Nautilus 2011 Annual Report Download

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NAUTILUS, INC.
FORM 10-K
(Annual Report)
Filed 03/16/12 for the Period Ending 12/31/11
Address 16400 SE NAUTILUS DRIVE
VANCOUVER, WA 98683
Telephone 3606947722
CIK 0001078207
Symbol NLS
SIC Code
3949 - Sporting and Athletic Goods, Not Elsewhere Classified
Industry Recreational Products
Sector Consumer Cyclical
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2012, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ... (Annual Report) Filed 03/16/12 for the Period Ending 12/31/11 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 16400 SE NAUTILUS DRIVE VANCOUVER, WA 98683 3606947722 0001078207 NLS 3949 - Sporting and Athletic Goods, Not Elsewhere Classified Recreational Products Consumer Cyclical...

  • Page 2
    ... No.) 16400 S.E. Nautilus Drive Vancouver, Washington 98683 (Address of principal executive offices, including zip code) (360) 859-2900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on...

  • Page 3
    ...affiliates computed by reference to the last sales price ($2.00) 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, 2011) was $61,493,672. The number of shares outstanding of the registrant's common stock...

  • Page 4
    Table of Contents NAUTILUS, INC. 2011 FORM 10-K ANNUAL REPORT PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Market for Registrant's Common Equity, Related Stockholder Matters and ...

  • Page 5
    ... solutions to help people achieve a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardio and strength fitness products and related accessories for consumer use, primarily in the United States and Canada. Our products...

  • Page 6
    ... product lines by designing fitness equipment that meets or exceeds the high expectations of our customers; • utilizing our strengths in product engineering to reduce product costs; • continuing our investment in research and development activities aimed at acquiring or creating new technologies...

  • Page 7
    ... GE Money Bank ("GE"). The relationship with GE has expanded the ability of our customers to obtain third-party consumer financing for buying our products. In addition, we added one secondary third-party consumer credit financing provider during the third quarter of 2010 and another in early 2011...

  • Page 8
    ... anticipated selling season. We use various commercial truck lines for our merchandise shipments to Retail customers. In 2011 approximately one-quarter of our Retail inventory replenishment orders were shipped by our contract manufacturers in Asia directly to our Retail customer locations, typically...

  • Page 9
    ... in the following products: TreadClimber specialized cardio machines; variable stride ellipticals; selectorized dumbbells; and recumbent exercise bikes. Nautilus is the exclusive licensee of patents that cover the Bowflex Revolution home gyms. Patent protection for these technologies extends as far...

  • Page 10
    ...success of our customers' businesses or specific products; • Changes in the market conditions for consumer fitness equipment; • Changes in macroeconomic factors; • Availability of consumer credit; • Timing and availability of products coming from our offshore contract manufacturing suppliers...

  • Page 11
    ... third quarter, and are generally weakest in the second quarter. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of fitness equipment. In addition, our customers may cancel orders, change delivery...

  • Page 12
    ...various programs offered by third- party consumer credit financing sources. Reductions in consumer lending and the availability of consumer credit could limit the number of customers with the financial means to purchase our products. Higher interest rates could increase monthly payments for consumer...

  • Page 13
    ... of our employees located in foreign countries. Our ability to control the actions of these employees may be limited by the laws and regulations in effect in each country. Changes in any of the above factors could have a material adverse effect on our operating results, financial position and cash...

  • Page 14
    ... of our Direct business is heavily dependent on our ability to respond to customer sales inquiries and process sales transactions using our call center communication systems, Internet websites and similar data monitoring and communication systems provided and supported by third-parties. If such...

  • Page 15
    ... of consumer financing programs. Item 1B. Unresolved Staff Comments None. Item 2. Properties Following is a summary of our principal properties as of December 31, 2011 : Owned or Leased Location Primary Function(s) Washington Oregon Canada China Corporate headquarters and customer call center...

  • Page 16
    ...compensation plans not approved by security holders Total 1,482,917 - 1,482,917 $ 8.72 - 8.72 4,080,000 - 4,080,000 For further information regarding our equity compensation plans, refer to Note 12, Stockholders' Equity, to our consolidated financial statements in Part II, Item 8 of this report...

