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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Commission file number: 000-25867
THE NAUTILUS GROUP, INC.
(Exact name of registrant as specified in its charter)
Washington 94-3002667
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 NE 136th Avenue
Vancouver, Washington 98684
---------------------------
(Address of principal executive offices, including zip code)
(360) 694-7722
----------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of issuer's common stock outstanding as of November 12, 2002:
32,554,917
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THE NAUTILUS GROUP, INC.
SEPTEMBER 30, 2002
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
THE NAUTILUS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
ASSETS 2002 2001
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 37,860 $ 35,639
Short-term investments, at amortized cost 25,313 16,070
Trade receivables (less allowance for
doubtful accounts of $2,790 and $2,064
in 2002 and 2001, respectively) 37,759 24,858
Inventories, net 62,440 45,516
Prepaid expenses and other current assets 7,738 2,007
Notes receivable 3,004 2,672
Current deferred tax assets 2,214 1,425
------------ ------------
Total current assets 176,328 128,187
PROPERTY, PLANT AND EQUIPMENT, net 50,963 25,228
GOODWILL 29,755 29,625
OTHER ASSETS, net 16,921 10,865
------------ ------------
TOTAL ASSETS $ 273,967 $ 193,905
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 34,635 $ 25,256
Accrued liabilities 15,927 10,888
Income taxes payable 4,066 4,792
Royalty payable to stockholders 2,531 1,885
Customer deposits 891 1,000
------------ ------------
Total current liabilities 58,050 43,821
LONG-TERM DEFERRED TAX LIABILITIES 6,985 2,670
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock - authorized, 75,000,000 shares
of no par value; issued and outstanding,
2002: 34,587,667 shares, 2001:
34,954,790 shares 570 4,900
Retained earnings 207,337 142,637
Accumulated other comprehensive income (loss) 1,025 (123)
------------ ------------
Total stockholders' equity 208,932 147,414
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 273,967 $ 193,905
============ ============
See notes to consolidated financial statements.
3
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES $ 152,865 $ 88,702 $ 429,187 $ 238,566
COST OF SALES 64,500 33,011 179,892 84,087
------------ ------------ ------------ ------------
Gross profit 88,365 55,691 249,295 154,479
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling and marketing 40,654 25,082 106,345 70,867
General and administrative 5,602 3,727 19,242 10,343
Royalties 2,915 1,686 7,809 5,008
------------ ------------ ------------ ------------
Total operating expenses 49,171 30,495 133,396 86,218
------------ ------------ ------------ ------------
OPERATING INCOME 39,194 25,196 115,899 68,261
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 333 966 1,260 3,478
Other, net (375) 31 (217) 218
------------ ------------ ------------ ------------
Total other income (expense), net (42) 997 1,043 3,696
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 39,152 26,193 116,942 71,957
INCOME TAX EXPENSE 14,093 9,429 42,099 25,904
------------ ------------ ------------ ------------
NET INCOME $ 25,059 $ 16,764 $ 74,843 $ 46,053
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.72 $ 0.48 $ 2.14 $ 1.31
DILUTED EARNINGS PER SHARE $ 0.71 $ 0.46 $ 2.10 $ 1.28
Basic shares outstanding 34,672,293 35,209,547 34,949,988 35,268,137
Diluted shares outstanding 35,343,184 36,180,686 35,692,274 36,090,841
See notes to consolidated financial statements.
4
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,843 $ 46,053
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,577 2,392
Tax benefit of exercise of nonqualified options 2,868 1,147
Deferred income taxes 3,526 785
Loss on sale of property, plant and equipment 104 --
Changes in assets and liabilities, net of the effect of acquisitions:
Trade receivables (4,876) (4,033)
Inventories (10,766) (6,806)
Prepaid expenses and other current assets (3,350) (248)
Trade payables 8,915 6,815
Income taxes payable (726) 7,289
Accrued liabilities and royalty payable to stockholders 2,794 3,180
Customer deposits (109) (1,239)
---------- ----------
Net cash provided by operating activities 77,800 55,335
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (25,364) (4,004)
Proceeds from sale of property, plant and equipment 26 --
Decrease (increase) in other assets (212) 8
Acquisitions, net of cash acquired (24,131) (67,466)
Purchases of short-term investments (34,811) (24,002)
Proceeds from maturities of short-term investments 25,568 14,767
Net increase in note receivable (332) (2,740)
---------- ----------
Net cash used in investing activities (59,256) (83,437)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,632 2,116
Funds used for stock repurchase (19,973) (16,299)
---------- ----------
Net cash used in financing activities (17,341) (14,183)
---------- ----------
Effect of foreign currency exchange rate changes 1,018 --
---------- ----------
(Continued)
5
THE NAUTILUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<table><caption>
Nine Months Ended
September 30,
------------------------
2002 2001
---------- ----------
<s> <c> <c>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 2,221 $ (42,285)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,639 77,181
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 37,860 $ 34,896
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ 36,327 $ 16,700
SUPPLEMENTAL DISCLOSURE OF OTHER NONCASH
INVESTING ACTIVITY:
Champion purchase option paid by restricted stock $ -- $ 250
(Concluded)
See notes to consolidated financial statements.
</table>
6
THE NAUTILUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The
Nautilus Group, Inc. (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of
America ("generally accepted accounting principles") and pursuant to
Securities and Exchange Commission rules and regulations. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
2001.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for
the full year.
CONSOLIDATION - The consolidated financial statements include The
Nautilus Group, Inc. and its wholly-owned subsidiaries (collectively the
"Company"). All intercompany transactions and balances have been
eliminated.
