128 384,034
Other................................................................ - 202,205
Liabilities:
Prepaid advertising...................................................... (82,984) (440,476)
Other prepaids........................................................... (12,705) (150,220)
---------------- ----------------
Net current deferred tax asset.............................................. $ 215,737 $ 820,789
================ ================
Non Current
Liabilities:
Other.................................................................... $ - $ (39,908)
Depreciation............................................................. (66,880) (147,576)
---------------- ----------------
Net long-term deferred tax liability........................................ $ (66,880) $ (187,484)
================ ================
</TABLE>
A reconciliation of the statutory income tax rate with the company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
<S> <C> <C>
Federal.................................................................. 35.00% 35.00%
State.................................................................... - 1.08%
Other.................................................................... (.05%) 0.03%
--------------- --------------
Total................................................................. 34.95% 36.11%
=============== ==============
</TABLE>
39
<PAGE>
10. EARNINGS PER SHARE
The per share amounts are based on the weighted average number of basic
and dilutive common equivalent shares assumed to be outstanding during the
period of computation. Net income for the calculation of both basic and diluted
earnings per share is the same for all periods.
The calculation of weighted average outstanding shares is as follows:
<TABLE>
<CAPTION>
Average Shares
------------------------------------------------------
1997 1998 1999
----------------- ------------------ -----------------
<S> <C> <C> <C>
Basic shares outstanding...................................... 8,986,655 9,336,525 10,165,617
Common stock equivalents...................................... 524,213 389,433 259,591
----------------- ------------------ -----------------
Diluted shares outstanding.................................... 9,510,868 9,725,958 10,425,208
================= ================== =================
</TABLE>
11. STOCK REPURCHASE PROGRAM
In the third quarter, the Board of Directors authorized the
expenditures of up to $8 million to purchase shares of Direct Focus, Inc. common
stock in open market transactions until December 31, 1999. During the third
quarter, the Company bought back $3.7 million, or 211,200 common shares in the
open market.
12. RELATED-PARTY TRANSACTIONS
The Company incurred royalty expense under an agreement with a
stockholder of the Company of $530,805 in 1997, $1,603,821 in 1998, and
$2,815,116 in 1999, of which $548,211 and $893,563 was payable at December 31,
1998 and 1999, respectively.
The Company incurred investment consulting expense under an agreement
with a director of the Company of $30,000 in 1997, all of which was paid in
1997. This agreement expired in 1997.
13. LITIGATION SETTLEMENT
On July 17, 1999, the Company reached an agreement with a competitor to
settle pending litigation. As a result of the settlement, the Company took a
one-time, after-tax charge of $2.6 million in the second quarter. The Company
made an $8 million cash payment to the competitor, of which $4 million was paid
by insurance.
The Company made no admission of guilt in the settlement and continues
to believe that the competitor's claims were without merit. However, when the
court denied the Company's motions to have the case dismissed before trial, the
Company was faced with a lengthy jury trial and the possibility of a large jury
verdict, including multiple damages as allowed under federal law. Under those
circumstances, the Company determined that it was in the best interest of its
shareholders to settle the case on terms that will have no negative long-term
impact on the Company.
This settlement does not affect the ongoing direct marketing campaign
for the Company's Bowflex home fitness equipment Additionally, in the normal
course of business, the Company is a party to various other legal claims,
actions and complaints. Although it is not possible to predict with certainty
whether the Company will ultimately be successful in any of these legal matters,
or what the impact might be, the
40
<PAGE>
Company believes that disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
14. OPERATING SEGMENTS
The Company's operating segments include its direct products segment
which includes all products marketed directly to consumers through a variety
of direct marketing channels. The Bowflex line of fitness equipment and the
Nautilus Sleep Systems are the principal products in the Company's direct
products segment. The other operating segment is the Nautilus products line
which includes products and operations that are not directly marketed to
consumers. Products in the segment include Nautilus commercial fitness
equipment and Nautilus fitness accessories. Accounting policies used by the
segments are the same as those disclosed in Note 1.
The following table presents information about the Company's two
operating segments (in thousands):
<TABLE>
<CAPTION>
Direct Products Nautilus Products Total
------------------- --------------------- -----------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenues from external customers $101,927 $ 19,091 $121,018
Interest income 1,002 2 1,004
Depreciation and amortization expense 565 618 1,183
Income tax expense 11,084 411 11,495
Segment net income 19,715 628 20,343
Segment assets 47,753 19,557 67,310
Additions to property, plant and equipment 1,379 550 1,929
YEAR ENDED DECEMBER 31, 1998
Revenues from external customers $ 57,297 - $ 57,297
Interest income 527 - 527
Depreciation and amortization expense 302 - 302
Income tax expense 6,708 - 6,708
Segment net income 12,485 12,485
Segment assets 24,373 - 24,373
Additions to property, plant and equipment 1,739 - 1,739
YEAR ENDED DECEMBER 31, 1997
Revenues from external customers $ 19,886 - $ 19,886
Interest income 119 - 119
Depreciation and amortization expense 96 - 96
Income tax expense 1,226 - 1,226
Segment net income 2,421 2,421
Segment assets 7,922 - 7,922
Additions to property, plant and equipment 279 - 279
</TABLE>
15. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) profit sharing Plan in 1999 covering all
employees over the age of 18, who also have three months of service. Each
participant in the 401(k) Plan may contribute up to 15% of eligible compensation
during any calendar year, subject to certain limitations. The 401(k) Plan
provides for Company matching contributions of up to 50% for eligible
contributions for participants who have one year of service. In addition, the
Company may make discretionary contributions. Employees are 100% vested in
41
<PAGE>
the matching and discretionary contributions after four years of service.
Expense for the Plan was $103,793 for the year ended December 31, 1999.
42
<PAGE>
<TABLE>
<CAPTION>
DIRECT FOCUS, INC.
Schedule II
Valuation and Qualifying Accounts
Three years ended December 31, 1999
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- -------------------------------------------- ------------------ ---------------- -------------- --------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997....................................... 12,000 73,000 - 85,000
1998....................................... 85,000 - 45,000 40,000
1999....................................... 40,000 264,727 - 304,727
Sales returns and allowances:
1997....................................... 37,000 248,000 - 285,000
1998....................................... 285,000 315,704 - 600,704
1999....................................... 600,704 186,217 - 786,921
Warranty reserves
1997....................................... 10,000 10,000 - 20,000
1998....................................... 20,000 50,000 - 70,000
1999....................................... 70,000 313,356 - 383,356
</TABLE>
All other financial statement schedules have been omitted since they
are not required, not applicable, or the information is included in the
consolidated financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE," respectively, in the Company's Proxy Statement
for its 2000 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement for its 2000 Annual
Meeting of Shareholders and is incorporated herein by reference.
43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the
caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Proxy
Statement for its 2000 Annual Meeting of shareholders and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See the Consolidated Financial Statements in Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULE
See Schedule II - Valuation and Qualifying Accounts in Item 8.
(a)(3) EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
3.1 Articles of Incorporation, as Amended - Incorporated by reference
to Exhibits 3.1, 3.2 and 3.3 of the Company's Registration
Statement on Form S-1, as filed with the Securities and Exchange
Commission (the "Commission") on March 3, 1999.
3.2 Amended and Restated Bylaws - Incorporated by reference to
Exhibit 3.4 of Amendment No. 2 to the Company's Registration
Statement on Form S-1, as filed with the Commission on April 30,
1999.
10.1 Direct Focus, Inc. Stock Option Plan, as amended - Incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, as filed with the Commission on March 3,
1999.
10.2 Lease Agreement dated September 16, 1992, between Bow-Flex of
America, Inc. and Christensen Group, Inc. - Incorporated by
reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1, as filed with the Commission on March 3, 1999.
10.3 First Amendment to Lease dated September 16, 1992, between
Bow-Flex of America, Inc. and Christensen Group, Inc. -
Incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1, as filed with the Commission
on March 3, 1999.
44
<PAGE>
10.4 Amendment to Bowflex, Inc. Lease Extension, dated August 27,
1996, between Bowflex, Inc. and Ogden Business Park Partnership -
Incorporated by reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-1, as filed with the Commission
on March 3, 1999.
10.5 First Amendment to Lease, dated December 10, 1996, between
Bowflex, Inc. and Ogden Business Park Partnership - Incorporated
by reference to Exhibit 10.5 of the Company's Registration
Statement on Form S-1, as filed with the Commission on March 3,
1999.
10.6 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc.
and Hart Enterprises - Incorporated by reference to Exhibit 10.6
of the Company's Registration Statement on Form S-1, as filed
with the Commission on March 3, 1999.
10.7 Amendment to Lease, dated as of October 20, 1998, between Direct
Focus, Inc. and LeRoy Hart Rentals. Incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form S-1,
as filed with the Commission on March 3, 1999.
10.8 Borrowing Agreement, dated December 16, 1998, between Direct
Focus, Inc. and Seafirst Bank - Incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form S-1,
as filed with the Commission on March 3, 1999.
10.9 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of
America, Inc. and Tessema D. Shifferaw - Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-1, as filed with the Commission on March 3, 1999.
10.10 Royalty Payment Agreement, dated as of June 18, 1992, between
Tessema D. Shifferaw, Brian R. Cook and R.E. "Sandy" Wheeler -
Incorporated by reference to Exhibit 10.10 of the Company's
Registration Statement on Form S-1, as filed with the Commission
on March 3, 1999.
10.11 First Amended and Restated Merchant Agreement dated as January
27, 1999, between Direct Focus, Inc. and Household Bank (SB),
N.A. - Incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1, as filed with the
Commission on March 3, 1999.
10.12 Lease Agreement, dated July 19, 1999, between Direct Focus, Inc.
and Las Vegas Motor Speedway, LLC.
21 Subsidiaries of Direct Focus, Inc. - Incorporated by reference to
Exhibit 21 of the Company's Registration Statement on Form S-1,
as filed with the Commission on March 3, 1999.
23 Consent of Deloitte & Touche LLP
45
<PAGE>
24.1 Power of Attorney for Kirkland C. Aly
24.2 Power of Attorney for C. Reed Brown
24.3 Power of Attorney for C. Rowland Hanson
24.4 Power of Attorney for Paul F. Little
24.5 Power of Attorney for Roger J. Sharp
24.6 Power of Attorney for Roland E. "Sandy" Wheeler
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000 DIRECT FOCUS, INC.
By______________________
Brian R. Cook, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2000:
SIGNATURE TITLE
- ---------- ------
- -------------- President (Principal Executive Officer)
Brian R. Cook
- -------------- Chief Financial Officer and Secretary
Rod W. Rice (Principal Financial and Accounting Officer)
Kirkland C. Aly* Director
- ----------------
Kirkland C. Aly
C. Reed Brown* Director
- -----------------
C. Reed Brown
C. Rowland Hanson* Director
- ------------------
C. Rowland Hanson
Paul F. Little* Director
- -------------------
Paul F. Little
Roger J. Sharp* Director
- -------------------
Roger J. Sharp
Roland E. "Sandy" Wheeler* Director
- -------------------------
Roland E. "Sandy" Wheeler
*By: ________________________ March 29, 2000
Rod W. Rice
ATTORNEY-IN-FACT
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000 DIRECT FOCUS, INC.
By: ______________________________
Brian R. Cook, President
SIGNATURE TITLE
- ---------- -------
/s/ BRIAN R. COOK President (Principal Executive Officer)
- -----------------
Brian R. Cook
/s/ ROD W. RICE Chief Financial Officer and Secretary
- ------------------ (Principal Financial and Accounting
Rod W. Rice Officer)
/s/ KIRKLAND C. ALY Director
- -------------------
Kirkland C. Aly
/s/ C. REED BROWN Director
- -------------------
C. Reed Brown
/s/ C. ROWLAND HANSON Director
- --------------------
C. Rowland Hanson
/s/ PAUL F. LITTLE Director
- ------------------
Paul F. Little
/s/ ROGER J. SHARP Director
- -------------------
Roger J. Sharp
/s/ ROLAND E. "SANDY" WHEELER Director
- ----------------------------
Roland E. "Sandy" Wheeler
<PAGE>
INDUSTRIAL REAL ESTATE LEASE
(Multi-Tenant Facility)
Exclusively for Las Vegas Motor Speedway Research & Development Center
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the Landlord
and Tenant named below. Other Articles, Sections and Paragraphs of the Lease
referred to in this Article One explain and define the Basic Terms and are to
be read in conjunction with the Basic Terms.