  • Page 17
    ... GE Money Bank ("GE"). The relationship with GE has expanded the ability of our customers to obtain third-party consumer financing for buying our products. In addition, we added one secondary third-party consumer credit financing provider during the third quarter of 2010 and another in early 2011...

  • Page 18
    ...our financial position and results of operations. Product Warranty Obligations Our products carry limited defined warranties for defects in materials or workmanship. Our product warranties generally obligate us to pay for the cost of replacement parts, cost of shipping the parts to our customers and...

  • Page 19
    ...of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer, product failure rates and variances in expected repair costs. Uncertainties exist with respect to outstanding warranty obligations of our discontinued Commercial business...

  • Page 20
    ... of operations for the years ended December 31, 2011 and 2010 (in thousands): Year Ended December 31, 2011 2010 Change % Change Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses Operating...

  • Page 21
    16

  • Page 22
    ...% 19.2 % 7.1 % $ $ $ Cardio products include treadclimbers, treadmills, exercise bikes and ellipticals. Strength products include home gyms, selectorized dumbbells, kettlebell weights, weight benches and CoreBody Reformer. Direct Net sales of our Direct business were $107.1 million in 2011 , an...

  • Page 23
    ... the mature home-gym category and to increase the media investment in our TreadClimber product line. Since early 2011, we have marketed home gyms through more cost efficient online media. Lower comparable Direct advertising expenses were offset in part by higher consumer credit financing costs, as...

  • Page 24
    ... secured credit line of up to $15.0 million. The amount available for borrowings varies based upon the total amount of eligible accounts receivable and inventory as of the end of the preceding month. The Loan Agreement is available for working capital, standby letters of credit and general corporate...

  • Page 25
    ...liquidation of assets, capital expenditures, payment of dividends, changes in our business operations and change of control transactions. The Purchase Agreement includes customary events of default, including nonpayment, insolvency, breach of warranty or covenant, cross-default of the Loan Agreement...

  • Page 26
    ... months, consumers tend to be involved in outdoor activities, including outdoor exercise, which impacts sales of indoor fitness equipment. This seasonality can have a significant effect on our inventory levels, working capital needs and resource utilization. NEW ACCOUNTING PRONOUNCEMENTS No new...

  • Page 27
    Table of Contents Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2011 and 2010 Consolidated Statements of Operations for the years ended December 31,...

  • Page 28
    ... for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion . An audit also includes examining, on a test basis...

  • Page 29
    ... liabilities, non-current Other long-term liabilities Total liabilities Commitments and contingencies (Note 15) Stockholders' equity: Common stock - no par value, 75,000 shares authorized, 30,747 and 30,744 shares issued and outstanding at December 31, 2011 and 2010, respectively Retained earnings...

  • Page 30
    ... of Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2011 2010 Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Total operating expenses...

  • Page 31
    ...NAUTILUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (In thousands) Accumulated Other Comprehensive Income (1) Common Stock Shares Amount Retained Earnings Total... plan Balances at December 31, 2011 30...notes to consolidated financial statements. 26

  • Page 32
    ... Proceeds from long-term borrowings Financing costs Proceeds from exercise of stock options Net cash (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and...

  • Page 33
    ... 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...

  • Page 34
    ... from revenue. Shipping and handling fees billed to customers are recorded gross and included in both revenue and cost of sales. Many direct business customers finance their purchases through a third-party credit provider, for which Nautilus pays a commission or financing fee to the credit provider...

  • Page 35
    ... to their terms, generally obligate Nautilus to pay the costs of supplying and shipping replacement parts to customers and, in certain instances, pay for labor and other costs to service products. Outstanding product warranty periods range from sixty days to, in limited circumstances, the lifetime...

  • Page 36
    Table of Contents Fair value of financial instruments - Financial instruments include cash and cash equivalents, restricted cash, trade receivables, trade payables, long-term note payable, letters of credit and guarantees entered into in the ordinary course of business. The carrying amounts ...

