Nautilus 2004 Annual Report Download

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FORM 10-K
NAUTILUS, INC.
(Annual Report)
Filed 3/16/2005 For Period Ending 12/31/2004
Address 1400 NE 136TH AVENUE
VANCOUVER, Washington 98684
Telephone 360-694-7722
CIK 0001078207
Industry Retail (Catalog & Mail Order)
Sector Services
Fiscal Year 12/31

Table of contents

  • Page 1
    NAUTILUS, INC. FORM 10-K (Annual Report) Filed 3/16/2005 For Period Ending 12/31/2004 Address Telephone CIK Industry Sector Fiscal Year 1400 NE 136TH AVENUE VANCOUVER, Washington 98684 360-694-7722 0001078207 Retail (Catalog & Mail Order) Services 12/31

  • Page 2
    ...-affiliates, computed by reference to the last sales price ($19.51) as reported on the New York Stock Exchange, as of the last business day of the Registrant's most recently completed second fiscal quarter (June 30, 2004) was $638,527,709. The number of shares outstanding of the Registrant's Common...

  • Page 3
    ... and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and...

  • Page 4
    ...; Our ability to adequately protect our intellectual property; Introduction of lower priced competing products; Unpredictable events and circumstances relating to our international operations, including our use of foreign manufacturers; and Government regulatory action. We describe certain of...

  • Page 5
    ... models of home gyms, plus strength cages, free weights, benches, TreadClimber and treadmills. Our Schwinn Fitness brand includes a popular line for indoor cycling, along with upright and recumbent exercise bikes, and treadmills and ellipticals. Our products are in approximately 25% of U.S. retail...

  • Page 6
    ...brand, are sold through commercial and/or retail sales channels. Product categories sold through the commercial/retail segment include strength equipment, treadmills, ellipticals, exercise bikes, stairclimbers, stepmills, and other fitness-related accessories. Sales from our Bowflex home-gym product...

  • Page 7
    ...private label credit card, typically up sells the benefits of higher priced models in our product line, and closes the transaction process by capturing the consumer's order information. These sophisticated systems allow us to most effectively utilize our customer service staff, prioritize call types...

  • Page 8
    ... dealers and retailers to health clubs, government agencies, hotels, corporate fitness centers, colleges, universities and assisted living facilities. Our commercial sales force is focused on strengthening the market position of our existing Nautilus, Schwinn, and StairMaster commercial product...

  • Page 9
    ...and product development events and ads are coded to assist us in measuring the effectiveness of each individual ad with respect to our objectives of increasing brand awareness and increasing sales leads. Direct Mail Promotions. We maintain a database that includes contacts at thousands of commercial...

  • Page 10
    ...our commercial/retail and direct segment product portfolios to dealers and retail stores within Canada. We have alliances with distributors in most markets to sell commercial products from our Nautilus, Schwinn, and StairMaster brands. This enables us to sell "package deals" to international fitness...

  • Page 11
    ... market for home fitness equipment as well as the commercial fitness equipment business. Consumers who utilize health clubs are exposed to an array of fitness equipment products and brand names, as well as education about the uses and benefits of fitness equipment. The U.S. fitness equipment market...

  • Page 12
    ... options, and customer service. Our direct marketed brands compete directly with a large number of companies that manufacture, market and distribute home fitness equipment. Our principal direct competitors include ICON Health and Fitness (marketing products under the brand names Powerflex, Crossbar...

  • Page 13
    ... exercise and nutrition markets that we compete in. During 2003, we performed in-depth analysis of our business model and believe that we have significant opportunities to optimize our sales channel mix for our brands. We are a leader in selling strength products through the direct marketing channel...

  • Page 14
    Table of Contents EMPLOYEES As of December 31, 2004, we employed approximately 1,200 employees, including nine executive officers. None of our employees are subject to any collective bargaining agreements. INTELLECTUAL PROPERTY We own many trademarks including Nautilus ® , Bowflex ® , Power Rod ®...

  • Page 15
    ...Current corporate headquarters, call center, warehouse, production, and distribution Warehouse, production, and distribution Future world headquarters and call center Warehouse and distribution Commercial equipment manufacturing Engineering, prototyping, customer service, and administrative Showroom...

  • Page 16
    ...are covered in whole or in part by insurance. Management believes that any liability resulting from such matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. In December 2002, the Company filed suit against ICON Health and Fitness...