SECTION 1.01. Date of Lease: July 19, 1999
SECTION 1.02. Landlord: Las Vegas Motor Speedway, LLC, a Nevada
limited liability company
Address: 7000 Speedway Boulevard
City, State, Zip: Las Vegas, Nevada 89115
SECTION 1.03. Tenant: Direct Focus, Inc.
Address: 2200 NE 65th Avenue
City, State, Zip: Vancouver, Washington 98661
SECTION 1.04. Property: The demised premises (the "Property") is
Building "P", 6857 Speedway Boulevard (the "Building"), as further described
on Exhibit "A-1" attached hereto and incorporated herein by reference. "Net
Rentable Area" of the Property (as described on Exhibit "A-2") is
approximately 53,657 square feet.
SECTION 1.05. Lease Term: Three (3) years beginning on December 1, 1999
or such other date as specified in this Lease, and ending on November 30, 2002.
SECTION 1.06. Rend and Other Charges Payable by Tenant:
(a) Base Rent: $.024 per square foot Twelve Thousand Eight Hundred
Seventy-seven and 68/100's Dollars ($12,877.68) per month for
the first twelve (12) months, as provided in Section 3.01, and
shall be increased EACH TWELVE (12) MONTHS after the
Commencement Date, either (i) in accordance with the increase
in the United States Department of Labor, Bureau of Labor
Statistics, U.S. All Cities Average, Consumer Price Index for
Urban Wage Earners and Clerical Workers (for all items
1982-1984 = 100) (the "Index"), as provided in Section 3.02,
or (ii) fixed of three and one-half (3.5%) percent Cost of
Living Increase annually. If (ii) is completed, then (i) and
Section 3.02 are inapplicable.
(b) Other Periodic Payments: Tenant shall be responsible for
payment of certain charges directly such as personal property
taxes (See Section 4.02), utilities (See Section 4.03), and
certain insurance (See Section 4.04). In addition, Tenant
shall be responsible for payment of Tenant's Proportionate
Share of Building Operating Costs (See Section 4.05). Tenant's
Proportionate Share of Building Operating Costs is currently
estimated to be $0.5 per month for the Property.
SECTION 1.07. Tenant's Proportionate Share: (See Section 4.05)
$2,682.85, (0.37%) (monthly based on 1st twelve
months of Lease Term).
SECTION 1.08. Initial Security Deposit: (See Section 3.03 and
Paragraph 13.03(C)) $14,000.00
SECTION 1.09. Tenant's Guarantor: (If none, so state) Direct Focus,
Inc.
SECTION 1.10. Permitted Uses: (See Section 5.01) Storage Assembly
and Distribution of Consumer Products
SECTION 1.11. Vehicle Parking Spaces Allotted to Tenant: (See
Section 4.05) Reciprocal
SECTION 1.12. Brokers: (See Article Fourteen) (If none, so state)
Lee & Associates Commercial Real Estate Services and
Americana Commercial
SECTION 1.13. Riders: The following Riders are attached to and made
a part of this Lease: (If none, so state) Agency
Disclosure, Hazardous Waste and ADA
ARTICLE TWO: LEASE TERM
SECTION 2.01. Lease of Property for Lease Term. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease. At such time as the Commencement Date shall have been established,
Landlord and Tenant shall execute Exhibit "B" attached hereto and incorporated
herein by reference as a confirmation of said date.
SECTION 2.02. Delay in Commencement. Landlord shall not be liable to
Tenant if Landlord does not delivery possession of the Property to Tenant on the
first date specified in Section 1.05 above. Landlord's non-delivery of the
Property to Tenant on that date shall not affect this Lease or the obligations
of Tenant under this Lease. However, the Commencement Date shall be delayed
until possession of the Property is delivered to Tenant provided the delay is
caused solely by Landlord. The Lease Term shall be extended for a period equal
to the delay in delivery of possession of the Property to Tenant, plus the
number of days necessary to end the Lease Term on the last day of a month. If
delivery of possession of the Property to Tenant is delayed, Landlord and Tenant
shall, upon such delivery, execute Exhibit "B" as confirmation of the
Commencement Date.
SECTION 2.03. Early Occupancy. If Tenant occupies the Property prior to
the Commencement Date with Landlord's permission, Tenant's occupancy of the
Property shall be subject to all of the provisions of this Lease, including,
without limitation, all insurance requirements. Early occupancy of the Property
shall not advance the expiration date of this Lease. Tenant shall pay Base Rent
and all other charges specified in this Lease for the early occupancy period.
SECTION 2.04. Holding Over. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages incurred by landlord from any
delay by Tenant in vacating the Property; including, without limitation, any
claim made by any succeeding tenant based on or resulting from such failure to
surrender. If Tenant does not vacate the Property upon the expiration or earlier
termination of the Lease and Landlord thereafter accepts rent from Tenant,
Tenant's occupancy of the Property shall be a "month-to-month" tenancy only, and
not a renewal hereof or an extension for any further term, subject to all of the
terms of this Lease applicable to a month-to-month tenancy, except that the Base
Rent then in effect shall be increased by fifty percent (50%). Nothing in this
Section 2.04 shall be construed as a consent by Landlord to any holding over by
Tenant and Landlord expressly reserves the right to require Tenant to surrender
possession of the Property upon the expiration of the Lease Term or upon the
earlier termination hereof and to assert any remedy in law or equity to evict
Tenant and/or collect damages in connection with such holding over.
ARTICLE THREE: BASE RENT
SECTION 3.01. Time and Manner of Payment. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.06(a) above together with an estimate of Additional Rent (as hereinafter
defined) for the first full month of the Lease Term. The Base Rent shall be
appropriately prorated for any fractional month on the basis of a thirty (30)
day month. On the first day of the second month of the Lease Term and each month
thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset,
deduction or prior demand. The Base Rent shall be payable at Landlord's address
or at such other place as Landlord may designate in writing.
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Landlord ___________
Tenant _____________
<PAGE>
SECTION 3.02. Cost of Living Increases. The Base Rent shall be
increased at the times specified in Paragraph 1.06(a) above, in proportion to
the increase in the Index which has occurred between the month three (3) months
prior to the first month of the Lease Term and the month three (3) months prior
to the month in which the Base Rent is to be increased. Landlord shall notify
Tenant of each increase by delivering a written statement setting forth the
Indices for the appropriate months, the percentage increase between those two
Indices, and the new amount of the Base Rent. The Base Rent shall not be reduced
from the last previous adjusted Base Rent by reason of any decrease in the
Index. Tenant shall pay the new Base Rent from its effective date until the next
periodic increase. Landlord's notice may be given after the effective date of
the increase since the Index for the appropriate month may be unavailable on the
effective date. In such event, Tenant shall pay Landlord the necessary rental
adjustment for the months elapsed between the effective date of the increase and
Landlord's notice of such increase within ten (10) days after Landlord's notice.
If the format or components of the Index are materially changed after the Date
of Lease, Landlord shall substitute an Index which is published by the Bureau of
Labor Statistics or similar agency and which is most nearly equivalent to the
Index in effect on the Date of Lease. Landlord shall notify Tenant of the
substituted Index, which shall be used to calculate the increase in the Base
Rent unless Tenant objects in writing within fifteen (15) days after receipt of
landlord's notice. If Tenant objects, the substitute Index shall be determined
in accordance with the rules and regulation s of the American Arbitration
Association. The cost of such arbitration shall be borne by Tenant.
SECTION 3.03. Security Deposit Increases. Each time the Base Rent is
increased, Tenant shall deposit additional funds with Landlord sufficient to
increase the Security Deposit to an amount which bears the same relationship to
the adjusted Base Rent as the initial Security Deposit bore to the initial Base
Rent.
SECTION 3.04. Termination; Advance Payments. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, an equitable
adjustment shall be made concerning advance rent, any other advance payments
made by Tenant to Landlord, and accrued real property taxes, and landlord shall
refund the unused portion of the Security Deposit to Tenant or Tenant's
successor.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
SECTION 4.01. Additional Rent and Definitions.
(a) Additional Rent. All charges payable by Tenant other than Base
Rent are called "Additional Rent." Unless this Lease provides
otherwise, all Additional Rent shall be paid with the next
monthly installment of Base Rent. The term "rent" shall mean
Base Rent and Additional Rent.
(b) Definitions. The Property is part of a multi-tenant
industrial/commercial real property development of landlord
(the "Project"). The Project includes the land, the buildings
and all other improvements located thereon, and the Common
Areas (as hereinafter defined). As used in this Lease,
"Building" shall mean the building of which the Property is a
part. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common
use of tenants of the Project and which are not leased or held
for the exclusive use of Tenant or other tenants, including,
but not limited to, parking areas, driveways, sidewalks,
loading areas, access roads, corridors, landscaping and
planted areas. Landlord may from time to time change the size,
location, nature and use of any of the Common Areas, including
converting Common Areas into leasable areas, constructing
additional parking facilities (including parking structures)
in the Common Areas, and increasing or decreasing Common Area
land and/or facilities. Tenant acknowledges that such
activities may result in occasional inconvenience to Tenant
from time to time. Such activities and changes shall be
expressly permitted if they do not materially affect Tenant's
use of the Property.
SECTION 4.02. Taxes.
(a) Payment. Tenant shall be liable for and shall pay before
delinquency (and, upon demand by Landlord, Tenant shall
furnish Landlord with satisfactory evidence of the payment
thereof) all taxes and assessments of whatsoever kind or
nature, and penalties and interest thereon, if any, levied
against Tenant's personal property and any other personal
property of whatsoever kind and to whomsoever belonging
situated or installed in or upon the Property, whether or not
affixed to the realty. Any leasehold improvements in excess of
those provided at Landlord's expense pursuant to this Lease
shall be deemed Tenant's personal property for the purposed of
this Section 4.02. If at any time during the term of this
Lease any such taxes on Tenant's property are assessed as part
of the tax on the real property of which the Property is a
part, then in such event Tenant shall pay to Landlord the
amount of such additional taxes as may be levied against the
real property by reason thereof. Tenant shall use its best
efforts to have Tenant's property assessed separately from
said real property.
(b) Impositions. For the purposes of Section 4.05 of this Lease,
"Impositions" means:
(i) Any real estate taxes, assessments or other charges
assessed against the Building and related structures
and parking facilities and the land on which they are
located.
(ii) All personal property taxes on personal property used
in connection with the Building and related
structures other than taxes payable by Tenant under
Paragraph 4.02(a) hereof and taxes of the same kind
as those described in said Paragraph payable by other
tenants in the Building pursuant to corresponding
provisions of their leases.
(iii) Any and all environmental levies or charges now in
force affecting the building or any portion thereof,
or which may hereafter become effective, including,
but not limited to, parking taxes, levies, or
charges, employer parking regulations and any other
parking or vehicular regulations, levies, or charges
imposed by any municipal, state or federal agency or
authority.
(iv) Any other taxes levied or assessed in addition to or
in lieu of such real or personal property taxes.
(c) Exclusion. Notwithstanding anything to the contrary contained
in this Section 4.02, Tenant shall not be liable for any of
the following taxes and assessments:
(i) Personal property, fixture or equipment taxes
assessed against the property used by Landlord in
operating, managing or leasing the Building;
(ii) Inheritance tax, estate taxes, gift taxes, income
taxes, transfer taxes and excess profit taxes.
(d) Substituted Taxes. If at any time during the term of this
Lease, under the laws of the United, States, Nevada or any
political subdivision thereof, a tax or excise on rents or
other tax (except income tax), however described, is levied or
assessed by the United States, Nevada or said political
subdivision against Landlord on account of any rent reserved
or space leased under this Lease, all such tax or excise on
rents or other taxes shall be paid by Tenant. Whenever
Landlord shall receive any statement or bill for any such tax
or shall otherwise be required to make any payment on account
thereof, Tenant shall pay the amount due hereunder within ten
(10) days after demand therefore accompanied by delivery to
Tenant of a copy of such tax statement, if any.
