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Table of Contents
NAUTILUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Organization and Business - Nautilus is a leading designer, developer and marketer of consumer fitness products sold under well-known brand
names, such as Nautilus
®
, Bowflex
®
, Schwinn
®
and Universal
®
. As used herein, the term “Nautilus” or “Company” refers to Nautilus, Inc. and
subsidiaries, unless the context indicates otherwise. The Company's goal is to develop and market fitness equipment and related products to help
people enjoy healthier lives. Nautilus was founded in 1986 and incorporated in the State of Washington in 1993. The Company's headquarters
are located in Vancouver, Washington.
The Company markets its products through two reportable segments: Direct and Retail, each representing a distinct marketing distribution
channel. The direct segment offers products directly to consumers through direct advertising, catalogs and the Internet. The retail segment offers
products through a network of independent retail companies with stores located in the United States and Canada, as well as Internet-based
merchandising.
The Company's commercial business, formerly a reportable segment and classified as a discontinued operation beginning in 2009, offered
products to health clubs, schools, hospitals and other organizations. On September 25, 2009, the Company committed to a plan for the complete
divestiture of its commercial business. Accordingly, results of operations and certain assets associated with the commercial business have been
presented in the consolidated financial statements as discontinued operations for all periods presented.
Basis of presentation
- The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and relate to Nautilus, Inc. and its subsidiaries, all of which are wholly-
owned, directly or indirectly. Intercompany transactions and balances have been eliminated in consolidation.
Liquidity
- As of December 31, 2010, the Company had $14.3 million of cash and cash equivalents, compared to $7.3 million as of December
31, 2009. The principal sources of this increase in cash and cash equivalents were $7.3 million in proceeds from the sale of the Company's
commercial business, a $5.0 million loan from a related party and $4.6 million from the reduction of restricted cash, partially offset by $10.7
million of cash used in operating activities. Cash provided by operating activities was $14.8 million and $5.6 million in 2009 and 2008,
respectively. The Company generated positive operating cash flows despite reporting significant net losses in 2009 and 2008, primarily by
significantly reducing receivables and inventories.
Management believes that sufficient funds will be available to meet the Company's expected cash needs for at least the next twelve months,
based on cash currently on hand and anticipated cash flows from operations. Despite negative operating cash flows in 2010, management expects
to generate adequate operating cash flows during the next twelve months, primarily by reducing losses of the Company's commercial business
discontinued operation and improving contribution of its direct business through increased sales. However, there is no assurance that such funds
will be sufficient for the Company's operating needs.
The Company currently is in compliance with the financial covenants of its bank loan agreement. While management expects to remain in
compliance with such covenants in the future, there is no assurance that the Company will remain so. Failure to maintain compliance with the
covenants might, absent a waiver from the bank, result in an obligation to cash collateralize the Company's standby letters of credit, which
totaled $3.2 million as of February 28, 2011.
Year-end - The Company's fiscal year ends on December 31.
Reclassifications
- Non-current warranty obligations, previously included in other long-term liabilities, have been reclassified as a separate
component of liabilities in the Company's consolidated balance sheets. Short-term notes receivable, previously included in prepaids and other
current assets, have been reclassified as a separate component of assets in the Company's consolidated balance sheets.
Use of estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in
the financial statements. Actual results could differ from those estimates.
Concentrations of risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash
held in bank accounts in excess of federally-insured limits and trade receivables. Trade receivables are
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