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FORM 10-K
NAUTILUS, INC.
(Annual Report)
Filed 3/16/2006 For Period Ending 12/31/2005
Address 16400 SE NAUTILUS DRIVE
VANCOUVER, Washington 98683
Telephone 360-694-7722
CIK 0001078207
Industry Retail (Catalog & Mail Order)
Sector Services
Fiscal Year 12/31

Table of contents

  • Page 1
    NAUTILUS, INC. FORM 10-K (Annual Report) Filed 3/16/2006 For Period Ending 12/31/2005 Address Telephone CIK Industry Sector Fiscal Year 16400 SE NAUTILUS DRIVE VANCOUVER, Washington 98683 360-694-7722 0001078207 Retail (Catalog & Mail Order) Services 12/31

  • Page 2
    ... YEAR ENDED DECEMBER 31, 2005 Commission file number: 001-31321 NAUTILUS, INC. (Exact name of Registrant as specified in its charter) Washington (State or other jurisdiction of incorporation or organization) 94-3002667 (I.R.S. Employer Identification No.) 16400 S.E. Nautilus Drive Vancouver...

  • Page 3
    ...Procedures Other Information PART III Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services PART IV...

  • Page 4
    ... of activity, performance, or achievements. Except to the extent required by federal securities laws, we undertake no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date of this Form 10-K or to reflect the occurrence of...

  • Page 5
    ... direct, retail and commercial fitness channels both domestically and internationally. Our cardiovascular and strength product lines reflect a complete assortment of high-quality fitness equipment. Our Nautilus brand includes four distinct lines of strength equipment, plus free weights and benches...

  • Page 6
    ... Canadian market. We also sell products to commercial, retail, and specialty retail customers in Canada. The Company was incorporated in California in 1986 and became a Washington corporation in 1993. On March 14, 2005, the Company changed its corporate name from The Nautilus Group, Inc. to Nautilus...

  • Page 7
    ... additional products available through more retailers. Operating Principles: In 2003, we conducted a thorough due diligence process, in which we interviewed our internal team, spoke with industry consultants, and conducted the most comprehensive market research study in our history in order to help...

  • Page 8
    ..., our fitness equipment is sold through direct, commercial, retail, and specialty retail channels and international channels. Sales from our Bowflex home-gym product line across all sales channels, including related shipping revenue, accounted for approximately 44% of our aggregate net sales in 2005...

  • Page 9
    ... bike dealers as well as to large outdoor retailing stores. The internet direct sales are comprised of product sales made directly to end consumers in the U.S. The Company leases 10 retail stores that sell primarily closeout fitness apparel and footwear items. The international distributor sales are...

  • Page 10
    ...Commercial Sales Channel and Marketing We market and sell our Nautilus, Schwinn, and StairMaster commercial fitness equipment through our sales force and selected dealers and retailers to health clubs, government agencies, hotels, corporate fitness centers, colleges, universities and assisted living...

  • Page 11
    ... of fitness equipment could be positioned in the home. Internet. The Company currently maintains and directs customers to our websites, which can be found at www.nautilus.com. These websites contain Company and product information. International Sales Channel and Marketing In 2005, our international...

  • Page 12
    ...our products, develop innovative marketing activities, and achieve global brand recognition. In our largest international markets, Canada, the United Kingdom, Germany, and Italy, we operate our own offices, which possess a team of sales representatives that focus not only on selling to fitness clubs...

  • Page 13
    ...This website contains Company and product information. None of the information on these websites is part of this Form 10-K. The fitness apparel segment has four distinct sales channels Wholesale direct; International distributors; Company leased retail stores; and Internet sales. The international...

  • Page 14
    ... fitness equipment products and brand names, as well as education about the uses and benefits of fitness equipment. Many consumers want the same features and feel in equipment they buy for their home that they experience in clubs. American Sports Data research in 2004 found that 40% of all treadmill...

  • Page 15
    ... the use of health clubs and the opportunities within this segment in terms of specific fitness apparel will increase demand for our product; High healthcare costs are focusing more attention on exercise and fitness and will help increase participation and sales; Government support for programs that...

  • Page 16
    ... overall Sports Nutrition and Weight Loss market, as defined by NBJ. COMPETITION Fitness Equipment Segment The markets for all of our products are highly competitive. The specific competitors vary by market and sales channel. We believe that our combination of recognized brand names, innovative and...

  • Page 17
    ...employed approximately 1,550 employees, including eight executive officers. None of our employees are subject to any collective bargaining agreements. INTELLECTUAL PROPERTY We own many trademarks including the Nautilus ® , Bowflex ® , Power Rod ® , TreadClimber ® , Schwinn ® Fitness, SelectTech...