RECENT ACCOUNTING PRONOUNCEMENTS - Effective July 1, 2001, the Company
adopted certain provisions of Statement of Financial Accounting Standards
("SFAS") No. 141, BUSINESS COMBINATIONS, and effective January 1, 2002,
the Company adopted the full provisions of SFAS No. 141 and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets apart from goodwill. SFAS No. 142 requires that
purchased goodwill and certain indefinite-lived intangibles no longer be
amortized but instead be tested for impairment at least annually. In
connection with the adoption of SFAS No. 142 on January 1, 2002, the
Company evaluated its identified intangible assets and determined that
the Nautilus trademark has an indefinite useful life.
SFAS No. 142 prescribes a two-phase process for testing the impairment of
goodwill and indefinite life intangibles. The first phase, required to be
completed by June 30, 2002, tests for impairment. If impairment exists,
the second phase, required to be completed by December 31, 2002, measures
the impairment. The Company completed its first phase impairment analysis
during the second quarter and found no instances of impairment of its
recorded goodwill or indefinite life intangibles. Accordingly, no
impairment charge has been recorded as a result of adopting SFAS No. 142.
Beginning in the fourth quarter of 2002, recorded goodwill and indefinite
life intangibles will be tested at least annually for impairment, and
more frequently if material changes in events or circumstances arise.
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF. SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale
7
and expands on the guidance provided by SFAS No. 121 with respect to cash
flow estimations. SFAS No. 144 was effective for the Company's fiscal
year beginning January 1, 2002. The adoption of SFAS No. 144 has not had
a material effect on the Company's financial position, results of
operations, or cash flows.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES.
The standard requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Costs covered by the standard
include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. This statement is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company is evaluating the impact of adopting the
provisions of this statement and does not believe it will have a material
effect on the Company's financial position, results of operations, or
cash flows.
2. ACQUISITIONS
Effective February 8, 2002, the Company acquired the trade receivables,
inventories, property, plant and equipment, certain intangible assets,
and the foreign subsidiaries of StairMaster Sports/Medical, Inc.
("StairMaster") for a cash purchase price of approximately $25,785
including acquisition costs. StairMaster was acquired through a
bankruptcy auction in the United States Bankruptcy Court for the Western
District of Washington that was completed on January 17, 2002.
The acquired assets include property, plant and equipment used to
manufacture, assemble, distribute, and sell fitness equipment, including
steppers, stepmills, treadmills, and exercise bicycles.
The purchase price for StairMaster was determined in the court auction.
The Company's bid was formulated on the basis of historical and projected
financial performance, which resulted in goodwill that had been recorded
in the Company's commercial/retail segment along with the acquired assets
and liabilities. The Company financed the acquisition with cash-on-hand.
The Company has determined that the intangible asset associated with the
StairMaster acquisition (a trademark originally valued at $6,200) has an
indefinite useful life and thus will not be amortized. The Company will
evaluate the useful life of the trademark each reporting period to
determine whether events or circumstances warrant a revision to the
indefinite useful life assumption or if the asset should be tested for
impairment.
During the third quarter, Quinton Cardiology Systems, Inc. ("Quinton")
agreed to acquire certain fixed assets and inventories that the Company
acquired in the StairMaster acquisition. As a result of the sale to
Quinton, the Company reduced its estimated cost of relocating
StairMaster's manufacturing facilities by $861. Accordingly, the
StairMaster acquisition cost was reallocated to the assets acquired and
liabilities assumed, resulting in no goodwill being recorded.
8
The total cost of the StairMaster acquisition subsequent to the Quinton
sale has been allocated to the assets acquired and liabilities assumed as
follows:
Cash and cash equivalents $ 793
Trade receivables 8,025
Inventories 6,158
Property, plant and equipment 4,807
Prepaid and other current assets 2,381
Trademark 6,115
Liabilities assumed (3,355)
----------
Total acquisition cost $ 24,924
==========
Effective September 20, 2001, the Company acquired the trade receivables,
inventories, property, plant and equipment, certain intangible assets,
and the foreign subsidiaries of the Fitness Division of Schwinn/GT Corp.
("Schwinn Fitness") for a cash purchase price of approximately $69,843
including acquisition costs.
The Company has determined that the intangible asset associated with the
Schwinn Fitness acquisition (a trademark valued at $6,800) has an
indefinite useful life. However, as the anticipated use and cash flows
from the trademark are expected to be approximately 20 years, the Company
will amortize the trademark using the straight-line method over this
period. The Company will evaluate the remaining useful life of the
trademark that is being amortized each reporting period to determine
whether events or circumstances warrant a revision to the remaining
period of amortization or if the asset should be tested for impairment.
The unaudited pro forma financial information below for the three months
and nine months ended September 30, 2002 and 2001 was prepared as if the
transactions involving the acquisitions of StairMaster and Schwinn
Fitness had occurred at the beginning of each period presented:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 152,865 $ 124,135 $ 435,466 $ 355,286
Net income 25,059 14,966 75,067 40,071
Basic earnings per share 0.72 0.43 2.15 1.14
Diluted earnings per share 0.71 0.42 2.10 1.11
The unaudited pro forma financial information is not necessarily
indicative of what actual results would have been had the transactions
occurred at the beginning of the respective year, nor does it purport to
indicate the results of future operations of the Company.
9
3. INVENTORIES, net
Inventories consisted of the following:
September 30, December 31,
2002 2001
------------ ------------
Finished goods $ 43,018 $ 34,862
Work-in-process 1,471 1,148
Parts and components 17,951 9,506
------------ ------------
Total inventories, net $ 62,440 $ 45,516
============ ============
4. PROPERTY, PLANT AND EQUIPMENT, net
Property, plant and equipment consisted of the following:
Estimated
Useful Life September 30, December 31,
(in years) 2002 2001
----------- ------------ ------------
Land N/A $ 3,395 $ 1,780
Buildings 31.5 21,580 11,785
Computer equipment 2-5 21,684 10,088
Production equipment 5 12,230 6,567
Furniture and fixtures 5 1,404 1,464
Automobiles and trucks 7 495 349
------------ ------------
Total property, plant and equipment 60,788 32,033
Accumulated depreciation (9,825) (6,805)
------------ ------------
Total property, plant and equipment, net $ 50,963 $ 25,228
============ ============
5. GOODWILL AND OTHER ASSETS, net
Other assets consisted of the following:
September 30, December 31,
2002 2001
------------ ------------
Trademarks and patents $ 17,510 $ 11,395
Other assets 515 303
------------ ------------
Total other assets 18,025 11,698
Accumulated amortization (1,104) (833)
------------ ------------
Total other assets, net $ 16,921 $ 10,865
============ ============
10
The Company evaluates goodwill and intangible assets with indefinite
lives for impairment annually or more frequently if events or changes in
circumstance indicate that such assets might be impaired. Intangible
assets with finite useful lives are tested for impairment whenever events
or changes in circumstance indicate that such assets might be impaired.