(e) Right to Contest. Tenant shall have the right to contest any
taxes the payment of which, in whole or in part, is the
obligation of Tenant hereunder. Said right to contest shall
not excuse Tenant of its obligation to pay such taxes as
herein provided. However, in the event that the effect of such
contest is to extend or postpone the date on which such taxes
are delinquent, Tenant may, instead of payment, deposit with
Landlord the amount of such claimed tax payable by Tenant,
together with interest and penalties thereon, pending
resolution of such contest, and within a reasonable time,
deliver to Landlord either (a) evidence satisfactory to
Landlord that such claim of taxability has been withdrawn or
defeated, in which event such deposit shall be returned to
Tenant to the extent it exceeds any monies then payable by
Tenant or (b) an instruction that such claim of taxability has
not been defeated and that such deposit be applied towards
payment of Tenant's obligations therefor. Such deposit shall
not relieve Tenant of the obligation to make any additional
payments for which Tenant would otherwise be responsible
hereunder. Tenant shall indemnify, save and hold Landlord, the
Building, the Project and the Property free, clear and
harmless from any and all liability, loss, costs, charges,
penalties, obligations, liens, expenses, reasonable attorneys'
fees, litigation, judgments, damages, claims and demands of
any kind whatsoever in connection with, arising out of, or by
reason of any contest of taxes pursuant to this Paragraph
4.02(e).
(f) Prorata Share. All taxes and assessments of whatever kind or
nature and penalties and interest thereon, if any, levied
against Tenant, other than Tenant's personal property as set
forth in Paragraph 4.02(a) herein, shall be determined based
upon Tenant's prorata portion of said tax and/or assessment
equal to Tenant's Proportionate Share.
SECTION 4.03. Utilities. Tenant shall be solely responsible for and
shall promptly pay, directly to the appropriate supplier, the cost of all
natural gas, heat (including filter replacement), light (including light
bulbs and ballast replacement), power, sewer service, telephone, water,
refuse disposal and other
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Landlord ___________
Tenant _____________
<PAGE>
utilities and services supplied to the Property. However, if any services or
utilities are jointly metered with other property, Landlord shall make a
reasonable determination of Tenant's proportionate share of the cost of such
utilities and services and Tenant shall pay such share to Landlord as
provided in Section 4.05 hereof.
SECTION 4.04. Insurance Premiums.
(a) Liability Insurance. At all times during the Lease Term,
Tenant shall maintain an policy of comprehensive public
liability insurance, at Tenant's expense, insuring Landlord
against liability arising out of the ownership, use,
occupancy, or maintenance of the Property. The initial amount
of such insurance shall be at least Two Million Dollars
($2,000,000), Combined Single Limit, for injuries to persons
and property, and shall be subject to periodic increase based
upon inflation, increased liability awards, recommendation of
professional insurance advisers, and other relevant factors.
However, the amount of such insurance shall not limit Tenant's
liability nor relieve Tenant of any obligation hereunder. The
policy shall contain cross-liability endorsements, if
applicable, and shall insure Tenant's performance of the
indemnity provisions of Paragraphs 5.04(a), (b), and (e).
Tenant shall, at Tenant's expense, maintain such other
liability insurance as Tenant deems necessary to protect
Tenant, including, without limitation, workers compensation
insurance in the manner required by law.
(b) Hazard and Rental Income Insurance. During the Lease Term,
Landlord shall maintain policies of insurance at Tenant's
expense, covering loss of or damage to the Property in the
full amount of its replacement value. Such policies shall
provide protection against all perils included within the
classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk),
sprinkler leakage, earthquake sprinkler leakage, and inflation
guard endorsement, and any other perils (except flood and
earthquake, unless required by any lender holding a security
interest in the Property) which Landlord deems necessary.
Landlord may, but is not obligated to, obtain insurance
coverage for Tenant's fixtures, equipment or building
improvements installed by Tenant in or on the Property. Tenant
shall, at Tenant's expense, maintain such primary or
additional insurance on its fixtures, equipment and building
improvements as Tenant deems necessary to protect its
interest. During the Lease term, Landlord shall also maintain
a rental income insurance policy at Tenant's expense with loss
payable to Landlord in an amount equal to one year's Base
Rent, Operating Expenses for one year, estimated real property
taxes and insurance premiums. Tenant will not be named in any
such policies carried by Landlord and shall have no right to
any proceeds therefrom. Tenant shall not do or permit to be
done anything which invalidates any such insurance policies.
(c) Payment of Premiums; Insurance Policies. Subject to Section
4.05 of this Lease, Tenant shall pay all premiums for the
insurance p9olicies covering the Property described in
Paragraphs 4.04(a) and (b) within fifteen (15) days after
receipt by Tenant of a copy of the premium statement or other
evidence of the amount due. If the insurance policies
maintained by Landlord cover improvements or real property
other than the Property, Landlord shall also deliver to Tenant
a statement of the amount of the premiums applicable to the
Property showing, in reasonable detail, how such amount was
computed. If the Lease Term expires before the expiration of
the insurance policy period, Tenant's liability for insurance
premiums shall be prorated on an annual basis. All insurance
shall be maintained with companies holding a "General
Policyholder's Rating" of A+ or better, as set forth in the
most current issue of "Best's Insurance Guide." Tenant shall
be liable for the payment of any deductible amount under
Landlord's insurance policies.
(d) Use. Tenant shall not use or occupy, or permit the Property to
be used or occupied in a manner which will increase the rates
of insurance for the Property or the Building, which will make
void or voidable any insurance then in force with respect
thereto, which would constitute a defense to any action
thereon, or which will make it impossible to obtain any
insurance with respect thereto. If, by reason of the failure
of Tenant to comply herewith, any insurance rates for the
Property or the Building become higher than they otherwise
would be, Tenant shall reimburse Landlord, on the first day of
the calendar month next succeeding notice by Landlord to
Tenant of said increase, for that part of all insurance
premiums thereafter paid by Landlord which shall have been
charged because of such failure of Tenant. Any policy of
insurance maintained by Tenant insuring against any risk in,
upon, about or in any way connected with the Property or
Tenant's use thereof shall, to the extent reasonably
obtainable, contain an express waiver of any and all rights of
subrogation thereunder whatsoever against landlord, its
officers, agents and employees.
(e) Additional Insureds. Tenant and landlord shall be named as
insureds (and at landlord's option, any other persons, firms
or corporations designated by Landlord shall be additionally
named insured) under each such policy of insurance which shall
provide that landlord, although named as an insured, shall
nevertheless be entitled to recovery thereunder for any loss
suffered by it, its agents, servants and employees by reason
of Tenant's negligence or the negligence of its subtenant or
assignee.
(f) Cancellation. Every policy required pursuant to this Section
4.04 shall provide that it will not be canceled or modified
except after thirty (30) days' written notice to landlord and
any lender of landlord requesting such notice, and that it
shall not be invalidated by any act or neglect of landlord or
Tenant, nor by occupation of the Property for purposes more
hazardous than permitted by such policy, nor by any
foreclosure or other proceedings relating to the Building, nor
by change in title to the Building or landlord's interest
therein.
(g) Evidence of Insurance. Tenant shall deliver to Landlord and
any lender of Landlord requiring the same original policies or
certificates of insurers satisfactory to Landlord and such
lender, if any, evidencing the existence of all insurance
which is required to be maintained by Tenant hereunder, fully
paid, such delivery to be made (i) promptly after the
execution and delivery hereof and (ii) within thirty (30) days
prior to the expiration of any then current policies. Tenant
shall not obtain or carry separate insurance concurrent in
form or contributing in the event of loss with that required
by this Section 4.04 unless Landlord is a named insured
therein (and, at Landlord's option, any other persons, firms
or corporations designated by Landlord shall be additionally
named insureds). Tenant shall immediately notify Landlord
whenever any such separate insurance is obtained and shall
deliver to Landlord and any lender of Landlord the policies or
certificates evidencing the same.
(h) Primary Insurance - Subrogation. Any insurance provided for
the benefit of landlord by Tenant shall be primary insurance
as respects any claim, loss or liability arising directly or
indirectly from Tenant's operations and any other insurance
maintained by Landlord shall be excess and non-contributory
with the insurance provided hereunder by Tenant. Landlord and
Tenant each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its
property or the property of others under its control, if such
loss or damage is covered by any insurance policy in force
(whether or not described in this Lease) at the time of such
loss or damage. Upon obtaining the policies of insurance
described herein, Landlord and Tenant shall give notice to the
insurance carrier or carriers of the foregoing mutual waiver
of subrogation.
SECTION 4.05. Common Areas; Use and Costs.
(a) Payment. Throughout the term hereof, Tenant will pay to
Landlord monthly in advance in addition to the Base Rent, as
further Additional Rent, a prorata portion of the Building
Operating Costs incurred by landlord during each calendar year
occurring during the term of this Lease. Tenant's prorata
portion of said amount shall equal the percentage which the
number of net rentable square feet of the Property bears to
the total number of net rentable square feet of the Building
("Tenant's Proportionate Share").
(b) Included Costs. "Building Operating Costs" shall include all
costs and expenses of every kind or nature incurred by
Landlord directly in the management, operation, maintenance
and repair of the Building and related structures and Common
Areas in a manner reasonable and appropriate and for the best
interest of the entire Building and that are generally passed
on to tenants in first class buildings in the Las Vegas
metropolitan area under lease provisions similar to this
Section 4.05, as determined and expensed in accordance with
generally accepted accounting principles. Without otherwise
limiting the generality of the foregoing, there shall be
included in such costs and expenses, all Impositions (as
herebefore defined), premiums with respect to public
liability, property damage, workmen's compensation, fire and
other insurance carried on or with respect to the building and
related structures, payroll taxes, unemployment taxes, social
security taxes, cleaning of any facilities, landscaping,
signs, lighting, music systems, janitorial services or common
areas, management fees consistent with other first class
projects in the Las Vegas metropolitan area, reasonable legal
and accounting expenses, supervising of attendants and
employment of other personnel used in such operations,
maintenance and repairs, fuel, energy and utilities (not
separately metered by Tenant), providing for security and fire
protection services, alarm systems and equipment, materials
and supplies, painting, striping, removing of rubbish or
debris, depreciation of rentals of machinery and equipment,
costs of replacement of paving, curbs and walkways, drainage,
repair and maintenance of parking and other common areas, roof
repairs and an administrative fee equal to fifteen percent
(15%) of all of the foregoing excluding costs of Impositions
and insurance.
Initials
Landlord ___________
Tenant _____________
<PAGE>
(c) Payment. The Additional Rent provided to be paid in this
Section 4.05 shall be estimated in advance by Landlord
annually and one-twelfth (1/12) of such estimate shall be paid
in advance by Tenant on the first day of each month without
further demand or any deduction or set-off whatsoever. When
Landlord shall ascertain the actual Building Operating Costs
for a calendar year, Landlord shall so notify Tenant and
Tenant shall pay to Landlord on demand the amount, if any,
equal to the difference between the amount due for such year
pursuant to this Section 4.05 and the amount previously paid
hereunder. Should the estimated payments have exceeded the
actual amount due, said excess shall be held by Landlord and
applied to the next monthly payment of Additional Rent
provided to be paid under this Section 4.05, and, if
necessary, each monthly payment thereafter until fully
exhausted. Tenant shall not be entitled to receive interest on
any Additional Rent paid hereunder. No delay by Landlord in
submitting any statement shall constitute a waiver of
landlord's right to submit such statement and/or receive any
Additional Rent pursuant hereto. The Additional Rent due
hereunder shall be prorated for the calendar year in which
this Lease terminates. Said amount shall be calculated and
paid as herein provided even though said calculation may not
occur until after the end of the term hereof.
