Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission file number: 001-31321

 
 
 
NAUTILUS, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
Washington
 
94-3002667
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification 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)
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  [ ]            Accelerated filer  [ ]        Non-accelerated filer  [ ]            Smaller reporting company  [x]
(do not check if a smaller
         reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  [ ]    No  [x]
The number of shares outstanding of the registrant's common stock as of July 31, 2011 was 30,746,836 shares.
 
Table of Contents

NAUTILUS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
 
 
 
Item 1.
 
Item 2.
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 6.
 
 



2
Table of Contents

PART I.    FINANCIAL INFORMATION
    
Item 1.     Financial Statements
NAUTILUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
 
As of
 
June 30, 2011
  
December 31, 2010
ASSETS

  

Current assets:

  

Cash and cash equivalents
$
15,052

  
$
14,296

Restricted cash
—


351

Trade receivables, net of allowances of $374 as of June 30, 2011 and $301 as of December 31, 2010
7,878

  
19,633

Inventories
12,518

  
10,347

Prepaids and other current assets
3,645

  
5,331

Income taxes receivable
1,044

  
456

Short-term notes receivable
704


832

Assets of discontinued operation held-for-sale
—

  
292

Deferred income tax assets
55

  
57

Total current assets
40,896

  
51,595

Property, plant and equipment, net
4,711

  
3,795

Goodwill
3,000

  
2,931

Other intangible assets, net
17,743

  
18,774

Other assets
920

  
1,272


$
67,270

  
$
78,367

LIABILITIES AND STOCKHOLDERS' EQUITY

  

Current liabilities:

  

Trade payables
$
16,041

  
$
24,535

Accrued liabilities
6,161

  
7,045

Warranty obligations, current portion
2,950

  
3,539

Deferred income tax liabilities
1,187

  
1,160

Total current liabilities
26,339

  
36,279

Long-term notes payable
5,365


5,141

Warranty obligations, non-current
408


396

Income taxes payable, non-current
3,472

  
3,210

Deferred income tax liabilities, non-current
1,355

  
1,008

Other long-term liabilities
1,358

  
1,534

Total liabilities
38,297

  
47,568

Commitments and contingencies (Note 12)

  

Stockholders' equity:

  

Common stock - no par value, 75,000 shares authorized, 30,747 and 30,744 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively
5,118

  
5,051

Retained earnings
16,633

  
18,295

Accumulated other comprehensive income
7,222

  
7,453

Total stockholders' equity
28,973

  
30,799


$
67,270

  
$
78,367


See accompanying notes to condensed consolidated financial statements.


3
Table of Contents

NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2011
 
2010
 
2011
 
2010
Net sales
$
34,724

 
$
30,642

 
$
83,025

 
$
76,286

Cost of sales
20,181

 
17,173

 
46,395

 
39,852

Gross margin
14,543

 
13,469

 
36,630

 
36,434

Operating expenses:

 

 

 

Selling and marketing
12,219

 
14,645

 
27,084

 
33,588

General and administrative
4,277

 
4,794

 
8,969

 
9,953

Research and development
724

 
788

 
1,477

 
1,591

Total operating expenses
17,220

 
20,227

 
37,530

 
45,132

Operating loss
(2,677
)
 
(6,758
)
 
(900
)
 
(8,698
)
Other income (expense):

 

 

 

Interest income
8

 
—

 
9

 
11

Interest expense
(113
)
 
—

 
(232
)
 
—

Other
53

 
(35
)
 
82

 
(59
)
Total other expense
(52
)
 
(35
)
 
(141
)
 
(48
)
Loss from continuing operations before income taxes
(2,729
)
 
(6,793
)
 
(1,041
)
 
(8,746
)
Income tax (benefit) expense
(533
)
 
201

 
34

 
619

Loss from continuing operations
(2,196
)
 
(6,994
)
 
(1,075
)
 
(9,365
)
Discontinued operation:

 

 

 

Loss from discontinued operation before income taxes
(1,035
)
 
(3,663
)
 
(490
)
 
(9,050
)
Income tax expense of discontinued operation
37

 
48

 
97

 
81

Loss from discontinued operation
(1,072
)
 
(3,711
)
 
(587
)
 
(9,131
)
Net loss
$
(3,268
)
 
$
(10,705
)
 
$
(1,662
)
 
$
(18,496
)
Loss per share from continuing operations - basic and diluted
$
(0.07
)
 
$
(0.23
)
 
$
(0.03
)
 
$
(0.30
)
Loss per share from discontinued operation - basic and diluted
$
(0.04
)
 
$
(0.12
)
 
$
(0.02
)
 
$
(0.30
)
Net loss per share - basic and diluted
$
(0.11
)
 
$
(0.35
)
 
$
(0.05
)
 
$
(0.60
)
Weighted average shares outstanding - basic and diluted
30,745

 
30,744

 
30,745

 
30,744





See accompanying notes to condensed consolidated financial statements.

4
Table of Contents

NAUTILUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
 
Six months ended June 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Loss from continuing operations
$
(1,075
)
 
$
(9,365
)
Loss from discontinued operation
(587
)
 
(9,131
)
Net loss
(1,662
)
 
(18,496
)
Adjustments to reconcile net loss to cash flows from operating activities:
 
 
 
Depreciation and amortization
2,081

 
3,510

Allowance for doubtful accounts
(17
)
 
1,043

Inventory lower-of-cost-or-market adjustments
127

 
1,595

Stock-based compensation expense
(7
)
 
254

Loss on asset disposals
—

 
181

Reduction of previously estimated asset disposal loss
(627
)
 
(2,338
)
Deferred income taxes, net of valuation allowances
470

 
388

Changes in operating assets and liabilities:
 
 
 
Trade receivables
11,586

 
16,090

Inventories
(2,289
)
 
(1,204
)
Prepaids and other current assets
1,937

 
1,166

Income taxes
(569
)
 
12,872

Trade payables
(8,530
)
 
(18,830
)
Accrued liabilities, including warranty obligations
(961
)
 
(4,737
)
Net cash provided by (used in) operating activities
1,539

 
(8,506
)
Cash flows from investing activities:
 
 
 
Proceeds from sale of discontinued operation
1,006

 
3,825

Proceeds from other asset sales
—

 
16

Purchases of software and equipment
(1,884
)
 
(116
)
Net decrease in restricted cash
351

 
586

Net cash provided by (used in) investing activities
(527
)
 
4,311

Cash flows from financing activities:
 
 
 
Financing costs
(36
)
 
(271
)
Proceeds from exercise of stock options
4

 
—

Net cash used in financing activities
(32
)
 
(271
)
Net effect of currency exchange rate changes
(224
)
 
1,664

Net increase (decrease) in cash and cash equivalents
756

 
(2,802
)
Cash and cash equivalents, beginning of year
14,296

 
7,289

Cash and cash equivalents, end of period
$
15,052

 
$
4,487

Supplemental disclosure of cash flow information:
 
 
 
Cash refunded for income taxes, net of payments
$
20

 
$
12,708

See accompanying notes to condensed consolidated financial statements.

5
Table of Contents

NAUTILUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL INFORMATION
 
Basis of Consolidation and Presentation
 
The accompanying condensed consolidated financial statements present the financial position, results of operations and cash flows of Nautilus, Inc. and its subsidiaries (collectively, “Nautilus” or the “Company”), all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
 
The accompanying condensed consolidated financial statements have not been audited. Nautilus has condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2010 (the “ 2010 Form 10-K”).
 
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 and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Further information regarding significant estimates can be found in the Company's 2010 Form 10-K.
 
In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly the Company's financial position as of June 30, 2011 and December 31, 2010 , and results of operations and cash flows for the three and six months ended June 30, 2011 and 2010 . Interim results are not necessarily indicative of results for a full year. The Company's revenues typically vary seasonally and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.
 
Unless indicated otherwise, all information regarding the Company's operating results pertains to its continuing operations.
 
New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05 (the "ASU"), Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. For public entities, the ASU's amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Since the ASU's requirements relate only to presentation, its adoption will 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 businesses, the Company committed to a plan for the complete divestiture of its Commercial business, which qualified for held-for-sale accounting treatment. The Commercial business is presented as a discontinued operation in the Company's condensed consolidated statements of operations for all periods. Following is a summary of the operating results of the Company's former Commercial business for the three and six months ended June 30, 2011 and 2010 (in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2011
 
2010
 
2011
 
2010
Revenue
$
40

 
$
1,392

 
$
141

 
$
11,227

Loss before income taxes
$
(1,323
)
 
$
(4,783
)
 
$
(1,117
)
 
$
(11,388
)
Reduction of previously-estimated disposal loss
288

 
1,120

 
627

 
2,338

Income tax expense
(37
)
 
(48
)
 
(97
)
 
(81
)
Loss from discontinued operation
$
(1,072
)
 
$
(3,711
)
 
$
(587
)
 
$
(9,131
)

6


Disposal of the Commercial business was completed in April 2011. Revenue in the three and six months ended June 30, 2011 consisted of sales of small quantities of discontinued product and spare parts inventories which were not acquired by buyers of components of the Commercial business. The Company may incur additional expenses in future periods in connection with the settlement of contingencies arising from and directly related to the Commercial business prior to its disposal. For further information regarding contingencies related to the Company's former Commercial business, see Note 12, Commitments and Contingencies.

The following table presents gain or loss recognized on completed disposal transactions for the six months ended June 30, 2011 (in thousands):
 
Previously Estimated Disposal Loss as of 12/31/10
 
Gain (Loss) on Completed Disposals
 
Reduction of Previously Estimated Disposal Loss
 
Disposal Loss Impairment as of 6/30/11
Sales of real property
$
(666
)
 
$
(658
)
 
$
8

 
$
—

Adjustments of previously completed disposal transactions
—

 
619

 
619

 
—

 
$
(666
)
 
$
(39
)
 
$
627

 
$
—



The following table presents losses recognized on completed disposal transactions for the six months ended June 30, 2010 (in thousands):
 
Previously Estimated Disposal Loss as of 12/31/09
 
Gain (Loss) on Completed Disposals
 
Reduction of Previously Estimated Disposal Loss
 
Disposal Loss Impairment as of 6/30/10
Sale of Commercial equipment manufacturing operation
$
(6,212
)
 
$
(4,990
)
 
$
1,222

 
$
—

Other completed disposals
(771
)
 
(369
)
 
402

 
—

Adjustments of previously completed disposal transactions
—

 
382

 
382

 
—

Remaining assets held-for-sale as of June 30, 2010
(3,283
)
 
—

 
332

 
(2,951
)
 
$
(10,266
)
 
$
(4,977
)
 
$
2,338

 
$
(2,951
)

The following table summarizes liabilities for exit costs related to the Commercial business discontinued operation, included in "Accrued liabilities" and "Other long-term liabilities" in the Company's condensed consolidated balance sheets (in thousands):
 
Severance and Benefits
 
Facilities and
Other Leases
 
Total
Liabilities
Balance as of December 31, 2010
$
476

 
$
2,160

 
$
2,636

Accruals
45

 
—

 
45

Payments
(476
)
 
(279
)
 
(755
)
Balance as of June 30, 2011
$
45

 
$
1,881

 
$
1,926


(3) INVENTORIES

Inventories, net of valuation allowances, as of June 30, 2011 and December 31, 2010 consisted of the following (in thousands):
 
As of
 
June 30, 2011
 
December 31, 2010
Finished goods
$
11,051

  
$
8,533

Parts and components
1,467

  
1,814

 
$
12,518

  
$
10,347



7

Valuation allowances were $1.2 million and $1.1 million as of June 30, 2011 and December 31, 2010 , respectively, and related primarily to excess parts inventories.

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of June 30, 2011 and December 31, 2010 consisted of the following (in thousands):
 
Estimated
Useful Life
(in years)
  
As of
 
  
June 30, 2011
 
December 31, 2010
Leasehold improvements
5 to 20
  
$
2,602

 
$
2,588

Computer equipment and software
2 to 5
  
38,131

 
38,033

Machinery and equipment
3 to 5
  
6,715

 
6,703

Furniture and fixtures
5
  
880

 
955

Construction in process (software and production tooling)
n/a
  
1,887

 
101

 
 
  
50,215

 
48,380

Accumulated depreciation
 
  
(45,504
)
 
(44,585
)
 
 
  
$
4,711

 
$
3,795


(5) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets as of June 30, 2011 and December 31, 2010 consisted of the following (in thousands):
 
Estimated
Useful Life
(in years)
  
As of
 
  
June 30, 2011
 
December 31, 2010
Goodwill
n/a
 
$
3,000

 
$
2,931

Other intangible assets:
 
 
 
 
 
Indefinite-lived trademarks
n/a
  
$
9,052

 
$
9,052

Patents
1 to 16
  
18,154

 
18,154

 
 
  
27,206

 
27,206

Accumulated amortization - patents
 
  
(9,463
)
 
(8,432
)
 
 
  
$
17,743

 
$
18,774


Nautilus reviews goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each year, or more frequently when events or changes in circumstances indicate the assets may be impaired. The change in goodwill since December 31, 2010 is due to currency exchange rate fluctuations between the U.S. and Canadian dollars.