The remaining useful lives of intangible assets with finite useful lives
are evaluated annually to determine whether events or circumstances
warrant changes in the estimated useful lives of such assets.
As discussed in Note 2, StairMaster goodwill was reduced to zero as a
result of the sale of certain assets to Quinton. The change in goodwill
of $130 from December 31, 2001 to September 30, 2002 is attributed
entirely to the effect of foreign currency exchange rate changes.
As discussed in Note 1, the Company adopted SFAS No. 142 on January 1,
2002. In accordance with SFAS No. 142, the effect of this statement,
which ceased the amortization of the Nautilus trademark, is reflected
prospectively. Supplemental comparative disclosure as if the change had
been retroactively applied to the three months and nine months ended
September 30, 2001 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 25,059 $ 16,764 $ 74,843 $ 46,053
Amortization expense, net of tax -- 34 -- 104
---------- ---------- ---------- ----------
Adjusted net income $ 25,059 $ 16,798 $ 74,843 $ 46,157
========== ========== ========== ==========
Basic earnings per share:
Reported net income $ 0.72 $ 0.48 $ 2.14 $ 1.31
Adjusted net income $ 0.72 $ 0.48 $ 2.14 $ 1.31
Diluted earnings per share:
Reported net income $ 0.71 $ 0.46 $ 2.10 $ 1.28
Adjusted net income $ 0.71 $ 0.46 $ 2.10 $ 1.28
Amortization of intangible assets for the three months and nine months
ended September 30, 2002 was $90 and $271, respectively. The estimated
amortization expense for the next five years is $362 each year. Such
estimated amortization will change if businesses or portions thereof are
either acquired or disposed, or if changes in events or circumstances
warrant the revision of estimated useful lives.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
September 30, December 31,
2002 2001
------------ ------------
Accrued warranty expense $ 5,283 $ 2,413
Accrued payroll 5,917 4,852
Sales return reserve 2,550 2,100
Other 2,177 1,523
------------ ------------
Total accrued liabilities $ 15,927 $ 10,888
============ ============
11
7. COMPREHENSIVE INCOME
Comprehensive income and its components are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 25,059 $ 16,764 $ 74,843 $ 46,053
Foreign currency
translation adjustment 432 -- 1,148 --
-------- -------- -------- --------
Comprehensive income $ 25,491 $ 16,764 $ 75,991 $ 46,053
======== ======== ======== ========
The foreign currency translation adjustment for the three months and nine
months ended September 30, 2002 is due to the translation of the
financial statements of the foreign subsidiaries acquired as part of
Schwinn Fitness and StairMaster.
8. RESEARCH AND DEVELOPMENT
Internal research and development costs are expensed as incurred and
included in cost of sales. Third party research and development costs are
expensed when the contracted work has been performed.
Research and development expense was $1,357 and $507 for the three months
ended September 30, 2002 and 2001, respectively. Research and development
expense was $3,218 and $1,406 for the first nine months of 2002 and 2001,
respectively.
9. STOCK OPTIONS
There were 350,977 options exercised at prices ranging from $0.24 to
$23.02 per share during the nine months ended September 30, 2002. There
were 256,075 new options granted at exercise prices ranging from $28.81
to $37.70 per share during that period. There were 27,625 options
canceled at prices ranging from $6.07 to $37.70 per share during the nine
months ended September 30, 2002. As of September 30, 2002, out of a total
of 1,603,854 options outstanding, there were 582,850 options outstanding
with exercise prices that exceeded the closing market price of the
Company's common stock as listed on the New York Stock Exchange.
12
10. OPERATING SEGMENTS
The following table presents selected information about the Company's
two operating segments:
Commercial/
Direct Retail Total
--------------------------- --------------------------- ---------------------------
Three Months Nine Months Three Months Nine Months Three Months Nine Months
------------ ----------- ------------ ----------- ------------ -----------
Period Ended September 30, 2002
Net sales $ 107,034 $ 301,204 $ 45,831 $ 127,983 $ 152,865 $ 429,187
========== ========== ========== ========== ========== ==========
Segment net income (loss) $ 26,021 $ 73,644 $ (962) $ 1,199 $ 25,059 $ 74,843
========== ========== ========== ========== ========== ==========
Period Ended September 30, 2001
Net sales $ 74,010 $ 210,529 $ 14,692 $ 28,037 $ 88,702 $ 238,566
========== ========== ========== ========== ========== ==========
Segment net income $ 15,807 $ 44,918 $ 957 $ 1,135 $ 16,764 $ 46,053
========== ========== ========== ========== ========== ==========
Commercial/
Direct Retail Total
---------- ---------- ----------
As of September 30, 2002
Segment assets $ 136,470 $ 137,497 $ 273,967
========== ========== ==========
As of December 31, 2001
Segment assets $ 87,264 $ 106,641 $ 193,905
========== ========== ==========
11. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are reconciled as follows:
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
---------------------------------------- ----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS:
Net income $ 25,059 34,672,293 $ 0.72 $ 16,764 35,209,547 $ 0.48
Effect of dilutive securities:
Stock options -- 670,891 (0.01) -- 971,139 (0.02)
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS:
Net income $ 25,059 35,343,184 $ 0.71 $ 16,764 36,180,686 $ 0.46
========== ========== ========== ========== ========== ==========
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
---------------------------------------- ----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS:
Net income $ 74,843 34,949,988 $ 2.14 $ 46,053 35,268,137 $ 1.31
Effect of dilutive securities:
Stock options -- 742,286 (0.04) -- 822,704 (0.03)
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS:
Net income $ 74,843 35,692,274 $ 2.10 $ 46,053 36,090,841 $ 1.28
========== ========== ========== ========== ========== ==========
Outstanding stock options of 266,075 and 244,075 for the three months and
nine months ended September 30, 2002 were not included in the calculation
of diluted earnings per share because they would be antidilutive. There
were no antidilutive stock options outstanding for the three months and
nine months ended September 30, 2001.