  • Page 37
    ... 2011-08 did not have any effect on the Company's financial position, results of operations or cash flows. (2) DISCONTINUED OPERATION On September 25, 2009, in light of continuing operating losses in its Commercial business and in order to focus exclusively on managing its Direct and Retail consumer...

  • Page 38
    ...09 Sale of commercial equipment manufacturing operation Sale of commercial equipment manufacturing facility Sale of European commercial business operations Other completed disposals Adjustments of previously completed disposal transactions Remaining assets held-for-sale as of December 31, 2010 Total...

  • Page 39
    ...internal use software development and production tooling construction in progress. Depreciation expense was $1.6 million and $4.5 million in 2011 and 2010 , respectively. (6) GOODWILL No goodwill is assigned to the Retail reporting unit. Changes in goodwill of the Direct reporting unit in the years...

  • Page 40
    ... secured credit line of up to $15.0 million. The amount available for borrowings varies based upon the total amount of eligible accounts receivable and inventory as of the end of the preceding month. The Loan Agreement is available for working capital, standby letters of credit and general corporate...

  • Page 41

  • Page 42
    ...liquidation of assets, capital expenditures, payment of dividends, changes in the Company's business operations and change of control transactions. The Purchase Agreement includes customary events of default, including nonpayment, insolvency, breach of warranty or covenant, cross-default of the Loan...

  • Page 43
    ... of Contents Income (loss) from continuing operations before income taxes in the years ended December 31, 2011 and 2010 consisted of the following (in thousands): 2011 2010 United States Non-U.S. Total income (loss) from continuing operations before income taxes $ $ 2,876 311 3,187 $ $ (11...

  • Page 44
    ... for doubtful accounts Inventory valuation Capitalized indirect inventory costs Stock-based compensation expense Net operating loss carryforward Basis difference on assets held-for-sale Capital loss carryforward Basis difference on long-lived assets Other Total deferred income tax assets before...

  • Page 45
    ... which the Company is permitted to utilize its net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change . As of December 31, 2011 , the Company had the following income...

  • Page 46
    ... than the fair market value of the Company's common shares on the date of the grant. The exercise price of an option or stock appreciation right may not be reduced without shareholder approval. Stock options generally vest over four years of continuous service, commencing on the date of grant. Stock...

  • Page 47
    ... 31, 2011 were as follows: (in thousands, except contractual life and exercise price): Options Outstanding Weighted Average Remaining Contractual Life (Years) WeightedAverage Exercise Price Options Exercisable WeightedAverage Exercise Price Range of Exercise Prices Number Outstanding Number of...

  • Page 48
    ... of the years 2011 and 2010 , primarily included in general and administrative expense. Following is a summary of performance stock unit activity in the years ended December 31, 2011 and 2010 (in thousands, except fair value per share): Weighted Average Grant Date Fair Value per Share Performance...

  • Page 49
    ... maker and is defined as net sales less product costs and directly attributable expenses. Directly attributable expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses that are directly related to segment operations. Segment assets...

  • Page 50
    43

  • Page 51
    ... divestiture, the Company's discontinued Commercial business would, from time-to-time, use third-party lease and financing arrangements to assist customers in purchasing products. While these arrangements generally were without recourse to Nautilus, in certain cases the Company offered a guarantee...

  • Page 52
    ... OPERATIONS (unaudited) The following table summarizes the Company's unaudited quarterly financial data for 2011 and 2010 (in thousands, except per share amounts): Quarter Ended March 31 June 30 September 30 December 31 Total 2011: Net sales Gross profit Operating income (loss) Income (loss) from...

  • Page 53
    .... Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Changes In Internal Control Over Financial...

  • Page 54
    ...changes in our internal control over financial reporting that occurred during the three months ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Given the timing of the event...

  • Page 55
    Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item will be set forth under the captions Election of Directors , Section 16(a) Beneficial Ownership Reporting Compliance, Executive Officers and Information Concerning the ...

  • Page 56
    ... the Consolidated Financial Statements in Part II, Item 8. (a)(2) Financial Statement Schedule There are no financial statement schedules filed as part of this Annual Report on Form 10-K, since the required information is included in the consolidated financial statements, including the notes thereto...

