As filed with the Securities and Exchange Commission on August 17, 2023
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIRECT FOCUS,
NAUTILUS, INC.
(Exact
(Exact name of registrant as specified in its charter)
| Washington | 001-31321 | 94-3002667 | ||
| (State or other jurisdiction incorporation or organization) | (Primary Standard Industrial Classification | (I.R.S. Employer Identification No.) |
17750 S.E. 6th Way
Vancouver, Washington 98683
(360) 694-7722
(Address,859-2900
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
ROD W. RICE, CHIEF FINANCIAL OFFICER
DIRECT FOCUS, INC.
2200 NE 65(TH) AVENUE, VANCOUVER, WASHINGTON 98661
Alan Chan
Secretary
17750 S.E. 6th Way
Vancouver, Washington 98683
(360) 694-7722
(Name, address,859-2900
(Address, including zip code, and telephone number, including area code, of agent for service)
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COPIES TO:
BRUCE A. ROBERTSON NOLAN S. TAYLOR
MICHAEL J. KING SAMUEL P. GARDINER
Garvey, Schubert
Copy to:
Keith M. Townsend
King & Barer LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1191 Second Avenue, 18th Floor 1000 Kearns Building
Seattle, WA 98101-2939 136 South MainSpalding LLP
1180 Peachtree Street, Salt Lake City, UT 84101-1685
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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NE
Suite 1600
Atlanta, GA 30309
(404) 572-4600
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / /
box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / /
offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement ornumber of the earlier effective registration statement for the same offering: / /
offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / /
offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 under the Securities Exchange Act of 1934. (Check one):
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |||
| Non-accelerated Filer | ☒ | Smaller Reporting Company | ☒ | |||
| Emerging Growth Company | ☐ | |||||
If delivery of this Prospectus is expectedan emerging growth company, indicate by check mark if the registrant has elected not to be madeuse the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Rule 434,
please checkSection 7(a)(2)(B) of the following box: / /
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CALCULATION OF REGISTRATION FEE
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 17, 2023
PRELIMINARY PROSPECTUS
4,098,362 shares of Common Stock
Issuable upon Exercise of Outstanding Warrants
This prospectus relates to be offered by the Company, 175,000 sharesresale from time to be
offeredtime, by the selling shareholders, andshareholder identified in this prospectus under the caption “Selling Shareholder,” of up to 150,0004,098,362 shares issuableof our common stock, no par value (the “Common Stock”), it may acquire upon the exercise of outstanding warrants, which we refer to as the underwriter's over-allotment option.
(2) Estimated solely for“Warrants.” We issued the purposeWarrants to the selling shareholder in a private placement concurrent with a registered direct offering of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED MARCH 2, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
1,000,000 SHARES
[COMPANY LOGO]
COMMON STOCK
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Our common stock currently trades on the Toronto Stock Exchange under the
symbol DFX. This is our first public offering in the United States. On February
26, 1999, the last reported price3,525,000 shares of our common stock on the TorontoCommon Stock Exchange, stated in U.S. dollars, was $17.82 per share. We have filed an
application for our common stock to be listed on the Nasdaq National Market
under the symbol DFXI.
We are offering 825,000 shares of common stock and the selling shareholders
listed on page 43 of this prospectus are offering an additional 175,000 shares
of common stock. The underwriters also hold an optionpre-funded warrants to purchase up to an additional 150,000aggregate of 573,362 shares of Common Stock, which was completed on June 15, 2023.
The selling shareholder may, from ustime to cover over-allotments,time, sell, transfer or otherwise dispose of any or all of their Common Stock or interests in their Common Stock on any stock exchange, market or trading facility on which the underwriters must exercise within 30 days afterCommon Stock is traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the datetime of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. See “Plan of Distribution” in this prospectus.prospectus for more information. We will not receive any proceeds from the saleresale or other disposition of common stockthe Common Stock by the selling shareholders.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6 OF
THIS PROSPECTUS.
Our common stock will be madeis listed on or about ,
1999, against paymentthe New York Stock Exchange under the symbol “NLS.” On August 16, 2023, the last reported sales price of our common stock on the New York Stock Exchange was $1.00 per share.
You should read this prospectus, together with additional information described under the headings “Information Incorporated by Reference” and “Where You Can Find More Information,” carefully before you invest in immediately available funds.
any of our securities.
An investment in our securities involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully the risks and uncertainties described in the section captioned “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 filed with the Securities and Exchange Commission on June 1, 2023, which is incorporated by reference herein in their entirety, together with other information in this prospectus and the information incorporated by reference herein.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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D.A. DAVIDSON & CO.
The date of this Prospectus is , 1999
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ABOUT THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
As usedPROSPECTUS
We have not authorized anyone to provide you with information that is different from that contained in this prospectus the terms "we," "our," "us," "Direct Focus" and
"the Company" referor in any free writing prospectus we may authorize to Direct Focus, Inc. and its subsidiaries. The names
Bow-Flex-Registered Trademark-, Nautilus-Registered Trademark-, Bowflex
Power-Pro-Registered Trademark-, Motivator-Registered Trademark-,
Versatrainer-Registered Trademark- and Power Rod-Registered Trademark- are
registered trademarks of Direct Focus, Inc. We have filed trademark applications
for the names Direct Focus-TM- and Instant Comfort-TM-. Except where we state
otherwise, we presentbe delivered or made available to you. When you make a decision about whether to invest in our securities, you should not rely upon any information other than the information in this prospectus assuming no exerciseor in any free writing prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful.
For investors outside the United States: We have not taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the underwriters' over-allotment option.
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[Inside coversecurities covered hereby and the distribution of this prospectus includesoutside the following artwork:
AlongUnited States.
This prospectus contains summaries of certain provisions contained in some of the left borderdocuments described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the full text of the actual documents, some of which have been filed or will be filed and incorporated by reference herein. See “Information Incorporated by Reference” and “Where You Can Find More Information” in this prospectus. We further note that the representations, warranties and covenants made by us in any agreement that is filed as an exhibit to any document that is incorporated by reference into this prospectus were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a fold-out page is a shaded column withrepresentation, warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of the Direct
Focus logo atopdate when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the column, beneath which is the following text: "A rapidly
growing, direct marketing company that:". Below the logocurrent state of our affairs.
This prospectus contains and textincorporates by reference certain market data and industry statistics and forecasts that are the
following bullet points: (1) "Developsbased on studies sponsored by us, independent industry publications and markets high-end, branded consumer
products through spot television commercialsother publicly available information. Although we believe these sources are reliable, estimates as they relate to projections involve numerous assumptions, are subject to risks and infomercials, the internetuncertainties, and print media";are subject to change based on various factors, including those discussed under “Risk Factors” in this prospectus and (2) "Recently solidified its presenceunder similar headings in the healthdocuments incorporated by reference herein and fitness market by acquiring the Nautilus product line and brand name."
Adjacent to the first column are three additional columns that depict and
briefly describe the Company's products. Atop the first product column is the
Bowflex logo, beneath which is a picture of a male torso and the following text:
"Fitness, weight loss and muscle building in one convenient, easy to use
machine." Belowtherein. Accordingly, investors should not place undue reliance on this are pictures of the Company's eight Bowflex machines,
labeled "Power Pro," "Power Pro XT," "Power Pro XTL," "Power Pro XTLU,"
"Motiviator," "Motivator XT," "Motivator XTL" and "Versatrainer." Adjacent to
the Bowflex images are the following four bullet points: (1) "Seven strength
training machines designed for home use"; (2) "One strength training machine
designed for wheelchair users"; (3) "Patented design and technology"; and (4) "A
complementary line of accessory equipment." Below these bullet points is a
close-up picture of the Company's Bowflex Power Rods with the following text:
"Each Bowflex fitness machine uses our patented Power Rod-Registered Trademark-
technology and comes with 210 pounds of resistance that can be upgraded to
deliver over 400 pounds of resistance."
Atop the second product column is the Nautilus logo. Under the logo is a
picture of a Nautilus fitness machine and a shaded Nautilus shell in the
background, with the following caption: "The equipment that has been making
America stronger for over 30 years." Below the picture and caption are pictures
of ten Nautilus machines, labeled "Pec Fly," "Lateral Raise," "Abdominal," "Low
Back," "Bench Press," "Compound Row," "Leg Extension," "Triceps Ext.," "Preacher
Curl" and "Seated Leg Curl." Adjacent to these pictures are the following bullet
points: (1) "27 all new strength training machines"; (2) "Patented technology
and design"; (3) "A full free weight equipment line"; and (4) "An extensive
consumer fitness accessory line." Below the bullet points are pictures of three
Nautilus fitness accessories (a handgrip, jump rope and dumbbells) with the
following caption: "In addition to high quality commercial fitness equipment,
our Nautilus business offers an extensive line of consumer fitness accessories."
Atop the third product column is the Instant Comfort logo. Below the logo is
a picture of the Company's airbed mattress in a bedroom setting with the
following caption: "Our airbeds allow users to control the comfort and firmness
of their sleeping surface." Below the picture and caption are pictures of the
Company's airbed product line, labeled "The Ultimate Premier Series," "The
Premier Series," "The Signature Series" and "The Basic Series." Adjacent to
these pictures are the following bullet points: (1) "Four luxury air support
sleep systems available in all standard sizes"; (2) "Patent pending technology
and design"; and (3) "A complementary accessory line." Below the bullet points
are pictures of the product components with the following caption: "Inside our
premier air bed sleep system are dual variable firmness support chambers that
allow users to independently control the firmness on each side of the bed. Our
directly connected remote permits easy adjustments."]
PROSPECTUS information.
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This summary highlights selected information fromcontained elsewhere in this prospectus and the documents incorporated by reference herein. This summary does not contain all of the information that you need toshould consider before purchasingdeciding to invest in our common stock.securities. You should read thethis entire prospectus carefully, including the section entitled “Risk Factors” beginning on page 5 and our consolidated financial statements and the related notes appearing elsewhereand the other information incorporated by reference into this prospectus before making an investment decision.
All references to the terms “Nautilus,” the “Company,” “we,” “us” or “our” in this prospectus refer to Nautilus, Inc., a Washington corporation, and its consolidated subsidiaries, unless the context requires otherwise.
This prospectus and the information incorporated by reference herein contain references to trademarks, service marks and trade names owned by us or other companies. Solely for convenience, trademarks, service marks and trade names referred to in orderthis prospectus and the information incorporated by reference herein, including logos, artwork, and other visual displays, may appear without the ® or ® symbols, but such references are not intended to make an informed investment decision.
DIRECT FOCUS, INC.
Direct Focusindicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, service marks and trade names. We do not intend our use or display of other companies’ trade names, service marks or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Other trademarks, trade names and service marks appearing in this prospectus and the documents incorporated by reference herein are the property of their respective owners.
Overview
Founded in 1986, Nautilus, Inc. and subsidiaries (collectively, “Nautilus” or the “Company”) is a rapidly growing, direct marketing company that develops
and markets high-end, branded consumer products. We market our consumer products
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 ofglobal leader in innovative home fitness solutions, headquartered in Vancouver, Washington and incorporated in the State of Washington in January 1993. We became a publicly traded company in May 1999 and are listed on the New York Stock Exchange and traded under ticker symbol: NLS.
Our diverse brand portfolio includes Bowflex®, Schwinn®, JRNY® and previously Nautilus®, pursuant to which we sell a broad selection of exercise bikes, other cardio equipment, strength training products, and our JRNY® digital fitness platform.
We empower healthier living through individualized connected fitness experiences. We sell our products through two distinct distribution channels, Direct and Retail, which we recently
developedconsider to be separate business segments. Consistent with our North Star strategy, subsequent to our fiscal year end, we sold the Nautilus® brand trademark assets and began testingrelated licenses, which we view as non-core assets.
We also derive a portion of our revenue from the licensing of our brands and intellectual property.
Recent Developments
Registered Direct Offering and Private Placement
On June 15, 2023, we entered into a securities purchase agreement with the selling shareholder for the issuance and sale of 3,525,000 shares of Common Stock and pre-funded warrants to purchase up to an aggregate of 573,362 shares of Common Stock in a registered direct marketing campaignoffering (the “RD Offering”) and warrants (the “Warrants”) to purchase 4,098,362 shares of Common Stock in a concurrent private placement (the “Private Placement”). The public offering price was $1.22 for each share of Common Stock and $1.2199 for each
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pre-funded warrant. The Warrants have an exercise price of $1.35 per share, and are exercisable at any time beginning six months following their original issuance and will expire five and a line of high-end
airbeds. In January 1999, we acquired substantially allhalf years from the original issuance date. The closing of the assetsissuance and sale of Nautilus International, Inc., a manufacturerthese securities was consummated on June 15, 2023. The gross proceeds from the offering, prior to deducting offering expenses and marketerplacement agent fees and expenses payable by us, were approximately $5.0 million. On July 28, 2023, 573,362 shares of Nautilus brand
commercial fitness equipment and consumer fitness accessories. We believeCommon Stock were issued in connection with the exercise of pre-funded warrants that Nautilus is onewere originally issued in the RD Offering. This prospectus covers the resale or other disposition by the selling shareholder of the most recognized brand namesshares of Common Stock issuable upon the exercise of the Warrants.
Corporate Information
We were incorporated in the fitness industry.
We have experienced recent rapid sales and earnings growth, based almost
entirely on the strength of our Bowflex products. In 1998, we generated net
income of $12.5 million on net sales of $57.3 million. This represents a 420.8%
increaseWashington in net income and a 187.9% increase in net sales from 1997, when we
generated net income of $2.4 million on net sales of $19.9 million.
We believe that we have been successful primarily because of our direct
marketing expertise, comprehensive statistical tracking systems, and extensive
management information systems we have developed and refined while directly
marketing our Bowflex products. We believe this expertise and experience enable
us to:
- Develop proprietary, high-end branded product lines with broad consumer
appeal that can be sold effectively through direct marketing channels;
- Develop and implement effective advertising and marketing strategies;
- Convert consumer interest and inquiries into sales;
- Effectively manage our product sourcing, manufacturing and distribution
operations; and
- Provide excellent customer service.
We believe Direct Focus is well positioned to become a leading direct
marketer of high-end consumer products. Key elements of our growth strategy
include the following:
- Continue to grow sales of our highly successful Bowflex line of home
fitness equipment by expanding our direct marketing campaign and
continuing to introduce enhancements and additions for these products;
- Expand our direct marketing campaign for our newly introduced line of
high-end airbeds;
- Develop and directly market additional high-end consumer products;
- Revitalize sales of Nautilus fitness equipment in the commercial
market;
- Capitalize on the well-recognized Nautilus brand name by introducing
and marketing consumer fitness equipment and related products under the
Nautilus name;
- Capitalize on direct marketing and e-commerce opportunities presented
by the internet, which currently generates 10.0% of our net sales; and
- Explore growth opportunities through strategic acquisitions that would
enhance our direct marketing capabilities or our product lines.
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2200 NE 65th Avenue,17750 S.E. 6th Way, Vancouver, Washington 98661, and our98683. Our telephone number is (360) 694-7722.859-2900. Our common stock is traded on the New York Stock Exchange under the trading symbol “NLS.” Our website address is https://www.nautilusinc.com/. We maintain web sites at www.bowflex.com, www.nautilus.com, www.nautilusdirect.comhave included our website address in this prospectus solely as an inactive textual reference. The information contained on the website is not incorporated by reference into this prospectus and www.instantcomfort.com.should not be considered part of this prospectus.
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The Offering
This prospectus relates to the resale or other disposition from time to time by the selling shareholder identified in this prospectus of up to 4,098,362 shares of Common Stock issuable upon exercise of the Warrants. None of the information on our web sites is part of
this prospectus.
THE OFFERING
shares registered hereby are being offered for sale by us.
Common | Up to 4,098,362 shares of Common |
Common Stock outstanding after this | 40,188,340 shares of Common |
Use of | We will not receive any proceeds from the shares of Common Stock offered by the selling shareholder under this prospectus. However, we will receive the proceeds of any cash exercise of the Warrants. We intend to use the net proceeds from any cash exercise of the Warrants for working capital |
Listing Information | Our common stock is listed on the New York Stock Exchange under the symbol “NLS.” |
Risk Factors | An investment in our securities involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully the risks and |
The number of shares of Common Stock to be outstanding upon completion of this offering is based on 9,532,93936,089,978 shares of our Common Stock outstanding as of February 26, 1999. Includes
84,416August 4, 2023 and excludes, as of that date, the following:
2,720,000 shares of common stock issued after December 31, 1998, upon the
exercise of options. Excludes: (a) 550,618 shares ofour common stock issuable upon the exercise of outstanding options;stock options, having a weighted average exercise price of $1.48 per share.
1,400,000 shares of our common stock issuable upon the vesting of outstanding restricted stock units;
1,003,000 shares of our common stock issuable upon the vesting of outstanding performance share units (at target performance levels);
1,150,000 shares of our common stock reserved for issuance in connection with future grants under our 2015 Long-Term Incentive Plan, as amended; and (b) 696,961
750,000 shares of our common stock available for future issuance underin connection with our Employee Stock OptionPurchase Plan. See "Management - Benefit
Plans."
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SUMMARY FINANCIAL INFORMATION
You should read the following summary financial information together with
the financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
YEAR ENDED DECEMBER 31,
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HISTORICAL PRO FORMA(1)
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1994 1995 1996 1997 1998 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 4,415 $ 4,772 $ 8,517 $ 19,886 $ 57,297 $ 76,601
Gross profit.................................. 2,841 3,156 5,914 14,772 44,855 50,211
Operating income (loss)....................... (531) (59) 460 3,616 18,888 15,603
Net income (loss)............................. $ (510) $ 15 $ 693 $ 2,421 $ 12,485 $ 9,756
Basic earnings (loss) per share............... $ (0.06) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 1.04
Diluted earnings (loss) per share............. $ (0.06) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.00
WEIGHTED AVERAGE COMMON SHARES:
Basic outstanding shares...................... 8,132 8,132 8,558 8,987 9,337 9,337
Diluted outstanding shares.................... 8,132 8,132 8,943 9,511 9,726 9,726
DECEMBER 31, 1998
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PRO FORMA
ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Working capital...................................................................... $ 15,682 $
Total assets......................................................................... 24,373
Long-term liabilities................................................................ 67
Total stockholders' equity........................................................... $ 17,651 $
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(1) The unaudited pro forma statement of operations data was prepared as if the
Nautilus acquisition occurred on January 1, 1998. The data reflects certain
adjustments for the effects of purchase accounting, certain assumptions
regarding financing and cash management and an adjustment for income taxes.