  • Page 17
    Table of Contents PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Price of Our Common Stock Our common stock is listed on the New York Stock Exchange and trades under the symbol "NLS." As of February 15, 2005, 33,165...

  • Page 18
    ... reported consolidated net income or stockholders' equity. In Thousands (except per share amounts) 2004 2003 2002 2001 2000 Statement of Operations Data Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Royalties Total...

  • Page 19
    ... of these steps have positioned us for 2005, the first year of our new three-year growth plan. The growth plan involves further increased investment in research and development, continuing the consolidation of our management information systems, investing in brand marketing and finally defending our...

  • Page 20
    ...the cost to ship those parts to our customers. The cost of labor 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...

  • Page 21
    ... periods for direct marketed product lines range from 30 days to six weeks depending on the specific product. We track product returns in order to identify any potential negative customer satisfaction trends. Our return reserve may be sensitive to a change in our customers' ability to pay during the...

  • Page 22
    ... the period of the event. In 2004 the Company derived tax benefits from an exclusion provided under U.S. income tax laws with respect to certain extraterritorial income attributable to foreign trading gross receipts ("FTGRs"). This exclusion was repealed as part of the American Jobs Creation Act of...

  • Page 23
    ...16.7% Year Ended December 31, 2004-2003 % change 2004 (In Thousands) 2003 2002 $ change $ change 2003-2002 % change Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Royalties Total operating expenses Operating income...

  • Page 24
    22

  • Page 25
    ... in sales within the commercial/retail segment was primarily attributable to a $7.1 million increase in the sale of Bowflex branded products within the retail side of the business. Additionally our international operations that handle sales outside of the America's performed strongly, increasing net...

  • Page 26
    ...13.2 million in 2003 to $10.5 million in 2004 due primarily to wage and consulting costs associated with the implementation of our information systems which was completed towards the end of 2003. Our commercial/retail segment general and administrative expenses remained consistent at $9.5 million in...

  • Page 27
    ...costs associated with the Bowflex Power Pro that was announced by our Company and the Consumer Product Safety Commission ("CPSC") in January 2004. In addition, direct segment gross profit margin was negatively impacted by declining sales resulting in higher fixed costs per sale and a change in sales...

  • Page 28
    ... reported consolidated net income or stockholders' equity. These operating results are not necessarily indicative of the results of any future period. Due to diversification towards our commercial/retail segment, we expect heightened seasonality in our business. We expect sales in the second...

  • Page 29
    ...million in 2004 compared with net cash used in investing activities in 2003 of $40.8 million. The change in cash flow from investing activities is primarily due to $9.0 million for capital expenditures primarily consisting of building improvements, manufacturing equipment and information systems and...

  • Page 30
    ...FASB issued SFAS No. 123R "Share-Based Payment," which requires companies to recognize in their statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective for interim or annual periods beginning after June 15...

  • Page 31
    ...and 60 second "spot" television commercials and 30-minute television "infomercials" to market and sell our direct-marketed products. Consequently, a marked increase in the price we must pay for our preferred media time or a reduction in its availability may adversely impact our financial performance...

  • Page 32
    ... products are sold in highly competitive markets with limited barriers to entry. As a result the introduction of lower priced competing products by our competitors could result in a significant decline in our net sales. Unpredictable events and circumstances relating to our international operations...

  • Page 33
    ... President, Chief Executive Officer and Chairman of the Company's Board of Directors. Our future success will also depend on our ability to attract and retain key managers, product development engineers, sales people, and others. We face intense competition for such individuals worldwide. Not being...

  • Page 34
    ...Data Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended December 31, 2004, 2003, and 2002 Consolidated Statements of Stockholders' Equity...

  • Page 35
    ... of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the...

  • Page 36
    ... tax assets Total current assets PROPERTY, PLANT AND EQUIPMENT, net GOODWILL OTHER ASSETS, net TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables Accrued liabilities Income taxes payable Royalty payable to stockholders Customer deposits Total current liabilities...

  • Page 37
    ...of Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (In Thousands, Except Share and Per Share Data) 2004 2003 2002 NET SALES COST OF SALES Gross profit OPERATING EXPENSES: Selling and marketing General and administrative Research and development...