  • Page 18
    ... commercial strength fitness equipment from our Virginia warehouse facilities directly to customers primarily through our truck fleet. This method of distribution allows us to effectively control the set up and inspection of equipment at the end-user's facilities. For international sales, we work...

  • Page 19
    ... when we launch new products. We could incur substantial costs in defending against such claims, even if they are without basis, and we could become subject to judgments requiring us to pay substantial damages. A delay in getting foreign sourced products through customs in a timely manner could...

  • Page 20
    ... structures or changes in international tax laws, changes in regulatory requirements, compliance with a variety of foreign laws and regulations and longer payment cycles in certain countries. Government regulatory actions could disrupt our marketing efforts and product sales. Various federal, state...

  • Page 21
    ... Corporate headquarters, call center, warehouse Held for sale (sale completed in February 2006) Warehouse, production, and distribution Warehouse and distribution Commercial equipment manufacturing Engineering, prototyping, customer service, and administrative Showroom Commercial equipment sales...

  • Page 22
    ... filed by ICON Health & Fitness, Inc. ("ICON") claiming false advertising involving the Company's advertising and promotion going back to 1987 for certain elements of its Bowflex home gyms and claiming trademark infringement for the name placed on a treadmill belt sold in 2002. On November 15, 2005...

  • Page 23
    Table of Contents PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Price of Our Common Stock Our common stock is listed on the New York Stock Exchange and trades under the symbol "NLS." As of March 1, 2006, 32,800,986...

  • Page 24
    ...000 84,364,000 In March 2005, the Company's Board of Directors authorized the repurchase of up to $100 million of the Company's common stock in open-market transactions, at times and in such amounts as management deems appropriate, depending on market conditions and other factors. The authorization...

  • Page 25
    ... reported consolidated net income or stockholders' equity. In Thousands (except per share amounts) 2005 2004 2003 2002 2001 Statement of Operations Data Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Royalties Total...

  • Page 26
    ... Bowflex TreadClimber cardio trainer, the Bowflex Revolution home gym, and Bowflex SelectTech dumbbells, specifically for women and teens. Our company has long been known for strength equipment, but now has a competitive offering of cardio equipment, which triples the addressable equipment market...

  • Page 27
    ... to information to manage the business. Another significant portion of this investment was our new world headquarters facility in Vancouver, Washington, which allowed us to consolidate a large portion of our administrative operations and improve our Company's ability to better serve customers and...

  • Page 28
    ... financial position, results of operations and cash flows. Sales Return Reserves The sales return reserve is maintained based on our historical experience of direct-marketed product return rates during the period in which a customer can return a product for refund of the full purchase price, less 27

  • Page 29
    ...an annual basis or more frequently if additional circumstances arise. Management estimates that the Nautilus ® , StairMaster ® and Pearl iZUMi ® trademarks have an indefinite life while the Schwinn ® Fitness trademark has an estimated useful live of 20 years. Any major change in the useful lives...

  • Page 30
    ... owned retail outlets. Prior to the acquisition of Pearl Izumi, the Company had predominantly operated in one industry segment: the design, production, marketing and selling of branded health and fitness products sold under the Nautilus, Bowflex, Schwinn Fitness, StairMaster and Trimline brand names...

  • Page 31
    ... Thousands) 2005 2004 Year Ended December 31, 2005-2004 2003 $ change % change 2004-2003 $ change % change Net sales Cost of sales Gross profit Operating expenses: Selling and marketing General and administrative Research and development Royalties Total operating expenses Operating income Other...

  • Page 32
    ... retail channel, specifically SelectTech, TreadClimber and new Bowflex home-gym products. The increase was also due to gaining additional retail customers as well as expanding the number of products offered at existing customer locations. Net sales from the direct channel were $293.9 million in 2005...

  • Page 33
    ...to litigation with ICON Health & Fitness, Inc. Consistent with our consumer-based business strategy to drive growth while investing in our future, general and administrative costs also increased approximately $8.3 million due to expenses associated with consolidating information systems. The primary...

  • Page 34
    ... the Bowflex home-gym line, strong demand for the Bowflex TreadClimber cardio products, and the introduction of Bowflex SelectTech dumbbells, coupled with more effective advertising placement and an increase in consumer financing approval rates. Additionally, sales of Bowflex branded products within...

  • Page 35
    ...previously reported consolidated net income or stockholders' equity. These operating results are not necessarily indicative of the results of any future period. Due to diversification towards the commercial and retail sales channels, we expect heightened seasonality in our fitness equipment business...

  • Page 36
    ... increase in trade receivables reflects our ongoing growth in sales channels with longer payment terms. More specifically, the direct-marketing model involves collecting cash at time of shipment, while sales through commercial and retail channels involve shipping product and subsequently collecting...