(6) PRODUCT WARRANTIES

The Company's products carry limited, defined warranties for defects in materials or workmanship which, according to their terms, generally obligate Nautilus to pay the costs of supplying and shipping replacement parts to customers and, in certain instances, for labor and other costs to service products. Outstanding product warranty periods range from sixty days to the lifetime of certain product components in certain limited situations. Changes in the Company's product warranty liability in the three and six months ended June 30, 2011 and 2010 were as follows (in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2011
 
2010
 
2011
 
2010
Balance at beginning of period
$
3,671

 
$
6,988

 
$
3,935

 
$
8,379

Accruals
320

 
156

 
1,019

 
701

Adjustments
(251
)
 
—

 
(360
)
 
(720
)
Payments
(382
)
 
(886
)
 
(1,236
)
 
(2,102
)
Balance at end of period
$
3,358

 
$
6,258

 
$
3,358

 
$
6,258

 
Warranty liability accruals in each period related only to the Company's continuing operations. The majority of payments in each period related to the Company's former Commercial business, a discontinued operation. Adjustments for the six months

8

ended June 30, 2010 primarily related to the assignment of certain Commercial warranty obligations to the buyer of certain components of the Company's former Commercial business.

(7) BORROWINGS

The Company has a Loan and Security Agreement (the “Loan Agreement”) with Bank of the West, which provides a revolving secured credit line of up to $15.0 million. The amount available for borrowings is dependent 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 purposes through August 31, 2012, assuming the Company satisfies certain terms and conditions at the time borrowings are requested. The interest rate on future borrowings, if any, under the Loan Agreement will be based on the bank's Base Rate or LIBOR and the Company's financial condition at the time it elects to borrow. The Loan Agreement includes a fee for the unused portion of the credit facility, which will vary depending on the Company's borrowing base availability.
 
The Loan Agreement is collateralized by substantially all of the Company's assets and contains customary covenants, including minimum current ratio, minimum liquidity, minimum EBITDA (defined as "earnings before interest, taxes, depreciation and amortization") and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Loan Agreement also contains customary events of default. Upon an event of default, the lender would have the option of accelerating all obligations under the Loan Agreement. Standby letters of credit under the Loan Agreement are treated as a reduction of the Company's available borrowing base.
 
As of June 30, 2011 , the Company had no outstanding borrowings and $3.2 million in standby letters of credit issued under the Loan Agreement. As of June 30, 2011 , the Company was in compliance with the financial covenants of the Loan Agreement.

On July 20, 2011, the Company and Bank of the West entered into a Third Amendment (the “Amendment”) of the Loan Agreement. The effect of the Amendment is generally to ease the restrictiveness of certain provisions by increasing the borrowing availability, raising the limitation on capital expenditures and reducing interest rates applicable to any outstanding amounts. The Amendment, dated effective as of June 30, 2011, increases the amount of eligible accounts receivable for calculating the borrowing base. Specifically, the Amendment (i) permits up to 40% of total accounts receivable included in the borrowing base to consist of receivables of a specific customer, an increase from the prior limitation of 25%; and (ii) permits accounts receivable of certain customers granted extended payment terms to be included in the borrowing base, subject to certain conditions and limitations. In addition, the Company and Bank of the West agreed to increase the limitation on the Company's capital expenditures permitted in any one calendar year from $1,500,000 to $3,000,000, and to reduce the interest rate margins applied to amounts outstanding under the Loan Agreement.
On September 3, 2010, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with certain entities (collectively, the “Sherborne Purchasers”) under common control of Sherborne Investors GP, LLC and its affiliates (collectively “Sherborne”). Sherborne was formerly the Company's largest shareholder and is controlled by Edward J. Bramson, the Company's former Chairman and Chief Executive Officer, and Craig L. McKibben, a former member of the Company's Board of Directors.
Pursuant to the Purchase Agreement, the Company issued to the Sherborne Purchasers $6,096,996 in aggregate principal amount at maturity of its Increasing Rate Senior Discount Notes due December 31, 2012 (the “Notes”). The Notes have an original principal amount totaling $5,000,000 and mature on December 31, 2012. The then-outstanding principal amount of the Notes accretes value at rates equal to 2.5% per annum from September 3, 2010 through February 28, 2011; 6.0% per annum from March 1, 2011 through August 31, 2011; 9.5% per annum from September 1, 2011 through February 29, 2012; 13.0% per annum from March 1, 2012 through August 31, 2012; and 14.5% per annum thereafter. If all the Notes are paid at maturity, the effective rate of interest over the term of the Purchase Agreement would be approximately 8.7% per annum, which is the rate at which interest expense is accrued. Prepayment of amounts due under the Notes is permitted under the Purchase Agreement, subject to certain restrictions in both the Purchase Agreement and the Loan Agreement.
The Notes are subordinated to the Loan Agreement. The Purchase Agreement includes certain negative covenants, including restrictions on the incurrence of additional indebtedness, liens, 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 Agreement, material adverse changes and other events. Upon the occurrence of an event of default all outstanding obligations under the Notes may be declared due and payable. The accretion rate of the Notes may be increased by 2% per annum during the continuance of an event of default.

(8) STOCK-BASED COMPENSATION

9


Stock Options

On April 21, 2011, the Company granted to an executive a non-qualified stock option covering 21,000 shares with an exercise price equal to the fair market value of the Company's stock on the date of the grant. The award expires seven years after the date of the grant and vests equally over four years, with 25% vesting each year on the anniversary date of the grant.

On May 19, 2011, the Company granted to certain members of its board of directors non-qualified stock options covering 40,000 shares with an exercise price equal to the fair market value of the Company's stock on the date of the grant. The awards expire seven years after the date of the grant and vest equally over four years, with 25% vesting each year on the anniversary date of the grant.

On May 30, 2011, the Company granted to an executive a non-qualified stock option covering 50,000 shares with an exercise price equal to the fair market value of the Company's stock on the date of the grant. The award expires seven years after the date of the grant and vests over three years, with 34% vesting after the first year, 33% vesting after the second year and the remaining 33% vesting after the third year.

The fair value of the stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions:
Expected Life (years)
 
Expected Volatility
 
Expected Dividend Yield
 
Risk Free Interest Rate
 
Weighted Average Grant Date Fair Value per Share
4.75

 
91.8
%
 
—

 
1.5
%
 
$1.92

Restricted Stock Units

On April 21, 2011, the Company granted to an executive an award of 59,000 restricted stock units with an average grant date fair value of $2.97 per share. The restricted stock units vest equally over a period of four years, with 14,750 units vesting each year on the anniversary date of the grant.

On May 30, 2011, the Company granted to an executive an award of 316,206 restricted stock units with an average grant date fair value of $2.53 per share. The restricted stock units vest over four years, with 93,874 units vesting after one year and 6,176 units vesting each month thereafter for 36 consecutive months.

(9) LOSS PER SHARE

Basic loss per share was computed using the weighted average number of common shares outstanding. For the computation of diluted loss per share, the number of basic weighted average shares outstanding was increased by dilutive potential common shares related to stock-based compensation, as determined by the treasury stock method. The weighted average number of shares outstanding used to compute loss per share were as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Number of shares in thousands)
2011
 
2010
 
2011
 
2010
Basic weighted average shares outstanding
30,745

 
30,744

 
30,745

 
30,744

Dilutive potential common shares (1)
—

 
—

 
—

 
—

Diluted weighted average shares outstanding
30,745

 
30,744

 
30,745

 
30,744

 
 
 
 
 
 
 
 
(1)  Dilutive potential shares omitted due to net loss
20

 
30

 
20

 
22


The weighted average number of shares outstanding listed in the table below were anti-dilutive and excluded from the computation of diluted loss per share, primarily because the average market price did not exceed the exercise price. These shares may be dilutive potential common shares in the future. Performance stock units were not anti-dilutive for the three and six months ended June 30, 2010 .

10

 
Three months ended June 30,
 
Six months ended June 30,
(Number of shares in thousands)
2011
 
2010
 
2011
 
2010
Stock options
1,034

 
1,256

 
1,025

 
1,255

Performance stock units
146

 
—

 
97

 
—

Restricted stock units
46

 
—

 
23

 
—


(10) COMPREHENSIVE LOSS

Following is a summary of the components of comprehensive loss, net of income taxes, for the three and six months ended June 30, 2011 and 2010 (in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(3,268
)
 
$
(10,705
)
 
$
(1,662
)
 
$
(18,496
)
Foreign currency translation gain (loss) adjustments
220

 
201

 
(231
)
 
639

Comprehensive loss
$
(3,048
)
 
$
(10,504
)
 
$
(1,893
)
 
$
(17,857
)

(11) SEGMENT INFORMATION

The Company has two reportable segments - Direct and Retail. Contribution is the measure of profit or loss used by the Company's chief operating decision 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 directly related to segment operations. Following is summary information by reportable segment for the three and six months ended June 30, 2011 and 2010 (in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2011

2010
 
2011
 
2010
Net sales:
 
 
 
 
 
 
 
Direct
$
22,455

 
$
18,443

 
$
52,709

 
$
46,946

Retail
11,417

 
11,820

 
28,380

 
27,751

Unallocated royalty income
852

 
379

 
1,936

 
1,589

Consolidated net sales
$
34,724

 
$
30,642

 
$
83,025

 
$
76,286

Contribution:
 
 
 
 
 
 
 
Direct
$
(1,022
)

$
(4,978
)
 
$
1,178

 
$
(6,514
)
Retail
872


1,333

 
3,101

 
3,593

Unallocated royalty income
852

 
379

 
1,936

 
1,589

Consolidated contribution
$
702

 
$
(3,266
)
 
$
6,215

 
$
(1,332
)
Reconciliation of consolidated contribution to loss from continuing operations:
 
 
 
 
 
 
 
Consolidated contribution
$
702

 
$
(3,266
)
 
$
6,215

 
$
(1,332
)
Less expenses not directly related to segments:
 
 
 
 
 
 
 
General and administrative
(3,379
)
 
(3,461
)
 
(7,115
)
 
(7,302
)
Research and development
—

 
(31
)
 


 
(64
)
Other
(52
)
 
(35
)
 
(141
)
 
(48
)
Income tax benefit (expense)
533

 
(201
)
 
(34
)
 
(619
)
Loss from continuing operations
$
(2,196
)
 
$
(6,994
)
 
$
(1,075
)
 
$
(9,365
)

(12) COMMITMENTS AND CONTINGENCIES

Guarantees, Commitments and Off-Balance Sheet Arrangements

As of June 30, 2011 , the Company had approximately $3.2 million in standby letters of credit with certain vendors with expiration dates through March 2012.


11

The Company has long lead times for inventory purchases and, therefore, must secure factory capacity from its vendors in advance. As of June 30, 2011 , the Company had approximately $11.2 million in non-cancelable market-based purchase obligations, all of which were for inventory purchases expected to be received in 2011.

In the ordinary course of business, the Company enters into agreements that require it to indemnify counterparties against third-party claims. These may include: agreements with vendors and suppliers, under which the Company may indemnify them against claims arising from use of their products or services; agreements with customers, under which the Company may indemnify them against claims arising from their use or sale of the Company's products; real estate and equipment leases, under which the Company may indemnify lessors against third-party claims relating to the use of their property; agreements with licensees or licensors, under which the Company may indemnify the licensee or licensor against claims arising from their use of the Company's intellectual property or the Company's use of their intellectual property; and agreements with parties to debt arrangements, under which the Company may indemnify them against claims relating to their participation in the transactions.

The nature and terms of these indemnification obligations vary from contract to contract, and generally a maximum obligation is not stated within the agreements. The Company holds insurance policies that mitigate potential losses arising from certain types of indemnification obligations. Management does not deem these obligations to be significant to the Company's financial position, results of operations or cash flows and, therefore, no related liabilities were recorded as of June 30, 2011 .

Guarantees, Commitments and Contingencies of Discontinued Operation

Prior to its divestiture, the Company's discontinued Commercial business would, from time-to-time, involve a third-party with 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 or other recourse provisions. The maximum contingent liability under all such recourse provisions was approximately $1.2 million as of June 30, 2011 .