(d) Excluded Costs. There shall not be included in Building
Operating Costs the payments (such as salaries or fees) to
Landlord's executive personnel; costs for items that, by
standard accounting practice, should be capitalized, unless
these costs reduce operating expense and are amortized over
the reasonable life of the capital item in accordance with
generally accepted accounting principles and the yearly
amortization does not exceed the actual cost reduction for the
relevant year; depreciation or interest (unless it is related
to allowable capital items); taxes on Landlord's business
(such as income, excess profits, franchise, capital stock,
estate, inheritance); leasing commissions; legal fees not
directly relating to the operation and maintenance of the
entire Building such as landlord and tenant issues; cost to
correct original construction defects; expenses paid directly
by a tenant for any reason (such as excessive utility use);
costs for improving any tenant's space; any repair or work
necessitated by condemnation, fire, or other casualty service
or benefits or both provided to some tenants, but not to
Tenant; and any costs, fines, and the like due to Landlord's
violation of any government rule or authority.
(e) Audit. Tenant shall have the right, upon fifteen (15) days'
written notice to Landlord, to audit, at Tenant's expense,
landlord's books and records as they relate to the Building
Operating Costs. Should said Building Operating Costs be five
percent (5%) higher than said Building Operating Costs as
determined by the audit, Landlord shall be obligated to pay
the reasonable cost of said audit.
(f) Dispute. Should a dispute arise as to the Building Operating
Costs, then the matter shall be determined by arbitration in
accordance with the rules of the American Arbitration
Association then prevailing.
(g) Parking. Tenant, its employees and business invitees shall
have the nonexclusive right, in common with Landlord and all
others to whom Landlord has granted or may hereafter grant
rights, to use Common Areas in or adjoining the Building
(including, but not limited to, the parking lot, walkways and
sidewalks) as are designated from time to time by Landlord,
subject to such rules and regulations as landlord may from
time to time impose, including the designation of specific
areas in which cars operated by Tenant, its employees and
business invitees must be parked. Tenant shall be entitled to
use the vehicle parking spaces in the Project allocated to
Tenant in Section 1.11 of the Lease without paying any
Additional Rent. Tenant's parking shall not be reserved and
shall be limited to vehicles no larger than standard size
automobiles or pickup utility vehicles. Tenant shall not cause
large trucks or other large vehicles to be parked within the
Project except in designated areas and spaces or on the
adjacent public streets. Temporary parking of large delivery
vehicles in the Project may be permitted by the rules and
regulations established by Landlord. Vehicles shall be parked
only in striped parking spaces and not in driveways, loading
areas or other locations not specifically designated for
parking. If Tenant parks more vehicles in the parking area
than the number set forth in Section 1.11 of the Lease, such
conduct shall be a material breach of the Lease. In addition
to Landlord's other remedies under the Lease, Tenant shall pay
a reasonable daily charge for each such additional vehicle.
Landlord may at any time close any Common Area to make repairs
or changes (provided the closure does not unreasonably impede
access to the Leased Property by customers and employees of
Tenant), to prevent the acquisition of public rights in such
areas, or to discourage non-customer parking. Landlord may do
such other acts in and to the Common Areas as in its judgment
may be desirable, including, but not limited to, the
conversion of portions thereof to other uses. Tenant shall
upon request furnish to landlord the license numbers of cars
operated by Tenant and its employees. Tenant shall not at any
time interfere with the right of landlord, other tenants, its
and their agents, employees, servants, contractors,
subtenants, licensees, customers and business invitees to use
any part of the parking lot or other Common Areas. Landlord
assumes no responsibility to police the use of said parking
areas and landlord shall not be liable for the use thereof by
Tenant, landlord's other tenants, its or their agents,
employees, servants, contractors, subtenants, licensees,
customers and/or business invitees or by any other person or
persons, entity or entities whomsoever.
(h) Bulletin Board. The bulletin board or directory of the
Building, if any, shall be provided exclusively for the
display of the names and locations of tenants only and other
matters relating to the Building, and Landlord reserves the
right to exclude any other names therefrom and otherwise limit
the number of listings thereon.
SECTION 4.06. Late Charges. Tenants' failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs is
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment. The parties further agree that the payment of late
charges and the payment of interest provided for in Section 4.07 below are
distinct and separate from one another in that the payment of interest is to
compensate Landlord for the use of Landlord's money by Tenant, while the payment
of a late charge is to compensate Landlord for the additional administrative
expense incurred by Landlord in handling and processing delinquent payments.
SECTION 4.07. Interest on Past Due Obligations. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount until paid.
However, interest shall not be payable on late charges to be paid by Tenant
under this Lease. The payment of interest on such amounts shall not excuse or
cure any default by Tenant under this Lease. If the interest rate specified in
this Lease is higher than the rate permitted by law, the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
ARTICLE FIVE: USE OF PROPERTY
SECTION 5.01. Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.10 above and for no other purpose without
the prior written consent of Landlord.
SECTION 5.02. Manner of Use. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the right of tenants of the development of which the Property is part, or which
constitutes a nuisance or waste. Tenant shall obtain and pay for all permits,
including a Certificate of Occupancy, required for Tenant's occupancy of the
Property and shall promptly take all substantial and non-substantial actions
necessary to comply with all applicable statues, ordinances, rules, regulations,
orders and requirements regulating the use by Tenant of the Property, including
the Occupational Safety and Health Act.
SECTION 5.03. Signs and Auctions. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auction or sheriff's sales at the Property.
SECTION 5.04. Indemnity. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property;
(c) any breach or default in the performance of Tenant's obligations under this
Lease; (d) any misrepresentation of breach of warranty by Tenant under this
Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord
against any such cost or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant hereby
assumes all risk of damage to property or injury to persons in or about the
Property arising from any cause, and Tenant hereby waives all claims in respect
thereof against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct.
SECTION 5.05. Landlord's Access. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties, or for any other purpose Landlord deems
necessary. Landlord shall give Tenant prior notice of such entry, except in the
case of an emergency. Landlord may place customary "For Sale" or "For Lease"
signs on the Property.
Initials
Landlord ___________
Tenant _____________
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SECTION 5.06. Quiet Possession. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE; REPAIRS AND ALTERATIONS
SECTION 6.01 Existing Conditions. Except as set forth in any rider
requiring landlord to perform work on the Property prior to the Commencement
Date, Tenant accepts the Property in its condition as of the execution of this
Lease, subject to all recorded matters, laws, ordinances, and governmental
regulations and orders. Tenant acknowledges that neither Landlord nor any agent
of Landlord has made any representation as to the condition of the Property or
the suitability of the Property for Tenant's intended use. Without limiting the
foregoing, Tenant agrees to abide by and conform to any covenants, conditions
and restrictions or reciprocal easement agreements relating to the Property
described as follows: 6857 Speedway Boulevard, Building "P", Las Vegas, Nevada
89115 (if none, so indicate). Tenant acknowledges receipt of such documents, if
any.
SECTION 6.02. Exception of Landlord from Liability. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of any building of which the
Property is a part, or from other sources or places; or (d) any act or omission
of any other tenant of any building of which the Property is a part. Landlord
shall not be liable for any such damage or injury even though the cause of or
the means of repairing such damage or injury are not accessible to Tenant. The
provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's negligence or willful misconduct.
SECTION 6.03. Tenant's Obligations.
(a) Except as provided for elsewhere herein, Tenant shall keep the
Property in good order, condition and repair during the Lease
Term, including, but without limitation, the exterior and
interior portion of all doors, windows, plate glass, all
plumbing and sewage facilities within the Property (including
maintaining free flow up the main sewer line); interior
fixtures, sprinkler system, walls, floors and ceilings in the
Property; and any work performed by or on behalf of Tenant
hereunder. Tenant shall promptly replace any portion of the
Property or system or equipment in the Property that cannot be
fully repaired, regardless of whether the benefit of such
replacement extends beyond the Lease Term. It is the intention
of Landlord and Tenant that, at all times during the Lease
Term, Tenant shall maintain the property in an attractive,
first-class and fully operative condition.
(b) All of Tenant's obligations to maintain and repair shall be
accomplished at Tenant's sole expense. If Tenant fails to
maintain and repair the Property, Landlord may, on ten (10)
days' prior notice (except that no notice shall be required in
case of emergency) enter the Property and perform such repair
and maintenance on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs so incurred immediately
upon demand.
SECTION 6.04.
(a) Landlord's Obligations. Landlord agrees to keep in good order,
condition and repair the foundations, exterior walls and roof
of the Property and the Building (but excluding the exterior
and interior of all windows, doors, and plate glass) and the
Common Areas, except for reasonable wear and tear and except
for any damage thereto caused by any act or negligence of
Tenant or its agents, employees, servants, contractors,
subtenants, licensees, customers or business invitees.
Landlord shall provide any Common Areas within the Building
with heating, ventilation and air conditioning during the
customary periods of the year therefor during normal business
hours of 8:00 a.m. to 6:00 p.m., Saturdays, Sundays and legal
holidays excluded. If the Building contains an elevator,
Landlord shall provide adequate elevator service to the
Property and the Building. Landlord's obligation to furnish
services shall be conditioned upon the availability of
adequate energy sources. Landlord shall have the right to
reduce heat, lighting and power as required by any mandatory
or voluntary fuel or energy conservation program provided the
voluntary reduction does not adversely affect Tenant's
comfort, use and occupancy of the Property. Landlord may, from
time to time, prescribe rules and regulations for
implementation of this paragraph.
(b) Limitation. Landlord shall not be obligated to perform any
service or to repair or maintain any structure or facility
except as provided in this Section 6.04 and Section 4.05
hereof. Tenant shall be responsible for its own janitorial
services for the Property. Landlord shall not be responsible
for light bulb or ballast replacement. Landlord shall not be
obligated to provide any service or maintenance or to make any
repairs when such service, maintenance or repair is made
necessary because of the negligence or misuse of Tenant,
Tenant's agents, employees, servants, contractors, subtenants,
licensees, customers or business invitees. Landlord reserves
the right to stop any service when Landlord reasonably deems
such stoppage necessary, whether by reason of accident or
emergency, or for repairs or improvements or otherwise.
Landlord shall not be liable for loss or injury however
occurring, through or in connection with or incident to any
stoppage of such services. Landlord shall have no
responsibility or liability for failure to supply any services
or maintenance or to make any repairs when prevented from
doing so by any cause beyond Landlord's control. Landlord
shall not be obligated to inspect the Property and shall not
be obligated to make any repairs or perform any maintenance
hereunder unless first notified of the need thereof in writing
by Tenant. In the event that Landlord shall fail to commence
such repairs or maintenance within twenty (20) days after said
notice, Tenant shall, after further notice to Landlord, make
such repairs or perform such maintenance at Landlord's
expense; provided, however, that the amount of such costs not
exceed the reasonable value of such repairs or maintenance.
Landlord shall not be liable for any loss or damage to persons
or property sustained by Tenant or other persons, which may be
caused by the Building or the Property, or any appurtenances
thereto, being out of repair or by bursting or leakage of any
water, gas, sewer or steam pipe, whether or not it is the
obligation of Landlord to repair the same, by theft, by fire,
oil or electricity, by any act of neglect of any tenant or
occupant of the Building, or of any other person, or by any
other cause of whatsoever nature, unless caused by the
negligence of Landlord.
SECTION 6.05. Alterations, Additions, and Improvements.
(a) Tenant shall not make any alterations, additions, or
improvements to the Property without Landlord's prior written
consent. Landlord may require Tenant to provide demolition
and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any
alterations, additions, or improvements constructed in
violation of this Paragraph 6.05(a) upon Landlord's written
request. All alterations, additions, and improvements will be
accomplished in a good and workmanlike manner, in conformity
with all applicable laws and regulations, and by a contractor
approved by Landlord. Upon completion of any such work, Tenant
shall provide Landlord with as built plans, copies of all
construction contracts, and proof of payment for all labor and
materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property and shall not permit the filing of
any mechanic's lien or other lien in connection with any
alterations, additions, or improvements. Tenant shall give
Landlord at least fifteen (15) days' prior written notice of
the commencement of any work on the Property. Landlord may
elect to record and post notices of non-responsibility on the
Property. If a mechanic's lien or other lien is filed against
the Property or the Project and Tenant fails to timely
discharge such lien, Landlord may, without waiving its rights
and remedies based on such breach of Tenant and without
releasing Tenant from any of its obligations, cause such liens
to be released by any means it shall deem proper, including
payment in satisfaction of the claim giving rise to such lien.
Tenant shall pay to Landlord within thirty (30) days following
notice by Landlord, any sum paid by Landlord to remove such
liens, together with interest at landlord's cost of money from
the date of such payment by Landlord.