The data is not necessarily indicative of what our actual results would have
been if the Nautilus acquisition had occurred on January 1, 1998, nor does
it purport to indicate the future results of our operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Unaudited Pro Forma Combined Results of Operations."
(2) The unaudited pro forma as adjusted balance sheet data assumes that we
consummated the Nautilus acquisition on December 31, 1998. We also adjusted
the data to give effect to this offering and the application of the net
proceeds as described under "Use of Proceeds."
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An investment in our securities involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are notin the only ones facingsection captioned “Risk Factors” contained in our company. OurAnnual Report on Form 10-K for the fiscal year ended March 31, 2023 filed with the Securities and Exchange Commission on June 1, 2023, which is incorporated by reference herein in their entirety, together with other information in this prospectus and the information incorporated by reference herein. If any of these risks actually occurs, our business, financial condition, and results of operations or cash flow could be materially adversely affected by any ofsuffer materially. In such event, the following risks.
The trading price of our common stockCommon Stock could decline, due to any of the following
risks, and you might lose all or part of your investment.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus also containsand the documents incorporated by reference herein and therein include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this prospectus, the accompanying prospectus and the documents incorporated by reference herein and therein. In some cases, you can identify forward-looking statements that involve risks
and uncertainties. Variousby terminology such as “may,” “could,” “will,” “would,” “should,” “could,” “expect,” “plan,” “aim,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing,” “goal,” or the negative of these terms or other comparable terminology. Important factors including the risks described below and
elsewhere in this prospectus,that could cause our actual results to differ materially from those anticipatedour forward-looking statements include, but are not limited to:
our ability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs;
changes in these forward-looking statements.
WE RELY ON SALES OF A FEW KEY PRODUCTS.
Our financial success has resulted almost entirely from marketing our
Bowflex line of homeconsumer fitness equipment, which has generated substantially all of
our historical net sales. We began diversifying our product line in August 1998
when we started test marketing a line of airbeds. We also recently expanded our
presence in the home and commercial fitness equipment markets by acquiring the
Nautilus product line. Despite these efforts, our financial performance remains
dependent on a few products. Any significant diminished consumer interest in our
Bowflex products would adversely affect our business. We could also experience
adverse financial consequences if we fail to sustain market interest in our
Nautilus commercial fitness equipment. We may not be able to develop successful
new products or implement successful enhancements to existing products. Any
products that we do develop or enhance may not generate sufficient sales to
justify the cost of developing and marketing these products.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR EXISTING OPERATIONS AND ANTICIPATED
GROWTH.
We have grown significantly since 1996 when we began the first widespread
direct marketing campaign for our Bowflex home fitness equipment. Specifically,
our net sales increased from $8.5 million in 1996 to $19.9 million in 1997 and
$57.3 million in 1998. We intend to continue to pursue an aggressive growth
strategy. We have also added substantial operations through our Nautilus
acquisition. Our recent growth and our Nautilus acquisition have strained our
management team, production facilities, information systems and other resources.
To manage our growth effectively, we believe that we must:
- Maintain a high level of manufacturing quality and efficiency;
- Continue to enhance our operational, financial and management systems
and controls;
- Effectively expand, train and manage our employee base;
- Effectively integrate the additional distribution center for our
Bowflex products at our Nautilus facilities in Independence, Virginia;
and
- Maintain an effective and efficient customer call center and inventory
control and distribution system.
Our failure to properly manage any of these or other growth-related
challenges could adversely affect our business. We cannot assure you that we
will succeed in effectively managing our existing operations or our anticipated
growth.
WE DEPEND ON FAVORABLE ECONOMIC CONDITIONS THAT STIMULATE CONSUMER SPENDING.
The success of each of our products depends substantially on how consumers
decide to spend their money. Certain trends;
changes in the economy, such asmedia consumption habits of our target consumers or the effectiveness, availability and price of media time consistent with our cost and audience profile parameters;
greater than anticipated costs or delays associated with launch of new products;
weaker than expected demand for new or existing products;
a decline in consumer spending due to unfavorable economic conditions;
softness in the retail marketplace or the availability from retailers of heavily discounted competitive products;
an adverse change in the availability of credit for our customers who finance their purchases;
our ability to pass along vendor raw material price increases and other cost pressures, including increased unemployment, highershipping costs and unfavorable foreign currency exchange rates, tariffs, risks associated with current and potential delays, work stoppages, or supply chain disruptions;
our ability to hire and retain key management personnel;
our ability to effectively develop, market and sell future products;
the availability and timing of capital for financing our strategic initiatives, including being able to raise capital on favorable terms or at all;
changes in the financial markets, including changes in credit markets and interest rates decreased credit availability or higher
inflation, may depress consumer spending. High-end products like ours may be
particularly vulnerable to these changes.
6
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE THE NAUTILUS BUSINESS INTO OUR
OPERATIONS.
In January 1999, we acquired substantially all of the assets of Nautilus
International, including the Nautilus brand name, its product line, and all
existing equipment, inventory and facilities. The acquisition presents
significant challenges for our management team. To be successful, we must
effectively and efficiently integrate the Nautilus business into our
organization, including the Nautilus product line, marketing and distribution
system, production facilities, product development teams, and administrative and
finance personnel and policies. We must also implement appropriate operational,
financial and management systems and controls. We may encounter significant
difficulties in this process, any one or more of which could adverselythat affect our business.
ability to access those markets on favorable terms;
the impact of any future impairments;
our ability to protect our intellectual property;
the introduction of competing products; and
our ability to get foreign-sourced product through customs in a timely manner.
Additional risks relatingfactors that may cause actual results to differ materially from current expectations include, among other things, those set forth in the acquisition include the following:
- Prior to the acquisition, Nautilus International had incurred several
years of declining sales and accelerating losses. Forsection titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 27, 1998, Nautilus International had a net loss of
approximately $14.8 million, ofMarch 31, 2023, which $8.8 million constituted a
one-time impairment charge, on net sales of $20.9 million. Unlessis incorporated by reference into this prospectus, and until we reverse these losses,as may be updated or supplemented by our financial performance will be
materially harmed;
- The key customer base forsubsequent filings with the Securities and Exchange Commission. Any forward-looking statement in this prospectus and the documents incorporated by reference herein and therein reflects our current Nautilus product line includes
commercial purchasers such as health clubs, corporate fitness centers,
hotelsview with respect to future events and rehabilitation clinics. We have little experience marketing
fitness equipmentis subject to commercial purchasers and may be unable to
profitably exploit this opportunity; and
- Our manufacturing experience is generally limited to the assembly of
our Bowflex and airbed products. We intend to continue Nautilus
manufacturing operations, which are much more extensive than our own.
We may be unable to operate Nautilus manufacturing operations in a
cost-effective or timely manner.
Because of these and other risks, the Nautilus acquisition could failuncertainties and assumptions relating to produce the revenue, earningsour operations, results of operations, industry and business synergies thatfuture growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we anticipate, in
which case our business would be adversely affected.
WE DEPEND ON CERTAIN KEY EMPLOYEES.
Our success depends on our key technical, marketing, sales and managerial
personnel. The loss ofassume no obligation to update or revise these forward-looking statements for any of our executive officers or other key personnel
could adversely affect our business. All of our executive officers are under
employment contracts, but none for longer than one year. We currently maintain a
key man life insurance policyreason, even if new information becomes available in the amount of $500,000 on Brian R. Cook, our
President and Chief Executive Officer.
WE FACE REGULATORY RISKS.
We are regulated by various federal, state and local authorities, including
the Federal Trade Commission, the Consumer Products Safety Commission, the
Occupational Safety and Health Administration and the Environmental Protection
Agency. We believe we are in material compliance with all applicable rules and
regulations. If we are incorrect, or if we violate such regulations in the
future, we may be subject to regulatory enforcement efforts. Any regulatory
enforcement efforts, particularly any actions that could interrupt our direct
marketing efforts or result in a product recall, would adversely affect our
business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price for our
common stock. See "Shares Eligible for Future Sale."
7
A UNITED STATES MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP.
Prior to this offering, the sole public market for our common stock has been
the Toronto Stock Exchange. In connection with this offering, we have applied to
have our common stock listed for trading on Nasdaq under the symbol DFXI.
However, an active United States trading market may not develop.
WE FACE YEAR 2000 RISKS.
We may not accurately identify all potential Year 2000 problems within our
business, and the corrective measures that we implement may be ineffective or
incomplete. Any such problems may adversely affect our business. We also
contract with many third parties that could be affected by the Year 2000
problem, such as telephone companies, carriers, manufacturers, suppliers and our
consumer credit facilitator. If any of these or other third parties on which we
rely experience Year 2000 problems, our business would be adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Compliance."
WE HAVE A LIMITED OPERATING HISTORY.
We altered our business plan in 1993 when we began our current direct
marketing activities. Accordingly, we have only a limited operating history on
which you can base your evaluation of our business and prospects. Despite our
recent growth in sales and net income, we cannot assure you that these trends
will continue or that we will remain profitable.
WE FACE RISKS RELATING TO PENDING LITIGATION WITH SOLOFLEX, INC.
Soloflex, Inc., a company that manufactures and directly markets home
fitness equipment, has filed an action against Direct Focus and Randal R.
Potter, our Vice President of Marketing. Soloflex is claiming that we are
improperly using certain slogans and images to market our Bowflex products and
that we have misappropriated some of its marketing trade secrets. We intend to
vigorously defend against these claims, which we believe lack merit. However, we
cannot assure you that we will prevail in this dispute. If Soloflex successfully
prosecutes any of its claims, the resulting monetary damages and/or injunctive
relief could significantly harm our business. See "Legal Proceedings."
WE FACE RISKS RELATING TO OUR RETURN POLICIES.
We offer a six-week satisfaction guarantee on all sales of Bowflex home
fitness equipment and a similar guarantee on our airbeds. During the guarantee
period, any dissatisfied customer may return these products and obtain a full
refund of the purchase price. We have limited operating experience with our
airbeds, which we began test marketing in August 1998. Any material increase in
product returns could adversely affect our business.
WE FACE RISKS RELATING TO OUR PRODUCT WARRANTIES.
We offer the following warranties on our principal products:
- A two- to five-year limited warranty on our Bowflex home fitness
equipment, depending on the model;
- A 20-year limited warranty on our airbeds; and
- A lifetime warranty on all Nautilus structural frames, welded moving
parts and weight stacks; a 120-day warranty on all Nautilus upholstery,
pads, grips and tethered-weight pin connectors; and a one-year warranty
on all other Nautilus parts.
We have conducted extensive testing on our Bowflex products and airbeds,
which we believe enables us to estimate warranty claims over their warranty
periods. However, if our warranty reserves are inadequate to cover future
warranty claims, our business would be adversely affected.
8
WE RELY ON UNINTERRUPTED AND RELIABLE CARRIER SERVICE.
We ship most of our products directly to our customers and have used UPS
almost exclusively to perform this service. Accordingly, we were particularly
vulnerable to the UPS labor dispute that lasted much of the third quarter of
1997. During this period, UPS was unable to deliver our products on time, which
caused delivery delays and required us to find and use acceptable alternative
carriers. As a result, we incurred substantially greater freight charges. We
continue to rely on UPS to deliver our Bowflex products. Any similar labor
difficulties at UPS in the future would adversely affect our business.
OUR MARKET IS INTENSELY COMPETITIVE.
Each market in which we participate is intensely competitive. We believe
that more than 75 companies manufacture and market commercial and home fitness
equipment, and more than 700 companies manufacture and market mattresses, of
which four large manufacturers dominate this market. Important competitive
factors in each of these markets include price, product quality and performance,
diversity of features, warranties and customer service. We believe that our
products are competitive in each of these categories. However, many of our
competitors possess greater financial resources, wider brand name recognition,
broader distribution networks and other resources and characteristics that may
give them a competitive advantage. See "Business - Competition."
WE FACE PRODUCT LIABILITY RISKS.
We are subject to potential product liability claims if our products injure
or allegedly injure our customers or other users. We believe that our insurance
coverage and reserves adequately cover potential product liability claims.
However, we may have inaccurately assessed our product liability risk. In
addition, we may be unable to purchase sufficient insurance coverage at an
affordable price, or our insurers may fail to satisfy their obligations. If our
insurance coverage and reserves are inadequate to cover future product liability
claims, our business may be adversely affected.
WE FACE RISKS ASSOCIATED WITH ANY FUTURE ACQUISITIONS.
We intend to explore growth opportunities through strategic acquisitions
that would enhance our direct marketing capabilities or product lines. We
currently have no agreements, understandings or other arrangements with respect
to any acquisition. If we identify and pursue an acquisition opportunity, our
management may be required to devote a significant amount of time and effort to
the process, which could unduly distract them from our existing operations. If
we complete an acquisition, we expect to face significant challenges integrating
the acquired business into our operations. An acquisition may not produce the
revenue, earnings or business synergies that we anticipate, and an acquired
product or technology may not perform as we expect. Any such difficulties would
adversely affect our business. In addition, the size, timing and integration of
any acquisitions could cause substantial fluctuations in our operating results.
To pay for an acquisition, we may use common stock or cash, including the
proceeds of the offering. See "Use of Proceeds." Alternatively, we may borrow
money from banks or other lenders. If we use common stock, the ownership
interest of our shareholders would be diluted. If we use cash or debt, our
financial liquidity will be reduced.
WE FACE RISKS RELATING TO OUR INTERNATIONAL OPERATIONS.
We currently acquire many of our product components from foreign
manufacturers, which subjects us to the general risks of doing business abroad.
These risks include shipment delays or cancellations, work stoppages, increases
in import duties and tariffs, foreign exchange rate fluctuations, changes in
foreign laws and regulations and political instability. We face similar risks in
distributing our Nautilus commercial products internationally. The loss of
certain foreign suppliers, customers or distributors
9
could adversely affect our business until we can make alternative arrangements.
We currently pay for all of our foreign purchases in United States dollars.
WE DEPEND ON DIRECT MARKETING AND OUR CUSTOMER SERVICE CALL CENTER TO SELL OUR
PRODUCTS.
We depend primarily on 60-second or "spot" television commercials and
television infomercials to market our products. See "Business - Direct
Marketing." Consequently, the price we must pay for our preferred media time
significantly affects our financial performance. If the cost of our preferred
media time increases, it may adversely affect our business. Our dependence on
spot commercials and infomercials also means that our future financial
performance depends substantially on consumers' continued acceptance of and
willingness to purchase products in response to these forms of advertising. We
cannot assure you that this form of advertising will continue to appeal to
consumers.
We receive and process almost all orders for our directly marketed products
through our customer service call center. See "Business - Direct Marketing." Our
call center could stop operating for a number of reasons, including poor
weather, natural disaster, fire or Year 2000 problems. If our backup facilities
and contingency plans are ineffective to handle such problems, we could not sell
our directly marketed products during the affected period. Our business could be
substantially harmed if our call center stops operating for a significant time
period.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We currently hold a number of United States, Canadian and international
patents for certain features of our Bowflex and Nautilus fitness products. We
also have several patent applications pending for certain features of our
Nautilus products and a patent application pending for a certain feature of our
airbed products. We believe that our patents and patent applications are
important factors in maintaining our competitive position in the fitness and
mattress industries. We also rely on a combination of copyright, trademark,
trade secret, unfair competition and other intellectual property laws,
nondisclosure agreements and other protective measures to protect our rights.
Our efforts to protect our intellectual property may be inadequate. Existing
trade secret, copyright and trademark laws offer only limited protection, and
the laws of other countries in which we market or may market our products may
afford little or no effective protection to our intellectual property. In
addition, other companies could independently develop similar or superior
technology without violating our intellectual property rights. Any
misappropriation of our technology or development of competitive technology may
adversely affect our business. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive.
Other third parties may claim that our products or technology infringe their
patents or other intellectual property rights. We could incur substantial costs
defending against such a claim, even if it is invalid, and could distract our
management from our business. A party making such a claim could possibly secure
a judgment requiring us to pay substantial damages. A judgment could also
include a court order that prevents us from selling our products. Any of these
events could adversely affect our business. See "Business - Intellectual
Property."
THE PRICE OF OUR COMMON STOCK MAY DECLINE FOR REASONS UNRELATED TO OUR FINANCIAL
PERFORMANCE.
Like all exchanges, Nasdaq and the Toronto Stock Exchange experience
significant changes in price and volume from time to time for reasons unrelated
to the financial performance of particular companies. These broad market
fluctuations may adversely affect the market price of our common stock. In
addition, the market price of our common stock is likely to be affected by
analysts' recommendations and predictions with respect to our business.
10
6
USE OF PROCEEDS
We expect to receive approximately $ in net proceeds from the sale of
the 825,000 shares of common stock in this offering. If the underwriters fully
exercise their over-allotment option, we expect to receive an additional $
in net proceeds. In calculating estimated net proceeds, we assume an offering
price of $ per share and take into account the underwriting discount and
estimated offering expenses.
We will not receive any proceeds from the sale of shares of Common Stock offered by the selling shareholders.shareholder under this prospectus. However, we will receive the proceeds of any cash exercise of the Warrants. If all of the Warrants were exercised for cash, we would receive aggregate proceeds of approximately $5.5 million. We intend to use the net proceeds from any cash exercise of the Warrants for working capital and general corporate purposes.
7
This prospectus covers the resale or other disposition by the selling shareholder identified in the table below of up to an aggregate of 4,098,362 shares of Common Stock issuable upon the exercise of our outstanding Warrants.
The selling shareholder acquired its securities in the transactions described above under the heading “Prospectus Summary – Recent Developments – Registered Direct Offering and Private Placement.”
The Warrants held by the selling shareholder contain limitations which prevent the holder from exercising such Warrants if such exercise would cause the selling shareholder, together with certain related parties, to beneficially own a number of shares of Common Stock which would exceed 4.99% of our then outstanding Common Stock following such exercise.
The table below sets forth, as of August 16, 2023, the following information regarding the selling shareholder:
the name of the selling shareholder;
the number of shares of Common Stock owned by the selling shareholder prior to this offering, without regard to any beneficial ownership limitations contained in the Warrants;
the number of shares of Common Stock to be offered by the selling shareholder in this offering;
the number of shares of Common Stock to be owned by the selling shareholder assuming the exercise of all of the Warrants and the sale of all of the shares of Common Stock covered by this prospectus; and
the percentage of our issued and outstanding Common Stock to be owned by the selling shareholder assuming the exercise of all of the Warrants and the sale of all of the shares of Common Stock covered by this prospectus based on the number of shares of Common Stock issued and outstanding as of August 4, 2023.