  • Page 38
    ...Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (In Thousands, Except Share Data...of unearned stock compensation Options exercised Stock repurchased Tax benefit of exercise of nonqualified options BALANCES, ...

  • Page 39
    ... payable to stockholders Customer deposits Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment Proceeds from sale of property, plant and equipment Net (increase) decrease in other assets Acquisition cost of StairMaster, net of...

  • Page 40
    Table of Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (In Thousands) 2004 2003 2002 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR SUPPLEMENTAL ...

  • Page 41
    ...through well established direct to consumer, commercial, and retail channels. The Company's consumer and commercial fitness equipment products include a full line of cardiovascular and weight resistance products such as home gyms, free weight equipment, treadmills, indoor cycling equipment, steppers...

  • Page 42
    ... to meet sales and profitability objectives, or changes in the Company's business operations or strategic direction. Any impairment charge would be classified as a component of general and administrative expenses. In the fourth quarter of 2004, the Company determined that goodwill and long lived...

  • Page 43
    ... price, less shipping and handling in certain instances. The return periods for direct marketed product lines range from 30 days to six weeks depending on the specific product. We track product returns in order to identify any potential negative customer satisfaction trends. In our commercial/retail...

  • Page 44
    ...Balance at End of Period Warranty reserves: 2004 2003 2002 $ 7,348 5,358 2,413 $ 7,362 5,845 6,155 $ 7,173 3,855 3,210 $ 7,537 7,348 5,358 * Deductions represent warranty claims paid out in the form of service costs and/or product replacements. Research and Development - Internal research and...

  • Page 45
    ...FASB issued SFAS No. 123R "Share-Based Payment," which requires companies to recognize in their statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective for interim or annual periods beginning after June 15...

  • Page 46
    ... generally have an exercise price equal to the closing market price of the Company's stock on the day before the date of grant, generally no longer than five 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...

  • Page 47
    ... its direct, commercial/retail, and corporate segments. The direct segment includes all brands and related operations involved in marketing to consumers through a variety of direct marketing channels. The Bowflex lines of strength and cardiovascular fitness equipment, and the Champion Nutrition line...

  • Page 48
    ...the Company's three operating segments: Commercial/ Direct Retail Corporate Total Year ended December 31, 2004: Net sales Interest income Depreciation and amortization expense Income tax expense (benefit) Segment net income (loss) Segment assets Additions to property, plant and equipment Year ended...

  • Page 49
    ... payable quarterly over a two-year period at prime plus 2%. These assets consisted of medical treadmill manufacturing fixed assets and inventories, which StairMaster used for outsourced production of Quinton branded medical treadmills. The total cost of the StairMaster acquisition has been allocated...

  • Page 50
    ... of Contents 6. PROPERTY, PLANT AND EQUIPMENT, net Details of property, plant and equipment are summarized as follows at December 31: Estimated Useful Life (in years) 2004 2003 Land Buildings and improvements Computer equipment Production equipment Furniture and fixtures Automobiles Total property...

  • Page 51
    ... ranging from, but not limited to, warehousing and distribution, product development, administration, and product sales. The Company also has operating leases for certain equipment mainly consisting of product delivery trucks used in our commercial fitness equipment business and product service...

  • Page 52
    Table of Contents The provision for income taxes consists of the following for the years ended December 31,: 2004 2003 2002 Current: Federal State Foreign Total current Deferred: Federal State Foreign Total deferred Total provision $13,495 861 446 14,802 884 48 (72) 860 $15,662 $18,996 731 287 20...

  • Page 53
    ... income tax rate is as follows: 2004 2003 2002 U.S. statutory income tax rate State tax, net of federal benefit Tax benefit related to U.S. export sales Nondeductible operational expenses Tax exempt interest Research and development credit Reduction in tax contingency reserve Other Total 35...

  • Page 54
    ...are covered in whole or in part by insurance. Management believes that any liability resulting from such matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. In December 2002, the Company filed suit against ICON Health and Fitness...

  • Page 55
    ... have completed one year of service before becoming eligible for Company matching contributions. Employees are 25% vested in the matching contributions per year for the first four years of service. Expense for the plan was $640, $613, and $356, for the years ended December 31, 2004, 2003 and 2002...

  • Page 56
    ..., which expresses unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. Inherent Limitations on Effectiveness of Controls The Company's management, including the Chief Executive Officer and Chief...