SECTION 6.06. Condition upon Termination. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the termination of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the termination of the Lease, except that Tenant may remove any of Tenant's
machinery or equipment which can be removed without material damage to the
Property. Tenant shall repair, at Tenant's expense, any damage to the Property
caused by the removal of any such machinery or equipment. In no event, however,
shall Tenant remove any of the following materials or equipment without
Landlord's prior written consent:
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any power wiring or power panels; lighting or lighting fixtures; wall
coverings; drapes, blinds or other window coverings; carpets or other floor
coverings; heaters, air conditioners or any other heating or air conditioning
equipment; fencing or security gates; or other similar building operating
equipment and decoration.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
SECTION 7.01. Partial Damage to Property. Tenant shall notify Landlord
in writing immediately upon the occurrence of any damage to the Property. If the
Property is only partially damaged and if the proceeds received by Landlord from
the insurance policies described in Paragraph 4.04(b) are sufficient to pay for
the necessary repairs, this Lease shall remain in effect and Landlord shall
repair the damage as soon as reasonably possible. Landlord may elect to repair
any damage to Tenant's fixtures, equipment, or improvements. If the insurance
proceeds received by Landlord are not sufficient to pay the entire cost of
repair, or if the damage was due to a cause not covered by the insurance
policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect to
(a) repair the damage as soon as reasonably possible in which case this Lease
shall remain in full force and effect, or (b) terminate this Lease as of the
date the damage occurred. Landlord shall notify Tenant within thirty (30) days
after receipt of notice of the occurrence of the damage, whether Landlord elects
to repair the damage or terminate the Lease. If Landlord elects to repair the
damage, Tenant shall pay Landlord he "deductible amount" (if any) under
Landlord's insurance policies, and, if the damage was due to an act or omission
of Tenant, Tenant shall pay the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord elects to terminate the
Lease, Tenant may elect to continue this Lease in full force and effect, in
which case Tenant shall repair any damage to the Property and any building in
which the Property is located. Tenant shall pay the cost of such repairs, except
that, upon satisfactory completion of such repairs, Landlord shall deliver to
Tenant any insurance proceeds received by Landlord for the damage repaired by
Tenant. Tenant shall give landlord written notice of such election within ten
(10) days after receiving Landlord's termination notice. If the damage to the
Property occurs during the last six (6) months of the Lease Term, Landlord may
elect to terminate this Lease as of the date the damage occurred regardless of
the sufficiency of any insurance proceeds. In such event, Landlord shall not be
obligated to repair or restore the Property and Tenant shall have no right to
continue this Lease. Landlord shall notify Tenant of its election within thirty
(30) days after receipt of notice of the occurrence of the damage.
SECTION 7.02. Total of Substantial Destruction. If the Property is
totally or substantially destroyed by any cause whatsoever, or if the Building
is substantially destroyed (even though the Property is not totally or
substantially destroyed), this Lease shall terminate as of the date of the
destruction occurred regardless of whether Landlord receives any insurance
proceeds. However, if the Property can be rebuilt within one (1) year after the
date of destruction, Landlord may elect to rebuild the Property at Landlord's
own expense, in which case, this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after the
occurrence of total or substantial destruction. If the destruction was caused by
an act or omission of Tenant, Tenant shall pay Landlord the difference between
the actual cost of rebuilding and any insurance proceeds received by Landlord.
SECTION 7.03. Temporary Reduction of Rent. If the Property is destroyed
or damaged and landlord or Tenant elect to repair or restore the Property
pursuant to the provisions of this Article Seven, any rent payable during the
period of such damage, repair and/or restoration shall be reduced according to
the degree, if any, to which Tenant's use of the Property is impaired. However,
the reduction shall not exceed the sum of one year's payment of Base Rent and
Additional Rent. Except for such possible reduction in Base Rent and Additional
Rent, Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of any damage, destruction, repair, or
restoration of or to the Property.
SECTION 7.04. Waiver. Tenant waives the protection of any statute, code
or judicial decision that grants a tenant the right to terminate a lease in the
event of the substantial destruction of the leased property. Tenant agrees that
the provisions of Section 7.02 above shall govern the rights and obligations of
landlord and Tenant in the event of any substantial or total destruction to the
Property.
ARTICLE EIGHT: CONDEMNATION
SECTION 8.01. Taking. If all or any portion of the Property is taken
under the power of eminent domain or sold under the threat of that power (all of
which are called "Condemnation"), this Lease shall terminate as to the part
taken or sold on the date the condemning authority takes title or possession,
whichever occurs first. If more than twenty percent (20%) of the floor area of
the Building is taken, Landlord may terminate this Lease as of the date the
condemning authority takes title or possession, by delivering written notice to
Tenant within ten (10) days after the receipt of written notice of such taking
or in the absence of such notice, within ten (10) days after the condemning
authority takes possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent shall be reduced in proportion to the reduction
in the floor area of the Property. Any Condemnation award or payment shall be
distributed in the following order: (a) first, to any ground lessor, mortgagee
or beneficiary under a deed of trust encumbering the Property, the amount of its
interest in the Property; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property; and (c) third, to Landlord, the remainder of such
award, whether as compensation for reduction in the value of the leasehold, the
taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall
repair any damage to the Property caused by the Condemnation, except that
Landlord shall not be obligated to repair any damage for which Tenant has been
reimbursed by the condemning authority. If the severance damages received by
Landlord are not sufficient to pay for such repair, Landlord shall have the
right to either terminate this Lease or make such repair at Landlord's expense.
SECTION 8.02. Temporary Taking. If all or any portion of the Property
is condemned or otherwise taken for public or quasi-public use for a limited
period of time, this Lease shall remain in full force and effect and Tenant
shall continue to perform all of the terms, conditions and covenants of this
Lease, including without limitation, the payment of Base Rent and all other
amounts required hereunder. Tenant shall be entitled to receive the entire award
made in connection with any other temporary condemnation or other taking
attributable to any period within the Term. Landlord shall be entitled to the
entire award for any such temporary condemnation or other taking which relates
to a period after the expiration of the Term or which is allocable to the cost
of restoration of the Property. If any such temporary condemnation or other
taking terminates prior to the expiration of the Term, Tenant shall restore the
Property as nearly as possible to the condition prior to the condemnation or
other taking, at Tenant's sole cost and expense; provided that, Tenant shall
receive the portion of the award attributable to such restoration.
ARTICLE NINE: ASSIGNMENT, SUBLETTING, AND SALE BY LANDLORD
SECTION 9.01. Landlord's Consent Required. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by assignment, mortgage, sublease, transfer, operation of law,
or other act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord shall grant or withhold its consent as
provided in Section 9.04 below. Any attempted transfer without consent shall be
void and shall constitute a non-curable breach of this Lease. If Tenant is a
partnership, any cumulative transfer of more than twenty percent (20%) of the
partnership interests shall require Landlord's consent. If Tenant is a
corporation, any change in a controlling interest of the voting stock of the
corporation shall require Landlord's consent.
SECTION 9.02. Tenant Affiliate. Tenant may assign this Lease or
sublease the Property, without Landlord's consent, to any corporation which is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant, (collectively,
"Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in
writing all of Tenant's obligations under this Lease. Proof of an entity's
eligibility to become an assignee or subtenant pursuant to this Section 9.02
shall be promptly furnished to Landlord upon Landlord's request.
SECTION 9.03. No Release of Tenant. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee, without
notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
SECTION 9.04. Landlord's Election. Tenant's request for consent to any
transfer described in Section 9.01 above shall be accompanied by a written
statement setting forth the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and rent and security
deposit payable under any assignment or sublease), and any other information
Landlord deems relevant. Landlord shall have the right (a) to withhold consent,
if reasonable; (b) to grant consent; or (c) if the transfer is a sublease of the
Property or an assignment of this Lease, to terminate this Lease as of the
effective date of such sublease or assignment, in which case Landlord may elect
to enter into a direct lease with the proposed assignee or subtenant.
SECTION 9.05. No Merger. No Merger shall result from Tenant's sublease of the
Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant or
sublandlord thereunder.
SECTION 9.06. Sale by Landlord. In the event of any sale or other transfer of
landlord's interest in the Building, other than a transfer for security purposes
only,
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Tenant _____________
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Landlord shall be automatically relieved of any and all obligations and
liabilities on the part of Landlord accruing from and after the date of such
transfer.
ARTICLE TEN: DEFAULTS; REMEDIES
SECTION 10.01. Covenants and Conditions. Tenant's performance of each
of Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is condition upon such
performance of all covenants and conditions.
SECTION 10.02. Defaults. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance
described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge required to be
paid by Tenant, as and when due;
(c) If Tenant fails to perform any of Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days
after written notice from Landlord; provided that if more than
thirty (30) days are required to complete such performance,
Tenant shall not be in default if Tenant commences such
performance within the thirty (30) day period and thereafter
diligently pursues its completion. However, Landlord shall not
be required to give such notice if Tenant's failure to perform
constitutes a non-curable breach of this Lease. The notice
required by this Paragraph is intended to satisfy any and all
notice requirements imposed by law on Landlord and is not in
addition to any such requirement.
(d) (i) If Tenant or any guarantor hereunder, or any general
partner of Tenant, if Tenant is a partnership, makes a general
assignment or general arrangement for the benefit of
creditors;
(ii) If a petition for adjudication of bankruptcy or for
reorganization or rearrangement is filed by or against Tenant
or any guarantor hereunder, or any general partner of Tenant,
if Tenant is a partnership, and is not dismissed within thirty
(30) days.
(iii) If a trustee or receiver is appointed to take possession
of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession
is not restored to Tenant within thirty (30) days; or
(iv) If substantially all of Tenant's assets located at the
Property or if Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not
discharged within thirty (30) days.
If a court of competent jurisdiction determines that any of the acts
described in this subparagraph (d) is not a default under this Lease, and a
trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfer Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the difference between the rent
(or any other consideration) paid in connection with such assignment or sublease
and the rent payable by Tenant hereunder.
SECTION 10.03. Remedies. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or
demand and without limiting Landlord in the exercise of any right or
remedy which Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Property
to Landlord. In such event, Landlord shall be entitled to
recover from Tenant all damages incurred by Landlord by reason
of Tenant's default, including:
(i) The worth at the time of the award of the unpaid Base
Rent, Additional Rent and other charges which had been earned
at the time of the termination;
(ii) The worth at the time of the award of the amount by which
the unpaid Base Rent, Additional Rent and other charges which
would have been earned after termination until the time of the
award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided;
(iii) The worth at the time of the award of the amount by
which the unpaid Base Rent, Additional Rent and other charge
which would have been paid for the balance of the Lease Term
after the time of award exceeds the amount of such rental loss
that Tenant proves could have been reasonably avoided; and
(iv) Any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's
failure to perform its obligations under the Lease or which in
the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or
expenses incurred by Landlord in maintaining or preserving the
Property after such default, the cost of recovering possession
of the Property, expenses of reletting, including necessary
renovation or alteration of the Property, Landlord's
reasonable attorney's fees incurred in connection therewith,
and any real estate commission paid or payable. As used in
subparts (i) and (ii) above, the "worth at the time of the
award" is computed by allowing interest on unpaid amounts at
the rate of fifteen percent (15%) per annum, or such lesser
amount as may then be the maximum lawful rate. As used in
subpart (iii) above, the "worth at the time of the award" is
computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%). If Tenant shall have abandoned
the Property, Landlord shall have the option of (i) retaking
possession of the Property and recovering from Tenant the
amount specified in this Paragraph 10.03(a), or (ii)
proceeding under Paragraph 10.03(b);
(b) Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant shall
have abandoned the Property. In such event, Landlord shall be
entitled to enforce all of Landlord's rights and remedies
under this Lease, including the right to recover the rent as
it becomes due hereunder;
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state in which the
Property is located.
SECTION 10.04. Abandonment Remedy. Tenant covenants to occupy the
Property throughout the term hereof. Tenant expressly recognizes that Landlord
will be injured should Tenant not comply with this provision and that the amount
of Landlord's damages thereby are incapable of measurement and Tenant,
therefore, expressly covenants to pay to Landlord as liquidated damages for the
breach of this covenant an amount, in addition to all other rents and other
monies due Landlord hereunder, equal to twenty-five percent (25%) of the Base
Rent due for the remainder of the term after such breach.