13
12. STOCK REPURCHASE PROGRAM
In June 2002, the Board of Directors authorized the expenditure of up to
$20,000 to purchase shares of the Company's common stock in open-market
transactions. During the nine months ended September 30, 2002, the
Company repurchased a total of 718,100 shares of common stock in open
market transactions for an aggregate purchase price of $19,973. The
authorization expired on August 31, 2002.
In October 2002, the Board of Directors authorized the repurchase of the
Company's common stock in open-market transactions from time to time,
commencing October 21, 2002 through and including January 31, 2003,
provided the aggregate amount spent on such repurchases during this
period will not exceed $30,000.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to litigation, claims and assessments in the
ordinary course of business, many of which are covered in whole or in
part by insurance. Management believes that any liability resulting from
such matters will not have any material adverse effect on the Company's
financial position, results of operations, or cash flows.
14. SUBSEQUENT EVENT
On October 2, 2002, the Company sold certain assets acquired through the
acquisition of StairMaster to Quinton for $1,725. These assets consisted
of medical treadmill manufacturing fixed assets and inventories, which
StairMaster used for outsourced production of Quinton branded medical
treadmills. As of September 30, 2002, the assets held for sale are
recorded in prepaid expenses and other current assets. Payment is to be
made by $1,000 in cash and a $725 promissory note payable quarterly over
a two-year period at prime plus 2%.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
Certain statements contained in this Form 10-Q, including, without limitation,
statements containing the words "could," "may," "will," "should," "plan,"
"believes," "anticipates," "estimates," "predicts," "expects," "projections,"
"potential," "continue," or words of similar import, constitute "forward-looking
statements." Investors are cautioned that all forward-looking statements involve
risks and uncertainties, and various factors could cause actual results to
differ materially from those in the forward-looking statements. From time to
time and in this Form 10-Q, we may make forward-looking statements relating to
our financial performance, including the following:
o Anticipated revenues, expenses, and gross margins;
o Seasonal patterns;
o Expense as a percentage of revenue;
o Anticipated earnings;
o New product introductions; and
o Future capital expenditures.
Numerous factors could affect our actual results, including the following:
o The availability of media time and fluctuating advertising costs;
o A decline in consumer spending due to unfavorable economic conditions;
o Expiration of important patents;
o Our reliance on a limited product line;
o Our ability to effectively develop, market, and sell future products;
o Growth management challenges, including the growth resulting from the
acquisition of the assets of the Fitness Division of Schwinn/GT Corp.
("Schwinn Fitness") in September 2001, and the acquisition of the assets of
StairMaster Sports/Medical, Inc. ("StairMaster") in February 2002;
o Our ability to integrate the StairMaster business, and any other acquired
businesses into our operations;
o Our reliance on the consumer finance market;
o Our ability to adequately protect our intellectual property;
o Our reliance on third-party manufacturers;
o Government regulatory action;
o Changes in global political, regulatory, or economic conditions; and
o Economic impacts from currency fluctuations in the Company's international
operations.
We describe certain of these and other key risk factors elsewhere in more detail
in this Form 10-Q and in our most recent annual report on Form 10-K. Although we
believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. We undertake no obligation to update publicly any
forward-looking statements to reflect new information, events, or circumstances
after the date of this Form 10-Q or to reflect the occurrence of unanticipated
events.
CRITICAL ACCOUNTING POLICIES
We have identified the most critical accounting policies for our Company. These
critical policies involve the most complex or subjective decisions or
assessments and consist of warranty reserves, sales return reserves, and the
allowance for doubtful accounts.
15
WARRANTY RESERVES
The product warranty reserve includes the cost to manufacture (raw materials,
labor and overhead) or purchase warranty parts from our suppliers as well as the
cost to ship those parts to our customers. In addition, the cost of a technician
to install a warranted part on our manufactured commercial equipment is also
included.
The warranty reserve is based on our historical experience with each product. A
warranty reserve is established for new products based on historical experience
with similar products, adjusted for any technological advances in manufacturing
or materials used. Thorough testing of new products in the development stage
helps to identify and correct potential warranty issues prior to manufacturing.
Continuing quality control efforts during manufacturing limit our exposure to
warranty claims. We track warranty claims by part and reason for claim in order
to identify any potential warranty trends.
If our quality control efforts were to fail to detect a fault in one of our
products, we could experience an increase in warranty claims resulting in an
increase in the warranty reserve. A change in our warranty reserve could have a
significant impact on our current and future financial position, results of
operations and cash flows.