  • Page 57
    ..., by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all...

  • Page 58
    ... opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other...

  • Page 59
    ...of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year then ended of the Company and our report dated March...

  • Page 60
    ... all employees, directors and officers, including the Company's principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is available on the Company's website, www.nautilus.com. Item 11. Executive Compensation The information...

  • Page 61
    Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) (a)(2) Financial Statements See the Consolidated Financial Statements in Item 8. Financial Statement Schedule There are no financial statement schedules filed as part of this annual report, since the required ...

  • Page 62
    ... authorized. Date: March 14, 2005 N AUTILUS , I NC . By: /s/ G REGGORY C. H AMMANN Greggory C. Hammann, Chief Executive Officer, President and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 63
    ... National Association - Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2002, as filed with the Commission on August 14, 2002. Lease agreement, dated November 23, 2004 between Columbia Tech Center LLC and The Nautilus Group...

  • Page 64
    .... Executive Employment Agreement dated January 1, 1998, by and between the Company and Rod W. Rice. Executive Employment Agreement dated January 14, 2004 by and between the Company and Darryl Thomas. Subsidiaries of Nautilus, Inc. Consent of Independent Registered Public Accounting Firm. Power of...

  • Page 65
    ... Optionee shall, concurrently with the exercise of all or any portion of this Option, deliver to the Company the Optionee's Investment Representation Statement in such form as may be required in the opinion of the Company's legal counsel to comply with applicable state and federal securities laws. 1

  • Page 66
    ...shall thereafter become exercisable as of the total Shares covered hereby at the end of each subsequent 12-month period of Optionee's continuous to an additional employment with the Company. (ii) Exercisable Period . This Option may not be exercised more than ten (10) years from the date of grant of...

  • Page 67
    ... OF GRANT: THE NAUTILUS GROUP, INC. By: Signature Print Name Its: Dated: (Optionee) Print Name 3 EXHIBIT 10.4 THE NAUTILUS GROUP, INC. NONSTATUTORY STOCK OPTION AGREEMENT (the "Optionee"), an option to purchase a total of shares of The Nautilus Group, Inc. (the "Company") has granted to Common Stock...

  • Page 68
    ... next Annual Shareholders meeting, provided that said Board member remains in office during such term. (ii) Exercisable Period . This Option may not be exercised more than ten (10) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and...

  • Page 69
    ... exercisable until such approval has been obtained. Dated: (Optionee) Print Name 3 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into as of January 29, 2004, by and between The Nautilus Group, Inc., a Washington corporation (the "Company" or "Employer...

  • Page 70
    ... of a key Employer policy or this Agreement by Employee (including, but not limited to, acts of harassment or discrimination, use of unlawful drugs or drunkenness on Employer's premises during normal work hours); (iv) insubordination (i.e. conduct such as refusal to follow direct orders of the...

  • Page 71
    ... the Date of Termination, the Company shall pay to the Employee severance equal to twelve months average monthly annual base salary 1 . Such severance payment shall be made according to the Company's normal payroll process spread out equally over the severance period. Violation of this Agreement or...

  • Page 72
    ...termination of this Agreement or at any other time upon the Company's request, Employee agrees to return all documents and property belonging to the Company in his possession including, but not limited to, customer lists, contracts, agreements, licenses, business plans, equipment, software, software...

  • Page 73
    ... the Business Protection Agreement attached as Exhibit A, sets forth the entire agreement of the parties hereto and supersedes any and all prior agreements and understandings concerning Employee's employment by the Company. This Agreement may be changed only by a written document signed by Employee...

  • Page 74
    ...shall initially report to the President of the Direct Division, and/or such other persons as may be designated by Employer, and perform his/her job duties subject to his/her general supervision, orders, advice and direction. Employee shall perform the duties normally associated with the position and...

  • Page 75
    ... proposals. If you shall terminate your employment or if your employment is terminated for cause prior to your one-year anniversary, you will owe The Nautilus Group, Inc. any reimbursed amount. Employee will also receive monthly payments for corporate housing at actual cost not to exceed $1,500...

  • Page 76
    ...Agreement by the Company without Cause or by Employee for Good Reason (as defined hereunder), then, in lieu of any further salary, bonus, or other payments for periods subsequent to the Date of Termination, the Company shall pay to the Employee severance equal to 120-days average monthly annual base...