The Company currently is negotiating settlements with respect to certain remaining outstanding contractual commitments of its former Commercial business. While the ultimate outcome of such negotiations cannot be accurately predicted, it is reasonably possible that the Company may incur additional charges of up to $0.2 million, which if incurred, would negatively affect results of the discontinued operation in future periods.

The Company retained certain warranty obligations in connection with its former Commercial business and remains contingently liable for certain product warranty obligations which were assumed by buyers of its Commercial business product lines to the extent a buyer fails to fulfill its assumed obligations. Uncertainties exist with respect to these warranty obligations , as units previously sold to customers approach end-of-life and settlements are reached with certain customers in connection with the Company's exit from its Commercial business. As of June 30, 2011 , the Company's warranty liability included $2.0 million for estimated future warranty costs of its former Commercial business.

Legal Matters

The Company is party to various legal proceedings arising from normal course business activities. In addition, the Company's tax filings are subject to audit by authorities in the jurisdictions where it conducts business, which may result in assessments of additional taxes. Management believes it has adequately provided for obligations that would result from these legal and tax proceedings. Management believes that the ultimate resolution of these matters will not have a material effect on the Company's financial position, results of operations or cash flows.

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”). All references to the second quarter s of 2011 and 2010 mean the three-month periods ended June 30, 2011 and 2010 , respectively. Unless the context otherwise requires, “Nautilus,” “we,” “us” and “our” refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.

Our results of operations may vary significantly from period-to-period. Our revenues typically fluctuate due to the seasonality of our industry, customer buying patterns, product innovation, the nature and level of competition for health and fitness products, our ability to procure products to meet customer demand, the level of spending on, and effectiveness of, our media and advertising programs and our ability to attract new customers and maintain existing sales relationships. In addition, our

12
Table of Contents

revenues are highly susceptible to economic factors, including, among other things, the overall condition of the economy and the availability of consumer credit in both the United States and Canada. Our profit margins may vary in response to the aforementioned factors and our ability to manage product costs. Profit margins may also be affected by fluctuations in the costs or availability of materials used to manufacture our products, product warranty costs, higher or lower fuel prices, and changes in costs of other distribution or manufacturing-related services. Our operating profits or losses may also be affected by the efficiency and effectiveness of our organization. Historically, our operating expenses have been influenced by media costs to produce and air television advertisements of our products, facility costs and operating costs of our information and communications systems. In addition, our operating expenses have been affected by asset impairment charges, restructuring charges and other significant unusual or infrequent expenses.

As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of Risk Factors located at Part I, Item 1A of our 2010 Form 10-K.

Forward-Looking Statements
 
This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "plan," "expect," "aim," "believe," "project," "intend," "estimate," "will," "should," "could," and other terms of similar meaning typically identify forward-looking statements. The forward-looking statements in this Form 10-Q include, without limitation, anticipated declines in sales of strength products, anticipated sales increases of cardio-oriented products and the expectation that increased sales of the TreadClimber® product line will offset anticipated declines in sales of legacy strength products; potential improvement in consumer credit financing approval rates; the continuance of promotional programs and the impact of such programs on profit margins; our new product development strategies; and our plans for achieving future profitability. Forward-looking statements also include any statements related to our expectations regarding future business and financial performance or conditions, anticipated sales growth across markets, distribution channels and product categories, expenses and gross margins, profits or losses, losses from discontinued operation, settlements of warranty obligations, new product introductions, financing and working capital requirements and resources. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risks described in Part I, Item 1A, “Risk Factors,” in our 2010 Form 10-K as supplemented or modified in our quarterly reports on Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

Available Information
 
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, available free of charge on our website, www.nautilusinc.com. In addition, our code of business conduct and ethics, corporate governance policies, and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on our corporate website. The information presented on our website is not part of this report.

OVERVIEW
 
Nautilus is committed to providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. Our principal business activities include designing, developing, sourcing and marketing high-quality cardiovascular and strength fitness products and related accessories for consumer home use, primarily in the United States and Canada. Our products are sold under some of the most recognized brand names in the fitness industry, including Nautilus ® , Bowflex ® , Schwinn ® , Schwinn Fitness™ and Universal ® .

We market our products through two distinct distribution channels, Direct and Retail, which we consider to be separate business segments. Our Direct business offers products to consumers through television advertising, the Internet and catalogs. Our Retail business offers our products through a network of third-party retailers with stores and websites located in the United States and internationally.

Although the second quarter remains the seasonally softest quarter for our operations, our business continues to be affected by challenging economic and market conditions. Such conditions include an uncertain economic environment, disruptions in the residential housing market, reduced availability of consumer credit for our customers, high unemployment and reduced

13
Table of Contents

consumer confidence, all of which have contributed to reductions in consumer spending, particularly on discretionary products such as our home fitness equipment.

Net sales for the second quarter ended June 30, 2011 were $34.7 million , an increase of $4.1 million , or 13.3% , as compared to net sales of $30.6 million for the second quarter of 2010 . This increase was driven by continued strong demand for our TreadClimber specialized cardio machines, reflecting the effectiveness of our media advertising, as well as higher consumer credit approval rates. Based on sales trends observed during the last three quarters, we expect that increased sales of cardio products should more than offset anticipated declines in strength product sales for the full year 2011.

Loss from continuing operations was $2.2 million for the second quarter ended June 30, 2011 , an improvement of 68.6% , or $4.8 million , over loss from continuing operations of 7.0 million for the second quarter of 2010 . Diluted loss per share from continuing operations for the second quarter of 2011 was $(0.07) , compared to $(0.23) for the same quarter a year ago. The significant reduction in loss from continuing operations was primarily due to a 14.9% reduction in operating expenses achieved through more effective advertising expenditures, as well as higher sales and the associated gross margin. Selling and marketing expenses for the second quarter of 2011 , as a percent of net sales, declined to 35.2% from 47.8% for the comparable 2010 period.
Net loss for the second quarter ended June 30, 2011 was $3.3 million , an improvement of $7.4 million , or 69.5% , over net loss of $10.7 million for the second quarter of 2010 . Basic and diluted net loss per share for the second quarter of 2011 was $(0.11) , as compared to basic and diluted net loss per share of $(0.35) for the same quarter a year ago.

During the second quarter of 2011, we continued to allocate a significantly greater portion of our television and online advertising budget toward our TreadClimber product line, compared to 2010, and we expect to continue to direct the majority of such expenditures to this product line during the remainder of this year. In addition, we began implementing a lower cost Internet-based advertising strategy for our home gyms in 2011, which is designed to capitalize on the extensive product awareness that currently exists among consumers for our Bowflex rod-based home gyms.


14
Table of Contents


COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2011 AND 2010

The following table compares selected financial information in our condensed consolidated statements of operations for the three months ended June 30, 2011 and 2010 (in thousands):
 
Three months ended June 30,
 
Change
 
2011
 
2010
 
$
 
%
Net sales
$
34,724

 
$
30,642

 
$
4,082

 
13.3
 %
Cost of sales
20,181

 
17,173

 
3,008

 
17.5
 %
Gross margin
14,543

 
13,469

 
1,074

 
8.0
 %
Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
12,219

 
14,645

 
(2,426
)
 
(16.6
)%
General and administrative
4,277

 
4,794

 
(517
)
 
(10.8
)%
Research and development
724

 
788

 
(64
)
 
(8.1
)%
Total operating expenses
17,220

 
20,227

 
(3,007
)
 
(14.9
)%
Operating loss
(2,677
)
 
(6,758
)
 
4,081

 
60.4
 %
Other income (expense):
 
 
 
 
 
 
 
Interest income
8

 
—

 
8

 
—

Interest expense
(113
)
 
—

 
(113
)
 
—

Other
53

 
(35
)
 
88

 
n.m.
Total other expense
(52
)
 
(35
)
 
(17
)
 
(48.6
)%
Loss before income taxes
(2,729
)
 
(6,793
)
 
4,064

 
59.8
 %
Income tax (benefit) expense
(533
)
 
201

 
(734
)
 
n.m.
Loss from continuing operations
(2,196
)
 
(6,994
)
 
4,798

 
68.6
 %
Loss from discontinued operation, net of tax
(1,072
)
 
(3,711
)
 
2,639

 
71.1
 %
Net loss
$
(3,268
)
 
$
(10,705
)
 
$
7,437

 
69.5
 %
 

The following table compares the net sales and gross margins of our business segments for the three months ended June 30, 2011 and 2010 (in thousands):
 
Three months ended June 30,
 
Change
 
2011
 
2010
 
$
 
%
Net sales:
 
 
 
 
 
 
 
Direct
$
22,455

 
$
18,443

 
$
4,012

 
21.8
 %
Retail
11,417

 
11,820

 
(403
)
 
(3.4
)%
Royalty income
852

 
379

 
473

 
124.8
 %
 
$
34,724

 
$
30,642

 
$
4,082

 
13.3
 %
Gross margin:
 
 
 
 
 
 
 
Direct
$
11,219

 
$
9,972

 
$
1,247

 
12.5
 %
Retail
2,473

 
3,116

 
(643
)
 
(20.6
)%
Royalty income
851

 
381

 
470

 
123.4
 %
 
$
14,543

 
$
13,469

 
$
1,074

 
8.0
 %
Gross margin percent:
 
 
 
 
 
 
 
Direct
50.0
%
 
54.1
%
 
(410
)
basis points
Retail
21.7
%
 
26.4
%
 
(470
)
basis points

The following table compares the net sales of our major product lines within each business segment for the three months ended June 30, 2011 and 2010 (in thousands):

15
Table of Contents

 
Three months ended June 30,
 
Change
 
2011
 
2010
 
$
 
%
Direct net sales:
 
 
 
 
 
 
 
Cardio products (1)
$
14,678

 
$
9,240

 
$
5,438

 
58.9
 %
Strength products (2)
7,777

 
9,203

 
(1,426
)
 
(15.5
)%
 
22,455

 
18,443

 
4,012

 
21.8
 %
Retail net sales:
 
 
 
 
 
 
 
Cardio products (1)
6,261

 
7,483

 
(1,222
)
 
(16.3
)%
Strength products (2)
5,156

 
4,337

 
819

 
18.9
 %
 
11,417

 
11,820

 
(403
)
 
(3.4
)%
Royalty income
852

 
379

 
473

 
124.8
 %
 
$
34,724

 
$
30,642

 
$
4,082

 
13.3
 %
 
 
 
 
 
 
 
 
(1)   Cardio products include: TreadClimbers, treadmills, exercise bikes and ellipticals.
 
(2)   Strength products include: home gyms, selectorized dumbbells, kettlebell weights, weight benches and accessories.
 

Direct

Net sales for our Direct business were $22.5 million for the second quarter of 2011 , an increase of $4.0 million , or 21.8% , compared to Direct net sales of $18.4 million for the second quarter of 2010 . The comparative increase in net sales of our Direct business for the second quarter of 2011 reflected a $5.4 million , or 58.9% , increase in sales of cardio products, driven by continued strong demand for our TreadClimber products. Our achievement of higher Direct net sales highlights the effectiveness of recent changes in our media advertising strategy, as well as higher consumer credit approval rates. The increase in sales of cardio products was partially offset by a $1.4 million , or 15.5% , comparative decline in sales of strength products, primarily rod-based home gyms, a mature product category. Based on recent sales trends, we expect that increased sales of TreadClimber products will continue to more than offset anticipated declines in home gym sales through our Direct channel for the full year 2011.

In September 2010, we completed our transition to a new consumer credit program with a new primary third-party financing provider, GE Money Bank ("GE"). Prior to this transition, we had experienced continued declines in consumer credit approval rates by our previous third-party provider of consumer financing. In addition, we added one secondary third-party consumer credit financing provider during 2010 and another in early 2011, both of which offer credit to certain qualified consumers whose credit applications have been declined by GE. As a result, combined consumer credit approvals by our primary and secondary third-party financing providers increased from 13% in the second quarter of 2010 (all by our former primary provider) to 24% in the second quarter of 2011 (17% by our new primary provider and 7% by our new secondary providers). Management expects combined consumer credit approval rates during the remainder of 2011 to remain at approximately the same level as the second quarter of 2011 , or to improve modestly, as we continue to optimize our consumer financing programs in a challenging environment.
 
Gross margin for our Direct business was 50.0% of net sales for the second quarter of 2011 , a decrease of 410 basis points compared to the second quarter of 2010 . The comparative decrease in Direct gross margin percent was attributable primarily to a fundamental shift in product mix from home gyms to cardio products, higher product costs and higher freight costs, reflecting higher fuel prices .