SALES RETURN RESERVES
The sales return reserve is based on our historical experience of product
returns during the trial period in which a customer can return a product for the
full purchase price, less shipping and handling in most instances. The trial
periods for Bowflex, Champion Nutrition, and Nautilus Sleep Systems product
lines are six weeks, 30 days, and 90 days, respectively. Trial periods are not
offered on our other product lines. We track all product returns in order to
identify any potential customer satisfaction trends. Our return reserve may be
sensitive to a change in our customers' ability to pay during the trial period
due to unforeseen economic circumstances and to different product introductions
that might fulfill the customers' needs at a perceived better value. A change in
our sales return reserve could have a significant impact on our current and
future financial position, results of operations and cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on our historical experience
adjusted for any known uncollectible amounts. We periodically review the
creditworthiness of our customers to help ensure collectibility. Our allowance
is sensitive to changes in our customers' ability to pay due to unforeseen
changes in the economy, including the bankruptcy of a major customer, our
efforts to actively pursue collections, and increases in chargebacks. Any major
change in the aforementioned factors may result in increasing the allowance for
doubtful accounts, which could have a significant impact on our current and
future financial position, results of operations and cash flows.
RESULTS OF OPERATIONS
We believe that period-to-period comparisons of our operating results are not
necessarily indicative of future performance. You should consider our prospects
in light of the risks, expenses and difficulties frequently encountered by
companies experiencing rapid growth and, in particular, rapidly growing
companies that operate in evolving markets.
16
STATEMENT OF OPERATIONS DATA - THREE MONTHS ENDED SEPTEMBER 30
The following table presents certain financial data regarding our third quarter
operations in 2002 and 2001, as a percentage of total revenues:
Quarter Ended September 30,
--------------------------
Statement of Operations Data 2002 2001
---------- ----------
Net sales 100.0% 100.0%
Cost of sales 42.2 37.2
---------- ----------
Gross profit 57.8 62.8
---------- ----------
Operating expenses:
Selling and marketing 26.6 28.3
General and administrative 3.7 4.2
Royalties 1.9 1.9
---------- ----------
Total operating expenses 32.2 34.4
---------- ----------
Operating income 25.6 28.4
Other income (expense), net 0.0 1.1
---------- ----------
Income before income taxes 25.6 29.5
Income tax expense 9.2 10.6
---------- ----------
Net income 16.4% 18.9%
========== ==========
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NET SALES
Net sales increased by 72.3% to $152.9 million in the third quarter of 2002 from
$88.7 million in the third quarter of 2001. The increase in sales was driven by
the growth in our direct segment and continued expansion of our
commercial/retail business. Excluding our acquisitions of Schwinn Fitness and
StairMaster, sales grew 39.7% on a consolidated basis compared to the same
period a year ago. During the third quarter of 2002, we continued to increase
the consumer awareness of our Bowflex and Nautilus Sleep Systems product lines.
Meanwhile, we have continued to expand our commercial/retail segment, where we
have grown the Nautilus brand, integrated the acquisition of the Schwinn Fitness
business, and continue to integrate StairMaster, which we acquired in the first
quarter of 2002. Looking ahead, we expect sequentially stronger fourth quarter
consolidated net sales based on seasonal buying patterns and initial shipments
of our new retail products. We continue to expect 2002 consolidated sales to
increase by approximately 60% compared to 2001 on a year-over-year basis.
Sales in our direct segment are comprised primarily of sales from our Bowflex
product line. However, as sales from our Nautilus Sleep Systems product line
continue to grow, they have become an increasingly important component of our
direct segment business. Sales within our direct segment were $107.0 million in
the third quarter of 2002, an increase of 44.6% over the third quarter of 2001.
A significant reason for the increase in direct segment sales can be attributed
to the introduction of our high-end Bowflex "Ultimate" at the end of the fourth
quarter of 2001. the "Ultimate" has been well received by consumers leading to
sequential growth in the average selling price from our Bowflex product line in
each quarter
17
since its introduction. We continued to experience increased net sales from our
Bowflex product line due to higher average sales prices despite a slight
sequential decline in Bowflex units sold during the third quarter of 2002, as we
believe our targeted consumers prefer premium products like our "Ultimate." We
experienced changes in the advertising environment as the third quarter
progressed as costs rose due to heightened demand for advertising time. If this
higher advertising cost environment continues, fourth quarter direct segment
revenue is expected to show year-over-year growth but not necessarily sequential
growth as we manage our advertising spending to optimize profitability. Our
direct segment accounted for 70.0% of our aggregate net sales in the quarter,
down from 83.4% in the third quarter of 2001, as we continued our strategy of
diversification into the commercial and retail markets.
Sales within our commercial/retail segment were $45.8 million in the third
quarter of 2002, an increase of 211.9% over third quarter of 2001. Excluding our
acquisitions of Schwinn Fitness and StairMaster, sales grew 5.1% in the
commercial/retail segment. Our commercial/retail segment now accounts for 30.0%
of our net sales, up from 16.6% in the third quarter of 2001 as we continue to
execute our strategy of expanding our presence, product lines, and brands across
all our channels, especially within the commercial/retail segment. In August of
2002, we expanded our product lines with the introduction of 16 new retail
products, which were first shown at the Health and Fitness Business show in
Denver, Colorado. The new retail products branded under our Nautilus name
include treadmills, stationary bicycles, an elliptical motion trainer, home
strength equipment, and heart rate monitors. We also introduced new products
under our Schwinn brand name including indoor cycling bicycles and an elliptical
motion trainer. In addition to the 16 new retail products, many of our existing
products were updated and enhanced. We will begin shipping the majority of our
new products during the fourth quarter. In 2002, with a full year of results
from Schwinn Fitness and with the acquisition of StairMaster, we expect our
commercial/retail segment will account for approximately 32.0% to 33.0% of total
sales. Our retail business is highly seasonal. We believe that sales within our
commercial/retail segment are considerably lower in the second quarter of the
year compared to the other quarters. Our strongest quarter for the
commercial/retail segment should be the fourth quarter, followed by the first
and third quarters. We believe the principal reason for this trend is the
commercial/retail fitness industry's preparation for the impact of New Year's
fitness resolutions and seasonal weather patterns related to colder winter
months.