  • Page 57
    ... M. Cazenave Bruce M. Cazenave * M. Carl Johnson, III * Ronald P. Badie * Richard A. Horn * Marvin G. Siegert Chief Executive Officer and Director (Principal Executive Officer and Acting Principal Financial Officer) Chairman Director Director Director *By: /s/ Wayne M. Bolio Wayne M. Bolio...

  • Page 58
    ... as of April 18, 2008 by and among Nautilus, Inc., Shimano American Corporation and DashAmerica, Inc. D/B/A Pearl Izumi USA, Inc. - Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K, as filed with the Commission on April 24, 2008. Amended and Restated Articles of...

  • Page 59
    ... by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 15, 2004. Office Lease Agreement, dated June 30, 2009, between Columbia Tech Center LLC and the Company - Incorporated by reference to Exhibit...

  • Page 60
    ....31 of the Company's Form 10-K for the fiscal year ended December 31, 2009 as filed with the Commission on March 8, 2010. Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between the Company and GE Money Bank - Incorporated by reference to Exhibit 10.1 of the Company...

  • Page 61
    ...the Company's Form 10-Q for the three months ended September 30, 2010 as filed with the Commission on November 9, 2010. First Amendment dated November 6, 2010 to Private Label Consumer Credit Card Program Agreement, dated June 15, 2010, by and between the Company and GE Money Bank. 10.30 10.31 52

  • Page 62
    ...25, 2011, to the Office Lease by and between Nautilus, Inc. and Columbia Tech Center, L.L.C. dated June 30, 2009 - Incorporated by reference to Exhibit 1012 to the Company's Current Report on Form 8-K as filed with the Commission on July 29, 2011. Office Lease Agreement dated as of July 25, 2011, by...

  • Page 63
    ..., is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. * Indicates management contract, compensatory agreement or arrangement, in which the Company's directors or executive officers may participate. 53

  • Page 64
    ... March 12, 2012, is by and between NAUTILUS, INC. , a Washington corporation ("Borrower"), and BANK OF THE WEST ("Lender"). A. Lender and Borrower are parties to that certain Credit Agreement dated as of March 8, 2010 (as amended, the "Credit Agreement"), pursuant to which Lender extends to Borrower...

  • Page 65
    ... Agreement is hereby amended by Section 3. deleting it in its entirety and replacing it with the following: "Section 3.14 Maturity Date of the Revolving Credit Facility . On the earlier of (a) December 31, 2012, or (b) acceleration of the Obligations following an Event of Default, if any, under this...

  • Page 66
    ... MAY HAVE AGAINST ANY OTHER PARTY HERETO (INCLUDING CROSS-CLAIMS AND COUNTERCLAIMS), WHETHER ANY SUCH CLAIM ARISES OUT OF CONTRACT, TORT, OR OTHERWISE AND WHETHER ANY SUCH CLAIM ARISES BEFORE OR AFTER THE DATE OF THIS AGREEMENT. Attorney Fees . In any action to interpret or enforce any provision...

  • Page 67
    EXHIBIT 10.45 BORROWER: NAUTILUS, INC. LENDER: BANK OF THE WEST By: /s/ Bruce M. Cazenave Bruce M. Cazenave, CEO By: /s/ Sean Edwards Sean Edwards, Vice President

  • Page 68
    ... SUBSIDIARIES OF NAUTILUS, INC. Nautilus, Inc., a Washington corporation Nautilus International Holdings, S.A., a Swiss corporation Nautilus International, S.A., a Swiss corporation Nautilus Switzerland, S.A., a Swiss corporation Nautilus International GmbH, a German corporation Nautilus Fitness UK...

  • Page 69
    ... on Form S-8 of our reports dated March 15, 2012 , relating to the consolidated financial statements of Nautilus, Inc. appearing in this Annual Report on Form 10-K of Nautilus, Inc. and subsidiaries for the year ended December 31, 2011 . /s/ Deloitte & Touche LLP Portland, Oregon March 15, 2012

  • Page 70
    ... on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is...

  • Page 71
    ... 1350, Chapter 63 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, 2011 (the "Form 10-K") of the Company fully complies...