Except as described above, the number of shares of Common Stock beneficially owned by the selling shareholder has been determined in accordance with Rule 13d-3 under the Exchange Act and includes, for such purpose, shares of Common Stock that the selling shareholder has the right to acquire within 60 days of August 4, 2023.
All information with respect to the Common Stock ownership of the selling shareholder has been furnished by or on behalf of the selling shareholder. We believe, based on information supplied by the selling shareholder, that except as may otherwise be indicated in the footnotes to the table below, the selling shareholder has sole voting and dispositive power with respect to the shares of Common Stock reported as beneficially owned by it. Because the selling shareholder identified in the table may sell some or all of the shares of Common Stock beneficially owned by it and covered by this prospectus, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares of Common Stock, no estimate can be given as to the number of shares of Common Stock available for resale hereby that will be held by the selling shareholder upon termination of this offering primarily for additional
working capital, capital equipment purchases and other general corporate
purposes, including increased direct marketing expenditures for our existing
products, increased development expenditures for new consumer products, and
capital expenditures made in the ordinary course of our business. Specifically,
we anticipate higher working capital needs as we grow the Nautilus consumer
product business. We also expect to direct additional funds toward the
development of new consumer products under the Nautilus brand name. As we
continue to grow sales of our Bowflex and airbed products, we anticipate adding
a second product assembly and distribution center in the Western United States.offering. In addition, wethe selling shareholder may use a portionhave sold, transferred or otherwise disposed of, the net proceeds for strategic acquisitions
that would enhance our direct marketing capabilities or our product lines.
Although we evaluate potential acquisitionsmay sell, transfer or otherwise dispose of, at any time and from time to time, wethe Common Stock they beneficially own in transactions exempt from the registration requirements of the Securities Act after the date on which they provided the information set forth in the table below. We have, therefore, assumed for the purposes of the following table, that the selling shareholder will sell all of the Common Stock owned beneficially by it that are covered by this prospectus, but will not currently negotiatingsell any acquisitions, nor do we haveother shares of Common Stock that they presently own. The
selling shareholder has not held any specific oralposition or written plans, agreementsoffice, or commitments to enter intohas otherwise had a material relationship, with us or consummate any such
transactions.
The amounts that we actually expend for working capital purposes will vary
significantly depending upon a number of factors, including future revenue
growth, if any, the amount of cash we generate from operations and the progress of our product development efforts. Assubsidiaries within the past three years other than as a result of the ownership of our Common Stock or other securities.
Name of Selling Shareholder | Shares Owned prior to Offering | Shares Offered by this Prospectus | Shares Owned after Offering | Percentage of Shares Beneficially Owned after Offering (1) | ||||||||||||
Armistice Capital Master Fund Ltd. (2) | 7,338,362 | 4,098,362 | 3,240,000 | 8.06 | % | |||||||||||
8
| (1) | Percentage is based on 36,089,978 shares of Common Stock outstanding as of August 4, 2023, assuming the exercise of all of the Warrants and the resale of all of the shares of Common Stock covered by this prospectus. |
| (2) | Consists of (i) 3,240,000 shares of Common Stock, and (ii) Warrants to purchase up to 4,098,362 shares of Common Stock (the “Warrants”). The exercise of the Warrants held by Armistice Capital Master Fund Ltd. (the “Master Fund”) are subject to a 4.99% beneficial ownership limitation, which prohibits the Master Fund from exercising any portion of those Warrants to the extent that, following such exercise, the Master Fund would own a number of shares of our Common Stock exceeding the applicable beneficial ownership limitation. The number of shares of Common Stock listed in the second and fourth columns are based on the number of shares of Common Stock and Warrants held by the Master Fund, assuming exercise in full of the Warrants and without regard to any limitations on exercise. The securities are directly held by the Master Fund, a Cayman Islands exempted company, and may be deemed to be indirectly beneficially owned by Armistice Capital, LLC (“Armistice”), as the investment manager of the Master Fund; and (ii) Steven Boyd, as the Managing Member of Armistice. Armistice and Steven Boyd disclaim beneficial ownership of the reported securities except to the extent of their respective pecuniary interest therein. The address of Armistice Capital Master Fund Ltd. is c/o Armistice Capital, LLC, 510 Madison Avenue, 7th Floor, New York, NY 10022. |
9
Authorized Capital Shares
Our authorized capital shares consist of 75,000,000 shares of Common Stock stock, no par value per share. As of August 4, 2023, we will retain broad discretion
in allocatinghad outstanding 36,089,978 shares of common stock.
Common Stock
Voting Rights
The holders of Common Stock are entitled to one vote per share on all matters voted on by the net proceedsshareholders, including the election of this offering. Pending the uses described
above, we will invest the net proceeds in short-term, interest-bearing,
investment grade securities.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERSdirectors. Our common stock has been listed on the Toronto Stock Exchange in the
Provincedoes not have cumulative voting rights.
Dividend Rights
The holders of Ontario, Canada, since January 26, 1993, and currently trades under
the symbol DFX. Currently, there is no established trading market for our common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors in its discretion out of funds legally available for the United States. However, we have applied to have our common stock
listed on Nasdaq under the symbol DFXI.
The following table summarizes the highpayment of dividends.
Fully Paid and low sales prices for our common
stock as reported on the Toronto Stock Exchange during the preceding two years.
The prices listed below are in Canadian dollars, the currency in which they were
quoted, and in United States dollars, which we calculated based on the currency
exchange rate in effect on the date of each high and low quarterly price.
All outstanding shares of our common stock were issuedare fully paid and outstandingnon-assessable.
Liquidation Rights
The holders of common stock will share ratably in all assets legally available for distribution to our shareholders in the event of dissolution.
Anti-Takeover Effects of Washington Law and heldour Articles of record by 81 shareholders. See "Shares Eligible for
Future Sale."
PaymentIncorporation and Bylaws
Certain provisions of any future dividends is at the discretionWashington law, our Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) and our Amended and Restated Bylaws, as amended (the “Bylaws”) contain provisions that may delay, defer or discourage another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed, in part, to encourage persons seeking to acquire control of us to first negotiate with 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 anticipate
paying any cash dividends in the foreseeable future. Instead, we intend to
retain and direct any future earnings to fund our anticipated expansion and
growth.
CAPITALIZATION
The following table describes our capitalization as of December 31, 1998 (1)
on an actual basis, and (2) on an as adjusted basis to reflect our sale of
825,000 shares of common stock under this prospectus at an assumed public
offering price of $ per share (taking into account estimated underwriting
discounts and offering expenses). You should read this information in
conjunction with our financial statements and notes thereto, which appear
elsewhere in this prospectus:
Anti-Takeover Provisions of Washington Law
Certain provisions of Washington law could have a historythe effect of generating favorable responses
for our existing products. Our initial objective is to determine their marketing
appeal and what, if any, creativedelaying, deferring, 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 componentdiscouraging another person from acquiring control of our direct marketing success is our
ability to purchase quality media time at an affordable price. We currently
purchase the majority of our media time on cable networks, throughcompany. These provisions, which we
reach more than 70 million homes. We recently began testing the effectiveness of
our spot commercials and infomercials on broadcast networks, through which we
hope to reach a broader viewing audience.
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
25
believe that 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 that 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. In 1998, approximately 5.8% of our Bowflex product inquiries and
10.0% of our net sales were initiated through our Bowflex web site, and we
expect the internet to become an increasingly important part of our direct
marketing strategy. In addition, 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.
We currently operate two direct marketing-oriented web sites: (1)
www.bowflex.com, which focuses on our Bowflex line of home exercise equipment;
and (2) www.instantcomfort.com, which focuses on our newly introduced line of
high-end airbeds. In an effort to expand and enhance our web presence, we
recently added dedicated web site development and management personnel. Our
immediate internet-related goals include improving the e-commerce capabilities
at our Bowflex web site and adding e-commerce capabilities to our airbed web
site. We also plan to redesign our web sites to enhance their role as a medium
for finalizing sales. Previously, 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. We now believe that we
can achieve a balance between our twin 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 advertise our directly marketed products in various print
media when we believe that such advertising can effectively supplement our
direct marketing campaigns. For example, we have advertised our Bowflex home
fitness equipment 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 begun to
reduce the print media advertising expenditures for our Bowflex products. In
contrast, our experience to date suggests that print media can play an effective
role in the direct marketing campaign for our line of airbeds. Consequently, we
intend to devote a higher portion of our overall advertising budget for our
airbed products to print media. 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 and airbed products. 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
26
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.
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 our Bowflex and
airbed products. We arrange this financing through a consumer credit company
with whom we recently signed a new non-recourse consumer financing agreement.
Under this arrangement, our customer service agents can obtain financing
approval in a few minutes over the phone and, if a customer is approved,
immediately ship product without the need for cumbersome paperwork. The consumer
finance company pays us promptly after we submit 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 1998,
approximately 39.7% of our net sales were financed in this manner, and we
believe that 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 various distributors.
We market and sell our Nautilus fitness accessories and consumer fitness
equipment through independent sales representatives.
DIRECT SALES FORCE
We recently 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
domestic market position of our existing Nautilus product line, which we sell
principally to health clubs, large hotels, assisted living facilities and the
government. 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 distributors.
OTHER SELLING AND MARKETING CHANNELS
We intend to implement additional sales and marketing strategies for our
Nautilus commercial equipment, including the following:
- Offer innovative financing, such as private label leasing that allows
pre-approved commercial customers to lease fitness equipment;
- Hire inside sales personnel to supplement and expand the selling
capabilities of our direct sales force;
- Implement a targeted mailing program directed at our commercial
customers; and
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- Expand the Nautilus trade-in program to induce existing commercial
customers to upgrade their equipment. We intend to donate much of the
used equipment to schools and other youth-oriented organizations and
facilities, which we hope will facilitate future growth and stability
as children grow up using Nautilus fitness equipment.
OUR 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 all Bowflex machines 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 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 approximately 93.3% of our net sales in 1998. 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 FITNESS ACCESSORIES
We currently offer a broad range of 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. We also offer the Nautilus 2ST for Women, which is
designed to meet the special needs of the female body and offers a safer, more
productive workout for women. In addition, we offer a line of specially designed
Nautilus 2ST equipment that we market principally to medical therapy and
rehabilitation clinics.
The key component of each Nautilus machine is its "cam," 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 that
is designed to accommodate and maximize the benefits associated with the motion
required for that machine.
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Our Nautilus business also distributes a line of quality consumer fitness
accessories that includes the following products:
- - Push-up bars - Ankle/wrist weights
- - Toning bands - Jump ropes
- - Cushioned dumbbells - Workout mats
- - Toning wheels - Wrist and knee wraps
- - Step tubes - Waist wraps
- - Hand grips - Audio packs
AIRBEDS
In August 1998, we began test marketing a line of high-end airbeds under the
brand name "Instant Comfort." The key feature of each airbed 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 and 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
airbeds favorably differentiate our airbeds from conventional innerspring
mattresses.
We currently offer three airbed models:
- The Premier Series is our top-of-the-line airbed 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
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 $850 for a twin to $1500
for a California king, excluding foundation. Customers can also
purchase an upgraded comfort layer of visco-elastic foam that conforms
to a user's body.
- 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 $500 for a twin to $1100 for a
California king, excluding foundation.
- The Basic Series is our entry-level airbed, 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 $250 for a twin to $700 for a California
king, excluding foundation.
We offer foundations that are specifically designed to support and enhance
the performance of our airbeds. 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 that the majority of
our airbed customers will order a complete sleep system, which includes both a
mattress and a foundation. Our foundations currently range in price from $150
for a twin to $350 for a California king.
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NEW PRODUCT DEVELOPMENT AND INNOVATION
DIRECT MARKETING PRODUCTS
We develop direct marketing products either from internally generated ideas
or 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
its direct marketing potential by continuing to research the product and its
probable market and by conducting blind product and focus group studies. If the
results are positive and we do not own the product, we will then attempt to
acquire the product outright or obtain rights to the product through a licensing
arrangement. 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. See "Direct Marketing."
NAUTILUS COMMERCIAL FITNESS PRODUCTS
Our Nautilus commercial product development group develops and refines our
commercial fitness products. Its members gather and evaluate ideas from various
departments, including 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.
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NAUTILUS CONSUMER FITNESS PRODUCTS
We are currently evaluating design and feature concepts for a new line of
Nautilus consumer fitness products, such as home gyms, treadmills, stationary
bicycles and stair machines. If we elect to proceed with one or more of these
products, we would then assess price points, develop a prototype and determine
the most appropriate manufacturing plan. We do not anticipate introducing any
such products before 2000.
MANUFACTURING AND DISTRIBUTION
BOWFLEX AND AIRBED PRODUCTS
Our primary manufacturing and distribution objectives for our Bowflex and
airbed products 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 half of our Bowflex components, although we produce
the main component of our Bowflex products, the Power Rods, exclusively in the
United States. We will continue to use overseas suppliers that meet our
manufacturing criteria. All of our airbed components are currently manufactured
domestically.
We assemble, inspect, package and ship our products from our Vancouver,
Washington and Independence, Virginia facilities. We also intend to establish an
additional distribution center in the Western United States. We rely primarily
on UPS to deliver our Bowflex products, and we currently use a private furniture
shipping company to deliver our airbed products. See "Risk Factors."
NAUTILUS COMMERCIAL FITNESS EQUIPMENT, CONSUMER FITNESS EQUIPMENT AND
FITNESS 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 Independence, Virginia
warehouse facilities directly to consumers 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 intend to outsource the
manufacturing of Nautilus consumer fitness equipment and fitness accessories to
outside manufacturers. We currently distribute our Nautilus fitness accessories
from our Vancouver, Washington 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 (the "SGMA"), United States consumers
spent roughly $5.2 billion on home exercise equipment in 1997, which represented
an 8.3% increase from roughly $4.8 billion in 1996.
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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 SGMA, 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, an 11.1%
increase.
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 (the "ISPA"), United
States consumers purchased approximately 35.3 million mattress and foundation
units in 1997, generating approximately $3.6 billion in wholesale sales. We
believe that this equates to over $6.0 billion in retail sales. The ISPA
estimates that innerspring mattresses accounted for approximately 90.0% of total
domestic mattress sales in 1997 and the four largest manufacturers (Sealy,
Serta, Simmons and Spring Air) accounted for nearly 62.0% of domestic wholesale
dollar sales. We believe over 700 manufacturers, operating primarily on a
regional basis, serve the balance of the mattress market. We believe that less
than 10.0% of all mattress sales are made through direct marketing channels.
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 that 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 that 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, our recent Nautilus acquisition presents a significant opportunity to
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
32
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 that 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, but 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.
AIRBEDS
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 ISPA,
conventional innerspring mattresses presently account for at least 90.0% of all
domestic mattress sales, with waterbeds, futons and other types of mattresses
making up the remainder of the market. We believe that market participants
compete primarily on the basis of price, product quality and durability, brand
name recognition, innovative features, warranties and return policies.
We believe that 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. According to the ISPA, these manufacturers were
responsible for approximately 62.0%, or $2.2 billion, of domestic wholesale
dollar mattress sales in 1997. We believe approximately 700 smaller
manufacturers serve the balance of the conventional mattress market. Although we
believe that our airbeds 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 airbeds. We believe that 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, and 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 that the market
for airbeds is large enough for both companies to be successful. In addition, we
believe that our airbeds possess features that will enable us to effectively
compete against Select Comfort and other airbed companies.
We believe that 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 that 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 business.
33
INTELLECTUAL PROPERTY
We believe that our intellectual property is an important factor in
maintaining our competitive position in the fitness and mattress industries.
Accordingly, we have taken the following steps to protect our intellectual
property:
- 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 airbeds;
- We have obtained United States trademark protection for various names
associated with our products, including "Bow-Flex," "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 "Bow-Flex" 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.
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. Despite our
efforts, the steps we have taken to protect our proprietary technology may be
inadequate. See "Risk Factors - Intellectual Property."
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, we recently 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 February 1, 1999, we employed 336 full-time employees, including three
executive officers and 34 part-time employees.
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 and airbed products. We lease these properties pursuant to
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operating leases that expire at various times, from May 30, 2000, to April 30,
2002. The aggregate base rent is approximately $24,000 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.
As part of our recent acquisition of substantially all of the assets of
Nautilus International, we acquired 54 acres of commercial real property in
Independence, Virginia, which includes 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 customer service operations; and
- A 9,187 square foot building that houses our Nautilus administrative
operations.
In general, our properties are well maintained, adequate and suitable for
their purposes. Assuming timely and effective integration of the Nautilus
facilities, we believe that these properties will meet our operational needs for
the foreseeable future. If we need additional warehouse or office space, we
believe that we will be able to obtain such space on commercially reasonable
terms.
LEGAL PROCEEDINGS
On May 1, 1998, Soloflex, Inc., a company that manufactures and directly
markets home fitness equipment, filed an action against Direct Focus and Randal
R. Potter, our Vice President of Marketing, in the United States District Court
for the District of Oregon. The suit is titled Soloflex, Inc. v. Bowflex, Inc.
and Randy Potter, Cause No. 98-557-JO. The judge has set a trial date of July 6,
1999, and both parties are now proceeding with discovery.
Soloflex is pursuing two categories of claims, both of which relate to
activities that allegedly violate its intellectual property rights. First,
Soloflex claims that we violated the Lanham Act, which relates to trademark and
trade dress infringement, and infringed upon several of its copyrights. The
principal basis for these claims is Soloflex's contention that our print and
video advertisements are too similar to its advertisements. For example,
Soloflex asserts that we are prohibited from marketing our products with
advertisements that: (1) feature Mr. Potter, a former model for Soloflex; (2)
feature an image of Mr. Potter removing his shirt; or (3) use phrases with the
words "unlock your body's potential" or "the body you always wanted."
Second, Soloflex claims that we misappropriated certain of its marketing
trade secrets. The principal basis for this claim is Soloflex's allegation that
Mr. Potter had access to marketing knowledge and physical documents while an
employee of Soloflex, and that Mr. Potter improperly used this knowledge and
documentation to our competitive advantage. Soloflex further alleges that we
hired another Soloflex employee, who also possessed this type of information,
for the specific purpose of acquiring such information and obtaining a
competitive advantage.