  • Page 77
    ... Employer. Upon termination of this Agreement or at any other time upon the Company's request, Employee agrees to return all documents and property belonging to the Company in his/her possession including, but not limited to, customer lists, contracts, agreements, licenses, business plans, equipment...

  • Page 78
    ... of seven (7) business days after mailing if sent by registered or certified mail, postage prepaid, to the parties at the following addresses: To the Company: The Nautilus Group, Inc. 1400 NE 136th Avenue Vancouver, WA 98684 Attention: Human Resources Garvey, Schubert & Barer 1191 Second Avenue, 18...

  • Page 79
    ... Agreement. Employee shall perform such services and act in such executive capacities as employer's President shall direct. Employee shall disclose to employer any business ideas related to the employer's present or planned business activities, such as ideas for new products or marketing strategies...

  • Page 80
    ... less than ninety (90) days before expiration of the applicable term. In such case, employer shall continue to pay employee and employee shall continue to perform employee's duties under this employment agreement until the end of the applicable term. Except for termination of employment for cause or...

  • Page 81
    ... information or services to any person, firm, corporation or other entity which is engaged in any similar or competing direct marketing business or which is otherwise selling any products that compete with employer's products existing or under development as of the effective date of the termination...

  • Page 82
    ...merger or consolidation with another company or group of companies which will acquire and operate the employer's business), or if employer shall make an assignment for the benefit of its creditors or admit an inability to pay its debts as they become due or file a voluntary petition in bankruptcy or...

  • Page 83
    ... party as set forth below: To Employer: Bow Flex, Inc. 2200 NE 65 th Avenue Vancouver, WA 98661 Rodney W. Rice To Employee: Employee shall notify employer of any change of address during any term of this Agreement and during the first year following termination of employee's employment under this...

  • Page 84
    .... Employee shall report to the President and Chief Executive Officer, and/or such other persons as may be designated by Employer, and perform his job duties subject to his general supervision, orders, advice and direction. Employee shall perform the duties normally associated with the position and...

  • Page 85
    ... of a key Employer policy or this Agreement by Employee (including, but not limited to, acts of harassment or discrimination, use of unlawful drugs or drunkenness on Employer's premises during normal work hours); (iv) insubordination (i.e. conduct such as refusal to follow direct orders of the...

  • Page 86
    ... to the Date of Termination, the Company shall pay to the Employee severance equal to 12 months average monthly annual base salary 1 . Such severance payment shall be made according to the Company's normal payroll process spread out equally over the severance period. Violation of this Agreement or...

  • Page 87
    ...termination of this Agreement or at any other time upon the Company's request, Employee agrees to return all documents and property belonging to the Company in his possession including, but not limited to, customer lists, contracts, agreements, licenses, business plans, equipment, software, software...

  • Page 88
    ... the Business Protection Agreement attached as Exhibit A, sets forth the entire agreement of the parties hereto and supersedes any and all prior agreements and understandings concerning Employee's employment by the Company. This Agreement may be changed only by a written document signed by Employee...

  • Page 89
    ... executed this Agreement as of the date first written above. Employer: THE NAUTILUS GROUP, INC. /s/ Gregg Hammann By Its Gregg Hammann C.E.O /s/ Darryl Thomas Employee 6 EXHIBIT 21 SUBSIDIARIES OF NAUTILUS, INC. Nautilus Direct, Inc., a Washington corporation Nautilus Human Performance Systems, Inc...

  • Page 90
    ... and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2004, and any amendments or supplements thereto, and to file this Power of Attorney and...

  • Page 91
    ... and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus Inc., a Washington corporation, for the fiscal year ended December 31, 2004, and any amendments or supplements thereto, and to file this Power of Attorney and...

  • Page 92
    ...'s internal control over financial reporting. By: /s/ Greggory C. Hammann Greggory C. Hammann, Chief Executive Officer, President and Chairman of the Board EXHIBIT 31.2 CERTIFICATION March 14, 2005 Date I, Rod W. Rice, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Nautilus...

  • Page 93
    ... of Title 18, United States Code), the undersigned officer of Nautilus, Inc., a Washington corporation (the "Company"), does hereby certify that: To my knowledge, the Annual Report on Form 10-K for the year ended December 31, 2004 (the "Form 10-K") of the Company fully complies with the requirements...