Nautilus 2002 Annual Report Download - page 28

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 48.9% to $332.3 million in 2002 from $223.2 million in 2001. 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 decreased to 56.8% in 2002, compared to 61.3% in 2001. We expect this trend to continue as we increase sales in the commercial/retail
segment of the market relative to our total sales.
The gross profit margin within our direct segment was 73.4% in 2002 and 69.8% in 2001. Gross margins on our Bowflex product line continue
to be very strong as we gain cost reductions from vendors and shipping cost savings. For example, the standard cost for the Bowflex "Power
Pro" with a 210-pound rod pack was reduced approximately 18% by the fourth quarter of 2002 compared with the same period in 2001. In
addition, product delivery costs were reduced by approximately 17% by the end of the fourth quarter of 2002 compared with the same period in
2001.
The decrease in gross profit margin within our commercial/retail segment to 23.0% in 2002, compared with 26.4% in 2001, was largely due to
the Schwinn Fitness and StairMaster acquisitions. Other downward pressure on commercial/retail margins included discounts offered on sales
of discontinued retail products and manufacturing inefficiencies associated with moves and the consolidation of our treadmill facilities.
Discounts were offered to reduce inventory levels of older products in order to accommodate 16 new retail fitness products that were
introduced during the third quarter.
OPERATING EXPENSES
SELLING AND MARKETING. Selling and marketing expenses grew to $145.3 million in 2002 from $99.8 million in 2001, an increase of
45.5%. This increase in selling and marketing expenses resulted primarily from the expansion of our direct marketing campaign for Bowflex
products and Nautilus Sleep Systems, higher advertising costs in the second half of 2002 due to increased demand for advertising time, and the
acquisitions of Schwinn Fitness and StairMaster. Advertising costs for our direct marketing segment rose for the first time in about two years,
and we expect costs to remain at higher levels during 2003. We experienced an increase of approximately 13% in advertising costs from the
fourth quarter of 2001 to the fourth quarter of 2002. We expect to materially increase our cash expenditures on spot commercials and
infomercials as we anticipate rates to remain higher than we experienced in the first half of 2002 and as we expand the direct marketing
campaigns for our Nautilus Sleep Systems as well as our new TreadClimber, which we introduced in the first quarter of 2003.
As a percentage of net sales, overall selling and marketing expenses decreased to 24.9% in 2002 from 27.4% in 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 30.9% of net sales in 2002, compared to 31.3% in 2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses grew to $25.9 million in 2002 from $15.6 million in 2001, an
increase of $10.3 million, or 66.3%. Our commercial/retail segment accounted for $7.4 million of the increase due primarily to our Schwinn
Fitness and StairMaster acquisitions. Our direct segment accounted for the remaining increase of $2.9 million due primarily to increased
staffing and
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