Soloflex has requested both monetary damages and injunctive relief in
connection with its claims. Specifically, Soloflex is seeking to recover: (1)
any profits it would have earned but for our allegedly improper activities; (2)
any profits we earned during the period when an alleged violationsummarized below, may have occurred; and/or (3) the costeffect of corrective advertising to remedy the allegedly
"false impressions" created by our advertising activities. The injunctive relief
that Soloflex is seeking would prohibit us from airing advertisements that
allegedly would infringe upon Soloflex's intellectual property rights. We intend
to vigorously defend against these claims, which we believe lack merit. However,
we cannot
35
assure you that we will prevail in this dispute. If Soloflex successfully
prosecutes any of its claims, the resulting monetary damages and/or injunctive
relief would significantly harm our business. See "Risk Factors - Soloflex
Litigation."
discouraging takeover bids.
We are also involved in various legal proceedings incident to the ordinary
course of our business. We believe that the outcome of these pending legal
proceedings will not, in the aggregate, have a material adverse effect on our
business.
36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their ages as of the date of this
prospectus are as follows:
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------------------------------------ --- ---------------------------------------------------------
Brian R. Cook................................... 49 President and Chief Executive Officer, Director
Randal R. Potter................................ 31 Vice President of Marketing
Rod W. Rice..................................... 34 Chief Financial Officer, Treasurer and Secretary
C. Reed Brown................................... 52 Director of Business/Legal Affairs, Director
Kirkland C. Aly................................. 42 Director
Gary L. Hopkins................................. 51 Director
Roger J. Sharp.................................. 43 Director
Roland E. Wheeler............................... 50 Director
BRIAN R. COOK has served as a director and the President and Chief Executive
Officer of Direct Focus since 1986. Mr. Cook received his B.A. in Business
Administration, with a major in accounting, from Western Washington University.
He is a Certified Public Accountant. Mr. Cook is related by marriage to Mr.
Hopkins.
RANDAL R. POTTER joined Direct Focus in 1991 as a Creative Director and
Marketing Manager and was named Vice President of Marketing in December 1995.
Mr. Potter, who received his B.S. in Social Science from Washington State
University, has been involved in the direct marketing industry since 1986.
ROD W. RICE joined Direct Focus in 1994 as Controller and was named Chief
Financial Officer, Treasurer and Secretary in 1995. From 1992 to 1994, Mr. Rice
was a senior assistant accountant with Deloitte & Touche LLP. Mr. Rice received
his B.S. in Business Administration, with a major in Accounting and Economics,
from Portland State University. He is a Certified Public Accountant.
C. REED BROWN joined Direct Focus in 1998 as the Director of Business/Legal
Affairs and has served as a director since 1998. From 1996 to 1997, Mr. Brown
served as Vice President/General Counsel and Director of Business Affairs at
Williams Worldwide Television, and also served briefly as President and Chief
Operating Officer of Stilson & Stilson Advertising and Marketing. From 1992 to
1996, Mr. Brown held various positions at HealthRider, Inc., including General
Counsel/Vice President, Executive Vice President, Corporate Secretary and
President of HealthRider Kiosk, Inc. Mr. Brown received his J.D. in 1973 from
the University of Utah College of Law. Mr. Brown also serves as a director of
Pen Interconnect, Inc.
KIRKLAND C. ALY has been a director of Direct Focus since 1996. Since 1998,
Mr. Aly has been the Vice President of Worldwide Sales & Marketing at Software
Logistix Corporation, a company that develops, implements and manages integrated
supply chains for high technology companies. From 1997 to 1998, Mr. Aly was the
Executive Vice President of Softbank Content Services, Inc., and from 1996 to
1997 was a principal in KDI Capital, LLC. From 1995 to 1997, Mr. Aly was the
President and Chief Executive Officer of Atrieva Corporation. Throughout 1994,
Mr. Aly was the President of Prism Group, Inc. Mr. Aly received his B.A. in
Communications from Washington State University.
GARY L. HOPKINS has been a director of Direct Focus since January 1993. Mr.
Hopkins is currently the Branch Operations Manager of Qpoint Mortgage, a
position he has held since March 1998. Mr. Hopkins previously served as a Senior
Lending Officer at Olympic NW Mortgage from 1996 to 1998, a Senior Loan Officer
at Emerald Mortgage from 1994 to 1996, and as President and CEO of Merit Escrow
from 1990 to 1994. Mr. Hopkins is related by marriage to Mr. Cook.
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ROGER J. SHARP has been a director of Direct Focus since 1995. Since 1993,
he has served as the President of The Sharp Law Firm in Vancouver, Washington, a
general civil legal practice. He received his J.D. from the University of
Washington School of Law in 1981. Mr. Sharp has provided, and from time to time
may continue to provide, legal services to Direct Focus.
ROLAND E. "SANDY" WHEELER has served as a director of Direct Focus since
1986. Since 1998, he has served as the President and CEO of DynaMed, Inc., a
cancer research company. In addition, since 1996, he has served as the President
of V-Care Health Systems, Inc., a medical equipment company. From 1994 to 1995,
Mr. Wheeler served as the Vice President of Marketing of Direct Focus.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has two committees: an audit committee and a Year
2000 committee. Roland Wheeler, Kirkland C. Aly, Gary L. Hopkins and C. Reed
Brown serve on the audit committee. The audit committee has authority to: (1)
make recommendations to the board of directors regarding the selection of
independent auditors; (2) review the results and scope of audits and other
services provided by our independent auditors; and (3) review and evaluate our
audit and control functions. C. Reed Brown and Roland Wheeler serve on the Year
2000 committee, which is charged with developing, overseeing and reviewing our
Year 2000 response and contingency plan. We do not have a compensation
committee. Instead, the full board of directors considers and determines
compensation issues, except that no officer who is a director participates in
board deliberations regarding their own compensation.
DIRECTOR COMPENSATION
All of our nonemployee directors are paid $500 per day plus travel expenses
for each board of directors meeting that they attend in person, and $150 per day
for each board of directors meeting that they attend telephonically. On February
27, 1998, the board granted to each non-employee director an option to purchase
5,000 shares of our common stock at an exercise price equal to the market price
of our common stock at the close of trading on the Toronto Stock Exchange on the
date of grant. On May 8, 1998, the board granted to Mr. Brown an option to
purchase 5,000 shares of our common stock under the same terms. In addition, on
May 8, 1998, the board of directors granted a $10,000 bonus to each director
other than C. Reed Brown.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by the Washington Business Corporation Act or other
applicable law, as then in effect. Consequently, subject to the Washington Business Corporation Act no director shall be personally liable to Direct Focus
or its shareholders for monetary damages resulting from his or her conduct as a
director of Direct Focus, except liability for:
- Acts or omissions involving intentional misconduct or knowing
violations of law;
- Unlawful distributions; or
- Transactions from(“WBCA”) which the director or officer personally receives a
benefit in money, property or services to which the director is not
legally entitled.
Our articles of incorporation and bylaws also provide that we shall
indemnify any individual made a party to a proceeding because that individual is
or was a director or officer of Direct Focus. We must also advance or reimburse
reasonable expenses incurred by such individual prior to the final disposition
of the proceeding to the fullest extent permitted by the Washington Business
Corporation Act or other applicable law, as then in effect. No repeal of or
modification to our articles of incorporation or bylaws may adversely affect any
indemnification rights of a director or officer of Direct Focus
38
who is or was a director or officer at the time of such repeal or modification.
To the extent the provisions of our articles of incorporation provide for
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933, those provisions are, in the opinion of the Securities
and Exchange Commission, against public policy as expressed in the Securities
Act and they are therefore unenforceable.
We do not currently maintain a liability insurance policy pursuant to which
our directors and officers may be indemnified against liability that they may
incur for serving in their capacities as directors and officers of Direct Focus.
However, we intend to obtain such a policy in 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors does not have a compensation committee. During 1998,
director Brian R. Cook, who is also the President and Chief Executive Officer of
Direct Focus, participated in board deliberations regarding the compensation of
all executive officers other than himself.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation we paid to our Chief Executive Officer and other executive officers
whose salary and bonus together exceeded $100,000 in 1998. We refer to these
individuals collectively in this prospectus as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) (#)
- ---------------------------------------------------------- --------- ---------- ------------ -------------------
Brian R. Cook, President & CEO............................ 1998 $ 175,000 $ 175,000 30,000
Randal R. Potter, Vice President, Marketing............... 1998 $ 105,000 $ 105,000 20,000
Rod W. Rice, Chief Financial Officer, Treasurer and
Secretary............................................... 1998 $ 90,000 $ 90,000 25,000
- ------------------------
(1) The board of directors has sole discretion in establishing bonus awards. All
bonuses awarded in 1998 were in accordance with the performance-based
criteria established by the board of directors in February 1998.
39
OPTION GRANTS
The following table sets forth information concerning stock option grants to
the Named Executive Officers during the year ended December 31, 1998.
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL GRANT DATE VALUE
UNDERLYING OPTIONS GRANTED ------------------
OPTIONS TO EMPLOYEES IN EXERCISE PRICE GRANT DATE PRESENT
NAME GRANTED(1) (#) 1998(2) ($/SH)(3) EXPIRATION DATE VALUE(4) ($)
- ------------------------- --------------- ----------------- --------------- --------------- ------------------
Brian R. Cook............ 30,000 16.0% $ 4.62 2/28/2003 $ 90,000
Randal R. Potter......... 20,000 10.6% $ 4.62 2/28/2003 $ 60,000
Rod W. Rice.............. 25,000 13.3% $ 4.62 2/28/2003 $ 75,000
- ------------------------
(1) The options were granted on February 27, 1998. Mr. Cook's option vested in
full on the date of grant. Mr. Potter's and Mr. Rice's options vest in
one-third increments on each of the first three anniversaries of the grant
date.
(2) During 1998, the board of directors granted options to purchase a total of
188,000 shares of Direct Focus common stock.
(3) In accordance with the rules of the Toronto Stock Exchange and our Stock
Option Plan, the exercise price per share equals the closing price (in U.S.
dollars) of our common stock on the Toronto Stock Exchange on the grant
date. The exercise price may be adjusted only upon the occurrence of
specific events that would dilute our share capital.
(4) 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: (a) all options granted will vest as scheduled; (b) no dividend
yield; (c) a risk-free interest rate of 5.0%; and (d) an expected volatility
of 76.0%.
The following table summarizes the number and value of options exercised by
the Named Executive Officers during 1998 and the value of options held by such
persons as of February 26, 1999.
AGGREGATED OPTION EXERCISES IN 1998 AND
YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT YEAR END (#) YEAR END ($)
EXERCISE REALIZED -------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ----------- ----------- ------------- ------------ -------------
Brian R. Cook................. -- $ -- 80,000 -- $ 1,026,300 $ --
Randal R. Potter.............. 63,500 $ 333,688 107,500 20,000 $ 1,581,675 $ 211,200
Rod W. Rice................... 37,213 $ 100,705 36,666 48,334 $ 527,791 $ 603,009
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
BRIAN R. COOK is employed as our President and Chief Executive Officer
pursuant to an employment agreement dated as of January 1, 1998 (the "Cook
Agreement"). Mr. Cook's current salary is $225,000 per year, and is subject to
increase at the discretion of our board of directors. He is also entitled to
reimbursement for reasonable out-of-pocket expenses. The Cook Agreement had an
initial term of one year, with automatic renewals for subsequent one-year terms.
We may terminate the Cook
40
Agreement by providing Mr. Cook with at least six months' notice of such
termination. Upon the receipt of such notice, all unpaid salary that would have
been paid to Mr. Cook during the remaining term of his employment would become
immediately due and payable.
RANDAL R. POTTER is employed as our Vice President of Marketing pursuant to
an employment agreement dated as of January 1, 1998 (the "Potter Agreement").
Mr. Potter's current salary is $150,000 per year, and is subject to increase at
the discretion of our board of directors. He is also entitled to reimbursement
for reasonable out-of-pocket expenses. The Potter Agreement had an initial term
of one year, with automatic renewals for subsequent one-year terms. We may
terminate the Potter Agreement by providing Mr. Potter with at least six months'
notice of such termination. Upon the receipt of such notice, all unpaid salary
that would have been paid to Mr. Potter during the remaining term of his
employment would become immediately due and payable.
ROD W. RICE is employed as our Chief Financial Officer pursuant to an
employment agreement dated as of January 1, 1998 (the "Rice Agreement"). Mr.
Rice's current salary is $120,000 per year, and is subject to increase at the
discretion of our board of directors. He is also entitled to reimbursement for
reasonable out-of-pocket expenses. The Rice Agreement had an initial term of one
year, with automatic renewals for subsequent one-year terms. We may terminate
the Rice Agreement by providing Mr. Rice with at least six months' notice of
such termination. Upon the receipt of such notice, all unpaid salary that would
have been paid to Mr. Rice during the remaining term of his employment would
become immediately due and payable.
BENEFIT PLANS
DIRECT FOCUS, INC. STOCK OPTION PLAN
In 1995, our board of directors and shareholders adopted the Direct Focus,
Inc. Stock Option Plan, which was amended in 1998 and 1999. The principal
purpose of the Stock Option Plan is to enhance shareholder value by offering our
employees, officers, directors and consultants a financial incentive to
stimulate our continued growth and success. Our board of directors has reserved
a total of 1,857,961 shares of Direct Focus common stock for issuance upon the
exercise of options granted under the Stock Option Plan. As of December 31,
1998, options to purchase 550,618 shares of Direct Focus common stock were
outstanding, of which options to purchase 309,199 shares were then exercisable.
The weighted average exercise price of outstanding options was $2.39 per share,
with actual exercise prices ranging between $0.12 and $9.75 per share.
The current plan administrator is our board of directors, although the board
may appoint a committee of two or more directors to administer the Stock Option
Plan. The plan administrator may grant (1) incentive stock options to any
employee of Direct Focus or its subsidiaries, and (2) non-qualified stock
options to any employee, officer, director or consultant of Direct Focus or its
subsidiaries. The plan administrator has the exclusive authority to administer
the Stock Option Plan in accordance with the terms thereof, including the
authority to:
- Select which employees, if any, will be granted incentive stock
options;
- Select which employees, officers, directors and/or consultants, if any,
will be granted non-qualified stock options;
- Specify the terms and conditions of each option granted;
- Designate the number of shares subject to each option granted;
- Designate the exercise price of each option granted (which, for
incentive stock options, must be at least equal to the fair market
value of Direct Focus common stock on the grant date); and
- Designate the vesting schedule.
41
Unless the plan administrator establishes a shorter term or the holder of an
incentive stock option dies or ceases to be an employee of Direct Focus or one
of our subsidiaries, all incentive stock options granted to persons who
beneficially own more than 10.0% of our outstanding common stock terminate five
years after the grant date, and all other options terminate ten years after the
grant date. If the holder of an incentive stock option dies or ceases to be an
employee of Direct Focus or one of our subsidiaries due to a disability, his or
her option will terminate six months after the date of death or cessation of
employment. If the holder of an incentive stock option ceases to be an employee
of Direct Focus or one of our subsidiaries for any reason other than a
disability, the plan administrator may designate a termination date between 30
days and three months after the cessation of employment.
The plan administrator is required to make proportional adjustments to the
aggregate number of shares issuable under the Stock Option Plan and pursuant to
outstanding options in the event of stock splits or other capital adjustments.
In addition, certain corporate transactions, such as a merger or consolidation
that would cause our shareholders to own less than a majority of the surviving
entity, will cause all outstanding options to become immediately exercisable
without regard for any vesting schedule or other vesting contingencies.
Similarly, all outstanding options will become immediately exercisable if a
person becomes the beneficial owner of 50.0% or more of our voting securities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We acquired the rights to our Bowflex technology from Tessema D. Shifferaw,
the inventor of the technology and an original shareholder, pursuant to an
agreement that provides for royalty payments to Mr. Shifferaw based on net sales
of our Bowflex products. We paid approximately $1.6 million to Mr. Shifferaw in
1998. Pursuant to a separate agreement between Mr. Shifferaw, Brian R. Cook and
Roland E. Wheeler, Mr. Shifferaw is obligated to pay Messrs. Cook and Wheeler
40.0% (20.0% each) of annual royalties in excess of $90,000. For 1998, Messrs.
Cook and Wheeler each expect to receive $302,765 from Mr. Shifferaw under this
arrangement.
42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of February 26, 1999, and as
adjusted to reflect the sale of common stock in this offering, by: (1) each
director; (2) each executive officer whose name appears in the summary
compensation table; (3) all persons that we know are beneficial owners of more
than 5.0% of our common stock, and (4) all directors and executive officers as a
group.
SHARES TO
BE
SHARES BENEFICIALLY SOLD IN SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OFFERING OWNED AFTER OFFERING
DIRECTORS, EXECUTIVE OFFICERS, 5% SHAREHOLDERS --------------------------- --------- ---------------------------
AND SELLING SHAREHOLDERS(1) NUMBER PERCENTAGE(2) NUMBER NUMBER PERCENTAGE(2)
- ------------------------------------------------ ---------- --------------- --------- ---------- ---------------
Brian R. Cook(3)................................ 696,071 7.2% 25,000 671,071 6.4%
Randal R. Potter(4)............................. 173,166 1.8 12,500 160,666 1.5
Rod W. Rice(5).................................. 108,499 1.1 12,500 95,999 *
Kirkland C. Aly(6).............................. 14,000 * -- 14,000 *
C. Reed Brown(7)................................ 5,000 * -- 5,000 *
Gary L. Hopkins(8).............................. 44,000 * -- 44,000 *
Roger J. Sharp(9)............................... 29,140 * -- 29,140 *
Roland E. Wheeler(10)........................... 349,586 3.7 25,000 324,586 3.1
Paul Little(11)................................. 452,610 4.7 100,000 352,610 3.4
All directors and executive officers as a group
(8 persons)................................... 1,419,462 14.6 75,000 1,344,462 12.7
- ------------------------
* Less than 1%.
(1) The address of all directors and executive officers is our address: 2200
N.E. 65(th) Avenue, Vancouver, Washington 98661.
(2) We have calculated the pre-offering percentages assuming that 9,532,939
shares of our common stock are issued and outstanding, and have calculated
post-offering percentages assuming that 10,357,939 shares of our common
stock will be issued and outstanding. In accordance with SEC regulations,
each percentage calculation with respect to a shareholder assumes the
exercise of all outstanding options that such shareholder holds and that can
be exercised within 60 days after the anticipated effective date of this
offering.
(3) Includes 80,000 shares issuable upon the exercise of options.
(4) Includes 96,416 shares issuable upon the exercise of options.
(5) Includes 8,333 shares issuable upon the exercise of options.
(6) Includes 5,000 shares issuable upon the exercise of options.
(7) Includes 5,000 shares issuable upon the exercise of options.