GROSS PROFIT
Gross profits continued to be strong, growing 58.7% to $88.4 million in the
third quarter of 2002 from $55.7 million in the same period a year ago. However,
due to our product diversification strategy, which has increased sales of
inherently lower margin products in the commercial/retail segment, our overall
gross profit margin as a percentage of sales decreased to 57.8% in the third
quarter of 2002, compared to 62.8% in the third quarter of 2001. We expect this
trend to continue as we increase sales in the commercial/retail segment of the
market relative to our total sales. For the remainder of 2002, as
commercial/retail segment sales increase, we expect our combined gross margin to
be in the range of 55% to 57%.
The gross profit margin within our direct segment was 74.7% in the third quarter
of 2002 and 69.6% in the third quarter of 2001. Gross margins on our Bowflex
product line continue to be very strong as we gain cost reductions from vendors
and shipping cost savings. The decrease in gross margins within our
commercial/retail segment to 18.4% in the third quarter of 2002, compared with
28.7% in the third quarter of 2001, was largely due to discounts offered on
sales of discontinued retail products and manufacturing inefficiencies
associated with moves and the consolidation of our treadmill facilities. More
specifically, our consumer treadmill manufacturing operations were shut down in
mid-July due to a facility move and production did not resume until mid-August.
These events were isolated to the third quarter, and we expect to see
substantial improvement in gross margin during the fourth quarter as we achieve
seasonally higher sales levels and begin shipments of our new retail products.
18
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $40.7 million in the third quarter of
2002 from $25.1 million in the same period a year ago, an increase of 62.1%.
This increase in selling and marketing expenses resulted primarily from the
expansion of our direct marketing campaign for Bowflex products and Nautilus
Sleep Systems, higher advertising costs as the third quarter progressed due to
heightened demand for advertising time, and the acquisitions of Schwinn Fitness
and Stairmaster.
As a percentage of net sales, overall selling and marketing expenses decreased
to 26.6% in the third quarter of 2002 from 28.3% in the third quarter of 2001.
The decrease was a result of our planned product diversification efforts leading
to a higher proportion of commercial/retail segment sales. Selling and marketing
expenses within our direct segment were 31.9% of net sales in the third quarter
of 2002, compared to 31.6% in the third quarter of 2001. For the remainder of
2002, we expect our combined selling and marketing expenses to be in the range
of 25% to 27% of total sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $5.6 million in the third quarter of
2002 from $3.7 million in the same period a year ago, an increase of $1.9
million, or 50.3%. Our commercial/retail operations accounted for the majority
of the increase due primarily to our Schwinn Fitness and StairMaster
acquisitions. As a percentage of net sales, general and administrative expenses
decreased to 3.7% in the third quarter of 2002 from 4.2% in the same period a
year ago. While we have experienced some increases in overhead related to our
acquisitions, we continue to work to control costs as our business grows. For
the remainder of 2002, we expect our combined general and administrative
expenses to be in the range of 4% to 5% of total sales.
ROYALTIES
Royalty expense grew to $2.9 million in the third quarter of 2002 from $1.7
million in the same period a year ago, an increase of 72.9%. Our direct and
commercial/retail segments have several agreements under which we are obligated
to pay royalty fees on certain products. The increase in our royalty expense is
primarily attributable to the increased sales of our Bowflex products in the
quarter, along with sales of other products under royalty agreements that have
been added as part of our product diversification strategy. Our royalty expenses
will fluctuate consistently with sales of our Bowflex products, and will also be
impacted by fluctuations in sales of other products that have royalty
agreements.
OTHER INCOME (EXPENSE)
In the third quarter of 2002, other expense was $42 thousand compared to other
income of $1.0 million for the same period a year ago. The decrease resulted
primarily from lower interest earned on invested cash and cash equivalents due
to lower average interest rates in 2002 coupled with lower invested cash
balances. Interest income decreased to $0.3 million in the third quarter of 2002
from $1.0 million in the same period a year ago.
INCOME TAX EXPENSE
Income tax expense increased by $4.7 million to $14.1 million for the third
quarter of 2002 from $9.4 million for the same period of 2001 due to the growth
in our income before taxes. We expect our income tax expense to fluctuate in
line with changes in our income before taxes.
19
NET INCOME
For the reasons discussed above, net income grew to $25.1 million in the third
quarter of 2002 from $16.8 million in the same period a year ago, an increase of
49.5%. We continue to expect 2002 net income to increase by approximately 50%
compared to 2001 on a year-over-year basis.
STATEMENT OF OPERATIONS DATA - NINE MONTHS ENDED SEPTEMBER 30
The following table presents certain financial data regarding operations for the
first nine months in 2002 and 2001, as a percentage of total revenues:
Nine Months Ended
September 30,
-------------------------
Statement of Operations Data 2002 2001
---------- ----------
Net sales 100.0% 100.0%
Cost of sales 41.9 35.2
---------- ----------
Gross profit 58.1 64.8
---------- ----------
Operating expenses:
Selling and marketing 24.8 29.7
General and administrative 4.5 4.3
Royalties 1.8 2.1
---------- ----------
Total operating expenses 31.1 36.1
---------- ----------
Operating income 27.0 28.7
Other income, net 0.2 1.5
---------- ----------
Income before income taxes 27.2 30.2
Income tax expense 9.8 10.9
---------- ----------
Net income 17.4% 19.3%
========== ==========
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NET SALES
Net sales grew by 79.9% to $429.2 million in the first nine months of 2002 from
$238.6 million in the same period in 2001. Sales were driven by the growth in
our direct segment and the continued expansion into the commercial/retail market
segment. Excluding our acquisitions of Schwinn Fitness and StairMaster, sales
grew 40.3% on a consolidated basis compared to the same period a year ago.
During the first six months of 2002, we took advantage of favorable advertising
costs and availability to increase the consumer awareness of our Bowflex and
Nautilus Sleep Systems product lines. As the third quarter progressed, however,
advertising costs increased due to heightened demand for advertising time.