Retail

Net sales for our Retail business totaled $11.4 million for the second quarter of 2011 , a decrease of $0.4 million , or 3.4% , compared to Retail net sales of $11.8 million for the second quarter of 2010 . The decrease in Retail net sales was attributable primarily to comparatively lower sales of elliptical products in the cardio category. Retail channel sales of strength products for the second quarter of 2011 increased by $0.8 million , or 18.9% , compared to the second quarter of 2010 , primarily due to a large shipment of home gyms to one customer.
 
Gross margin for our Retail business was 21.7% of net sales for the second quarter of 2011 , a decrease of 470 basis points

16
Table of Contents

compared to the second quarter of 2010 , primarily due to comparatively higher product costs and a change in product mix.
 
Operating Expenses

Operating expenses totaled $17.2 million for the second quarter of 2011 , an improvement of $3.0 million , or 14.9% , compared to operating expenses of $20.2 million for the second quarter of 2010 . These lower operating expenses reflect our ability to maintain fixed costs across higher sales volumes, as well as more cost effective advertising expenditures.

Selling and Marketing

Selling and marketing expenses were $12.2 million for the second quarter of 2011 , a decrease of $2.4 million , or 16.6% , compared to the second quarter of 2010 . Advertising expense for our Direct business was $6.3 million for the second quarter of 2011 , a decline of $3.3 million, or 34.9%, compared to the second quarter of 2010 . The comparative decrease in Direct advertising expense from a year ago was primarily attributable to the effectiveness of our media advertising. Lower comparable Direct advertising expenses were offset in part by higher consumer credit financing costs as a result of higher credit approval rates and additional secondary financing providers available in 2011 as compared to 2010.

General and Administrative

General and administrative expenses were $4.3 million for the second quarter of 2011 , a decrease of $0.5 million , or 10.8% , compared to the second quarter of 2010 , primarily due to lower depreciation, personnel and legal costs.

Research and Development

Research and development expenses were $0.7 million for the second quarter of 2011 , a decrease of $0.1 million , or 8.1% , compared to the second quarter of 2010 . We expect research and development expenses to increase for the full year 2011, as compared to 2010, due to an increase in new product development activities.

Other Income and Expense
 
Interest Expense
 
Interest expense of $0.1 million for the second quarter of 2011 was incurred in connection with our long-term subordinated notes. We incurred no interest expense in the second quarter of 2010 .
 
Income Tax Expense
 
Income tax benefit was $0.5 million for the second quarter of 2011 , compared to income tax expense of $0.2 million for the second quarter of 2010 . Income tax benefit for the second quarter of 2011 primarily related to the Company's pre-tax loss in the second quarter of 2011. We expect our effective income tax rate for the full year 2011 to be approximately 18% of pre-tax income. Income tax expense for the second quarter of 2010 was attributable to taxable income generated outside of the United States.
 
Discontinued Operation
 
Our Commercial business discontinued operation resulted in a loss of $1.1 million for the second quarter of 2011 , compared to a loss of $3.7 million for the second quarter of 2010 , as we completed the disposal of our former Commercial business in April 2011. We may incur additional expenses in future periods in connection with the settlement of contingencies arising from and directly related to the Commercial business prior to its disposal. Loss from discontinued operation for the second quarter of 2011 and 2010 was net of a reduction in the amount of pre-tax disposal loss previously estimated in connection with the divestiture of $0.3 million and $1.1 million , respectively.


COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

The following table compares selected financial information in our condensed consolidated statements of operations for the six months ended June 30, 2011 and 2010 (in thousands):


17
Table of Contents

 
Six months ended June 30,
 
Change
 
2011
 
2010
 
$
 
%
Net sales
$
83,025

 
$
76,286

 
$
6,739

 
8.8
 %
Cost of sales
46,395

 
39,852

 
6,543

 
16.4
 %
Gross margin
36,630

 
36,434

 
196

 
0.5
 %
Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
27,084

 
33,588

 
(6,504
)
 
(19.4
)%
General and administrative
8,969

 
9,953

 
(984
)
 
(9.9
)%
Research and development
1,477

 
1,591

 
(114
)
 
(7.2
)%
Total operating expenses
37,530

 
45,132

 
(7,602
)
 
(16.8
)%
Operating loss
(900
)
 
(8,698
)
 
7,798

 
89.7
 %
Other income (expense):
 
 
 
 
 
 
 
Interest income
9

 
11

 
(2
)
 
(18.2
)%
Interest expense
(232
)
 
—

 
(232
)
 
—

Other
82

 
(59
)
 
141

 
n.m.
Total other expense
(141
)
 
(48
)
 
(93
)
 
(193.8
)%
Loss before income taxes
(1,041
)
 
(8,746
)
 
7,705

 
88.1
 %
Income tax expense
34

 
619

 
(585
)
 
(94.5
)%
Loss from continuing operations
(1,075
)
 
(9,365
)
 
8,290

 
88.5
 %
Loss from discontinued operation, net of tax
(587
)
 
(9,131
)
 
8,544

 
93.6
 %
Net loss
$
(1,662
)
 
$
(18,496
)
 
$
16,834

 
91.0
 %
 

The following table compares the net sales and gross margins of our business segments for the six months ended June 30, 2011 and 2010 (in thousands):
 
Six months ended June 30,
 
Change

2011
 
2010
 
$
 
%
Net sales:


 

 

 

Direct
$
52,709

 
$
46,946

 
$
5,763

 
12.3
 %
Retail
28,380

 
27,751

 
629

 
2.3
 %
Royalty income
1,936

 
1,589

 
347

 
21.8
 %

$
83,025

 
$
76,286

 
$
6,739

 
8.8
 %
Gross margin:
 
 
 
 
 
 
 
Direct
$
28,253

 
$
27,513

 
$
740

 
2.7
 %
Retail
6,441

 
7,330

 
(889
)
 
(12.1
)%
Royalty income
1,936

 
1,591

 
345

 
21.7
 %
 
$
36,630

 
$
36,434

 
$
196

 
0.5
 %
Gross margin percent:
 
 
 
 
 
 
 
Direct
53.6
%
 
58.6
%
 
(500
)
basis points
Retail
22.7
%
 
26.4
%
 
(370
)
basis points

The following table compares the net sales of our major product lines within each business segment for the six months ended June 30, 2011 and 2010 (in thousands):

18
Table of Contents

 
Six months ended June 30,
 
Change
 
2011
 
2010
 
$
 
%
Direct net sales:
 
 
 
 
 
 
 
Cardio products (1)
$
35,263

 
$
25,445

 
$
9,818

 
38.6
 %
Strength products (2)
17,446

 
21,501

 
(4,055
)
 
(18.9
)%
 
52,709

 
46,946

 
5,763

 
12.3
 %
Retail net sales:
 
 
 
 
 
 
 
Cardio products (1)
16,748

 
18,075

 
(1,327
)
 
(7.3
)%
Strength products (2)
11,632

 
9,676

 
1,956

 
20.2
 %
 
28,380

 
27,751

 
629

 
2.3
 %
Royalty income
1,936

 
1,589

 
347

 
21.8
 %
 
$
83,025

 
$
76,286

 
$
6,739

 
8.8
 %
 
 
 
 
 
 
 
 
(1)   Cardio products include: TreadClimbers, treadmills, exercise bikes and ellipticals.
 
(2)   Strength products include: home gyms, selectorized dumbbells, kettlebell weights, weight benches and accessories.
 

Direct

Net sales for our Direct business totaled $52.7 million for the six months ended June 30, 2011 , an increase of $5.8 million , or 12.3% , compared to Direct net sales of $46.9 million for the six months ended June 30, 2010 . The comparative increase in net sales in our Direct business for the first six months of 2011 over 2010 reflected a $9.8 million , or 38.6% , increase in sales of cardio products, particularly the TreadClimber product category. Our achievement of higher Direct net sales highlights the effectiveness of recent changes in our media advertising strategy, as well as higher consumer credit approval rates. The increase in sales of cardio products was partially offset by a $4.1 million , or 18.9% , comparative decline in sales of strength products, primarily rod-based home gyms, a mature product category. Based on recent sales trends, we expect that increased sales of TreadClimber products will continue to more than offset anticipated declines in home gym sales through our Direct channel for the full year 2011.

In September 2010, we completed our transition to a new consumer credit program with a new primary third-party financing provider, GE Money Bank ("GE"). Prior to this transition, we had experienced continued declines in consumer credit approval rates by our previous third-party provider of consumer financing. In addition, we added one secondary third-party consumer credit financing provider during the third quarter of 2010 and another in early 2011, both of which offer credit to certain qualified consumers whose credit applications have been declined by GE. As a result, combined consumer credit approvals by our primary and secondary third-party financing providers increased from 13% in the first six months of 2010 (all by our former primary provider) to 23% in the first six months of 2011 (17% by our new primary provider and 6% by our new secondary providers). In view of continuing soft economic conditions, we expect only a modest improvement in our consumer credit approval rates for the balance of 2011.

Gross margin for our Direct business was 53.6% of net sales for the six months ended June 30, 2011 , a decrease of 500 basis points compared to the six months ended June 30, 2010 . The comparative decrease in Direct gross margin percent was attributable primarily to a fundamental shift in product mix from home gyms to cardio products, higher product costs and increased freight expense, reflecting higher fuel prices .
 
Retail Business

Net sales for our Retail business totaled $28.4 million for the six months ended June 30, 2011 , an increase of $0.6 million , or 2.3% , compared to Retail net sales of $27.8 million for the six months ended June 30, 2010 . The increase in Retail net sales was attributable primarily to higher demand for both cardio and strength products from Internet-based Retail customers, which was partially offset by a decrease in sales to brick-and-mortar Retail customers. Retail channel sales of strength products in the first six months of 2011 increased by $2.0 million , or 20.2% , compared to the first six months of 2010 , primarily due to a large shipment of home gyms to one customer.
 
Gross margin for our Retail business was 22.7% of net sales for the six months ended June 30, 2011 , a decrease of 370 basis

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points compared to the six months ended June 30, 2010 , primarily due to comparatively higher product costs.
 
Operating Expenses

Operating expenses totaled $37.5 million for the six months ended June 30, 2011 , an improvement of $7.6 million , or 16.8% , compared to operating expenses of $45.1 million for the six months ended June 30, 2010 . These lower operating expenses reflect our ability to maintain fixed costs across higher sales volumes, as well as more cost effective advertising expenditures.

Selling and Marketing

Selling and marketing expenses were $27.1 million for the six months ended June 30, 2011 , a decrease of $6.5 million , or 19.4% , compared to the six months ended June 30, 2010 . Advertising expense for our Direct business was $14.1 million for the first six months of 2011 , a decrease of $8.5 million, or 37.7%, compared to the first six months of 2010 . The comparative decrease in Direct advertising expense was primarily attributable to management's decision in early 2011 to shift advertising away from the mature home gym category and to emphasize our TreadClimber product line. Lower comparable Direct advertising expenses were offset in part by higher consumer credit financing costs as a result of higher credit approval rates and additional secondary financing providers available in 2011 as compared to 2010.

General and Administrative

General and administrative expenses were $9.0 million for the six months ended June 30, 2011 , a decrease of $1.0 million , or 9.9% , compared to the six months ended June 30, 2010 , primarily due to reduced depreciation, personnel and legal costs.

Research and Development

Research and development expenses were $1.5 million for the six months ended June 30, 2011 , a decrease of $0.1 million , or 7.2% , compared to the six months ended June 30, 2010 . We expect research and development expenses to increase for the full year 2011, as compared to 2010, due to an increase in new product development activities.

Other Income and Expense
 
Interest Expense
 
Interest expense was $0.2 million for the six months ended June 30, 2011 in connection with our long-term subordinated notes. We incurred no interest expense in the six months ended June 30, 2010 .
 
Income Tax Expense
 
Income tax expense was less than $0.1 million for the six months ended June 30, 2011 , compared to income tax expense of $0.6 million for the six months ended June 30, 2010 . Income tax expense for the first six months of 2011 was primarily related to liabilities for uncertain tax positions recognized during the period. We expect our effective income tax rate for the full year 2011 to be approximately 18% of pre-tax income. Income tax expense for the first six months of 2010 was attributable to taxable income generated outside of the United States.
 
Discontinued Operation
 
Our Commercial business discontinued operation resulted in a loss of $0.6 million for the six months ended June 30, 2011 , compared to a loss of $9.1 million for the six months ended June 30, 2010 , as we completed the disposal of our former Commercial business in early 2011. We may incur additional expenses in future periods in connection with the settlement of contingencies arising from and directly related to the Commercial business prior to its disposal. Loss from discontinued operation in the first six months of 2011 and 2010 was net of a reduction in the amount of pre-tax disposal loss previously estimated in connection with the divestiture of $0.6 million and $2.3 million , respectively.

LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 2011 , we had $15.1 million of cash and cash equivalents, compared to $14.3 million as of December 31, 2010 . The principal source of this increase in cash and cash equivalents was $1.5 million of cash provided by operating activities for the six months ended June 30, 2011 . Cash used in operating activities was $8.5 million for the six months ended June 30, 2010 . The increase in operating cash flows for the first six months of 2011, compared to the first six months of 2010, primarily was

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due to the reduction of losses from both our discontinued Commercial business and our continuing operations. The cash flow effect of such losses in the first six months of last year was partially offset by income tax refunds of $12.7 million . Management believes that sufficient funds will be available to meet our expected cash needs for at least the next twelve months, based on cash currently on hand and anticipated cash flows from operations.

Inventories increased to $12.5 million as of June 30, 2011 , compared to $10.3 million at the end of 2010, reflecting an improved in-stock condition to meet our future sales expectations. Trade receivables were $7.9 million as of June 30, 2011 , compared to $19.6 million at the end of 2010, reflecting seasonally lower activity with our Retail business customers. Trade payables decreased to $16.0 million as of June 30, 2011 , compared to $24.5 million at the end of 2010, due to a lower overall level of business activity.

Cash provided by investing activities of $0.5 million for the six months ended June 30, 2011 consisted of $1.0 million in proceeds from the sale of portions of our discontinued Commercial business, partially offset by $1.9 million used for purchases of computer software and tooling for new cardio products. Cash provided by investing activities of $4.3 million for the six months ended June 30, 2010 included $3.8 million in proceeds from the sale of portions of our discontinued Commercial business and a $0.6 million net decrease in the amount of restricted cash collateralizing our outstanding letters of credit. We do not expect cash provided by the sale of our Commercial business to be material in future periods.

Financing Arrangements
We have a Loan and Security Agreement (the “Loan Agreement”) with Bank of the West, which provides a revolving secured credit line of up to $15.0 million. The amount available for borrowings is dependent 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 purposes through August 31, 2012, assuming we satisfy certain terms and conditions at the time borrowings are requested. The interest rate on future borrowings, if any, under the Loan Agreement will be based on the bank's Base Rate or LIBOR and our financial condition at the time we elect to borrow. The Loan Agreement includes a fee for the unused portion of the credit facility, which will vary depending on our borrowing base availability.
The Loan Agreement is collateralized by substantially all of our assets and contains customary covenants, including minimum current ratio, minimum liquidity, minimum EBITDA (defined as "earnings before interest, taxes, depreciation and amortization") and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The Loan Agreement also contains customary events of default. Upon an event of default, the lender would have the option of accelerating all obligations under the Loan Agreement. Standby letters of credit under the Loan Agreement are treated as a reduction of our available borrowing base.
 
As of June 30, 2011 , we had no outstanding borrowings and $3.2 million in standby letters of credit issued under the Loan Agreement. As of June 30, 2011 , we were in compliance with the financial covenants of the Loan Agreement.

On July 20, 2011, subsequent to quarter-end, we entered into a Third Amendment (the “Amendment”) of the Loan Agreement. The effect of the Amendment was generally to ease the restrictiveness of certain provisions by increasing our borrowing availability, raising the limitation on our capital expenditures and reducing interest rates applicable to any outstanding amounts. The Amendment, dated effective June 30, 2011, increases the amount of eligible accounts receivable for calculating the borrowing base. Specifically, the Amendment (i) permits up to 40% of total accounts receivable included in the borrowing base to consist of receivables of a specific customer, an increase from the prior limitation of 25%; and (ii) permits accounts receivable of certain customers granted extended payment terms to be included in the borrowing base, subject to certain conditions and limitations. In addition, Bank of the West agreed to increase the limitation on our capital expenditures permitted in any one calendar year from $1,500,000 to $3,000,000, and to reduce the interest rate margins applied to amounts outstanding under the Loan Agreement.

On September 3, 2010, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with certain entities (collectively, the “Sherborne Purchasers”) under common control of Sherborne Investors GP, LLC and its affiliates (collectively “Sherborne”). Sherborne was formerly our largest shareholder and is controlled by Edward J. Bramson, our former Chairman and Chief Executive Officer, and Craig L. McKibben, a former member of our Board of Directors.
Pursuant to the Purchase Agreement, we issued to the Sherborne Purchasers $6,096,996 in aggregate principal amount at maturity of our Increasing Rate Senior Discount Notes due December 31, 2012 (the “Notes”). The Notes have an original principal amount totaling $5,000,000 and mature on December 31, 2012. The then-outstanding principal amount of the Notes accretes value at rates equal to 2.5% per annum from September 3, 2010 through February 28, 2011; 6.0% per annum from March 1, 2011 through August 31, 2011; 9.5% per annum from September 1, 2011 through February 29, 2012; 13.0% per

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annum from March 1, 2012 through August 31, 2012; and 14.5% per annum thereafter. If all the Notes are paid at maturity, the effective rate of interest over the term of the Purchase Agreement would be approximately 8.7% per annum. Prepayment of amounts due under the Notes is permitted under the Purchase Agreement, subject to certain restrictions in both the Purchase Agreement and the Loan Agreement.
The Notes are subordinated to the Loan Agreement. The Purchase Agreement includes certain negative covenants, including restrictions on the incurrence of additional indebtedness, liens, 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, material adverse changes and other events. Upon the occurrence of an event of default all outstanding obligations under the Notes may be declared due and payable. The accretion rate of the Notes may be increased by 2% per annum during the continuance of an event of default.   
 
On July 19, 2011, subsequent to quarter-end, beneficial interest in the Notes was assigned by the Sherborne Purchasers pro-rata to their respective investors in the manner permitted by the Purchase Agreement. Such assignment was made in connection with the resignation, on May 26, 2011, of Messrs. Bramson and McKibben from their respective positions with Nautilus, and the subsequent pro-rata distribution by certain Sherborne-affiliated entities to their respective investors of the common stock of the Company owned by such entities.

Commitments and Contingencies
 
For a description of our commitments and contingencies, refer to Note 12 to our condensed consolidated financial statements in Item 1 of this Form 10-Q.
 
Seasonality
 
We expect sales of fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters and are generally weakest in the second quarter. During the spring and summer months, consumers tend to be more involved in outdoor activities, including exercise, which impacts sales of fitness equipment used indoors. This seasonality can have a significant effect on our operating results, inventory levels and working capital needs.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our critical accounting policies have not changed from those discussed in our 2010 Form 10-K.


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Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a- 15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Controls over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2011 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings

We are party to various legal proceedings and claims arising from normal business activities. In addition, our tax filings are subject to audit by authorities in the jurisdictions where we conduct business, which may result in assessments of additional taxes. Management believes the Company has adequately provided for obligations that would result from these legal and tax proceedings where it is probable the Company will pay some amounts and the amounts can be reasonably estimated. In some cases, however, it is too early to predict a final outcome. Management believes that the ultimate resolution of these matters will not have a material effect on the Company's financial position, results of operations or cash flows.


Item 1A.    Risk Factors

Nautilus operates in an environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 2010 Form 10-K are not the only risks and uncertainties that we face. Additional risks and uncertainties that presently are not considered material or are not known to us, and therefore are not mentioned herein, may impair our business operations. If any of the risks described in our 2010 Form 10-K actually occur, our business, operating results and financial position could be adversely affected. There has not been a material change to the risk factors as set forth in our 2010 Form 10-K.


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Item 6.    Exhibits

The following exhibits are filed herewith.
Exhibit No.
 
Description
10.1*
 
Executive Employment Agreement dated as of May 30, 2011, between the Company and Bruce M. Cazenave.
 
 
 
10.2*
 
Form of Restricted Stock Unit Agreement
 
 
 
10.3*
 
Form of Restricted Stock Unit Agreement
 
 
 
10.4*
 
Form of Non-Employee Director Nonstatutory Stock Option Agreement
 
 
 
31.1
  
Certification of Principal Executive Officer pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934, as amended.
 
 
 
31.2
  
Certification of Principal Financial Officer pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934, as amended.
 
 
 
32.1
  
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following financial statements from Nautilus, Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. Information is furnished and not filed, and is not incorporated by reference in any registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, 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.


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SIGNATURES

Pursuant to the requirements 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.
 
 
N AUTILUS , I NC .
 
 
 
Date: August 10, 2011
By:
/ S /    Michael D. Mulholland
 
 
Michael D. Mulholland
 
 
Chief Financial Officer
(Principal Financial Officer and for the Registrant)



25


Exhibit 10.1


EMPLOYMENT AGREEMENT
This Employment Agreement (this “Agreement”) is entered into as of May 30, 2011, by and between Nautilus Inc., a Washington corporation (the “Company” or “Employer”), and Bruce M. Cazenave (“Employee”). In consideration of the premises and the mutual covenants and agreements hereinafter set forth, the Company and Employee hereby agree as follows:
1.      Employment . Employee is being hired as Chief Executive Officer, effective May 30, 2011 . Employee shall (a) devote his professional entire time, attention, and energies to his position, (b) use his best efforts to promote the interests of Employer; (c) perform faithfully and efficiently his responsibilities and duties, and (d) refrain from any endeavor outside of employment which interferes with his ability to perform his obligations hereunder provided that the Employee may manage personal investments, participate in industry, trade, professional, and academic activities, and, after the first anniversary of the effective date of this Agreement and with the prior approval of the Board of Directors, service on the board of directors or board committees of not more than two for-profit businesses that do not compete with the Company, provided that such activities do not materially interfere with the performance of his duties to the Company. Employee shall report to and be under the supervision and direction of the Board of Directors, and perform his job duties subject to their general supervision, orders, advice and direction. Employee shall perform the duties normally associated with the position and/or such duties as delegated and assigned by the Company that are consistent with his position as Chief Executive Officer, and shall have the responsibility and authority customary for a Chief Executive Officer of a business comparable to the Company in the United States.
Employee additionally agrees to abide by any pre-employment hiring procedures, general employment guidelines or policies adopted by Employer such as those detailed in an employer's handbook, as such guidelines or policies may be implemented and/or amended from time to time. Upon commencement of employment, Employee shall thereafter be nominated to serve on the Board of Directors. Both during the term of the Agreement and thereafter Employee will be entitled to be indemnified against any claims asserted against him that relate to his employment or service of the Board of Directors of the Company and all expenses of defending such claims, including reasonable attorneys fees, to the fullest extent permitted by law, to have the costs of defending against any such claims advanced to him as incurred with an obligation to repay such costs if it is subsequently determined by a final judgment that he was not entitled to indemnification, and to be covered by the Company's Director and Officer's insurance policy as it is in effect from time to time at the same level as the Company's current Directors and most senior officers.
2.      Salary . As compensation for services to be rendered hereunder, the Company shall pay Employee an initial annual salary in the gross amount of Three hundred seventy five thousand dollars ($375,000). Said salary will be paid in accordance with the Company's existing payroll policies, and shall be subject to normal and/or authorized deductions and withholdings. Employee will be subject to an annual performance review by the Board of Directors who, in their discretion, may increase but not decrease Employee's salary without Employee's consent.
3.      Bonus. Employee will be eligible to receive an annual bonus targeted at one hundred percent (100%) of Employee's base salary earned in the applicable year, with a potential for a bonus in excess of such target for superior performance. The amount of such bonus (if any) is determined based on the accomplishment of corporate and individual performance goals. For the 3 rd and 4 th Quarters of 2011 only, Employee's bonus eligibility will be based on Company performance objectives without regard to any individual personal goals. For the 2nd Quarter of 2011, Employee will be eligible for a pro-rated bonus based on Employee's length of employment and tied to the bonus performance achievement of the Senior