(8) Includes 15,000 shares issuable upon the exercise of options.
(9) Includes 5,000 shares issuable upon the exercise of options, 4,000 shares
held by Mr. Sharp's spouse and 1,900 shares held by Mr. Sharp's children.
Mr. Sharp's spouse is the custodian for all shares held by their children.
(10) Includes 5,000 shares issuable upon the exercise of options and 18,900
shares held by Mr. Wheeler's daughter.
(11) Includes 202,810 shares held by Westover Investments, Inc., of which Mr.
Little is the sole shareholder and director. Mr. Little's address is 211
Queen's Quay West, Suite 911, Toronto, Ontario, Canada M5J 2M6.
43
UNDERWRITING
The underwriters named below, acting through their representative, D.A.
Davidson & Co., have severally agreed with the Company and the selling
shareholders, subject to the terms and conditions of the Underwriting Agreement,
to purchase the number of shares of common stock set forth opposite their
respective names below. The underwriters are committed to purchase and pay for
all such shares if any are purchased.
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
D.A. Davidson & Co...............................................................
----------
Total........................................................................ 1,000,000
----------
----------
D.A. Davidson & Co. has advised the Company and the selling shareholders
that the underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession of not in excess of $
per share, of which $ may be reallowed to other dealers. After the
offering, the public offering price, concession and reallowance to dealers may
be reduced by D.A. Davidson & Co. No such reduction shall change the amount of
proceeds to be received by the Company and the selling shareholders as set forth
on the cover page of this prospectus.
The Company has granted to the underwriters an option, exercisable during
the 30-day period after the date of this prospectus for the offering, to
purchase up to 150,000 additional shares of common stock at the same price per
share as the Company and the selling shareholders will receive for the one
million shares that the underwriters have agreed to purchase. To the extent that
the underwriters exercise such option, each of the underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of such additional shares that the number of shares of common stock
to be purchased by it shown in the above table represents as a percentage of the
one million shares offered hereby. If purchased, the underwriters will sell such
additional shares on the same terms as those on which the one million shares are
being sold.
The following table summarizes the compensation to be paid to the
underwriters by the Company and the selling shareholders, and the expenses
payable by the Company and the selling shareholders.
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------- -------------- --------------
Underwriting discounts and commissions paid by the Company............ $ $ $
Underwriting discounts and commissions paid by the selling
shareholders........................................................ $ $ $
Expenses payable by the Company....................................... $ $ $
The Underwriting Agreement contains covenants of indemnity among the
underwriters, the Company and the selling shareholders against certain civil
liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of representations and warranties contained in
the Underwriting Agreement.
The Company has applied to have its common stock listed for trading on
Nasdaq.
Each officer and director of the Company and each selling shareholder have
agreed that, for a period of 180 days after the effective date of this
prospectus, they will not, subject to certain exceptions, directly or indirectly
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to, any shares of common stock, or any securities
convertible into or exchangeable for shares of common stock, now owned or
hereafter acquired directly by such holders or
44
with respect to which they have the power of disposition, without the prior
written consent of D.A. Davidson & Co., which may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. In addition, the Company has agreed that during the 180 days
following the effective date of this prospectus, the Company will not, without
the prior written consent of D.A. Davidson & Co., subject to certain exceptions,
offer, issue, sell, contract to sell, or otherwise dispose of any shares of
common stock, any options or warrants to purchase any shares of common stock, or
any securities convertible into, exercisable for or exchangeable for shares of
common stock other than the Company's sales of shares in the offering.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the offering, there has been no public market in the United States
for the common stock of the Company. Consequently, the public offering price for
the common stock offered hereby will be determined through negotiations among
the Company and D.A. Davidson & Co. Among the factors to be considered in such
negotiations include prevailing market conditions, the market price of the
Company's common stock on the Toronto Stock Exchange, certain financial
information of the Company, market valuations of other companies that the
Company and D.A. Davidson & Co. believe to be comparable to the Company,
estimates of the business potential of the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future revenues of the Company,
the present state of the Company's development and other factors deemed
relevant. The Company's common stock has been listed on the Toronto Stock
Exchange in the Province of Ontario, Canada, since January 26, 1993 and
currently trades under the symbol DFX.
D.A. Davidson & Co. has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids that may have the effect of
stabilizing or maintaining the market price of the common stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or the purchase of the common stock on
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting D.A. Davidson & Co. to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by D.A. Davidson & Co. in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
D.A. Davidson & Co. has advised the Company that such transactions may be
effected on Nasdaq or otherwise and, if commenced, may be discontinued at any
time.
45
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
no par value. As of February 26, 1999, 9,532,939 shares of Direct Focus common
stock were outstanding and held of record by 81 shareholders. Following this
offering, 10,357,939 shares of Direct Focus common stock will be outstanding
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options), all of which will be fully paid and nonassessable.
COMMON STOCK
Our common shareholders are entitled to: (1) one vote per share at all
shareholder meetings; (2) receive dividends ratably, if, as and when declared by
our Board of Directors; and (3) participate ratably in any distribution of
property or assets upon any liquidation, winding up, or dissolution of the
Company. None of our common stock has cumulative voting rights, preemptive
rights or conversion rights, and there are no redemption or sinking fund
provisions applicable to our common stock.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF WASHINGTON LAW
Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation ActThe WBCA generally prohibits a "target corporation," with
certain exceptions,“target corporation” (as defined in the WBCA) from engaging in certain significant business transactions with an "acquiring“acquiring person,"” which is defined as a person or group of persons that beneficially owns 10.0%10% or more of the voting securities of the target corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved (1) prior to the time of the acquisition, by a majority of the members of the target corporation'scorporation’s board of directors prioror (2) at or subsequent to the acquiring person’s share acquisition time, by
10
a majority of acquisition.the members of the target corporation’s board of directors and authorized at an annual or special meeting of shareholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting shares, except for shares beneficially owned by or under the voting control of the acquiring person. Such prohibited transactions include, among other things:
- A
a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from the acquiring person;
- Termination
termination of 5.0%5% or more of the employees of the target corporation employed in Washington, whether at one time or over a five-year period as a result of the acquiring person'sperson’s acquisition of 10.0%10% or more of the shares; or
- Allowing
allowing the acquiring person to receive any disproportionate benefit as a shareholder.
After the five-year period, a "significant“significant business transaction"transaction” may occur if the transactionit complies with certain "fair price"“fair price” provisions specified in the statute or are approved at an annual or special meeting of shareholders by a majority of the statute.
A corporationoutstanding shares other than those of which the acquiring person has beneficial ownership. As a result, Chapter 23B.19 of the WBCA could have the effect of delaying, deferring, or preventing a change in control.
Limits on Ability of Shareholders to Act by Written Consent
Our Bylaws require unanimous consent for a shareholder action by written consent to be effective. This limit on the ability of our shareholders to act by less than unanimous written consent may lengthen the amount of time required to take shareholder actions. As a result, a holder controlling a majority of our capital stock who is unable to obtain unanimous written consent from all of our shareholders would not "opt out"be able to amend our Bylaws or remove directors without holding a shareholders meeting.
Requirements for Advance Notification of this statute. This provisionShareholder Nominations and Proposals
Our Bylaws establish advance notice procedures with respect to shareholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors. The Bylaws do not give the board of directors the power to approve or disapprove shareholder nominations of candidates or proposals regarding business to be conducted at a special or annual meeting of the shareholders. However, our Bylaws may have the effect of delaying, deterringprecluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may also discourage or preventingdeter a change inpotential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of Direct Focus.
TRANSFER AGENT AND REGISTRAR
Theus.
No Cumulative Voting
Our Articles of Incorporation provide that shareholders are not entitled to cumulate votes in the election of directors.
Transfer Agent and Registrar
Our transfer agent and registrar for Direct Focusis Computershare Trust Company, N.A.
Listing
Our common stock is traded in
Canada is Montreal Trust. on the New York Stock Exchange under the trading symbol “NLS.”
Warrants
The transfer agent and registrar for Direct Focus
common stock tradedWarrants were issued in the United StatesPrivate Placement on June 15, 2023 in connection with a registered direct offering of our Common Stock and pre-funded warrants to purchase shares of our Common Stock. As of August 4, 2023, the Warrants were exercisable for an aggregate of 4,098,362 shares of Common Stock.
11
Exercisability. The Warrants are exercisable on December 20, 2023 and expire on December 20, 2028. The Warrants are exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the shares of Common Stock underlying the Warrants under the Securities Act is effective and available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment in full in immediately available funds for the number of shares of Common Stock purchased upon such exercise. If at the time of exercise there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the shares of Common Stock underlying the Warrants, then the Warrants may also be exercised, in whole or in part, at such time by means of a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Common Stock determined according to the formula set forth in the Warrant.
Exercise Limitation. A holder will not have the right to exercise any portion of the Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage, provided that any increase will not be effective until the 61st day after such election.
Exercise Price. The Warrants have an exercise price of $1.35 per share of Common Stock. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our Common Stock and also upon any distributions of assets, including cash, stock or other property to our shareholders.
Transferability. Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange Listing. There is no established public trading market for the Warrants. We do not intend to apply for listing of the Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Warrants is limited.
Fundamental Transactions. In the event of any fundamental transaction, as described in the Warrants and generally including any merger with or into another entity, sale of all or substantially all of our assets, tender offer or exchange offer, or reclassification of our Common Stock, then upon any subsequent exercise of a Warrant, the holder will have the right to receive as alternative consideration, for each share of Common Stock that would have been issuable upon such exercise immediately prior to the occurrence of such fundamental transaction, the number of shares of Common Stock of the successor or acquiring corporation or of our company, if it is the surviving corporation, and any additional consideration receivable upon or as a result of such transaction by a holder of the number of shares of Common Stock for which the Warrant is exercisable immediately prior to such event. Notwithstanding the foregoing, in the event of a fundamental transaction, the holders of the Warrants have the right to require us or a successor entity to redeem the Warrants for cash in the amount of the Black Scholes Value (as defined in each Warrant) of the unexercised portion of the Warrants concurrently with or within 30 days following the consummation of a fundamental transaction.
Rights as a Shareholder. Except as otherwise provided in the Warrants or by virtue of such holder’s ownership of our Common Stock, the holder of a Warrant does not have the rights or privileges of a holder of our Common Stock, including any voting rights, until the holder exercises the Warrant.
Registration Rights. We have filed this registration statement with the SEC that includes this prospectus to register for resale under the Securities Act of 1933, the shares of Common Stock issuable upon exercise of the Warrants to satisfy our obligations in connection with the Private Placement. We will use commercially reasonable efforts to keep registration statement effective at all times until the selling shareholder no longer owns any Warrants or shares of Common Stock issuable upon exercise thereof.
12
The selling shareholder, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling the shares of Common Stock, or interests in the shares of Common Stock received after the date of this prospectus from a selling shareholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of Common Stock or interests in the shares of Common Stock on any stock exchange, market or trading facility on which the shares of Common Stock are traded or in private transactions. The selling shareholder may sell all or a portion of the shares of Common Stock held by it and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of Common Stock are sold through underwriters or broker-dealers, the selling shareholder will be ChaseMellon Shareholder
Services, L.L.C.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our common stock listedresponsible for trading on Nasdaq under
the symbol DFXI.
46
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, the only public market for our common stock was the
Torontounderwriting discounts or commissions or agent’s commissions. The shares of Common Stock Exchange. We have applied to have our common stock listed for
trading on Nasdaq under the symbol DFXI. However, we cannot provide any
assurance that a significant public market for our common stock will develop on
Nasdaqmay be sold in one or be sustained after this offering. Future sales of substantial amounts
of our common stock in the public market, or the possibility of such sales,
could adversely affectmore transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods:
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
in the over-the-counter market;
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
through the writing or settlement of options or other hedging transactions, whether such options are listed on an options exchange or otherwise;
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
purchases by a broker-dealer as principal and resale by the broker-dealer for our common stock or our
future abilityits account;
an exchange distribution in accordance with the rules of the applicable exchange;
privately negotiated transactions;
short sales effected after the date the registration statement of which this prospectus is a part was declared effective by the SEC;
broker-dealers may agree with a selling shareholder to raise capital through an offeringsell a specified number of equity securities.
After this offering, approximately 10,357,939such shares at a stipulated price per share;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
The aggregate proceeds to the selling shareholder from the sale of the shares of our common stockCommon Stock offered by it will be outstanding (10,507,939the purchase price of the shares of Common Stock less discounts or commissions, if any. The selling shareholder reserves the underwriter's over-allotment
option is fully exercised). Of theseright to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of shares of Common Stock to be made directly or through agents. We will not receive any of the 825,000 newly issuedproceeds from sales of shares that we areof Common Stock by the selling shareholder.
The selling shareholder may also sell shares of Common Stock under Rule 144 promulgated under the Securities Act, if available, rather than under this prospectus. In addition, the selling shareholder may transfer the Common Stock by other means not described in this prospectus. If the selling shareholder effects such transactions by selling shares of Common Stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the
13
selling shareholders or commissions from purchasers of the shares of Common Stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved but, except as set forth in a supplement to this prospectus to the extent required, in the case of an agency transaction will not be in excess of a customary brokerage commission in compliance with FINRA Rule 5110).
In connection with sales of the shares of Common Stock or otherwise, the selling shareholder may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the shares of Common Stock in the course of hedging in positions they assume. The selling shareholder may also sell shares of Common Stock short and deliver shares of Common Stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling shareholder may also loan or pledge shares of Common Stock to broker-dealers that in turn may sell such shares. The selling shareholder may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares of Common Stock offered by this prospectus, which shares of Common Stock such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The selling shareholder may pledge or grant a security interest in some or all of the shares of Common Stock owned by it and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of Common Stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus. The selling shareholder also may transfer and donate the shares of Common Stock in other circumstances as permitted by applicable law, in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
To the extent required by the Securities Act and the rules and regulations thereunder, the selling shareholder and any broker-dealer participating in the distribution of the shares of Common Stock may be deemed to be “underwriters” within the meaning of the Securities Act. In such event, any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. Selling shareholders who are deemed to be “underwriters” under the Securities Act (if any) will be subject to the prospectus delivery requirements of the Securities Act and may be subject to certain statutory liabilities of, including but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
Each selling shareholder has informed us that it is not a registered broker-dealer and does not have any written or oral agreement or understanding, directly or indirectly, with any person to engage in a distribution of the shares of Common Stock. Upon us being notified in writing by a selling shareholder that any material arrangement has been entered into with a broker-dealer for the distribution of shares of Common Stock, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of Common Stock being distributed and the terms of the offering, (975,000including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling shareholder and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.
Under the securities laws of some states, the Common Stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the Common Stock may not be sold unless such shares ifhave been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
The selling shareholder may sell all, some or none of the underwriters'
over-allotment option is fully exercised)shares of Common Stock registered pursuant to the registration statement of which this prospectus forms a part. If sold under the registration statement of which this
14
prospectus forms a part, the shares of Common Stock registered hereunder will be freely tradable in the publichands of persons other than our affiliates that acquire such shares.
We have advised the selling shareholder that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares of Common Stock in the market without restrictionand to the activities of the selling shareholder and its affiliates. In addition, to the extent applicable, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling shareholder for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling shareholder may indemnify any broker-dealer that participates in transactions involving the sale of the shares of Common Stock against certain liabilities, including liabilities arising under the Securities Act. As explained below, we
believe that as many as 8.3 million additional shares, including the 175,000
shares being offered by the selling shareholders, all of which are currently
issued and outstanding, will be freely tradable in the public market without
restriction under the Securities Act.
Approximately 8.9 million shares that will be outstanding after the offering
were issued in private placement transactions that were exempt from the
registration requirements of the Securities Act, of which 861,000 shares are
currently held by our directors and officers.
15
The majority of these transactions
occurred in 1993 and the last occurred in 1997. All of these shares originally
qualified as "restricted securities" (as such term is defined in Rule 144).
Restricted securities cannot be resold in the public market except in a
registered transaction or in a transaction exempt from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144,
which is discussed below. In addition, restricted securities continue to qualify
as such until they are resold in a registered transaction or in accordance with
Rule 144. Allvalidity of the shares issued in these transactions have been held beyond
the minimum holding periods set forth in Rule 144, and we believe that many of these shares have been resold through the TorontoCommon Stock Exchange or otherwise
and no longer qualify as restricted securities. The shares other than those held
by our officers and directors can be freely sold without restriction under the
Securities Act.
Approximately 650,000 additional shares were issued upon the exercise of
options in reliance upon the exemption afforded by Rule 701 of the Securities
Act. Approximately 417,000 of these shares are still held by the optionees,
including 264,000 shares currently held by our officers and directors, and
qualify as restricted securities that may be resold in accordance with Rule 701.
Rule 701 permits resales pursuant to Rule 144 (other than the holding period)
beginning 90 days after the date of this prospectus. Approximately 233,000 of
these shares have been resold on the Toronto Stock Exchange and no longer
qualify as restricted securities.
After the offering, our directors and executive officers will own
approximately 1,125,000 shares of our common stock, some of which they acquired
in private placement transactions or pursuant to option exercises. Pursuant to
certain "lock-up" agreements between the underwriters and each director and
executive officer, shares of common stock held by these individuals cannot be
offered sold or otherwise disposed of in any way until 180 days after the date
of this prospectus. On the expiration date of this lock-up period, our directors
and executive officers may sell these shares in the public market, subject to
any applicable resale limitations set forth in Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of:
- One percent of the then outstanding shares of the issuer's common
stock; or
47
- The average weekly trading volume during the four calendar weeks
preceding such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about Direct
Focus. Under Rule 144(k), a person who has not been an affiliate of Direct Focus
during the preceding 90 days and who has beneficially owned the restricted
shares for at least two years is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144. Generally, an affiliate includes all of our officers and
directors and any shareholder who holds 10% or more of our outstanding common
stock. All of our affiliates are subject to continuing volume limitations
described above.
After the effective date of this offering, we intend to file a registration
statement on Form S-8 to register up to approximately 550,618 shares of our
common stock that are reserved for issuance under our Stock Option Plan. The
Form S-8 registration statement will become effective automatically upon filing.
Shares issued under our Stock Option Plan after filing the Form S-8 registration
statements may be freely sold in the open market, subject only to certain Rule
144 limitations applicable to affiliates, the above-referenced lock-up
agreements and the vesting requirements applicable to the options.
