Nautilus Inc. said it has canceled plans to buy its largest contract manufacturer in Xiamen, China. In a filing with the U.S. Securities and Exchange Commission, the Vancouver-based company said it would terminate its agreement to buy Land America Health & Fitness Co. for $72 milliion in cash and stock.
Nautilus said it likely will have to forfeit the $18.5 million nonrefundable deposit paid Land America. It also will pay a higher price and lose a special rebate for equipment made for it by Land America. The acquisition agreement was first entered into on February 2007.
According to the filing, , legal counsel to Land America and Treuriver in a letter dated January 21 notified Nautilus that Land America and Treuriver consider Nautilus to be in breach of certain duties set forth in the Asset Purchase Agreements and that Land America and Treuriver have incurred unspecified economic damages as a result of such alleged breach. Nautilus has previously paid Land America non-refundable deposits of $18.5 million. Nautilus said some or all of which may be written off as a result of the termination.
Nautilus also noted that Land America also informed Nautilus of its intention to comply with its obligations under the Supply Agreement, dated as of June 30, 2006, between Nautilus and Land America. In accordance with the terms of the Supply Agreement the 11% rebate previously paid by Land America to Nautilus terminates effective January 1, 2008, and certain price increases on products manufactured by Land America, as specified in the Supply Agreement, will take effect retroactively to January 1, 2008.
Nautilus estimates that the net cost of products purchased from Land America could increase as a result of the combined effect of termination of the rebate and the price increases under the Supply Agreement by approximately $2,000,000 in the first quarter of 2008.
“Notwithstanding the foregoing, the financial impact of the price increases will vary materially depending on the volume of products purchased from Land America which purchases are subject to seasonal variability,” Nautilus said in its filling.
At the time it announced the acquisition, Nautilus said it expected the move to help the company improve its operating margins as well as balance its manufacturing base between factories it contracts with and factories it owns. Nautilus already owns U.S. factories in Virginia and Oklahoma, which produce 25 percent of its equipment. The move was intended to give Nautilus more control over costs, intellectual property, quality and delivery of goods from Asia.
At the close of this year, Nautilus Inc. conceded defeat in its proxy battle with New York-based Sherborne Investors LP. Sherborne replaced four of seven board members. Sherborne partner Edward Bramson was elected chairman of Nautilus, replacing Robert Falcone. Falcone, who says on as president and CEO.