SECTION 10.05. Cumulative Remedies. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
SECTION 11.01. Subordination. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. However, Tenant's right to quiet possession of the
Property during the Lease Term shall not be disturbed if Tenant pays the rent
and performs all of Tenant's obligations under this Lease and is not otherwise
in default. If any ground lessor, beneficiary or mortgagee elects to have this
Lease prior to the lien of its ground lease, deed of trust or mortgage and gives
written notice thereof to Tenant, this Lease shall be deemed prior to such
ground lease, deed of trust or mortgage whether this Lease is dated prior or
subsequent to the date of said ground lease, deed of trust or mortgage or the
date of recording thereof.
SECTION 11.02. Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgage, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as landlord under this Lease. Tenant waives the protection of any
state or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
SECTION 11.03. Signing of Document. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. Such subordination and attornment
documents may contain such provisions as are customarily required by any ground
lessor, beneficiary under a deed of trust or mortgagee. If Tenant fails to do so
within ten (10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
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SECTION 11.04. Estoppel Certificates.
(a) Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to landlord a written statement
certifying: (i) that none of the terms or provisions of this
Lease have been changed (or if they have been changed, stating
how they have been changed); (ii) that this Lease has not been
canceled or terminated; (iii) the last date of payment of the
Base Rent and other charges and the time period covered by
such payment; (iv) that Landlord is not in default under this
Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other matters as may be reasonably required
by Landlord or the holder of a mortgage, deed of trust or lien
to which the Property is or becomes subject. Tenant shall
deliver such statement to Landlord within ten (10) days after
Landlord's request. Any such statement by Tenant may be given
by Landlord to any prospective purchaser or encumbrancer of
the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within
such ten (10) day period, Landlord, and any prospective
purchaser or encumbrancer, may conclusively presume and rely
upon the following facts: (i) that the terms and provisions of
this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been
canceled or terminated except as otherwise represented by
Landlord; (iii) that not more than one month's Base Rent or
other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event,
Tenant shall be estopped from denying the truth of such facts.
SECTION 11.05. Tenant's Financial Condition. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements s are reasonably required by Landlord to verify the net worth of
Tenant, or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant
shall deliver to any lender designated by Landlord any financial statements
required by such lender to facilitate the financing or refinancing of the
Property. Tenant represents and warrants to Landlord that each such financial
statement is a true and accurate statement as of the date of such statement. All
financial statements shall be confidential and shall be used only for the
purposes set forth herein.
ARTICLE TWELVE: LEGAL COSTS
SECTION 12.01. Legal Proceedings. Tenant shall reimburse landlord, upon
demand, for any costs or expenses incurred by Landlord in connection with any
breach or default of Tenant under this Lease, whether or not suit is commenced
or judgment entered. Such costs shall include legal fees and costs incurred for
the negotiation of a settlement, enforcement of rights or otherwise.
Furthermore, if any action for breach of or to enforce the provisions of this
Lease is commenced, the court in such action shall award to the party in whose
favor a judgment is entered, a reasonable sum as attorneys' fees and costs. Such
attorneys' fees and costs shall be paid by the losing party in such action.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability incurred by Landlord if Landlord becomes
or is made a party to any claim or action (a) instituted by Tenant, or by any
third party against Tenant, or by or against any person holding any interest
under or using the Property by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claims or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs incurred by Landlord in any
such claim or action.
SECTION 12.02. Landlord's Consent. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
SECTION 13.01. Non-Discrimination. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
SECTION 13.02. Landlord's Liability; Certain Duties.
(a) As used in this Lease, the term "Landlord" means only the
current owner or owners of the fee title to the Property or
the leasehold estate under a ground lease of the Property at
the time in question. Each Landlord is obligated to perform
the obligations of Landlord under this Lease only during the
time such Landlord owns such interest or title. Any Landlord
who transfers its title or interest is relieved of all
liability with respect to the obligations of Landlord under
this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all
funds previously paid by Tenant if such funds have not yet
been applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord
and to any ground lessor, mortgagee or beneficiary under any
deed of trust encumbering the Property whose name and address
have been furnished to Tenant in writing. Landlord shall not
be in default under this Lease unless Landlord (or such ground
lessor, mortgagee or beneficiary) fails to cure such
non-performance within thirty (30) days after receipt of
Tenant's notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall
not be in default if such cure is commenced within such
thirty- (30) day period and thereafter diligently pursued to
completion.
(c) Upon the execution of this Lease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in
Section 1.08 above. Landlord may apply all or part of the
Security Deposit to any unpaid rent or other charges due from
Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore
the Security Deposit to its full amount within ten (10) days
after Landlord's written request. Tenant's failure to do so
shall be a material default under this Lease. No interest
shall be paid on the Security Deposit. Landlord shall not be
required to keep the Security Deposit separate from its other
accounts and no trust relationship is created with respect to
the Security Deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it,
the Security Deposit or any balance thereof shall be returned
to Tenant (or, at Landlord's option, to the last assignee of
Tenant's interest hereunder) within fourteen (14) days
following the later of expiration of the Term and surrender of
possession of the Property to Landlord.
SECTION 13.03. Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall be valid and enforceable to the fullest extent permitted
by law.
SECTION 13.04. Interpretation. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or other using the Property with Tenant's expressed or
implied permission. If any of the obligations of Tenant hereunder is guaranteed
by another person or entity, the term "Tenant" shall be deemed to include all of
such guarantors and any one or more of such guarantors.
SECTION 13.05. Incorporation of Prior Agreements, Modification. This
instrument along with any exhibits and attachments or other documents affixed
hereto, or referred to herein, constitutes the entire and exclusive agreement
between Landlord and Tenant with respect to the Property and the estate and
interest leased to Tenant hereunder. This instrument and said exhibits and
attachments and other documents may be altered, amended, modified or revoked
only by an instrument in writing signed by both landlord and Tenant. Landlord
and Tenant hereby agree that all prior or contemporaneous oral understandings,
agreements or negotiations relative to the leasing of the Property are merged
into and revoked by this instrument.
SECTION 13.06. Notices. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. Notices shall be deemed sufficiently
served or given at the time of personal delivery or three (3) days after the
date of mailing thereof. Either party may change its notice address upon written
notice to the other party.
Initials
Landlord ___________
Tenant _____________
<PAGE>
SECTION 13.07. Waivers. All waivers must be in writing and signed by
the waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord, may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
SECTION 13.08. No Recordation. This Lease or a memorandum thereof my
not be recorded without prior written consent from Landlord.
SECTION 13.09. Binding Effect; Choice of Law. This Lease binds any
party who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interest of Tenant's successor are acquired in accordance with the
terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
SECTION 13.10. Corporate Authority; Partnership Authority. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he/she has full authority to do so and that this lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to landlord. If Tenant is a partnership, each
person signing this Lease for Tenant represents and warrants that he/she is a
general partner of the partnership, that he/she has full authority to sign for
the partnership and that this lease binds the partnership and all general
partners of the partnership. Tenant shall give written notice to Landlord of any
general partner's withdrawal or addition. Within thirty (30) days after this
Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded
statement of partnership or certificate of limited partnership.
SECTION 13.11. Joint and Several Liability. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
SECTION 13.12. Force Majeure. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond landlord's control include but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions. It is expressly agreed that Landlord
shall not be obliged to settle any strike to avoid a force majeure event from
continuing.
SECTION 13.13. Execution of Lease. This Lease may be executed in
counterparts, and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. The delivery of this Lease by
Landlord to Tenant shall not be deemed to be an offer and shall not be binding
upon either party until executed and delivered by both parties.
SECTION 13.14. Limitation of Liabilities. The obligations of Landlord
under this Lease do not constitute personal obligations of the individual
partners, trustees, directors, officers or shareholders of Landlord, and Tenant
shall not seek recourse against the individual partners, trustees, directors,
officers or shareholders of Landlord or any of their personal assets for
satisfaction of any liability arising out of this Lease. Tenant's sole remedy
shall be recourse against Landlord's interest in the Property or the Project of
which the Property is a part.
SECTION 13.15. Consents. Whenever the consent of either party is
required hereunder such consent shall not be unreasonably withheld.
SECTION 13.16. Modification for Lender. If, in connection with
obtaining construction, interim or permanent financing for the Project or
Building of which the Property is a part, the lender requests reasonable
modifications to this Lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder or materially
adversely affect the leasehold interest hereby created or Tenant's rights
hereunder.
SECTION 13.17. Mortgagee Protection. Tenant agrees to send by certified
or registered mail to any first mortgagee or first deed of trust beneficiary of
Landlord, whose address has been furnished to Tenant, a copy of any notice of
default served by Tenant on landlord. If Landlord fails to cure such default
within the time provided for in this Lease, such mortgagee or beneficiary shall
have an additional thirty- (30) day period to cure such default. If such default
cannot be cured within the additional thirty- (30) day cure period, then such
mortgage or beneficiary shall have such additional time to cure such default as
is reasonably necessary under the circumstances.
SECTION 13.18. Building Planning. In the event Landlord requires the
Property for use in conjunction with other premises in the Building or for other
reasons connected with the building planning program, upon notifying Tenant in
writing, Landlord shall have the right to move Tenant to other space in the
Building or the Project at Landlord's sole cost and expense, and the terms and
conditions of the original Lease shall remain in full force and effect, save and
excepting that a revised Exhibit "A" shall become part of this Lease and shall
reflect the location of the new space and Article One of this Lease shall be
amended to include and state all correct data as to the new space.
ARTICLE FOURTEEN: BROKERS
The parties recognize that the brokers who negotiated this Lease are
the brokers whose names are stated in Section 1.12 hereof and agree that
Landlord shall be solely responsible for the payment of brokerage commissions to
said brokers, and that Tenant shall have no responsibility therefore. Tenant
shall indemnify and hold Landlord free and harmless against any claims, damages,
costs, expenses, or liability or any nature arising from claims by any other
person or real estate broker claiming a fee through dealings with Tenant arising
out of this Lease.
ARTICLE FIFTEEN: TOXIC AND HAZARDOUS SUBSTANCES, HAZARDOUS MATERIALS,
REGULATED SUBSTANCES AND HAZARDOUS WASTE
SECTION 15.01. Definition. As used in this Section, the term "Hazardous
Waste" means:
(a) Those substances defined as "hazardous substances," "hazardous
materials," "toxic substances," "regulated substances," or
"solid waste" in the Toxic Substance Control Act, 15 U.S.C.
2601 ET. SEQ., as now amended or hereafter amended ("TSCA"),
the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, 42 U.S.C. 9601 ET. SEQ., as now amended
or hereafter amended ("CERCLA"), the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. 6901 ET. seq.,as now amended
or hereafter amended ("RCRA"), the Federal Hazardous
Substances Act, 15 U.S.C. 1261 ET. SEQ., as now amended or
hereafter amended ("FHSA"), the Occupational Safety and Health
Act of 1970, 29 U.S.C. 651 ET. SEQ., as now amended or
hereafter amended ("OSHA"), the Hazardous Materials
Transportation Act, 29 U.S.C. 2801 ET. SEQ., as now amended or
hereafter amended ("HMTA"), and the rules and regulations not
in effect or promulgated hereafter pursuant to each law
referenced above;
(b) Those substances defined as "hazardous waste," "hazardous
material," or "regulated substances" under the Nevada law,
including without limitation, Nevada revised Statues Chapter
459, or in the regulations now existing or hereafter
promulgated pursuant thereto, or in the Uniform fire Code, as
amended;
(c) Those substances listed in the United States Department of
Transportation table or by the Environmental Protection Agency
(or any successor agency) as hazardous substances; and
(d) Such other substances, mixtures, materials and waste which are
regulated under applicable local, state or federal law, or
which are classified as hazardous or toxic under federal,
state or local laws or regulations (all laws, rules and
regulations referenced in Paragraphs (a), (b), (c) and (d) are
collectively referred to as "Environmental Laws").