LEGAL MATTERS
The legality of the common stock that we and the selling shareholders are
offering hereunder will be passed upon by Garvey, Schubert & Barer, Seattle,
Washington. Certain legal matters in connection with the issuance of the common
stockhereby will be passed upon for the underwritersus by LeBoeuf, Lamb, GreeneHillis Clark Martin & MacRae, L.L.P.Peterson P.S., Salt Lake City, Utah.
Seattle, Washington.
The audited financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998, includedincorporated by reference in this prospectus and elsewhere in the registration statement have been auditedso incorporated by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are includedreference in reliance upon the report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of the Nautilus Business as of June 27, 1998, and
June 28, 1997, and for each of the years in the three year period ended June 27,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG Peat MarwickGrant Thornton LLP, independent certifiedregistered public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
48
ADDITIONAL
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to “incorporate by reference” information that we have filed with it into this prospectus, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later in any prospectus supplement or free writing prospectus will automatically update and supersede information contained in this prospectus.
We incorporate by reference the documents listed below that we have previously filed with the SEC:
| • | Our Annual report on Form 10-K for the fiscal year ended March 31, 2023, filed with the SEC on June 1, 2023; |
| • | Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, filed with the SEC on August 9, 2023; |
| • | Our Definitive Proxy Statement on Schedule 14A filed with the SEC on June 16, 2023; and |
| • | The Description of Securities Registered Under Section 12 of the Exchange Act (included as Exhibit 4.1 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the Commission on June 1, 2023). |
We will provide you without charge, upon your oral or written request, with a copy of any or all reports, proxy statements and other documents incorporated by reference in this prospectus or the registration statement (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be directed to:
Nautilus, Inc.
Attention: Investor Relations
17750 S.E. 6th Way
Vancouver, Washington 98683
(646) 277-1254
john.mills@icrinc.com
16
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange CommissionSEC a Registration
Statementregistration statement on Form S-1.S-1 under the Securities Act with respect to the Common Stock offered by this prospectus. This prospectus, which forms ais part of the Registration
Statement, does not contain all of theregistration statement, omits certain information, includedexhibits, schedules and undertakings set forth in the Registration
Statement. Certainregistration statement. For further information pertaining to us and our Common Stock, reference is omittedmade to our SEC filings and you should referthe registration statement and the exhibits and schedules to the Registration Statement and its exhibits. With respect to references maderegistration statement. Statements contained in this prospectus as to the contents or provisions of any contract or other document of Direct Focus, such referencesdocuments referred to in this prospectus are not necessarily complete, and you should refer to the exhibits attached to
the Registration Statement for copies of the actual contract or document. You
may reviewin each instance where a copy of the Registration Statement,document has been filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matters involved.
In addition, registration statements and certain other filings made with the SEC electronically are publicly available through the SEC’s web site at http://www.sec.gov. The registration statement, including all exhibits and schedulesamendments to the registration statement, has been filed therewith, atelectronically with the SecuritiesSEC.
We are subject to the information and Exchange Commission's public
reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional officesperiodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, Exchange Commission located at 7 World Trade Center, Suite 1300, New York, New
York, 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies ofin accordance with such materials from the Public
Reference Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that containsrequirements, will file periodic reports, proxy statements, and other information regarding registrants, such as Direct Focus, that file
electronically with the SecuritiesSEC. These periodic reports, proxy statements, and Exchange Commission.
49
DIRECT FOCUS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
DIRECT FOCUS, INC.
Report of Deloitte & Touche LLP, Independent Auditors.................................................... F-2
Balance Sheets as of December 31, 1997 and 1998.......................................................... F-3
Statements of Income for the three years ended December 31, 1998......................................... F-5
Statements of Stockholders' Equity for the three years ended December 31, 1998........................... F-6
Statements of Cash Flows for the three years ended December 31, 1998..................................... F-7
Notes to Financial Statements............................................................................ F-8
DIRECT FOCUS, INC. AND AFFILIATE PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation.................................................................................... F-16
Pro Forma Combined Balance Sheet......................................................................... F-17
Pro Forma Combined Statement of Operations............................................................... F-19
NAUTILUS BUSINESS
Report of KPMG Peat Marwick LLP, Independent Auditors.................................................... F-20
Combined Balance Sheets as of June 28, 1997 and June 27, 1998............................................ F-21
Combined Statements of Operations and Accumulated Deficit for the years ended June 29, 1996, June 28,
1997 and June 27, 1998................................................................................. F-22
Combined Statements of Cash Flows for the years ended June 29, 1996, June 28, 1997 and June 27, 1998..... F-23
Notes to Combined Financial Statements................................................................... F-24
NAUTILUS BUSINESS COMBINED FINANCIAL STATEMENTS
Balance Sheets as of June 27, 1998 and December 31, 1998 (Unaudited)..................................... F-33
Unaudited Combined Statements of Operation and Accumulated Deficit for the six month periods ended
December 27, 1997 and December 31, 1998................................................................ F-34
Unaudited Combined Statements of Cash Flows for the six month periods ended December 27, 1997 and
December 31, 1998...................................................................................... F-35
Notes to Combined Financial Statements................................................................... F-36
F-1
INDEPENDENT AUDITORS' REPORT
Boardother information will be available for inspection and copying at the web site of Directorsthe SEC referred to above. We also maintain a website at www.nautilusinc.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of, and Stockholders
of Direct Focus, Inc.:is not incorporated into, this prospectus. We have audited the accompanying balance sheets of Direct Focus, Inc. as of
December 31, 1997 and 1998 and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based onincluded our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements present fairly, in all material
respects, the financial position of Direct Focus, Inc. at December 31, 1997 and
1998 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
February 26, 1999
F-2
DIRECT FOCUS, INC.
BALANCE SHEETS,
DECEMBER 31, 1997 AND 1998
1997 1998
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 4,790,316 $ 18,910,675
Trade receivables (less allowance for doubtful accounts of: 1997, $85,000 and 1998,
$40,000)......................................................................... 259,543 218,207
Inventories........................................................................ 1,945,773 2,614,673
Prepaid expenses and other current assets.......................................... 212,382 378,409
Current deferred tax asset......................................................... 222,139 215,737
------------ -------------
Total current assets............................................................. 7,430,153 22,337,701
------------ -------------
Furniture and Equipment:
Equipment.......................................................................... 587,661 1,822,205
Furniture and fixtures............................................................. 257,325 459,297
------------ -------------
844,986 2,281,502
Less accumulated depreciation...................................................... (446,922) (438,790)
------------ -------------
Total furniture and equipment.................................................... 398,064 1,842,712
------------ -------------
Long-Term Deferred Tax Asset......................................................... 26,202 --
------------ -------------
Other Assets (Less accumulated amortization of: 1997, $39,242 and 1998, $49,967)..... 67,821 192,859
------------ -------------
Total............................................................................ $ 7,922,240 $ 24,373,272
------------ -------------
------------ -------------
See notes to financial statements.
F-3
DIRECT FOCUS, INC.
BALANCE SHEETS,
DECEMBER 31, 1997 AND 1998
1997 1998
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables..................................................................... $ 1,178,255 $ 3,602,074
Income taxes payable............................................................... 801,128 504,775
Accrued liabilities................................................................ 1,089,134 1,851,253
Royalty payable to stockholders.................................................... 210,511 548,211
Customer deposits.................................................................. 41,853 148,937
Current portion of capital lease obligation........................................ 9,167 --
------------ -------------
Total current liabilities........................................................ 3,330,048 6,655,250
------------ -------------
Long-term Deferred Tax Liability..................................................... -- 66,880
------------ -------------
Commitments and Contingencies (Note 5)............................................... -- --
------------ -------------
Stockholders' Equity:
Common stock--authorized, 50,000,000 shares of no par value; outstanding, 1997:
9,005,328 shares, 1998: 9,448,523 shares......................................... 2,992,172 3,565,628
Retained earnings.................................................................. 1,600,020 14,085,514
------------ -------------
Total stockholders' equity....................................................... 4,592,192 17,651,142
------------ -------------
Total............................................................................ $ 7,922,240 $ 24,373,272
------------ -------------
------------ -------------
F-4
DIRECT FOCUS, INC.
STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1998
1996 1997 1998
------------ ------------- -------------
Net Sales............................................................ $ 8,516,584 $ 19,886,354 $ 57,296,880
Cost of Sales........................................................ 2,602,717 5,113,980 12,442,307
------------ ------------- -------------
Gross profit..................................................... 5,913,867 14,772,374 44,854,573
------------ ------------- -------------
Operating Expenses:
Selling and marketing.............................................. 4,712,365 9,600,076 22,642,885
General and administrative......................................... 472,661 974,887 1,700,956
Royalties.......................................................... 269,123 580,677 1,622,726
------------ ------------- -------------
Total operating expenses......................................... 5,454,149 11,155,640 25,966,567
------------ ------------- -------------
Operating Income..................................................... 459,718 3,616,734 18,888,006
------------ ------------- -------------
Other Income (Expense):
Interest income.................................................... 37,524 118,541 526,961
Interest expense................................................... (2,225) (1,381) (455)
State business tax and other-net................................... (51,113) (86,660) (221,434)
------------ ------------- -------------
Total other income (expense)-net................................. (15,814) 30,500 305,072
------------ ------------- -------------
Income Before Income Taxes........................................... 443,904 3,647,234 19,193,078
Income Tax Expense (Benefit)......................................... (249,000) 1,226,068 6,707,584
------------ ------------- -------------
Net Income........................................................... $ 692,904 $ 2,421,166 $ 12,485,494
------------ ------------- -------------
------------ ------------- -------------
Basic Earnings Per Share............................................. $ 0.08 $ 0.27 $ 1.34
------------ ------------- -------------
------------ ------------- -------------
Diluted Earnings Per Share........................................... $ 0.08 $ 0.25 $ 1.28
------------ ------------- -------------
------------ ------------- -------------
See notes to financial statements.
F-5
DIRECT FOCUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
RETAINED
COMMON STOCK EARNINGS
-------------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------------ ------------ ------------- -------------
Balances, January 1, 1996.............................. 8,131,541 $ 2,788,535 $ (1,514,050) $ 1,274,485
Common shares issued................................. 750,000 247,090 -- 247,090
Options exercised.................................... 40,000 4,800 -- 4,800
Net income........................................... -- -- 692,904 692,904
------------ ------------ ------------- -------------
Balances, December 31, 1996............................ 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
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
See notes to financial statements.
F-6
DIRECT FOCUS, INC.
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
1996 1997 1998
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 692,904 $ 2,421,166 $ 12,485,494
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 88,460 96,133 301,913
Loss on equipment disposal........................................ 230 -- --
Deferred income taxes............................................. (249,000) 140,659 99,484
Write-off of investment........................................... 6,676 -- --
Changes in:
Trade receivables............................................... 297,211 (29,128) 41,336
Inventories..................................................... (311,845) (1,156,643) (668,900)
Prepaid expenses and other current assets....................... (565,669) 373,807 (166,027)
Trade payables.................................................. 305,776 277,909 2,423,819
Income taxes payable............................................ -- 835,409 143,099
Accrued liabilities and royalty payable to stockholders......... 111,514 944,547 1,099,819
Customer deposits............................................... 5,126 25,473 107,084
------------ ------------- -------------
Net cash provided by operating activities..................... 381,383 3,929,332 15,867,121
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of investment in certificate of deposit............. (100,000) 100,000 --
Additions to furniture and equipment................................ (123,516) (278,886) (1,738,836)
Additions to other assets........................................... (3,201) (22,514) (12,309)
Prepaid acquisition cost of Nautilus................................ -- -- (120,454)
------------ ------------- -------------
Net cash used in investing activities......................... (226,717) (201,400) (1,871,599)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation................... (8,269) (9,113) (9,167)
Proceeds from issuing common stock.................................. 251,890 15,586 134,004
Stock repurchased................................................... -- (98,120) --
------------ ------------- -------------
Net cash provided by (used in) financing activities........... 243,621 (91,647) 124,837
------------ ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 398,287 3,636,285 14,120,359
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................... 755,744 1,154,031 4,790,316
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR................................ $ 1,154,031 $ 4,790,316 $ 18,910,675
------------ ------------- -------------
------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 2,225 $ 1,381 $ 455
Cash paid for income taxes.......................................... -- 250,000 6,465,006
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS--Tax benefit
of exercise of nonqualified options................................. $ -- $ 34,281 $ 439,452
See notes to financial statements.
F-7
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Direct Focus, Inc. (the "Company") is a direct marketing company that
develops and markets high-end, branded consumer products. The Company markets
consumer products directly to consumers 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 recently the Company has introduced a
direct marketing campaign for a line of high-end airbeds.
The Company is registered under the laws of the State of Washington and is
subject to the securities laws of Ontario (Ontario Securities Commission),
Canada and the regulations of the Toronto Stock Exchange.
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.
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 date 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, which include assembly and testing labor, 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.
FURNITURE AND EQUIPMENT
Furniture and Equipment is stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to seven years,
except for the capital lease equipment which is being depreciated over the life
of the lease.
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, 1998. If there were an indication of impairment,
management would prepare an estimate of future cash flows (undiscounted and
without
F-8
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 specifically of acquisition costs, license agreements
and patents and trademarks. Amortization is computed using the straight-line
method over estimated useful lives of 3 to 17 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 Bowflex line of home fitness products and twenty years on airbeds.
A provision for estimated warranty costs has been provided and is included in
accrued liabilities.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. The
Company has established reserves for potential sales returns for 1997 and 1998
of $285,000 and $600,704, respectively, based upon historical experience.
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.
SEGMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
which establishes standards for reporting information regarding an entity's
operating activities. SFAS No. 131 requires that operating segments
F-9
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
be defined at the same level and in a similar manner as management evaluates
operating performance. Currently, the Company is operating as a single segment.
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and for hedging activities. Currently, the
Company does not engage in any derivative or hedging activities.
RECLASSIFICATIONS
Certain amounts from the 1996 and 1997 have been reclassified to conform to
the 1998 presentation.
(2) ACQUISITION
Effective January 4, 1999, the Company acquired substantially all of the net
assets of Nautilus International, Inc. ("Nautilus"), a manufacturer and
distributor of commercial fitness equipment. The acquisition has been accounted
for under the purchase method of accounting. The Company paid approximately
$16.0 million for the assets and intellectual property of Nautilus and assumed
$2.5 million in current liabilities.
The unaudited pro forma financial information below for the fiscal year
ended December 31, 1998 was prepared as if the transaction had occurred on
January 1, 1998:
Revenue........................................................................ $ 76,600,696
Net income..................................................................... $ 9,755,812
Basic earnings per share....................................................... $ 1.04
Diluted earnings per share..................................................... $ 1.00
The unaudited pro forma financial information is not necessarily indicative
of what actual results would have been had the transaction occurred at the
beginning of the respective year nor do they purport to indicate the results of
future operations of the Company.
(3) INVENTORIES
Inventories at December 31 consisted of the following:
1997 1998
------------ ------------
Finished goods.................................................... $ 1,156,862 $ 1,758,171
Parts and components.............................................. 788,911 856,502
------------ ------------
Total......................................................... $ 1,945,773 $ 2,614,673
------------ ------------
------------ ------------
F-10
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(4) ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of the following:
1997 1998
------------ ------------
Accrued expenses.................................................. $ 162,261 $ 127,970
Accrued payroll................................................... 114,569 357,033
Accrued payroll taxes............................................. 60,515 185,996
Sales return reserve.............................................. 285,000 600,704
Accrued advertising............................................... 92,144 275,298
Accrued bonus..................................................... 175,000 20,411
Accrued other..................................................... 199,645 283,871
------------ ------------
Total......................................................... $ 1,089,134 $ 1,851,253
------------ ------------
------------ ------------
(5) COMMITMENTS AND CONTINGENCIES
LINES OF CREDIT
During 1998, the Company obtained two lines of credit for $5,000,000 each
with a bank. Both lines are secured by the Company's general assets, and
interest is payable on outstanding borrowings under each line at the bank's
prime rate (7.75% at December 31, 1998). There were no outstanding borrowings on
these lines of credit at December 31, 1998.
OPERATING LEASES
The Company leases its 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 31, 2000. Rent expense under these leases was
$66,714 in 1996, $107,361 in 1997, and $239,197 in 1998.
OBLIGATIONS
Future minimum lease payments under the operating leases during the years
ending December 31 are as follows:
1999.............................................................................. $ 300,324
2000.............................................................................. 186,664
2001.............................................................................. 73,644
2002.............................................................................. 24,548
----------
Total minimum lease payments.................................................. $ 585,180
----------
----------
F-11
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT CONTRACTS
Three officers of the Company are employed under employment contracts.
LITIGATION
A competitor has filed an action against the Company and one of its
officers, alleging violations of the competitor's intellectual property rights.
The competitor seeks, among other things, monetary damages and injunctive relief
in connection with its claims. The Company believes the claims lack merit and
intends to vigorously defend against the claims. However, if the competitor
successfully prosecutes any of its claims against the Company, the resulting
monetary damages and/or injunctive relief would have a material adverse effect
on the Company's financial position, results of operations and/or cash flows.
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 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.
(6) PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT
During 1996, the Company entered into a Private Placement Subscription
Agreement (the "Agreement") to issue 750,000 shares of common shares at $0.33
per share. Net proceeds, after deducting expenses of $2,910 were $247,090. In
addition, upon meeting certain conditions the Agreement would grant to the
subscriber nontransferable common share purchase warrants to purchase up to
1,280,000 common shares subject to certain conditions. These conditions were not
met in 1997 and the warrants expired.
(7) 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 for up to 1,857,961 shares of
common stock. 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
market price of the Company's stock on the date of the grant, and vesting
periods vary by option granted, generally no longer than three 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
F-12
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(7) STOCK OPTIONS (CONTINUED)
options granted in 1996, 1997, and 1998 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, 1996,
1997, and 1998:
1996 1997 1998
---------- ------------ -------------
Net income, as reported............................. $ 692,904 $ 2,421,166 $ 12,485,494
Net income, pro forma............................... 671,452 2,334,082 12,274,208
Diluted earnings per share, as reported............. $ 0.08 $ 0.25 $ 1.28
Diluted earnings per share, pro forma............... $ 0.08 $ 0.25 $ 1.26
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 awarding of stock compensation awards in future years.
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 1996, 1997, and 1998, respectively; all options
granted will vest as scheduled; no dividend yield for all three years; risk-free
interest rate of 5.9%, 5.5%, and 5%; expected volatility of 178%, 93% and 76%;
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, 1996, 1997, and 1998, and changes during the years ended on those dates is
presented below.