Vice President Consumer Business. During Employee's employment Employee's bonus target will not be less than that of the Senior Vice President Consumer Business or the position of President/Chief Operating Officer (if one is appointed.) Bonuses currently shall be paid quarterly, with each quarter's bonus being paid not later than the fifteenth day of the third month following the end of the quarter. Company reserves the right to modify the bonus plan for Employee and all other Executives in the future to include annual or semi-annual targets; however, Employee's bonus target will not be less than 100% of base salary.
4.      Restricted Share Units and Stock Options . Pursuant to the Company's current 2005 Long Term Incentive Plan (the “Plan”), on the date employment commences Employee will be granted a non-qualified stock option exercisable for 50,000 shares of the Company's common stock (“Options”) at a per share exercise price equal to the closing price of the Company's common stock on the last trading preceding the date employment commences. The Options will vest as to one-third of the total shares on each of the first, second and third anniversaries of Employee's employment, subject in each case to continued employment with the Company (except as otherwise provided in Sections 9 and 20). The terms of the option grant shall be governed by the Plan and subject to execution by Employee of the Company's standard form of Non-Qualified Stock Option Agreement (the “Option Agreement”). Employee acknowledges that any stock options granted do not, and will not, constitute wages or compensation. On the date employment commences, Employee will also be granted two restricted stock unit awards under the Plan. One award will cover shares with a fair market value of $750,000 based on the closing price of the Company's stock on the last trading day preceding Employee's first day of employment. Subject to continued employment on each vesting date, this award will vest over a 48 month period with 25% vesting on the first anniversary of employment and thereafter the remainder of the award vesting in monthly installments over the next 36 months (except as otherwise provided in Sections 9 and 20). The second restricted stock unit award will cover shares with a fair market value of $50,000 based on the closing price of the Company's stock on the last trading day preceding Employee's first day of employment. This award will vest on the first anniversary of Employee's employment, subject to continued employment with the Company (except as otherwise provided in Sections 9 and 20). The terms of both restricted stock unit awards shall be governed by the Plan and subject to execution by Employee of the Company's standard form of Restricted Stock Unit Agreement (the “Restricted Stock Unit Agreement”). In the event of any conflict between the terms of the standard form of Option Agreement and Restricted Stock Agreement and this Agreement, the terms of this Agreement shall control. Employee shall also be eligible, at the discretion of the Board, for additional equity and/or long term incentive grants in future years under the terms of the Plan, or any other equity or long-term incentive plan adopted by the Company, on the same eligibility terms as other senior executives of the Company.
5 .      Relocation Assistance . Employee will be provided employee relocation benefits and assistance from Indiana to the Vancouver area, in accordance with the Company's standard relocation policy for its most senior officers. The benefits will include but not be limited to movement of household goods, including two automobiles, one family visit to the Vancouver area, and temporary living accommodations for up to 60 days. In addition, after 60 days and if Employee has not purchased a home, Employee will be provided a monthly amount of $2,500 for up to an additional six months for all temporary living expenses, which shall be grossed-up so that the net amount after all applicable federal and state income tax is equal to $2,500 per month. Following expiration of these benefits, the Company will consider an additional extension of temporary living expenses; in no event will relocation benefits extend for greater than 12 months after Employee begins employment.
a. In addition to the relocation benefits provided under the Company's relocation policy as described above, Employee will be provided the gross amount of $50,000 effective upon Employee's beginning employment, from which any required deductions will be made. In the event that Employee resigns other than for “Good Reason” or is terminated for “Cause”, as such terms are defined in Section 8,




prior to Employee's one year anniversary of employment, Employee will be required to re-pay the $50,000 cash payment.
6.      Expenses . The Company will reimburse Employee for all necessary and reasonable travel, entertainment and other business expenses incurred by him in the performance of his duties hereunder, upon receipt of signed itemized lists of such expenditures with appropriate back-up documentation, and/or in accordance with such other reasonable procedures as the Company may adopt generally from time to time. Employee will also receive $1,000 per month to be used in connection with travel expenses for Employee and/or his family between Portland and Indiana, which shall be grossed-up so that the net amount after all applicable federal and state income tax is equal to $1,000 per month. This benefit will be available until Employee's family relocates to the Vancouver area, and in any event for a maximum period of 12 months after Employee's employment begins.
7.      Employee Benefits . Upon satisfaction of eligibility criteria, the Employee shall be eligible to receive employee benefits, if any, generally provided to its employees by Employer, including, if provided, retirement, savings, medical, dental, and life insurance and Paid-Time Off. Such benefits may be amended or discontinued by Employer at any time. Employee shall also be entitled to four (4) weeks of Paid Time Off annually in accordance with the Company's policies. Company will reimburse employee for any premium for health care coverage pending Employee's eligibility for Company provided medical and dental benefits.
8.      Termination . The parties acknowledge that Employee's employment with the Company is “at will” and may be terminated by either party with or without cause. No one other than the Board of Directors has the power to change the at-will character of the employment relationship. As discussed below, however, the various possible ways in which Employee's employment with the Company may be terminated will determine the payments that may be due to Employee under this Agreement. As used in this Agreement, the following terms have the following meanings:
(a)      Cause . As used in this Agreement, Cause means (i) Employee's indictment or conviction in a court of law for any crime or offense that in Employer's reasonable judgment makes Employee unfit for continued employment, prevents Employee from performing Employee's duties or other obligations or adversely affects the reputation of Employer; (ii) dishonesty by Employee related to his employment; (iii) willful violation 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) willful refusal to follow the lawful direct orders of the Board of Directors; (v) Employee's competition with Employer, diversion of any corporate opportunity or other similarly serious conflict of interest or self-dealing incurring to Employee's direct or indirect benefit and Employer's detriment; or (vi) intentional or grossly negligent conduct by Employee that is significantly injurious to Employer or its affiliates.
(b)      Good Reason . As used in this Agreement, “Good Reason” means the occurrence, without the consent of Employee, of any one or more of the following: (i) a material diminution in the duties, responsibilities, authority or title of Employee from those set forth in this Agreement; (ii) any material reduction in Employee's salary or bonus opportunity from that set forth in this Agreement; (iii) any material breach of the Company's obligations to Employee as set forth in this Agreement, or any other material agreement between the Company and Employee; or (iv) the assignment of this Agreement to any successor to the Company that does not agree in writing to assume the Company's obligations hereunder; provided, however, that no such event shall be deemed to be Good Reason for termination unless (i) Employee shall have notified the Company in writing (setting forth in reasonable detail the nature of the events constituting Good Reason) of such event within ninety (90) days of the first occurrence of such




event, (ii) the Company shall have failed to remedy or cure such event within thirty (30) days of receiving such notice, and (iii) Employee resigns within ninety (90) days after the end of such thirty day cure period.
(c)      Disability . As used in this Agreement, “Disability” means the inability of Employee to perform the essential functions of his position, with or without a reasonable accommodation, as a result of mental or physical illness, accident, or congenital condition, which inability lasts for a period of not less than one hundred twenty (120) days (or, if longer, the elimination period then in effect under the Company's long-term disability policy), as determined on the basis of medical evidence provided by a licensed physician selected by the Company with Employee's consent.
(d)      At-Will . At-will termination shall mean a termination by the Company where it does not seek to establish Cause or Disability or by Employee without Good Reason. If either party exercises the right to terminate Employee's employment without Cause, Disability or Good Reason, the party exercising such right agrees to provide the other party with 21 days' prior written notice of the termination of Employee's employment (Notice of Termination). After receiving such Notice, the party receiving the notice retains the right to terminate the employment relationship at an earlier date than provided in the Notice of Termination, without affecting the amounts payable pursuant to Section 9 by reason of such termination.
9.      Severance Upon Termination .
(a)      Upon the termination of Employee's employment for any reason, Employee shall be entitled to (i) his salary accrued through the date of termination, (ii) the ability to utilize any accrued but unused vacation prior to the effective date of termination, (iii) reimbursement of expenses properly incurred prior to the date of termination, (iv) except in the case of termination for Cause or resignation without Good Reason, unpaid and earned, if any, quarterly bonus payments for quarters ended prior to the date of termination, and (v) any (benefits payable upon termination of employment under any employee benefit plan or policy maintained by the Company (except for any severance plan or policy) (the “Accrued Benefits”).
(b)      Upon termination of Employee's employment under this Agreement by the Company without Cause, or by Employee for Good Reason, then, in addition to the Accrued Benefits but in lieu of any further salary, bonus, or other payments for periods subsequent to the Date of Termination, the Company shall (i) pay to the Employee severance equal to twelve months of his annual base salary at the rate in effect at the rate in effect at the time of termination (but disregarding any decrease that constituted Good Reason), which shall be made according to the Company's normal payroll process spread out equally over the severance period, (ii) pay to Employee an amount equal to his target annual bonus (disregarding any decrease that constituted Good Reason) for the year of termination pro rated through the date of termination, and reduced by any quarterly payments previously received for the same year, payable at the time specified by the terms of any bonus plan then in effect, and (iii) continue, at its cost, the Company portion of the current medical and dental coverage elected by Employee and his eligible dependents, as of the date of termination for the duration of the severance period. Employee will be required to sign up and elect COBRA benefits in order to be eligible for continued coverage under this Agreement and to pay any employee portion of the coverage. Material violation of this Agreement or the Business Protection Agreement and/or failure to sign the Release and Waiver Agreement shall immediately relieve the Company from its payment obligation under this paragraph and entitle it to recover any amounts paid under this paragraph. This Section 9 shall be read in conjunction with Section 8, and entitles the Employee to a maximum of twelve months salary, bonus amounts if any, and benefits under this Agreement in addition to the Accrued Benefits.




(c)      If the Company terminates the Employee's employment during the term of this Agreement for Cause or if the Employee terminates his employment for any reason, then the Company shall have no further payment obligations to Employee other than the Accrued Benefits.
(d)      For avoidance of doubt, in the event of Employee's death during the severance period, any remaining severance payments would be paid to his estate.
(e)      Each separate payment of severance pay, including the amount payable on each payroll date, shall be considered a separate “payment” for purposes of §409A of the Internal Revenue Code and the regulations thereunder. In the event that the termination of Employee's employment does not constitute a “separation from service” for purposes of §409A, Employee's right to all amounts payable upon such termination of employment shall vest upon termination, but payment of all amounts that constitute deferred compensation subject to §409A (taking into account all applicable exceptions) shall be deferred and paid in a lump sum without interest upon the date on which Employee incurs a separation from service as so defined (or the first day of the seventh month following such date if the following sentence applies), or if earlier the date of his death. In the event that at the time he incurs a separation from service as so defined Employee is a “specified employee” of the Company as defined in §409A, then any amounts that constitute deferred compensation subject to §409A (taking into account all applicable exceptions), and that would otherwise be payable by reason of such separation from service within the six months following the separation from service, shall be deferred and paid in a lump sum, without interest, on the first day of the seventh month following the separation from service, or if earlier on the date of Employee's death.
10.      Return of Documents . Employee understands and agrees that all equipment, records, files, manuals, forms, materials, supplies, computer programs, and other materials furnished to the Employee by Employer or used on Employer's behalf, or generated or obtained during the course of his/her employment shall remain the property of 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 possession including, but not limited to, customer lists, contracts, agreements, licenses, business plans, equipment, software, software programs, products, work-in-progress, source code, object code, computer disks, Confidential Information, books, notes and all copies thereof, whether in written, electronic or other form. In addition, Employee shall certify to the Company in writing as of the effective date of termination that none of the assets or business records belonging to the Company is in his/her possession, remain under his control, or have been transferred to any third person.
11.      Confidential Information/Non-Competition . By virtue of his employment, Employee will have access to confidential, proprietary and trade secret information, the ownership and protection of which is very important to the Company. Employee hereby agrees to enter into a Business Protection Agreement with the Company in the form set forth in Exhibit A concurrent with his entry into this Agreement.
12.      Release of Claims . As a precondition to receipt of the severance provided in Section 9 of this Agreement, Employee acknowledges and understands that he must sign a Waiver and Release of Claims Agreement. Such Agreement shall be substantially similar to the Agreement attached as Exhibit B. Employee understands that he will not be entitled to receive any payments under this Agreement until he executes and delivers the Waiver and Release of Claims Agreement, and the revocation period set forth in the Waiver and Release of Claims Agreement has run. The Waiver and Release Agreement shall be furnished to Employee not later than five (5) business days after his date of termination, and must be executed and returned to the Company within the time period stated therein but in no event more than sixty (60) days after his date of termination. Provided that Employee executes and returns the Waiver and Release Agreement within such period and does not thereafter revoke it, payment of severance shall commence upon the expiration of the revocation period, and any amounts that would otherwise have been