SECTION 15.02. Tenant's Covenants. Tenant does not intend to and Tenant
will not nor will Tenant allow any other person (including partnerships,
corporations and joint ventures), during the term of this Lease, to manufacture,
process, store, distribute, use, discharge or dispose of any Hazardous Waste in,
under or on the Property, the Building, the Common Areas, or any property
adjacent thereto.
(a) Tenant shall notify Landlord promptly in the event of any
spill or release of hazardous Waste into, on or onto the
Property regardless of the source of the spill or release,
whenever Tenant knows or suspects that such a release has
occurred.
Initials
Landlord ___________
Tenant _____________
<PAGE>
(b) Tenant will not be involved in operations at or near the
Property which could lead to the imposition on the Tenant or
the Landlord of liability or the creation of a lien on the
Property under the Environmental Laws.
(c) Tenant shall, upon twenty-four (24) hours' prior notice by
Landlord, permit Landlord or Landlord's agent access to the
Property to conduct anenvironmental site assessment with
respect to the Property.
SECTION 15.03. Indemnity. Tenant for itself and its successors and
assigns undertakes to protect, indemnify, save and defend landlord, its agents,
employees, directors, officers, shareholders, affiliates, consultants,
independent contractors, successors and assigns (collectively the "Indemnities")
harmless from any and all liability, loss, damage and expense, including
attorney's fees, claims, suits and judgments that Landlord or any other
indemnitee, whether as Landlord or otherwise, may suffer as a result of, or with
respect to:
(a) Any Environmental Law, including the assertion of any lien
thereunder and any suit brought or judgment rendered
regardless of whether the action was commenced by a citizen
(as authorized under the Environmental Laws) or by a
government agency;
(b) Any spill or release of or the presence of any Hazardous Waste
affecting the Property whether or not the same originates or
emanates from the Property or any contiguous real estate,
including any loss of value of the Property as a result of a
spill or release of or the presence of any Hazardous Waste;
(c) Any other matter affecting the Property within the
jurisdiction of the United States Environmental Protection
Agency, the Nevada State Environmental Commission, the Nevada
Department of Conservation and natural Resources, or the
Nevada Department of Commerce, including costs of
investigations, remedial action, or other response costs
whether such costs are incurred by the United States
Government, the State of Nevada, or any indemnitee;
(d) Liability for clean-up costs, fines, damages or penalties
incurred pursuant to the provisions of any applicable
Environmental Law; and
(e) Liability for personal injury or property damage arising under
any statutory or common-law tort theory, including, without
limitation, damages assessed for the maintenance of a public
or private nuisance, or for the carrying of an abnormally
dangerous activity, and response costs.
SECTION 15.04. Remedial Acts. In the event of any spill or release of
or the presence of any hazardous Waste affecting the Property, whether o not the
same originates or emanates from the property or any contiguous real estate,
and/or if Tenant shall fail to comply with any of the requirements of any
Environmental law, Landlord may, without notice to Tenant, as its election, but
without obligation so to do, give such notices and/or cause such work to be
performed at the Property and/or take any and all other actions as landlord
shall deem necessary or advisable in order to remedy said spill or release of
hazardous Waste or cure said failure of compliance and any amounts paid as a
result thereof, together with interest at the rate of fifteen percent (15) per
annum, from the date of payment by Landlord, shall be immediately due and
payable by Tenant to Landlord.
SECTION 15.05. Settlement. Landlord upon giving Tenant ten (10) days
prior notice, shall have the right in good faith to pay, settle or compromise,
or litigate any claim, demand, loss, liability, cost, charge, suite, order,
judgment or adjudication under the belief that it is liable therefore, whether
liable or not, without the consent or approval of Tenant unless Tenant within
said ten (10) day period shall protest in writing and simultaneously with such
protest deposit with Landlord collateral satisfactory to Landlord sufficient to
pay and satisfy any penalty and/or interest which may accrue as a result of such
protest and any judgment or judgments as may result, together with attorneys'
fees and expenses, including, but not limited to, environmental consultants.
ARTICLE SIXTEEN: RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the "Rules and
Regulations," a copy of which is attached hereto and marked "Exhibit "C" and all
reasonable and nondiscriminatory modifications thereof and additions thereto
from time to time put into effect by Landlord. Landlord shall not be responsible
to Tenant for the violation or non-performance by and other tenant or occupant
of the Building or the Project of any of said Rules and Regulations.
ARTICLE SEVENTEEN: GUARANTY
This Lease shall be guaranteed by Direct Focus, Inc. (collectively, the
"Guarantors"). Concurrently with the execution of this Lease, the Guarantors
shall execute and deliver to Landlord a guaranty in the form attached hereto as
Exhibit "D" (the "Guaranty").
Landlord and Tenant have signed this Lease at the place and on the
dates specified adjacent to their signatures below and have initialed all Riders
which are attached to or incorporated by reference in this Lease.
"TENANT"
DIRECT FOCUS, INC.
By: BRIAN R. COOK
-------------------------------------
Name: Brian R. Cook
Title: President/CEO
Date:
------------------------------------
"LANDLORD"
LAS VEGAS MOTOR SPEEDWAY, LLC, a Nevada
limited liability company
By:
------------------------------------
Name: Chris Powell
Title: Executive Vice President & General
manager
Date:
------------------------------------
Initials
Landlord ___________
Tenant _____________
<PAGE>
EXHIBIT "A-2"
NET RENTABLE AREA
The term "Usable Area" shall mean the entire area included within the
Property, being the area bounded by the outside surface of any exterior glass
walls (or the outside surface of the permanent exterior wall where there is no
glass) of the Building bounding such Property, the inside surface of the
exterior walls separating such Property from any public corridors or such other
public areas on such floor, and the centerline of all walls separating such
Property from other areas leased or to be leased to other tenants on such floor.
The term "Net Rentable Area" shall mean the computation of multiplying
the Usable Area of the Property by the quotient of the division of the Rentable
Area of the floor (the area of the floor to the outside surface of the dominant
portion of the permanent outer Building walls, excluding any major vertical
penetration of the floor, by the Useable Area of the floor.
See Tenant improvements attached to be supplied by Landlord at
Landlord's sole cost and expense.
1. LANDLORD TO INSTALL AN 6' WIDE OPENING BETWEEN P103 AND P104.
2. LANDLORD TO INSTALL AN 8' WIDE OPENING BETWEEN P101 AND P102.
3. LANDLORD TO INSTALL WAREHOUSE ACCESS DOOR TO RESTROOM LOCATED AT EAST END OF
BUILDING.
4. LANDLORD TO INSTALL A GRADE LEVEL DOOR 12' X 14' AT BEST POSSIBLE LOCATION.
5. LANDLORD TO INSTALL TWO 3O HOLLOW CORE DOORS WITHIN THE 6' WIDE OPENING
BETWEEN P103 AND P104.
Initials
Landlord ___________
Tenant _____________
<PAGE>
EXHIBIT "B"
MEMORANDUM OF COMMENCEMENT DATE AND ADDITIONS OR DELETIONS TO LEASE
Re: Industrial Real estate Lease dated July 21, 1999, between LAS VEGAS MOTOR
SPEEDWAY, LLC, a Nevada Limited Liability Company ("Landlord") and DIRECT FOCUS
INC., ("Tenant").
In accordance with the Lease, we wish to advise and/or confirm as follows:
1. That the Property has been accepted herewith by the Tenant as
being substantially complete in accordance with the Lease, and
that there is no deficiency in construction.
2. That the Tenant has possession of the Property and
acknowledges that under the provisions of the Lease, the term
of the lease commenced as of December 1, 1999 for a term of
three (3) years ending on November 30, 2002.
3. That in accordance with the Lease, rent commenced to accrue on
December 1, 1999.
4. Souvenirs that would be directly in competition with the
souvenirs sold by the Landlord and/or Las Vegas Motor Speedway
will not be allowed. No hospitality food and/or drink sales
during race events shall be allowed. Any such proposed use
shall be presented to Landlord for approval.
5. TENANT TO HAVE AN OPTION TO TERMINATE THIS LEASE ANYTIME AFTER
THE FIRST TWO YEARS (DECEMBER 1, 2001), UPON
a) WRITTEN NINETY (90) DAYS NOTICE
b) THE TENANT TO PAY LANDLORD CERTIFIED FUNDS
$22,000.00 TO EXERCISE OPTION TO TERMINATE
LEASE.
AGREED AND ACCEPTED
TENANT LANDLORD
Direct Focus Inc. Las Vegas Motor Speedway, LLC, a Nevada
limited liability company
By: By:
-------------------- ----------------------------
Name: Brian R. Cook Name: Chris Powell
Title: President/C.E.O. Title: Executive Vice-President & General Manager
Initials
Landlord ___________
Tenant _____________
<PAGE>
EXHIBIT "C"
RULES AND REGULATIONS
1. No sign, placard, picture, aerial display, balloons, advertisement, name or
notice shall be installed or displayed on any part of the Building or Project
(or within public rights-of-ways adjacent to the Project through the use of
truck signs, sign trailers or similar items) without the prior written consent
of Landlord, which consent of Landlord shall not unreasonably be withheld.
Landlord shall have the right to remove, at Tenant's expense and without notice,
any sign installed or displayed in violation of this rule. All approved signs or
lettering on doors, walls and service areas of the Property shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person chosen by
Landlord.
2. If Landlord objects in writing to any curtains, blinds, shades, screens or
hanging plants or other similar objects attached to or used in connection with
any window or door of the Property, Tenant shall immediately discontinue such
use. No awning shall be permitted on any part of the Property. Tenant shall not
place anything against or near glass partitions or doors or windows which may
appear unsightly from outside the Property.
3. If Tenant requires telegraphic, burglar alarm or similar services, it shall
first obtain Landlord's permission to install such service, and comply with
Landlord's instructions in their installation.
4. Tenant shall not place a load upon any floor of the Property, which exceeds
the load per square foot which such floor was designed to carry and which is
allowed by law. Landlord shall have the right to prescribe the weight, size and
position of all equipment, materials, furniture or other property brought into
the Building. Heavy objects shall, if considered necessary by Landlord, stand on
such platforms as determined by Landlord to be necessary to properly distribute
the weight. Business machines and mechanical equipment belonging to Tenant,
which cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building, shall be placed and maintained by
Tenant, at Tenant's expense on vibration eliminators or other devices sufficient
to eliminate noise or vibration. The persons employed to move such equipment in
or out of the building must be acceptable to Landlord. Landlord will not be
responsible for loss of, or damage to, any such equipment or other property from
any cause, and all damage done to the Building by maintaining or moving such
equipment or other property shall be repaired at the expense of Tenant.
5. Tenant shall not allow the Property to be occupied or used in a manner which
is offensive or objectionable to Landlord or other occupants of the Project by
reason of noise, odors or vibrations.
6. Tenant shall not use any method of heating or air conditioning other than
that supplied by Landlord without the written consent of Landlord.
7. Tenant shall not waste electricity, water or air-conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Building's heating and air-conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Tenant has actual notice, and
shall refrain from attempting to adjust controls other than room thermostats
installed for Tenant's use. Tenant shall keep corridor doors closed, and shall
close window coverings at the end of each business day.
8. Landlord reserves the right, exercisable without liability to Tenant, to
change the name and street address of the Building.
9. Tenant shall close and lock the doors of the Property, including any roll-up
doors in any service areas and entirely shut off all water faucets or other
water apparatus, and electricity, gas or air outlets before Tenant and its
employees leave the Property. Tenant shall be responsible for any damage or
injuries sustained by other tenants or occupants of the Building or by Landlord
for noncompliance with this rule.
10. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed and no
foreign or hazardous substance of any kind whatsoever shall be thrown therein.
The expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the Tenant who, or whose employees or invitees,
shall have caused the same.
11. Tenant shall not use the Property for any business activity other than that
specifically provided for in Tenant's Lease.
12. Tenant shall not install any radio or television antenna, satellite dish,
microwave receiver, cellular telephone transmitter or receiver, loudspeaker or
other device on the rook or exterior walls of the Building. Tenant shall not
interfere with radio or television broadcasting or reception from or in the
Building or elsewhere.
13. Tenant shall not mark, drive nails, screw or drill into the partitions,
woodwork or plaster or in any way deface the Property or any part thereof.