1996 1997 1998
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at beginning of year............. 535,000 $ 0.43 646,500 $ 0.18 813,113 $ 0.47
Granted...................................... 356,500 0.20 386,500 0.96 188,000 5.70
Forfeited or canceled........................ (205,000) 0.87 (90,000) .98 (10,000) 0.96
Exercised.................................... (40,000) 0.12 (129,887) 0.12 (440,495) 0.30
---------- ----- ---------- ----- ---------- -----
Outstanding at end of year................... 646,500 $ 0.18 813,113 $ 0.47 550,618 $ 2.39
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Options exercisable of end of year........... 465,000 504,779 309,199
---------- ---------- ----------
---------- ---------- ----------
Weighted average for value of options granted
in current year............................ $ 0.26 $ 0.91 $ 3.72
---------- ---------- ----------
---------- ---------- ----------
F-13
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(7) STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------- ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER OF AVERAGE
NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------------------------------------------- ----------- --------------- ----------- ----------- -----------
$0.12 - $0.98 362,618 3.0 $ 0.68 264,617 $ 0.64
$4.62 - $9.75 188,000 4.3 5.70 44,582 4.94
--
----------- ----- ----------- -----
$0.12 - $9.75 550,618 3.4 $ 2.39 309,199 $ 1.26
--
--
----------- ----- ----------- -----
----------- ----- ----------- -----
(8) INCOME TAXES
The tax effect of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1997 and 1998 can be summarized as
follows:
1997 1998
----------------------- -----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
DEFERRED DEFERRED DEFERRED DEFERRED
---------- ----------- ---------- -----------
Deferred tax assets.............................................. $ 222,139 $ 26,202 $ 311,426 $ --
Deferred tax liabilities......................................... -- -- (95,689) (66,880)
---------- ----------- ---------- -----------
Deferred income taxes, net................................... $ 222,139 $ 26,202 $ 215,737 $ (66,880)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
The expense (benefit) for income taxes consists of the following:
1996 1997 1998
----------- ------------ ------------
Current:
Federal............................................ $ -- $ 1,085,409 $ 6,608,100
Deferred:
Federal............................................ (249,000) 140,659 99,484
----------- ------------ ------------
Total income tax expense (benefit)............... $ (249,000) $ 1,226,068 $ 6,707,584
----------- ------------ ------------
----------- ------------ ------------
The principal differences between taxes on income computed at the statutory
federal income tax rate and recorded income tax expense (benefit) for 1996,
1997, or 1998 are as follows:
1996 1997 1998
----------- ------------ ------------
Tax computed at statutory rate....................... $ 155,366 $ 1,240,060 $ 6,717,577
Change in valuation allowance........................ (385,000) -- --
Other................................................ (19,366) (13,992) (9,993)
----------- ------------ ------------
Income tax expenses (benefit).................... $ (249,000) $ 1,226,068 $ 6,707,584
----------- ------------ ------------
----------- ------------ ------------
F-14
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(9) EARNINGS PER SHARE
Effective for the year beginning January 1, 1997, the Company adopted SFAS
No. 128, EARNINGS PER SHARE. SFAS No. 128 established new standards for
computing and presenting earnings per share and, accordingly, all periods have
been restated. 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:
AVERAGE SHARES
----------------------------------
1996 1997 1998
---------- ---------- ----------
Basic shares outstanding............................... 8,558,227 8,986,655 9,336,525
Common stock equivalents............................... 385,058 524,213 389,433
---------- ---------- ----------
Diluted shares outstanding............................. 8,943,285 9,510,868 9,725,958
---------- ---------- ----------
---------- ---------- ----------
(10) RELATED-PARTY TRANSACTIONS
The Company incurred royalty expense under an agreement with a stockholder
of the Company of $220,397 in 1996, $530,805 in 1997, and $1,603,821 in 1998, of
which $210,511 and $548,211 was payable at December 31, 1997 and 1998,
respectively.
The Company incurred royalty expense under an agreement with a stockholder
who is a director of the Company of $41,048, $36,722, and zero in 1996, 1997,
and 1998, 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.
The Company incurred attorney fees to a director of the Company of $2,692,
$4,401, and $5,545 in 1996, 1997, and 1998, respectively.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosure of fair value information about financial
instruments when it is practicable to estimate that value. 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.
F-15
DIRECT FOCUS, INC. AND AFFILIATE
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Effective January 4, 1999, Direct Focus, Inc. ("Direct Focus") acquired
substantially all of the assets of Nautilus International, Inc. ("Nautilus").
Direct Focus accounted for the acquisition using the purchase method of
accounting. Direct Focus paid $16.0 million in cash for the assets and assumed
approximately $2.5 million in current liabilities. Because of the Nautilus
acquisition, several adjustments and factors will impact the comparability of
our historical financial results with our future results of operations. The
following unaudited pro forma combined financial statements reflect: (1) certain
adjustments for the effects of purchase accounting; (2) certain assumptions
described below regarding financing and cash management aspects of the
transaction; and (3) a provision for income taxes as if the combined operations
had been taxed as a C-corporation for all periods presented.
In addition, the unaudited pro forma combined balance sheet has been
prepared as if the Nautilus acquisition had occurred on December 31, 1998. The
unaudited pro forma combined statement of operations was prepared as if the
Nautilus acquisition were consummated on January 1, 1998. Direct Focus believes
that all adjustments necessary to present fairly the unaudited pro forma
combined financial statements have been made. These financial statements are not
necessarily indicative of what actual results would have been had the
transaction occurred on January 1, 1998, nor do they purport to indicate the
future results of Direct Focus's operations. The unaudited pro forma combined
financial statements should be read in conjunction with our financial statements
and accompanying notes and the financial statements of Nautilus and related
notes appearing elsewherewebsite address in this prospectus.
The costs of the acquisition have been allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition as
determined by management. The allocation of the costs of acquisitions is
preliminary while the Company obtains final information regarding the fair
values of all assets acquired; however, management believes that any adjustments
to the amounts allocated will not have a material effect on the Company's
financial position or results of operations.
F-16
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
DIRECT FOCUS,
INC. NAUTILUS ADJUSTMENTS PRO FORMA
---------------- ------------- --------------- -------------
Current Assets:
Cash and cash equivalents............... $ 18,910,675 13,309 $ (16,013,309 (1) $ 2,910,675
Trade Receivables....................... 218,207 3,226,325 (193,332 (2) 3,251,200
Inventories............................. 2,614,673 4,024,132 (1,000,000 (2) 5,638,805
Prepaid expenses and other current
assets................................ 594,146 111,551 -- 705,697
---------------- ------------- --------------- -------------
Total current assets.................. 22,337,701 7,375,317 17,206,641 12,506,377
Property:................................. 1,842,712 10,692,938 (2,058,585 (2) 10,477,065
Other Assets.............................. 192,859 618,808 3,601,764 )(3 4,413,431
---------------- ------------- --------------- -------------
Total..................................... $ 24,373,272 $ 18,687,063 $ (15,663,462) $ 27,396,873
---------------- ------------- --------------- -------------
---------------- ------------- --------------- -------------
Current Liabilities:
Trade payables.......................... $ 3,602,074 $ 348,175 408,664(2) $ 4,358,913
Income taxes payable.................... 504,775 -- -- 504,775
Accrued liabilities..................... 2,548,401 2,168,174 -- 4,716,575
Due to affiliate........................ -- 39,733,312 (39,733,312 (4) --
---------------- ------------- --------------- -------------
Total current liabilities............. 6,655,250 42,249,661 (39,324,648) 9,580,263
Long-term Liabilities..................... 66,880 98,588 -- 165,468
Total Stockholders' Equity................ 17,651,142 (23,661,186) 23,661,186(4) 17,651,142
---------------- ------------- --------------- -------------
Total..................................... $ 24,373,272 $ 18,687,063 $ (15,663,462) $ 27,396,873
---------------- ------------- --------------- -------------
---------------- ------------- --------------- -------------
- ------------------------
(1) Represents $16.0 million cash paid for Nautilus and cash not acquired from
Nautilus.
(2) To record the estimated fair value of assets acquired and liabilities
assumed in the Nautilus acquisition. The purchase price was comprised of
$16.0 million in cash and $2.5 million in assumed current liabilities.
NAUTILUS
HISTORICAL
NET ASSETS ACQUIRED DECEMBER 31, 1998 FAIR VALUE
- ----------------------------------------------------------- ----------------- -------------
Accounts receivables....................................... $ 3,226,325 $ 3,032,993(a)
Inventories................................................ 4,024,132 3,024,132(b)
Prepaid expenses and other current assets.................. 111,551 111,551
Furniture and equipment.................................... $ 10,692,938 8,634,353
Liabilities assumed........................................ (2,614,937) (2,523,601)(c)
----------------- -------------
Total...................................................... $ 15,440,009 $ 12,279,428
----------------- -------------
----------------- -------------
(a) Excludes $193,332 of current receivables not purchased.
(b) Reflects $1 million of inventories related to Nautilus products which
will be discontinued.
(c) Excludes $91,336 of liabilities not assumed and includes $500,000 of
acquisition costs.
F-17
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
(3) Includes $4,220,572 representing the estimated fair value of the Nautilus
brand trademark, less $618,808 of finance notes receivable not acquired by
Direct Focus.
(4) Reflects the elimination of Nautilus' deficit and amounts due to an
affiliate, which Direct Focus did not assume.
F-18
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
DIRECT FOCUS, PRO FORMA
INC. NAUTILUS ADJUSTMENTS PRO FORMA
---------------- -------------- ----------------- -----------------
Net sales................................ $ 57,296,880 $ 19,303,816 $ -- $ 76,600,696
Cost of Sales............................ 12,442,307 15,016,987 (1,069,827)(1) 26,389,467
---------------- -------------- ----------------- -----------------
Gross profit........................... 44,854,573 4,286,829 1,069,827 50,211,229
Total Operating Expenses................. 25,966,567 8,908,559 (267,336)(2) 34,607,790
Impairment Charges....................... -- 11,100,000 (11,100,000)(3) --
---------------- -------------- ----------------- -----------------
Operating income (loss)................ 18,888,006 (15,721,730) 12,437,163 15,603,439
Interest Expense......................... (455) (3,142,238) 2,754,256(4) (388,437)
Other Income (Expense)................... 305,527 81,244 (608,205)(5) (221,434)
---------------- -------------- ----------------- -----------------
Net income (loss) before income
taxes................................ 19,193,078 (18,782,724) 14,583,214 14,993,568
Income Taxes............................. 6,707,584 -- (1,469,829)(6) 5,237,755
---------------- -------------- ----------------- -----------------
Net Income (Loss)........................ $ 12,485,494 $ (18,782,724) $ 16,053,042 $ 9,755,812
---------------- -------------- ----------------- -----------------
---------------- -------------- ----------------- -----------------
Basic Earnings Per Share................. $ 1.34 $ 1.04
---------------- -----------------
---------------- -----------------
Diluted Earnings Per Share............... $ 1.28 $ 1.00
---------------- -----------------
---------------- -----------------
Basic Outstanding Shares................. 9,336,525 9,336,525
---------------- -----------------
---------------- -----------------
Diluted Outstanding Shares............... 9,725,958 9,725,958
---------------- -----------------
---------------- -----------------
- ------------------------
(1) Reflects a $1.1 million decrease in depreciation expense associated with the
depreciation of acquired property with an estimated fair value of $8.6
million. The depreciation is on a straight-line basis over periods ranging
from 7 to 31.5 years.
(2) Reflects a $211,000 decrease in total operating expenses relating to the
reduced amortization of the estimated intangible asset value of $4.2 million
on a straight-line basis over a period of 20 years and depreciation expense
of $56,000 on acquired assets.
(3) The $11.1 million adjustment eliminates the effect of a one-time impairment
charge taken by Nautilus International in connection with the revaluation of
its assets based upon the $18.5 million acquisition price (including
assumption of $2.5 million of current liabilities.)
(4) Reflects a $2.8 million decrease in interest expense, which would have
resulted had the acquisition occurred on January 1, 1998.
(5) Reflects a $608,000 decrease in other income relating to interest income
that we would have foregone by using cash in the acquisition.
(6) The $1.5 million decrease in income tax expense reflects income tax expense
at our effective tax rates after giving effect to the adjustments described
above.
F-19
INDEPENDENT AUDITORS' REPORT
The Boards of Directors of
Delta Woodside, Inc.:
We have audited the accompanying combined balance sheets of the Nautilus
Business (the "Business"), as described in Note 1, as of June 28, 1997 and June
27, 1998, and the related combined statements of operations and accumulated
deficit and cash flows for each of the years in the three-year period ended June
27, 1998. These combined financial statements are the responsibility of the
Business' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Business as of
June 28, 1997 and June 27, 1998, and the results of its operations and cash
flows for each of the years in the three-year period ended June 27, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
October 2, 1998
F-20
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED BALANCE SHEETS
ASSETS
JUNE 28, JUNE 27,
1997 1998
-------------- --------------
Current assets:
Cash............................................................................ $ 1,790 $ 1,600
Accounts receivable (notes 3 and 9):
Customer........................................................................ 4,196,491 4,414,042
Financed notes.................................................................. 792,438 473,171
Other........................................................................... 155,049 74,912
Less allowance for doubtful accounts............................................ (1,723,982) (1,604,407)
-------------- --------------
3,419,996 3,357,718
-------------- --------------
Inventories (notes 2 and 9):
Raw materials................................................................. 2,078,598 1,730,295
Work in process............................................................... 1,597,676 1,614,862
Finished goods................................................................ 702,141 970,206
Supplies...................................................................... 25,574 20,661
-------------- --------------
4,403,989 4,336,024
-------------- --------------
Prepaids and other current assets (note 2)...................................... 125,544 122,103
-------------- --------------
Total current assets.......................................................... 7,951,319 7,817,445
-------------- --------------
Property, plant and equipment, net (note 4)....................................... 12,897,432 11,522,745
Financed notes receivable (note 3)................................................ 2,241,777 1,771,773
Intangible assets, net (note 5)................................................... 11,476,601 1,987,961
-------------- --------------
$ 34,567,129 $ 23,099,924
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................ 271,892 515,223
Bank overdraft.................................................................. 552,658 469,963
Accrued employee compensation................................................... 824,194 1,084,480
Other accrued expenses (note 6)................................................. 1,946,448 1,046,636
Due to affiliates, net (note 9)................................................. 33,011,924 36,992,270
Current bond obligations........................................................ 116,566 --
-------------- --------------
Total current liabilities..................................................... 36,723,682 40,108,572
-------------- --------------
Other liabilities................................................................. 70,000 13,138
-------------- --------------
Total liabilities............................................................. 36,793,682 40,121,710
-------------- --------------
Stockholder's deficit:
Common stock, $1 par value, authorized, issued and outstanding 100 shares......... 100 100
Additional paid in capital...................................................... 10,692,506 10,692,506
Accumulated deficit............................................................. (12,919,159) (27,714,392)
-------------- --------------
Total stockholder's deficit................................................... (2,226,553) (17,021,786)
-------------- --------------
Commitments and contingencies
$ 34,567,129 $ 23,099,924
-------------- --------------
-------------- --------------
See accompanying notes to combined financial statements
F-21
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED
----------------------------------------------
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
-------------- -------------- --------------
Net sales........................................................ $ 28,591,447 $ 21,935,298 $ 20,851,063
Cost of goods sold............................................... 19,914,644 17,134,933 16,291,581
-------------- -------------- --------------
Gross profit................................................... 8,676,803 4,800,365 4,559,482
-------------- -------------- --------------
Selling, general and administrative expenses..................... (13,463,038) (11,014,925) (7,704,677)
Impairment charges (note 2)...................................... -- -- (8,800,000)
Intercompany management fees..................................... (228,000) (302,428) (194,471)
Royalty income (note 2).......................................... 474,125 445,121 268,779
Other income (expense)........................................... 4,028 90,265 (42,871)
-------------- -------------- --------------
Operating loss................................................. (4,536,082) (5,981,602) (11,913,758)
-------------- -------------- --------------
Interest income (expense):
Interest income................................................ 662,615 160,913 112,966
Interest expense............................................... (67,656) (19,141) (24,774)
Intercompany interest expense.................................. (1,879,433) (2,158,509) (2,969,667)
-------------- -------------- --------------
(1,284,474) (2,016,737) (2,881,475)
-------------- -------------- --------------
Loss before taxes................................................ (5,820,556) (7,998,339) (14,795,233)
Income tax benefit (note 8)...................................... (2,495,057) (1,202,379) --
-------------- -------------- --------------
Net loss (3,325,499) (6,795,960) (14,795,233)
Accumulated deficit, beginning of year........................... (2,797,700) (6,123,199) (12,919,159)
-------------- -------------- --------------
Accumulated deficit, end of year................................. $ (6,123,199) $ (12,919,159) $ (27,714,392)
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to combined financial statements
F-22
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED
----------------------------------------------
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
-------------- -------------- --------------
Operating activities:
Net loss....................................................... $ (3,325,499) $ (6,795,960) $ (14,795,233)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation................................................. 1,351,164 1,469,573 1,486,652
Amortization................................................. 692,753 689,846 688,640
Deferred taxes............................................... (1,944,345) (1,185,199) --
Impairment charges........................................... -- -- 8,800,000
Provision for losses on accounts receivable.................. 123,426 283,626 (119,575)
(Gain) loss on sale of property and equipment................ -- (83,267) 1,595
Changes in operating assets and liabilities:
Accounts receivable........................................ 2,595,441 1,543,410 651,857
Inventories................................................ (292,303) (231,699) 67,965
Prepaids and other current assets.......................... 73,130 317,671 3,441
Other noncurrent assets.................................... 111,268 -- --
Accounts payable........................................... (333,376) (658,453) 243,331
Bank overdraft............................................. 406,725 20,710 (82,695)
Accrued employee compensation.............................. 53,057 159,367 260,286
Other accrued expenses..................................... 478,266 412,894 (899,812)
Other liabilities.......................................... 15,664 (669,103) (56,862)
-------------- -------------- --------------
Net cash provided (used) by operating activities......... 5,371 (4,726,584) (3,750,410)
-------------- -------------- --------------
Investing activities:
Purchases of property, plant and equipment..................... (863,354) (620,288) (121,185)
Proceeds from sale of property, plant and equipment............ -- 266,386 7,625
-------------- -------------- --------------
Net cash used by investing activities.................... (863,354) (353,902) (113,560)
-------------- -------------- --------------
Financing activities:
Principal payments on bond obligations......................... (9,576) (58,661) (116,566)
Change in due to affiliates, net............................... 874,811 5,131,415 3,980,346
-------------- -------------- --------------
Net cash provided by financing activities................ 865,235 5,072,754 3,863,780
-------------- -------------- --------------
Increase (decrease) in cash...................................... 7,252 (7,732) (190)
Cash at beginning of year........................................ 2,270 9,522 1,790
-------------- -------------- --------------
Cash at end of year.............................................. $ 9,522 $ 1,790 $ 1,600
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Interest paid.................................................. $ 1,879,433 $ 2,158,509 $ 2,969,667
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to combined financial statements.