paid prior to the expiration of the revocation period shall be paid in a lump sum, without interest, as soon as practical following the expiration of the revocation period but in no event later than March 15 of the year that follows the year of termination.
13.      Assignment . This Agreement is personal, and is being entered into based upon the singular skill, qualifications and experience of Employee. Employee shall not assign this Agreement or any rights hereunder without the express written consent of Employer which may be withheld with or without reason. This Agreement will bind and benefit any successor of the Employer, whether by merger, sale of assets, reorganization or other form of business acquisition, disposition or business reorganization; provided that any such successor assumes and agrees in writing to be bound by all provisions of this Agreement.
14.      Notices . Any Notice of Termination or notice of good reason shall be in writing and shall be deemed to have been given or submitted (i) upon actual receipt if delivered in person or by facsimile transmission with confirmation of transmission, (ii) upon the earlier of actual receipt or the expiration of two (2) business days after sending by express courier (such as U.P.S. or Federal Express), and (iii) upon the earlier of actual receipt or the expiration 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:
Nautilus, Inc.
16400 SE Nautilus Drive
Vancouver, WA 98683
Attention: Senior Vice President Law
With a Copy to:
Garvey, Schubert & Barer
1191 Second Avenue, 18 th  Floor
Seattle, WA 98101-2939
Attention: Bruce Robertson
To Employee:
Employee: Bruce M. Cazenave
At the last address and fax number
Shown on the records of the Company
Employee shall be responsible for providing the Company with a current address. Either party may change its address (and facsimile number) for purposes of notices under this Agreement by providing notice to the other party in the manner set forth above within ten business days.
15.      Effect of Waiver . The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach hereof. No waiver shall be valid unless in writing.
16.      Entire Agreement . This Agreement, along with the Business Protection Agreement, 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 and the Company. The provisions of this Agreement shall survive the termination of Employee's employment by the Company to the extent necessary to enable the parties to enforce their respective rights under this Agreement, whether arising during the term of employment or




thereafter.
17.      Employment Guidelines . Employee understands that while not constituting a contract, the Employer sets certain policies and standards that it expects employees to comply with as part of general expectations of employee behavior. Employee agrees to abide by any general employment guidelines or policies adopted by the Company such as those detailed in an employee handbook, as such guidelines may be implemented and amended from time to time; provided that in the event of any conflict between any such guideline or policy and the provisions of this Agreement, the provisions of this Agreement shall control, and provided further that nothing contained in any such guideline or policy shall be deemed to alter the definition of “Cause” as set forth herein.
18.      Governing Law/Jurisdiction/Venue . This Agreement shall be governed by, and construed and enforced in accordance with, the substantive and procedural laws of the State of Washington without regard to rules governing conflicts of law. For all disputes under this Agreement, the parties agree that any suit or action between them shall be instituted and commenced exclusively in the state courts in Clark County or King County Washington (U.S.A) or the United States District Court for the Western District of Washington, sitting in Seattle, Washington. Both parties waive the right to change such venue and hereby consent to the jurisdiction of such courts for all potential claims under this Agreement. The court shall have the authority to award costs, including attorney's fees, to the prevailing party as part of its judgment in any such proceeding.
19.      Acknowledgment . The Employee acknowledges that he has read and understands this Agreement, that he has had the opportunity to consult with an attorney regarding the terms and conditions hereof, and that he accepts and signs this Agreement as his own free act and in full and complete understanding of its present and future legal effect.
20.      Certain Other Events . In the event of a material alteration in the capital structure of the Company on account of a recapitalization, stock split, reverse stock split, stock dividend or otherwise the Options and Restricted Stock Units referenced in this Agreement shall be subject to adjustment by the Plan Administrator in accordance with the Plan. Any Option or Restricted Stock Unit shall become immediately exercisable, without regard to any contingent vesting provision set forth herein, upon the occurrence of any of the following events: (1) the sale, liquidation or other disposition of all or substantially all of the Company's assets; (ii) a merger or consolidation of the Company with one or more corporations as a result of which, immediately following such merger or consolidation, the shareholders of the Company as a group hold less than a majority of the outstanding capital stock of the surviving corporation; (iii) any person or entity, including any “person” as such term is used in Section 13(d) (3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), becomes the “beneficial owner” as defined in the Exchange Act, of shares of the Company's Common Stock representing fifty percent (50) or more of the combined voting power of the voting securities of the Company; or (iv) the election of a majority Directors to the Board of Directors who are nominated by any person or entity other than the Board of Directors in existence.
21.      Nondisparagement . Employee shall not, directly or indirectly, make, or allow his name to be used in, any communication (oral, written, electronic, through any form of media (including, without limitation, social media, or otherwise) which, directly or indirectly, expressly or impliedly, attacks, degrades, criticizes, discredits or in any way impugns the personal or professional integrity, reputation or business practices of the Company, any of its affiliates, equity holders or their respective officers, managers, employees, agents or attorneys. The Company shall not, and shall not permit any of its directors, executives, or senior employees to, directly or indirectly, make, or allow its or their name to be used in, any communication (oral, written, electronic, through any form of media (including, without limitation, social media, or otherwise) which, directly or indirectly, expressly or impliedly, attacks,




degrades, criticizes, discredits or in any way impugns the personal or professional integrity, reputation or business practices of Employee. Nothing in this paragraph shall prevent any party from giving truthful testimony or information to law enforcement entities, administrative agencies or courts or in any other legal proceedings as required by law. The provisions of this Section shall apply during the term of this Agreement and at all times thereafter.
IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the date first written above.
Employer:      NAUTILUS, INC.


/s/ Richard A. Horn              6/28/11         
By Richard A. Horn              Date
Its Director



/s/ Bruce M. Cazenave          5/26/2011
Employee                  Date






Exhibit 10.2

NAUTILUS, INC.
RESTRICTED STOCK UNIT AGREEMENT

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Agreement”), dated as of ________, 20__ (the “Date of Grant”), is made by and between Nautilus, Inc., a Washington corporation (the “Company”), through its Board of Directors or a Committee thereof (the “Plan Administrator”"), and ____________________ (the “Grantee”).
WHEREAS, the Company has adopted the Nautilus, Inc. 2005 Long Term Incentive Plan, as amended (the “Plan”), pursuant to which the Company may grant Restricted Stock Units; and
WHEREAS, the Company desires to give Grantee an opportunity to acquire or enlarge his/her equity ownership in the Company for the purpose of augmenting Grantee's proprietary interest in the success of the Company and thereby focusing Grantees efforts on increasing shareholder value; and
WHEREAS, the Company wishes to grant to Grantee the number of Restricted Stock Units provided for herein;
NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein contained, the parties hereto agree as follows:

1.      Grant of Restricted Stock Unit Award .

1.1      In accordance with the Plan, the Company hereby grants to Grantee _____________(____) Restricted Stock Units (the “Restricted Units”). Each Restricted Unit represents the right to receive one share of the Company's common stock (“Stock”) upon the satisfaction of certain vesting requirements set forth in Section 2.

1.2      The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan.
1.3      The Administrator shall have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations thereunder, and its decision shall be binding and conclusive upon Grantee and his/her legal representative in respect of any questions arising under the Plan or this Agreement.

2.      Vesting.

2.1      Subject to Sections 2.2 through 2.4 below, twenty-five percent (25%) of the total number of Restricted Units shall vest at the end of the twelve (12) month period of Grantee's continuous employment with the Company following the Date of Grant. Thereafter, an additional twenty-five percent (25%) of the total number of Restricted Units shall vest at the end of each subsequent twelve (12) month period of Grantee's continuous employment with the Company. The period of time between the Date of Grant and the date a Restricted Unit becomes fully vested is referred to herein as the “Restriction Period.”

2.2      Except as expressly provided in Section 2.3, in the event of the termination of Grantee's employment or service with the Company for any reason, Grantee shall forfeit all rights, title, and interest in and to that portion of the Restricted Units which have not vested as of the date of termination of Grantee's employment. Neither Grantee nor any of Grantee's successors, heirs, assigns or personal representatives shall have any rights or interests in any Restricted Units that are so forfeited.

2.3      If Grantee's employment or service with the Company is terminated as a result of Grantee's death, all




unvested Restricted Units shall immediately vest.

2.4.      In the event of a material alteration in the capital structure of the Company on account of a recapitalization, stock split, reverse stock split, stock dividend or otherwise, this award shall be subject to adjustment by the Plan Administrator in accordance with the Plan. All of the Restricted Units shall immediately vest upon the occurrence of any of the following events: (i) the sale, liquidation or other disposition of all or substantially all of the Company's assets; (ii) a merger or consolidation of the Company with one or more corporations as a result of which, immediately following such merger or consolidation, the shareholders of the Company as a group hold less than a majority of the outstanding capital stock of the surviving corporation; or (iii) any person or entity, including any “person” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), becomes the “beneficial owner”, as defined in the Exchange Act, of shares of the Company's Common Stock representing fifty percent (50%) or more of the combined voting power of the voting securities of the Company.

3.      Terms and Conditions of Award .

The Restricted Units shall be subject to the following terms, conditions and restrictions:

3.1      The Restricted Units are bookkeeping entries only. During the Restriction Period the Grantee shall have no rights as a stockholder of the Company, no dividend rights and no voting rights with respect to unvested Restricted Units.

3.2      Restricted Unit may not be transferred in any manner except as expressly permitted by the Plan. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Grantee.

4.      Delivery of Shares .     

4.1      As soon as administratively practicable after the date upon which a Restricted Unit vests, and provided Grantee shall have paid the Withholding Liability to the Company pursuant to Section 5 hereof, the Company shall issue to Grantee or, at Grantee's request, Grantee's designated broker, one share of Stock free and clear of any restrictions in settlement of each vested Restricted Unit.

5.      Income Taxes .

5.1      The Grantee shall be liable for all applicable income and withholding taxes, including without limitation, any federal, state, local or other income taxes, or any FICA, state disability insurance tax or other employment tax (“Withholding Taxes”) with respect to any compensation income arising out of the vesting and issuance of the Restricted Units hereunder.

5.2      If the Company becomes obligated to withhold an amount on account of any Withholding Taxes imposed in connection with the vesting of Restricted Units, Grantee shall, on the date the Shares are issued, or such other date upon which the Company becomes so obligated to withhold (the “Withholding Date”), pay such amount (the “Withholding Liability”) to the Company in cash or check payable to the Company.

5.3      If Grantee does not pay such Withholding Liability to the Company on or before the Withholding Date, Grantee hereby authorizes the Company to withhold and/or reacquire from the earned award such number of whole shares as have an aggregate Fair Market Value on the date that the amount of tax to be withheld is to be determined as equals the amount of withholding tax so payable (the “Net Share Settlement”). Such withholding obligation shall be determined based on any applicable minimum statutory withholding rates. The Grantee will receive a cash refund for any fraction of a surrendered share not necessary for required Withholding Taxes.

5.4      In the event the Company cannot (under applicable legal, regulatory, listing or other requirements, or otherwise) satisfy such Withholding Liability in such methods as described in Sections 5.2 and 5.3, the Company may satisfy such withholding by deducting such amount out of any other compensation otherwise payable to the Grantee.




Grantee hereby consents to the Company withholding the full amount of the Withholding Liability from any compensation or other amounts otherwise payable to Grantee (including, without limitation, any vested Restricted Units) if Grantee does not pay the Withholding Liability to the Company on the Withholding Date, and Grantee agrees that the withholding and payment of any such amount by the Company to the relevant taxing authorities shall constitute full satisfaction of the Company's obligation to pay such compensation of other amounts to Grantee.

5.5      Regardless of any action the Company takes with respect to any or all Withholding Liability, the Grantee acknowledges and agrees that the ultimate liability for all Withholding Liability legally due from Grantee is and remains the Grantee's responsibility.


6.      Miscellaneous Provisions .

6.1      Notices. Any notices, designations, consents, offers, acceptances and any other communications required or permitted hereunder shall be given in writing and shall be delivered either personally or by registered or certified mail, postage prepaid, which shall be addressed, in the case of the Company to the principal office of the Company and, in the case of the Grantee, to the Grantee's address appearing on the books of the Company or to the Grantee's residence or to such other address as may be designated in writing by the Grantee.
6.2      Invalid Provision. The invalidity or unenforceability of any particular provision thereof shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted.
6.3      Modifications. No change, modification or waiver of any provision of this Agreement shall be valid unless the same is in writing and signed by the parties hereto.
6.4      Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties with respect to the subject matter contained herein and supersedes all prior communications, representations and negotiations in respect thereto.
6.5      Governing Law. This agreement shall be interpreted and construed in accordance with the laws of the State of Washington.
 
IN WITNESS WHEREOF, the Company has indicated its agreement to the terms hereof by electronically posting this Agreement on the Grantee's Company E*Trade account. By electronically accepting and acknowledging the Restricted Units in the manner provided in the Grantee's Company E*Trade account, Grantee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof and hereby accepts these Restricted Units subject to all the terms and provisions hereof.