Sales within our direct segment were $301.2 million in the first nine months of
2002, an increase of 43.1% over the same period of 2001. Our direct segment
accounted for 70.2% of our aggregate net sales in the first nine months of 2002
down from 88.2% in the same period of 2001, as we continued our strategy of
diversification in the commercial/retail segment.
Sales within our commercial/retail segment were $128.0 million in the first nine
months of 2002, an increase of 356.5% over the same period of 2001. Excluding
our acquisitions of Schwinn Fitness and StairMaster, sales grew 15.6% in the
commercial/retail segment. Our commercial/retail segment now accounts for 29.8%
of our net sales, up from 11.8% in the first nine months of 2001 as we continue
to execute our strategy of expanding our presence, product lines, and brands
across all our channels, especially within the commercial/retail segment.
20
GROSS PROFIT
Gross profits grew 61.4% to $249.3 million in the first nine months of 2002 from
$154.5 million in the same period a year ago. However, due to our product
diversification strategy, which has increased sales of inherently lower margin
products in the commercial/retail segment, our overall gross profit margin as a
percentage of sales decreased to 58.1% in the first nine months of 2002 from
64.8% in the first nine months of 2001. We expect this trend to continue as we
further expand our business in the commercial/retail segment. The gross profit
margin within our direct segment was 73.1% in the first nine months of 2002 and
69.3% in the first nine months of 2001. The decrease in gross margins within our
commercial/retail segment to 22.7% in the first nine months of 2002, compared
with 31.0% in the first nine months of 2001, was largely due to the Schwinn
Fitness and StairMaster acquisitions. Commercial/retail segment gross margins
were also impacted in the third quarter of 2002 by discounts offered on sales of
discontinued retail products and manufacturing inefficiencies associated with
moves and the consolidation of our treadmill facilities.
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $106.3 million in the first nine months
of 2002 from $70.9 million in the same period a year ago, an increase of 50.1%.
This increase in selling and marketing expenses resulted primarily from the
expansion of our direct marketing campaign for Bowflex products and Nautilus
Sleep Systems, higher advertising costs as the third quarter progressed due to
heightened demand for advertising time, and the acquisitions of Schwinn Fitness
and Stairmaster. As a percentage of net sales, overall selling and marketing
expenses decreased to 24.8% in the first nine months of 2002 from 29.7% in the
first nine months of 2001. The decrease was primarily a result of executing our
product diversification strategy leading to a higher proportion of
commercial/retail segment sales. Selling and marketing expenses within our
direct segment were 29.5% of net sales in the first nine months of 2002,
compared to 31.4% in the first nine months of 2001.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $19.2 million in the first nine
months of 2002 from $10.3 million in the same period a year ago, an increase of
$8.9 million, or 86.0%. Our commercial/retail segment accounted for $6.9 million
of the increase due primarily to our Schwinn Fitness and StairMaster
acquisitions. Our direct segment accounted for the remaining increase of $2.0
million due primarily to increased staffing and infrastructure expenses
necessary to support our continuing growth. As a percentage of net sales,
general and administrative expenses increased to 4.5% in the first nine months
of 2002 from 4.3% in the same period a year ago.
ROYALTIES
Royalty expense grew to $7.8 million in the first nine months of 2002 from $5.0
million in the same period a year ago, an increase of 55.9%. The increase in our
royalty expenses is primarily attributable to increased sales of our Bowflex
products.
21
OTHER INCOME (EXPENSE)
In the first nine months of 2002, other income was $1.0 million compared to $3.7
million for the same period a year ago. The decrease resulted primarily from
lower interest earned on invested cash and cash equivalents due to lower average
interest rates in 2002 coupled with lower invested cash balances.
INCOME TAX EXPENSE
Income tax expense increased by $16.2 million to $42.1 million for the first
nine months of 2002 from $25.9 million for the same period of 2001 because of
the growth in our income before taxes.
NET INCOME
For the reasons discussed above, net income grew to $74.8 million in the first
nine months of 2002 from $46.1 million in the same period a year ago, an
increase of 62.5%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our growth and acquisitions primarily from cash
generated by our operating activities. During the first nine months of 2002, our
operating activities generated $77.8 million in net cash, which contributed to
an aggregate $37.9 million balance in cash and cash equivalents and $25.3
million of short-term investments, compared with $55.3 million net cash
generated by our operating activities in the first nine months of 2001.
Net cash used in our investing activities decreased substantially in the first
nine months of 2002 to $59.3 million from $83.4 million in the first nine months
of 2001. This was primarily due to the acquisition of StairMaster in February of
2002 for $24.1 million, net of cash acquired, versus the acquisition of Schwinn
Fitness in September of 2001 for $67.5 million, net of cash acquired.
Additionally, we used $25.4 million during the first nine months of 2002 for
capital expenditures primarily consisting of land and buildings, manufacturing
equipment, and computer systems and related equipment. We purchased land and a
building in Colorado for $6.7 million, including improvements, which serves as
the commercial/retail segment headquarters. We also purchased land and buildings
in Texas and Virginia for $3.1 million, including improvements, that serve as
manufacturing and warehouse facilities. We invested $1.2 million in tooling for
manufacturing our new products. We invested $1.4 million at our corporate
headquarters in Washington to consolidate our Washington operations and to
expand our call center. We invested $12.2 million in capital expenditures for
our direct segment computer systems and related equipment to support the growth
of the business. Finally, we invested $9.2 million in net purchases of
short-term investments due to our strong cash flows generated from operations.
Net cash used in financing activities was $17.3 million in the first nine months
of 2002 attributed to Company stock repurchases of $20.0 million offset by stock
option exercises. We used $14.2 million of net cash for financing activities
during the first nine months of 2001 for Company stock repurchases of $16.3
million offset by stock option exercises.