Landlord reserves the right to direct electricians as to where and how telephone
and telegraph wires are to be introduced to the Property. Tenant shall not cut
or bore holes for wires. Tenant shall not affix any floor covering to the floor
of the Property in any manner except as approved by Landlord. Tenant shall
repair any damage resulting from noncompliance with this rule at its own
expense.
14. Tenant shall not install, maintain or operate upon the Property any vending
machines without the prior written consent of Landlord.
15. Canvassing, soliciting and distribution of handbills or any other written
material, and peddling in the Project are prohibited, and each Tenant shall
cooperate to prevent the same.
16. Landlord reserves the right to exclude or expel from the Project any person
who, in Landlord's judgement is intoxicated or under the influence of liquor or
drugs or who is in violation of any of the Rules and Regulations of the
Building.
17. Tenant shall store all its trash and garbage within the Property or within
trash receptacles in the Common Areas nearest the Property. Tenant shall not
place in any trash box or receptacle any material which cannot be disposed of in
the ordinary and customary manner of trash and garbage disposal. All garbage and
refuse disposal shall be made in accordance with directions issued from time to
time by Landlord. Tenant shall be responsible for any additional charges or
expenses arising from the failure to abide by this rule.
18. The Property shall not be used for the storage of merchandise held for sale
to the general public, or for manufacturing of any kind except as specifically
authorized in Tenant's Lease, nor shall the Property be used for lodging or any
improper, immoral or objectionable purpose. No cooking shall be done or
permitted by any tenant on the Property, except that use by Tenant of Insurance
Service Office or Underwritters' laboratory approved microwave and other
equipment for brewing coffee, tea, hot chocolate, and similar beverage shall be
permitted, provided that such equipment and use is in accordance with all
applicable federal, state, county and city laws, codes, ordinances, rules and
regulations.
19. Without the prior written consent of Landlord, Tenant shall not use the
name, picture or representation of the Building in connection with or in
promoting or advertising the business of Tenant except as Tenant's address.
Landlord shall have the right to prohibit any advertising by Tenant which, in
Landlord's opinion, tends to impair the reputation of the Building or its
desirability as a location for offices, and upon written notice from Landlord,
Tenant shall refrain from or discontinue such advertising.
20. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
21. Tenant assumes any and all responsibility for protecting its property from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Property closed.
22. Landlord reserves the right to modify and/or adopt such other reasonable and
nondiscriminatory rules and regulations for the parking areas as it deems
necessary for the operation of the parking area. Landlord may refuse to permit
any person who violates the rules to park in the parking area and any violation
of the rules shall subject the car to removal.
23. Cars must be parked entirely within the stall lines. All directional signs
and arrows must be observed. The speed limit in the Project shall be 5 miles per
hour. Parking is prohibited: (a) in areas not striped for parking, (b) in
aisles, (c) where `no parking' signs are posted, (d) on ramps, (e) in cross
hatched areas, (f) in any manner which will interfere with loading or turning
areas of loading dock areas, and (g) in such other areas as may be designated by
Landlord as reserved for the
Initials
Landlord ___________
Tenant _____________
<PAGE>
exclusive use of others. Washing, waxing, cleaning or servicing of any
vehicle by anyone is prohibited. Tenant shall acquaint all persons to whom
Tenant assigns parking spaces of these Rules and Regulations.
24. Tenant shall not park its vehicles in any parking areas designated by
Landlord as areas for parking by visitors to the Building. Tenant shall not
leave vehicles, trailers, containers or truck-tractors in the Building parking
area. Common Areas, or on adjacent streets, overnight no park any vehicles in
the Building parking areas other than automobiles, motorcycles, motor driven or
non-motor driven bicycles or four-wheeled trucks.
25. Landlord may waive any one or more of these Rules and Regulations for the
benefit of Tenant or any other tenant, but no such waiver by Landlord shall be
construed as a waiver of such Rules and Regulations in favor of Tenant or any
other tenant, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against any or all of the tenants of the Building.
26. Tenants, its employees, agents or associates, or other persons entering or
leaving the Building at any time when so locked, may require to sign the
building register and the watchman or Landlord's agent in charge shall have the
right to refuse admittance to any person into the building without a pass or
other satisfactory identification showing right of access at such time. Landlord
assumes no responsibility and shall not be liable for any damage resulting from
the admission or refusal to admit any authorized or unauthorized person to the
Building. In case of invasion, mob, riot, public excitement or other commotion,
Landlord reserves the right to prevent access to the Building during the
continuance of the same by closing the doors, or otherwise.
27. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part the terms, covenants,
agreements and conditions of any lease of premises in the Building.
28. Landlord reserves the right to make such other reasonable Rules and
Regulations as, in its judgement, may from time to time be needed for safety and
security for care and cleanliness of the Building and for the preservation of
good order therein. Tenant agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are adopted.
29. Tenants shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and guests.
Initials
Landlord ___________
Tenant _____________
<PAGE>
DISCLOSURE STATEMENT
HAZARDOUS WASTE
Landlord/Owner agrees to disclose to Broker and to prospective tenants any and
all information which Landlord/Owner has regarding present and future zoning and
environmental matters affecting the Property and regarding the condition of the
Property, including but not limited to, structural, mechanical and soil
conditions, the presence and location of asbestos, PCD transformers, other
toxic, hazardous or contaminated substances, and underground storage tanks, in,
on or about the Property. Broker is authorized to disclose any such information
to prospective tenants.
AMERICAN WITH DISABILITIES ACT
Please be advised that an owner or tenant of real property may be subject to the
Americans With Disability Act (the ADA) a federal law codified at 42 USC Section
12101 et seq. Among other requirements of the ADA that could apply to your
property, Title III of the ADA requires owners and tenants of "public
accommodations" to remove barriers to access by disabled persons and provide
auxiliary aids and services for hearing, vision and speech impaired persons by
January 26, 1992. The regulations under Title III of ADA are codified at 28 CFR
Part 36.
We recommend that you and your attorney review the ADA and the regulations and
if appropriate, your proposed lease agreement to determine if this law would
apply to you and the nature of the requirements. These are legal issues. You are
responsible for conducting your own independent investigation of these issues.
Lee & Associates cannot give you legal advice on these issues.
Please acknowledge your receipt of this Notice by signing and dating it below.
LANDLORD TENANT
Las Vegas Motor Speedway LLC Direct Focus Inc.
By: By:
------------------------------ ----------------------------------
Chris Powell Brian R. Cook
Title: Executive Vice President Title: President/C.E.O.
and General Manager
By: By:
------------------------------ ----------------------------------
Title: Title:
------------------------------ --------------------------------
Date: Date:
------------------------------ --------------------------------
Initials
Landlord ___________
Tenant _____________
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 333-79643 of Direct Focus, Inc. and subsidiaries on Form S-8 of
our report dated February 21, 2000, appearing in the Annual Report on Form 10-K
of Direct Focus, Inc. and subsidiaries for the year ended December 31, 1999.
DELOITTE & TOUCHE, LLP
Portland, Oregon
March 27, 2000
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KIRKLAND C. ALY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Kirkland C. Aly,
hereby constitutes and appoints Brian R. Cook or Rod W. Rice, severally and not
jointly, his true and lawful attorney-in-fact and agent, for him and his name,
place and stead, in any and all capacities, to sign the Form 10-K of Direct
Focus, Inc., a Washington corporation, for the fiscal year ended December 31,
1999, and any amendments or supplements thereto, and to file this Power of
Attorney and the Form 10-K, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and the NASDAQ
National Market System, granting unto said attorney-in-fact and agent full power
and authority to do and perform each requisite and necessary act to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, may do or cause to be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ Kirkland C. Aly
---------------------------------------
Kirkland C. Aly
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
C. REED BROWN
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, C. Reed Brown,
hereby constitutes and appoints Brian R. Cook or Rod W. Rice, severally and not
jointly, his true and lawful attorney-in-fact and agent, for him and his name,
place and stead, in any and all capacities, to sign the Form 10-K of Direct
Focus, Inc., a Washington corporation, for the fiscal year ended December 31,
1999, and any amendments or supplements thereto, and to file this Power of
Attorney and the Form 10-K, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and the NASDAQ
National Market System, granting unto said attorney-in-fact and agent full power
and authority to do and perform each requisite and necessary act to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, may do or cause to be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ C. Reed Brown
-----------------------------------------
C. Reed Brown
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
C. ROWLAND HANSON
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, C. Rowland
Hanson, hereby constitutes and appoints Brian R. Cook or Rod W. Rice, severally
and not jointly, his true and lawful attorney-in-fact and agent, for him and his
name, place and stead, in any and all capacities, to sign the Form 10-K of
Direct Focus, Inc., a Washington corporation, for the fiscal year ended December
31, 1999, and any amendments or supplements thereto, and to file this Power of
Attorney and the Form 10-K, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and the NASDAQ
National Market System, granting unto said attorney-in-fact and agent full power
and authority to do and perform each requisite and necessary act to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, may do or cause to be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ C. Rowland Hanson
----------------------------------------
C. Rowland Hanson
<PAGE>
EXHIBIT 24.4
POWER OF ATTORNEY
PAUL F. LITTLE
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Paul F.
Little, hereby constitutes and appoints Brian R. Cook or Rod W. Rice,
severally and not jointly, his true and lawful attorney-in-fact and agent,
for him and his name, place and stead, in any and all capacities, to sign the
Form 10-K of Direct Focus, Inc., a Washington corporation, for the fiscal
year ended December 31, 1999, and any amendments or supplements thereto, and
to file this Power of Attorney and the Form 10-K, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission and the NASDAQ National Market System, granting unto said
attorney-in-fact and agent full power and authority to do and perform each
requisite and necessary act to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, may do or cause to
be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ Paul F. Little
----------------------------------------
Paul F. Little
<PAGE>
EXHIBIT 24.5
POWER OF ATTORNEY
ROGER J. SHARP
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Roger J. Sharp,
hereby constitutes and appoints Brian R. Cook or Rod W. Rice, severally and not
jointly, his true and lawful attorney-in-fact and agent, for him and his name,
place and stead, in any and all capacities, to sign the Form 10-K of Direct
Focus, Inc., a Washington corporation, for the fiscal year ended December 31,
1999, and any amendments or supplements thereto, and to file this Power of
Attorney and the Form 10-K, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and the NASDAQ
National Market System, granting unto said attorney-in-fact and agent full power
and authority to do and perform each requisite and necessary act to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, may do or cause to be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ Roger J. Sharp
----------------------------------------
Roger J. Sharp
<PAGE>
EXHIBIT 24.6
POWER OF ATTORNEY
ROLAND E. "SANDY" WHEELER
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Roland E. "Sandy"
Wheeler, hereby constitutes and appoints Brian R. Cook or Rod W. Rice, severally
and not jointly, his true and lawful attorney-in-fact and agent, for him and his
name, place and stead, in any and all capacities, to sign the Form 10-K of
Direct Focus, Inc., a Washington corporation, for the fiscal year ended December
31, 1999, and any amendments or supplements thereto, and to file this Power of
Attorney and the Form 10-K, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and the NASDAQ
National Market System, granting unto said attorney-in-fact and agent full power
and authority to do and perform each requisite and necessary act to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, may do or cause to be done by virtue hereof.
Dated this 27th day of March, 2000.
Signature:
/s/ Roland E. "Sandy" Wheeler
----------------------------------------
Roland E. "Sandy" Wheeler
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIRECT
FOCUS, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,1999 AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,703
<SECURITIES> 0
<RECEIVABLES> 5,049
<ALLOWANCES> 305
<INVENTORY> 9,168
<CURRENT-ASSETS> 52,300
<PP&E> 11,745
<DEPRECIATION> 1,100
<TOTAL-ASSETS> 67,310
<CURRENT-LIABILITIES> 14,091
<BONDS> 0
0
0
<COMMON> 18,602
<OTHER-SE> 34,428
<TOTAL-LIABILITY-AND-EQUITY> 67,310
<SALES> 121,018
<TOTAL-REVENUES> 121,018
<CGS> 34,423
<TOTAL-COSTS> 90,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,838
<INCOME-TAX> 11,495
<INCOME-CONTINUING> 20,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,343
<EPS-BASIC> 2.00
<EPS-DILUTED> 1.95
</TABLE>