Exhibit 10.3

NAUTILUS, INC.
RESTRICTED STOCK UNIT AGREEMENT

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Agreement”), dated as of ________, 20__ (the “Date of Grant”), is made by and between Nautilus, Inc., a Washington corporation (the “Company”), through its Board of Directors or a Committee thereof (the “Plan Administrator”"), and ____________________ (the “Grantee”).
WHEREAS, the Company has adopted the Nautilus, Inc. 2005 Long Term Incentive Plan, as amended (the “Plan”), pursuant to which the Company may grant Restricted Stock Units; and
WHEREAS, the Company desires to give Grantee an opportunity to acquire or enlarge his/her equity ownership in the Company for the purpose of augmenting Grantee's proprietary interest in the success of the Company and thereby focusing Grantees efforts on increasing shareholder value; and
WHEREAS, the Company wishes to grant to Grantee the number of Restricted Stock Units provided for herein;
NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein contained, the parties hereto agree as follows:

1.      Grant of Restricted Stock Unit Award .

1.1      In accordance with the Plan, the Company hereby grants to Grantee _____________(____) Restricted Stock Units (the “Restricted Units”). Each Restricted Unit represents the right to receive one share of the Company's common stock (“Stock”) upon the satisfaction of certain vesting requirements set forth in Section 2.

1.2      The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan.
1.3      The Administrator shall have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations thereunder, and its decision shall be binding and conclusive upon Grantee and his/her legal representative in respect of any questions arising under the Plan or this Agreement.

2.      Vesting.

2.1      Subject to Sections 2.2 through 2.4 below, twenty-five percent (25%) of the total number of Restricted Units shall vest at the end of the twelve (12) month period of Grantee's continuous employment with the Company following the Date of Grant. Thereafter, an additional twenty-five percent (25%) of the total number of Restricted Units shall vest at the end of each subsequent twelve (12) month period of Grantee's continuous employment with the Company. The period of time between the Date of Grant and the date a Restricted Unit becomes fully vested is referred to herein as the “Restriction Period.”

2.2      Except as expressly provided in Section 2.3, in the event of the termination of Grantee's employment or service with the Company for any reason, Grantee shall forfeit all rights, title, and interest in and to that portion of the Restricted Units which have not vested as of the date of termination of Grantee's employment. Neither Grantee nor any of Grantee's successors, heirs, assigns or personal representatives shall have any rights or interests in any Restricted Units that are so forfeited.

2.3      If Grantee's employment or service with the Company is terminated as a result of Grantee's death, all




unvested Restricted Units shall immediately vest.

2.4.      In the event of a material alteration in the capital structure of the Company on account of a recapitalization, stock split, reverse stock split, stock dividend or otherwise, this award shall be subject to adjustment by the Plan Administrator in accordance with the Plan. All of the Restricted Units shall immediately vest upon the occurrence of any of the following events: (i) the sale, liquidation or other disposition of all or substantially all of the Company's assets; (ii) a merger or consolidation of the Company with one or more corporations as a result of which, immediately following such merger or consolidation, the shareholders of the Company as a group hold less than a majority of the outstanding capital stock of the surviving corporation; (iii) any person or entity, including any “person” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), becomes the “beneficial owner”, as defined in the Exchange Act, of shares of the Company's Common Stock representing fifty percent (50%) or more of the combined voting power of the voting securities of the Company; or (iv) the election of a majority Directors to the Board of Directors who are nominated by any person or entity other than the Board of Directors in existence.

3.      Terms and Conditions of Award .

The Restricted Units shall be subject to the following terms, conditions and restrictions:

3.1      The Restricted Units are bookkeeping entries only. During the Restriction Period the Grantee shall have no rights as a stockholder of the Company, no dividend rights and no voting rights with respect to unvested Restricted Units.

3.2      Restricted Unit may not be transferred in any manner except as expressly permitted by the Plan. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Grantee.

4.      Delivery of Shares .     

4.1      As soon as administratively practicable after the date upon which a Restricted Unit vests, and provided Grantee shall have paid the Withholding Liability to the Company pursuant to Section 5 hereof, the Company shall issue to Grantee or, at Grantee's request, Grantee's designated broker, one share of Stock free and clear of any restrictions in settlement of each vested Restricted Unit.

5.      Income Taxes .

5.1      The Grantee shall be liable for all applicable income and withholding taxes, including without limitation, any federal, state, local or other income taxes, or any FICA, state disability insurance tax or other employment tax (“Withholding Taxes”) with respect to any compensation income arising out of the vesting and issuance of the Restricted Units hereunder.

5.2      If the Company becomes obligated to withhold an amount on account of any Withholding Taxes imposed in connection with the vesting of Restricted Units, Grantee shall, on the date the Shares are issued, or such other date upon which the Company becomes so obligated to withhold (the “Withholding Date”), pay such amount (the “Withholding Liability”) to the Company in cash or check payable to the Company.

5.3      If Grantee does not pay such Withholding Liability to the Company on or before the Withholding Date, Grantee hereby authorizes the Company to withhold and/or reacquire from the earned award such number of whole shares as have an aggregate Fair Market Value on the date that the amount of tax to be withheld is to be determined as equals the amount of withholding tax so payable (the “Net Share Settlement”). Such withholding obligation shall be determined based on any applicable minimum statutory withholding rates. The Grantee will receive a cash refund for any fraction of a surrendered share not necessary for required Withholding Taxes.

5.4      In the event the Company cannot (under applicable legal, regulatory, listing or other requirements, or




otherwise) satisfy such Withholding Liability in such methods as described in Sections 5.2 and 5.3, the Company may satisfy such withholding by deducting such amount out of any other compensation otherwise payable to the Grantee. Grantee hereby consents to the Company withholding the full amount of the Withholding Liability from any compensation or other amounts otherwise payable to Grantee (including, without limitation, any vested Restricted Units) if Grantee does not pay the Withholding Liability to the Company on the Withholding Date, and Grantee agrees that the withholding and payment of any such amount by the Company to the relevant taxing authorities shall constitute full satisfaction of the Company's obligation to pay such compensation of other amounts to Grantee.

5.5      Regardless of any action the Company takes with respect to any or all Withholding Liability, the Grantee acknowledges and agrees that the ultimate liability for all Withholding Liability legally due from Grantee is and remains the Grantee's responsibility.


6.      Miscellaneous Provisions .

6.1      Notices. Any notices, designations, consents, offers, acceptances and any other communications required or permitted hereunder shall be given in writing and shall be delivered either personally or by registered or certified mail, postage prepaid, which shall be addressed, in the case of the Company to the principal office of the Company and, in the case of the Grantee, to the Grantee's address appearing on the books of the Company or to the Grantee's residence or to such other address as may be designated in writing by the Grantee.
6.2      Invalid Provision. The invalidity or unenforceability of any particular provision thereof shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted.
6.3      Modifications. No change, modification or waiver of any provision of this Agreement shall be valid unless the same is in writing and signed by the parties hereto.
6.4      Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties with respect to the subject matter contained herein and supersedes all prior communications, representations and negotiations in respect thereto.
6.5      Governing Law. This agreement shall be interpreted and construed in accordance with the laws of the State of Washington.
 
IN WITNESS WHEREOF, the Company has indicated its agreement to the terms hereof by electronically posting this Agreement on the Grantee's Company E*Trade account. By electronically accepting and acknowledging the Restricted Units in the manner provided in the Grantee's Company E*Trade account, Grantee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof and hereby accepts these Restricted Units subject to all the terms and provisions hereof.





Exhibit 10.4

NAUTILUS, INC.
NON-EMPLOYEE DIRECTOR
NONSTATUTORY STOCK OPTION AGREEMENT

Nautilus, Inc. (the “Company”), through its Board of Directors or a Committee thereof (the "Plan Administrator"), has granted to Director Name (the “Optionee”), an option to purchase a total of XX,XXX shares of the Company's Common Stock (the "Option Shares"), at an exercise price of $XX.XX for each Option Share. This Option has been granted on Date, 20XX (the "Grant Date") pursuant to the Nautilus, Inc. 2005 Long Term Incentive Plan (the “Plan”) which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein.

1.      Nature of the Option . This Option is a nonstatutory stock option and is not intended to qualify for any special tax benefits to the Optionee.

2.      Exercise Price . The exercise price is $XX.XX U.S. for each Option Share, which price is not less than the Fair Market Value per share of the Common Stock on the date of grant.

3.      Date Exercisable; Vesting .

3.1      This Option has been granted upon Optionee's election or appointment to the Company's Board of Directors. Subject to the restrictions and conditions set forth in the Plan, the Option shall become exercisable as to twenty-five percent (25 %) of the total number of Option Shares at the end of the twelve (12) month period of Optionee's continuous service as a director of the Company following the Grant Date. The Option shall thereafter become exercisable as to an additional twenty-five percent (25%) of the total number of Option Shares at the end of each subsequent twelve (12) month period of Optionee's continuous service as a director of the Company.
3.2      In the event Optionee ceases to serve as a director of the Company, this Option shall be exercisable thereafter only to the extent Optionee was entitled to exercise it at the date Optionee is no longer serving as a director of the Company.

4.      Exercise of Option . The Option may be exercised in whole or in part by delivery to the Company, from time to time, of written notice, signed by Optionee, specifying the number of Option Shares that Optionee then desires to purchase, together with cash or check payable to the order of the Company, or other form of payment acceptable to the Plan Administrator, for an amount of United States dollars equal to the exercise price of such Option Shares.

5.      Duration of Option; Suspension or Termination of Option .

5.1      Subject to earlier termination in accordance with the Plan, this Option, to the extent not previously exercised, shall terminate upon the earliest of the following dates:

(i)      Three months after the date on which Optionee is no longer serving as a member of the Company's Board of Directors;

(ii)      The date seven (7) years from the Grant Date (the “Expiration Date”); or

(iii)      The date of any transfer of the Option in violation of Section 6.
5.2      Suspension or Termination of Stock Options and SARs . This Option shall be subject to




suspension or termination by the Plan Administrator as set forth in Section 8(d) of the Plan.

6.      Non-Transferability of Option . This Option may not be transferred in any manner otherwise than by will or by the laws of the descent or distribution or pursuant to a qualified domestic relations order as defined by Section 414(p) of the Internal Revenue Code or Title I of the Employee Retirement Income Security Act or the rules thereunder, and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

7.      Adjustments Upon Recapitalization, Reorganization, and Certain Other Events . In the event of a material alteration in the capital structure of the Company on account of a recapitalization, stock split, reverse stock split, stock dividend or otherwise, this Option shall be subject to adjustment by the Plan Administrator in accordance with the Plan. This Option shall become immediately exercisable, without regard to any contingent vesting provision set forth herein, upon the occurrence of any of the following events: (i) the sale, liquidation or other disposition of all or substantially all of the Company's assets; (ii) a merger or consolidation of the Company with one or more corporations as a result of which, immediately following such merger or consolidation, the shareholders of the Company as a group hold less than a majority of the outstanding capital stock of the surviving corporation; or (iii) any person or entity, including any “person” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), becomes the “beneficial owner”, as defined in the Exchange Act, of shares of the Company's Common Stock representing fifty percent (50%) or more of the combined voting power of the voting securities of the Company.

8.      Disputes . Any dispute or disagreement that may arise under or as a result of this Agreement, or any question as to the interpretation of this Agreement or the Plan, shall be determined by the Plan Administrator in its absolute discretion, and any such determination shall be final, binding, and conclusive on all affected persons.

9.      Taxation Upon Exercise of Option.    Optionee understands that upon exercise of this Option, Optionee may recognize income for federal and state income tax purposes in an amount equal to the excess of the then fair market value of the Option Shares over the exercise price.  Optionee shall be responsible for all taxes, including but not limited to income, employment, and withholding taxes, arising out of the exercise of the Option Shares.

10.      Governing Law . This agreement shall be interpreted and construed in accordance with the laws of the State of Washington.

OPTIONEE                              NAUTILUS, INC.

                    By:         
Signature                              Signature
                
Print Name                              Print Name
    
Date                                  Its:     





Exhibit 31.1
CERTIFICATION
I, Bruce M. Cazenave, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Nautilus, Inc.;
2.
Based on my knowledge, this 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 report;
3.
Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based 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 reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
 
 
August 10, 2011
By:
/s/ Bruce M. Cazenave
Date
 
Bruce M. Cazenave
 
 
Chief Executive Officer






Exhibit 31.2
CERTIFICATION
I, Michael D. Mulholland, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Nautilus, Inc.;
2.
Based on my knowledge, this 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 report;
3.
Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based 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 reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
 
 
 
August 10, 2011
By:
/s/ Michael D. Mulholland
Date
 
Michael D. Mulholland,
 
 
Chief Financial Officer






Exhibit 32.1

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 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 Quarterly Report on Form 10-Q for the period ended June 30, 2011 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 10, 2011
By:
/s/ Bruce M. Cazenave
Date                                                            
 
Bruce M. Cazenave
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
To my knowledge, the Quarterly Report on Form 10-Q for the period ended June 30, 2011 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
August 10, 2011
By:
/s/ Michael D. Mulholland
Date                                        
 
Michael D. Mulholland
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)