Our working capital needs have increased as we continue to implement our growth
strategy. Working capital was $118.3 million at September 30, 2002 compared to
$84.4 million at December 31, 2001, largely due to increased inventory and trade
receivable levels. The $16.9 million increase in inventories was due to factors
in both our business segments. Direct segment inventories increased for the
purposes of building safety stock in response to the possibility that a West
Coast longshoremen strike would delay shipments from Asian suppliers and to
catch up with demand for the Bowflex "Ultimate." Commercial/retail segment
inventories
22
increased in anticipation of increased sales, especially of new products, during
the fourth quarter of 2002 and the addition of inventories associated with the
acquisition of StairMaster. The $12.9 million increase in trade receivables can
primarily be attributed to the seasonal timing of orders in the last month of
the third quarter for the commercial/retail segment, as more sales occur in
September because retailers and commercial fitness centers take delivery of
products for the fitness season, which typically begins in October. Also
contributing to the increase in receivables was the acquisition of StairMaster.
We expect that our working capital will increase going forward as a result of
our anticipated future profitability.
We maintain a $10 million line of credit with a bank. The line of credit is
secured by certain assets and contains certain financial covenants. As of the
date of this filing, we are in compliance with the covenants applicable to the
line of credit, and there is no outstanding balance under the line.
As of September 30, 2002, the Company had no contractual capital obligations or
commercial commitments other than operating leases.
We believe our existing cash balances, combined with our line of credit, will be
sufficient to meet our capital requirements for at least the next 12 months.
INFLATION AND PRICE INCREASES
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material adverse effect on our financial position,
results of operations or cash flows. However, increases in inflation over
historical levels or uncertainty in the general economy could decrease
discretionary consumer spending for products like ours. Very little of our
revenue growth is attributable to price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2001, the Company adopted certain provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS, and
effective January 1, 2002, the Company adopted the full provisions of SFAS No.
141 and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for recording
intangible assets apart from goodwill. SFAS No. 142 requires that purchased
goodwill and certain indefinite-lived intangibles no longer be amortized but
instead be tested for impairment at least annually. In connection with the
adoption of SFAS No. 142 on January 1, 2002, the Company evaluated its
identified intangible assets and determined that the Nautilus trademark has an
indefinite useful life.
SFAS No. 142 prescribes a two-phase process for testing the impairment of
goodwill and indefinite life intangibles. The first phase, required to be
completed by June 30, 2002, tests for impairment. If impairment exists, the
second phase, required to be completed by December 31, 2002, measures the
impairment. The Company completed its first phase impairment analysis during the
current quarter and found no instances of impairment of its recorded goodwill or
indefinite life intangibles. Accordingly, no impairment charge has been recorded
as a result of adopting SFAS No. 142. Beginning in the fourth quarter of 2002,
recorded goodwill and indefinite life intangibles will be tested at least
annually for impairment, and more frequently if material changes in events or
circumstances arise.
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,
addresses accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144
23
establishes a single accounting model for long-lived assets to be disposed of by
sale and expands on the guidance provided by SFAS No. 121 with respect to cash
flow estimations. SFAS No. 144 was effective for the Company's fiscal year
beginning January 1, 2002. The adoption of SFAS No. 144 has not had a material
effect on the Company's financial position, results of operations, or cash
flows.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or disposal
activity. This statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is evaluating the
impact of adopting the provisions of this statement and does not believe it will
have a material effect on the Company's financial position, results of
operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
We have primarily invested cash with banks and in liquid debt instruments
purchased with maturity dates of less than one year. Our bank deposits may
exceed federally insured limits, and there is risk of loss of the entire
principal with any debt instrument. To reduce risk of loss, we limit our
exposure to any one debt issuer and require certain minimum ratings for debt
instruments that we purchase.
FOREIGN EXCHANGE RISK
The Company is exposed to foreign exchange risk to the extent of currency
fluctuations mainly in Europe. Based on the relative size of the Company's
foreign operations, management believes that its exposure to foreign exchange
risk is not material, and that any possible near-term changes in the related
exchange rates would not have a material impact on the Company's financial
position, results of operations, or cash flows.
INTEREST RATE RISK
The Company has financed its growth through cash generated from operations. At
September 30, 2002, the Company had no outstanding borrowings and was not
subject to any related interest rate risk. The Company invests in liquid debt
instruments purchased with maturity dates of less than one year. Due to the
short-term nature of those investments, management believes that any possible
near-term changes in related interest rates would not have a material impact on
the Company's financial position, results of operations, or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures, as
defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (Exchange Act), as of a date within ninety days before the filing date
of this quarterly report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that our disclosure controls and
procedures are adequate and effective for the purposes set forth in the
definition of "disclosure controls and procedures" in Exchange Act Rule
15d-14(c).
24
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other factors
that could significantly affect internal controls and procedures including any
corrective actions with regard to significant deficiencies and material
weaknesses subsequent to the date of our most recent evaluation.
25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits
The following exhibits are filed herewith and this list constitutes the
exhibit index:
EXHIBIT NO. DOCUMENT DESCRIPTION
----------- --------------------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE NAUTILUS GROUP, INC.
November 12, 2002 By: /s/ Brian R. Cook
- ----------------- ---------------------------
Date Brian R. Cook, Chief Executive Officer
(Principal Executive Officer)
November 12, 2002 By: /s/ Rod W. Rice
- ----------------- ---------------------------
Date Rod W. Rice, Chief Financial Officer, Treasurer
and Secretary (Principal Financial and Accounting
Officer)
CERTIFICATION
I, Brian R. Cook, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Nautilus
Group;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
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5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002 By: /s/ Brian R. Cook
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Date Brian R. Cook, Chief Executive Officer
CERTIFICATION
I, Rod W. Rice, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Nautilus
Group;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
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5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002 By: /s/ Rod W. Rice
- ----------------- ------------------------------------
Date Rod W. Rice, Chief Financial Officer,
Treasurer and Secretary
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