F-23
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 27, 1998
(1) BASIS OF PRESENTATION
The combined financial statements include the operations and accounts of
Nautilus International, Inc., a Virginia corporation, and the Nautilus
trademark, combined and referred to herein as the Business. The Business is
owned by Alchem Capital Corporation, a wholly owned subsidiary of Delta Woodside
Industries, Inc. ("DWI"). The accompanying combined financial statements have
been prepared for purposes of depicting the combined financial position and
results of operations of the Business on a historical cost basis.
All balances and transactions among the Business have been eliminated in
combination. Balances and transactions with other affiliates have not been
eliminated in the combination and are reflected as affiliate balances and
transactions.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
The Business designs, manufactures, markets and services fitness
equipment. The Business sells its products and services in the domestic
market through direct sales representatives, distributors and dealers.
Internationally, the Business sells its products and services through a
network of distributors.
(B) FISCAL YEAR
The Business' operations are based upon a fifty-two, fifty-three week
fiscal year ending on the Saturday closest to June 30. Fiscal years 1996,
1997 and 1998 each consist of 52 weeks.
(C) INVENTORIES
Inventories are stated at the lower of cost or market determined using
the first-in, first-out (FIFO) method.
Included in finished goods inventories are consignment inventory balances
which represent equipment which is used by customers on a trial basis.
The Business does not record revenue for trial equipment until the
customer agrees to purchase the items. However, in order to account for
the risk of loss if this equipment is not returned to the Business, a
reserve has been established where this equipment is depreciated over 3
years. The net book value of this consignment inventory is approximately
$49,000 and $43,000 as of June 28, 1997 and June 27, 1998, respectively.
Included in finished goods inventories are used equipment which customers
trade-in when purchasing new equipment. The Business values this
equipment at the trade-in allowance and attempts to sell these items to
customers in the used fitness equipment market. The net book value of
this inventory is approximately $202,000 and $177,000 as of June 28, 1997
and June 27, 1998, respectively.
(D) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated on the basis of cost.
Depreciation is computed by the straight-line method for financial
reporting based on estimated useful lives of 3 to 31.5 years, and by
accelerated methods for income tax reporting.
F-24
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Business adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, in fiscal year 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets.
The Business' assets held for sale include all net assets except for
intercompany balances with affiliates. The net value of assets held for
sale have been written down to their estimated fair market value, which
is the net estimated purchase price of the Business of approximately
$20.0 million. Therefore, in order to value these assets held for sale at
their estimated fair market value, the Business has recorded an
impairment charge of $8.8 million during 1998 which was recorded as a
reduction in intangible assets, net.
(F) OTHER ASSETS
Other assets consist principally of prepaid insurance and prepaid
expenses for booth space related to future trade shows.
(G) RESEARCH AND DEVELOPMENT, AND ADVERTISING
Research and development, and advertising costs are expensed as incurred.
Research and development costs amounted to approximately $666,000,
$692,000 and $593,000 in 1996, 1997 and 1998, respectively. Advertising
costs amounted to approximately $2,820,000, $1,142,000 and $600,000 in
1996, 1997 and 1998, respectively.
(H) REVENUE RECOGNITION
Sales are recorded upon shipment if the products are shipped with a
common carrier or upon installation if the Business' truck fleet is used
for delivery of the products.
(I) ROYALTY INCOME
The Business licenses its products through International Apparel
Marketing Corporation, a subsidiary of the Business' parent, Delta
Woodside Industries, Inc. The Business receives 35% of the royalties
earned by International Apparel Marketing Corporation on the Nautilus
licensees. The Business' current licensing agreements expire at various
intervals from September 30, 1998 to January 31, 2000, with renewal
options ranging from zero to three years. In addition, the Business
receives royalty income directly from various customer sources which is
primarily due to licensing fees for use of the Nautilus name in fitness
clubs.
(J) INCOME TAXES
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
F-25
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) YEAR 2000
In 1998, the Business recognized its computer programs are not Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
As of June 27, 1998, the Business has not begun to convert its systems to
be Year 2000 compliant. If the Business were to not become Year 2000
compliant by January 1, 2000, it may have a material adverse impact on
the Business' operations.
(L) WARRANTY COSTS
The Business offers product warranties to all its customers. These
warranties include 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. Warranty
expense was approximately $373,000, $287,000 and $367,000 for fiscal
years 1996, 1997 and 1998, respectively. Accrued warranty expense, which
is included in other accrued expenses, was approximately $177,000 as of
June 28, 1997 and June 27, 1998.
(M) COMMITMENTS AND CONTINGENCIES
The Business has been named as a "potentially responsible party" under
the Comprehensive Environmental Response, Compensation, and Liability Act
with respect to three hazardous waste sites. To the Business' knowledge,
all of the transactions with these sites were conducted by a corporation
whose assets were sold in 1990 pursuant to the terms of an order of the
United States Bankruptcy Court to another corporation, the stock of which
was subsequently acquired by the Business in January 1993. The Business,
therefore, has denied any responsibility at the sites and has declined to
participate in any settlements. Accordingly, the Business has not
provided for any reserves for costs or liabilities attributable to the
previous corporation. At two sites, the previous company is listed as a
"de minimis" party. At the third site, the previous company is ranked
eleventh out of a total of over 300 potentially responsible parties based
on the company's volume of contribution of about 3.0%. Latest estimates
of certain costs to clean up the site range up to $4 million. Although
there is uncertainty as to several legal issues, the Business believes
that it has certain defenses to liability at these sites and the
potential liabilities arising from these three sites will not have a
materially adverse impact on the Business.
From time to time, the Business is a defendant in legal actions involving
claims arising in the normal course of business, including product
liability claims. The Business believes that, as a result of legal
defenses, insurance arrangements and indemnification provisions with
parties believed to be financially capable, none of these actions should
have a material effect on its operations or financial condition.
(N) USE OF 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.
F-26
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(3) ACCOUNTS RECEIVABLE
The Business' customer receivable balances are due in a lump-sum from
various customers.
The Business' financed receivable balances relate to customer receivable
balances which are due in equal installments over periods of time ranging up to
60 months. This program was usedprospectus solely as an additional incentive to promote
purchasinginactive textual reference.
17
4,098,362 Shares of the Business' products by domestic customers. This program was
discontinued in May 1996 and all sales transactions are now payable within
normal trade credit terms.
In May 1996, the Business sold approximately $5.8 million of its financed
receivable balances to a financial institution under a purchase agreement.
Approximately $0.9 million of these receivable balances were sold without
recourse while approximately $4.9 million of these receivable balances were sold
with recourse. The receivable balances sold with recourse have been accounted
for as a sale, in accordance with Statement of Financial Standards No. 77
"Reporting by Transferors for Transfers of Receivables with Recourse." The net
loss on this sale was approximately $150,000 after a contingency of $250,000 for
the Business' estimated future obligations related to the sale was accrued as of
the sale date. The remaining contingency reserve as of June 28, 1997 and June
27, 1998 was $180,000 and $108,000, respectively. As of June 28, 1997 and June
27, 1998, the outstanding balance of these receivables sold with recourse was
approximately $3,558,000 and $1,973,000, respectively.
Other receivable balances are principally due to royalty and employee
receivables.
Changes in the reserve for doubtful accounts are as follows:
PRELIMINARY PROSPECTUS
, a Virginia corporation, and the Nautilus
trademark, combined and referred to herein as the Business. The Business is
owned by Alchem Capital Corporation, a wholly owned subsidiary of Delta Woodside
Industries, Inc. (DWI). The accompanying combined financial statements have been
prepared for purposes of depicting the combined financial position and results
of operations of the Business on a historical cost basis.
The parent company, DWI, has sold certain assets and liabilities of the
Business (as defined in the Asset Purchase Agreement dated November 10, 1998) to
Direct Focus, Inc. The transaction closed on January 4, 1999.
All balances and transactions among the Business have been eliminated in
combination. Balances and transactions with other affiliates have not been
eliminated in the combination and are reflected as affiliate balances and
transactions.
(2) SIGNIFICANT ACCOUNTING POLICIES
The condensed financial statements included herein as of June 27, 1998 and
December 31, 1998 and for the six month periods ended December 27, 1997 and
December 31, 1998 have been prepared by the Business, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments necessary for a fair presentation have been
included, herein and are of a normal, recurring nature.
(3) IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal year 1998, the Business' assets held for sale include all net
assets except for intercompany balances with affiliates. The net value of assets
held for sale have been written down to their estimated fair market value, which
is the net estimated purchase price of the Business of approximately $20.0
million. Therefore, in order to value these assets held for sale at their
estimated fair market value, the Business has recorded an impairment charge of
$8.8 million during 1998, which was recorded as a reduction in intangible
assets, net. However in 1999, the purchase price of certain assets of the
Business was finalized at $16 million plus the assumption of certain
liabilities. Therefore, in order to value these assets held for sale at their
estimated fair market value, the Business recorded an additional impairment
charge of $2.3 million during the period ended December 31, 1998, which was
recorded as a $2.2 million reduction in intangible assets, net and a $.1 million
reduction in property, plant and equipment, net.
F-36
[Inside back cover of the prospectus includes the following artwork:
In the top left corner of this single page layout is the Bowflex logo,
beneath which is a picture of a male torso surrounded by a picture of the
Bowflex Power Pro XTLU and two pictures of individuals using the Company's
Bowflex machines. The top right corner includes the Direct Focus logo and the
following bullet points: (1) "High quality, branded products"; and (2) "Direct
marketing to control and enhance our image." Immediately below these two images
is the Nautilus logo and a picture of a Nautilus fitness machine with a shaded
Nautilus shell in the background. Below the Nautilus image is the Instant
Comfort logo, together with a picture of the product components and a complete
airbed in a bedroom setting.]
[OUTSIDE BACK COVER]
[COMPANY LOGO APPEARS HERE]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
| Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth the variouscosts and expenses, other than placement agent fees, paid or payable by Nautilus, Inc., or the Registrant, in connection with the issuancesale and distribution of the securities being registered, other than the
underwriting discount, all of which shall be borne by the Company.registered. All amounts shown are estimatesestimated except the SecuritiesSEC registration fee.
Item | Amount | |||
SEC registration fee | $ | 452 | ||
Legal fees and expenses | 35,000 | |||
Accounting fees and expenses | 7,500 | |||
Printing and engraving expenses | 12,000 | |||
Miscellaneous fees and expenses | 3,048 | |||
|
| |||
Total | $ | 58,000 | ||
|
| |||
| Item 14. | Indemnification of Directors and Officers |
Sections 23B.08.510 and Exchange Commission registration
fee, the National Association of Securities Dealers, Inc. filing fee and the
Nasdaq National Market listing fee.
Section 23B.08.32023B.08.560 of the WBCA authorizes a corporation by provision in a bylaw approved by its shareholders to limitindemnify or agree to indemnify a director's liabilitydirector made a party to a proceeding, or obligate itself to advance or reimburse expenses incurred in a proceeding, without regard to the corporationlimitations imposed by Sections 23B.08.510 through 23B.08.550 of the WBCA; provided that no such indemnity shall indemnify any director from or its shareholders for monetary damages
foron account of (a) acts or omissions as aof the director except in certain circumstances involvingfinally adjudged to be intentional misconduct or a knowing violationsviolation of law, (b) conduct of the director finally adjudged to be in violation of Section 23B.08.310 of the WBCA or illegal corporate loans or
distributions, or(c) any transaction forwith respect to which theit was finally adjudged that such director personally receivesreceived a benefit in money, property or services to which the director iswas not legally entitled. Section 8.4
Article IX of the registrant'sRegistrant’s Amended and Restated Articles of Incorporation, contains
provisions implementing,provides that, to the fullest extent permittedthat the WBCA permits the limitation or elimination of directors’ or officers’ liability, a director or officer shall not be liable to the Registrant or its shareholders for monetary damages as a result of acts or omissions as a director or officer, as applicable. Article X of the Registrant’s Amended and Restated Bylaws, as amended, requires the Registrant to indemnify every present or former director or officer to the fullest extent authorized by the WBCA or other applicable law against liabilities and losses incurred in connection with serving as a director or officer, as applicable, and to advance expenses of such limitationsdirector or officer in connection with defending any proceeding covered by the indemnity.
The Registrant maintains directors’ and officers’ liability insurance under which the Registrant’s directors and officers are insured against loss (as defined in the policy) as a result of claims brought against them for their wrongful acts in such capacities.
II-1
| Item 15. | Recent Sales of Unregistered Securities. |
In the three years preceding the filing of this registration statement, the Company made sales of the following unregistered securities:
June 2023 Private Placement
In connection with a registered direct offering of shares of our Common Stock and pre-funded warrants to purchase shares of our Common Stock, on June 15, 2023, we entered into a director's liabilitysecurities purchase agreement with an institutional investor (the “Purchaser”), pursuant to which, among other things, we sold to the registrant and its shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1996, the Company issued 750,000 shares of its common stock to an
investor with whom the Company had a business relationship, for an aggregate
purchase price of $250,000. As part of the same transaction, the investor could
have acquiredPurchaser warrants (the “Warrants”) to purchase up to 1,280,0004,098,362 shares of Common Stock in a private placement. No separate consideration was paid for the Company's
common stock at a priceissuance of $1.25 per share for one year and then $2.50 per
share, subject to certain conditions. These conditions were not satisfied in
1997the Warrants. The Warrants and the warrantsshares of Common Stock issuable upon exercise of the Warrants were never issued.
II-1
The Company issued the shares in reliance uponoffered pursuant to an exemption from the registration exemption
afforded by Rule 504requirement of Regulation D.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of registrant.
3.2 Articles of Merger of registrant.
3.3 Articles of Amendment of registrant.
3.4 Bylaws of registrant.
3.5 Amendment to Bylaws of registrant.
5.1* Opinion of Garvey, Schubert & Barer as to the legality of the shares.
10.1 Direct Focus, Inc. Stock Option Plan, as amended.
10.2 Form of Nonstatutory Option Agreement.
10.3 Form of Incentive Stock Option Agreement.
10.4 Lease Agreement dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen Group, Inc.
10.5 First Amendment to Lease dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen
Group, Inc.
10.7 Amendment to Bowflex, Inc. Lease Extension, dated August 27, 1996, between Bowflex, Inc. and Ogden
Business Park Partnership.
10.8 First Amendment to Lease, dated December 10, 1996, between Bowflex, Inc. and Ogden Business Park
Partnership
10.9 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc. and Hart Enterprises
10.10 Amendment to Lease, dated as of October 20, 1998, between Direct Focus, Inc. and LeRoy Hart Rentals.
10.11 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
10.12 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
10.13 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of America, Inc. and Tessema D.
Shifferaw.
10.14 Royalty Payment Agreement, dated as of June 18, 1992, between Tessema D. Shifferaw, Brian R. Cook and
R.E. 'Sandy' Wheeler.
10.15 First Amended and Restated Merchant Agreement dated as January 27, 1999, between Direct Focus, Inc. and
Household Bank (SB), N.A.**
10.16 Exclusive Sales Agreement dated as of January 1, 1996, between Delta Consolidated Corporation and
Novacare, Inc.**
21.1 Subsidiaries of Direct Focus, Inc.
23.1 Consent of Deloitte & Touche LLP.
II-2
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
23.2 Consent of KPMG Peat Marwick LLP.
23.3* Consent of Garvey, Schubert & Barer (included in Exhibit 5.1).
24.1 Power of Attorney of Kirland C. Aly.
24.2 Power of Attorney of C. Reed Brown.
24.3 Power of Attorney of Gary L. Hopkins.
24.4 Power of Attorney of Roger J. Sharp.
24.5 Power of Attorney of Roland E. Wheeler.
27.1 Financial Data Schedule.
- ------------------------
* To be filed by amendment
** We have requested confidential treatment for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
withAct provided in Section 4(a)(2) of the Securities Act and Rule 406, we have omitted these confidential portions from506(b) promulgated thereunder.
| Item 16. | Exhibits and Financial Statement Schedules. |
| (a) | Exhibits |
See the Exhibit Index attached to this exhibit
and filed them separately withRegistration Statement, which is incorporated by reference herein.
| (b) | Financial Statement Schedules |
No financial statement schedules are provided because the Commission.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specifiedinformation called for is not required or is shown either in the underwriting agreements, certificates in such
denominations and registered in such names as required byfinancial statements or the underwriters to
permit prompt delivery to each purchaser.
notes thereto.
| Item 17. | Undertakings |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange CommissionSEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) Forundertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
| (ii) | to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
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| (iii) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
| (2) | that for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) | to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: |
| (i) | if the registrant is relying on Rule 430B: |
| (A) | each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
| (B) | each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or |
| (ii) | If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use; |
| (5) | that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
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EXHIBIT INDEX
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| * | Filed herewith. |
| # | Management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrantregistrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Vancouver, State of Washington on March 1, 1999.
August 17, 2023.
| Nautilus, Inc. | ||
| By: | /s/ James Barr, IV | |
| James Barr, IV | ||
| Director and Chief Executive Officer | ||
POWER OF ATTORNEY AND SIGNATURES
Each person whose signature appears below constitutes and appoints James Barr, IV and Aina Konold and each of them singly, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including, without limitation, post-effective amendments) to this registration statement and any and all additional registration statements pursuant to Rule 462(b) of the Securities Act and to file the same, with all exhibits thereto and all other documents in connection therewith, with the SEC, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their, his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Person | Capacity | Date | ||
/s/ James Barr, IV James Barr, IV | Director (Principal Executive Officer) | August 17, 2023 | ||
/s/ Aina Konold Aina Konold | Chief Financial Officer (Principal Financial and | |||
| August | ||||
/s/ Anne G. Saunders Anne G. Saunders | Director | August 17, 2023 | ||
/s/ Patricia M. Ross Patricia M. Ross | Director | August 17, 2023 | ||
/s/ Kelley Hall Kelley Hall | Director | August 17, 2023 | ||
/s/ Shailesh Prakash Shailesh Prakash | Director | August 17, 2023 | ||
/s/ Ruby Sharma Ruby Sharma | Director | August 17, 2023 | ||
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