  • Page 37
    ... generated from operations and borrowings available under our lines of credit, will be sufficient to meet our working capital, stock repurchase, dividend and debt requirements for at least the next 12 months. The Company's contractual obligations and commercial commitments (as defined in Item 303...

  • Page 38
    ... January 1, 2006. The new standard will require us to expense stock options and other share based payments. The statement requires companies to assess the most appropriate model to calculate the value of the options. We currently use the Black-Scholes option-pricing model to value options and are...

  • Page 39
    ... Item 8. Consolidated Financial Statements and Supplementary Data Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Income for the years ended December 31, 2005...

  • Page 40
    ... of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of...

  • Page 41
    Table of Contents NAUTILUS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (In Thousands, Except Share Data) 2005 2004 ASSETS CURRENT ASSETS: Cash and cash equivalents Short-term investments Trade receivables (less allowance for doubtful accounts of $4,085 and $3,252 in 2005 and 2004, ...

  • Page 42
    Table of Contents NAUTILUS, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (In Thousands, Except Share and Per Share Data) 2005 2004 2003 NET SALES COST OF SALES Gross profit OPERATING EXPENSES: Selling and marketing General and administrative Research and ...

  • Page 43
    ...NAUTILUS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (In Thousands, Except Share Data... - - - - 4,084 - (1,343 2,741 Total $202,423 34,402 2,079 36,481 (13...exercised Tax benefit of exercise of nonqualified options BALANCES...

  • Page 44
    ...Trade payables Income taxes payable Accrued liabilities Customer deposits Net cash (used in) provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment Proceeds from sale of property, plant and equipment Net increase in other assets Acquisitions...

  • Page 45
    ..., END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for income taxes Cash paid for interest SUPPLEMENTAL DISCLOSURE OF OTHER NONCASH INVESTING ACTIVITY Other receivable issued as part of the sale of land Other long term liability issued in conjunction with the acquisition of...

  • Page 46
    ... home gyms, free weight equipment, treadmills, indoor cycling equipment, steppers, ellipticals, treadclimbers and fitness accessories. The Company's fitness apparel products include an assortment of high-end performance apparel predominately marketed under the Pearl Izumi brand. The fitness apparel...

  • Page 47
    ... Assets consist of license agreements, patents, trademarks and goodwill. Long-lived and intangible assets that are determined to have finite lives are amortized using the straight-line method over their estimated useful lives of two to twenty years and are measured for impairment only when events...

  • Page 48
    ... from a percentage of each sale held back by the financing company. In the event that the financing company experiences higher consumer default rates than specified under our contract, we are required to pay an additional amount to the financing company. As of December 31, 2005, we have accrued $400...

  • Page 49
    ... and retail line of fitness products include a lifetime warranty on the frame and structural parts, a four month to three year warranty on parts, labor, electronics, upholstery, grips and cables, and typically a five year warranty on motors. Warranty costs are estimated based on the Company...

  • Page 50
    ... rates change. Net foreign currency transaction gains and (losses) were $999, ($175) and ($31) for the years ended December 31, 2005, 2004 and 2003, respectively. Stock-Based Compensation - The Company measures compensation expense for its stock-based employee compensation plans using the method...

  • Page 51
    ... of a stock option award. At December 31, 2005, 3,978,284 shares are available for future issuance under the Plan. Stock options granted generally have an exercise price equal to the closing market price of the Company's stock on the day before the date of grant, and vesting periods vary by option...

  • Page 52
    ... was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for the grants in 2005, 2004 and 2003: 2005 2004 2003 Dividend yield Risk-free interest rate Expected volatility Expected option lives Weighted-average fair value of...

  • Page 53
    ... and marketing these branded fitness products to consumers through direct, commercial, retail, specialty retail, and international sales channels. The fitness equipment segment also consists of corporate overhead costs consisting mainly of director costs, general legal and accounting fees, and...

  • Page 54
    ...Property, plant and equipment Trade name (indefinite life) Customer base (eight year life) Developed technology (four year life) In process research and development Other assets Goodwill Current liabilities assumed Long-term deferred tax liabilities Long-term debt Total acquisition cost 7,855 11,928...

  • Page 55
    ... world headquarters and implementation of the Company's new information system that are not yet in service and therefore not yet being depreciated. 7. GOODWILL The changes in the carrying amount of goodwill for the year ending December 31, 2005 are as follows: Fitness Equipment Fitness Apparel Total...

  • Page 56
    ... at December 31: Estimated Useful Life (in years) 2005 2004 Indefinite life trademarks Definite life trademarks Patents Customer base Developed technology Non-compete agreement Other assets Total other assets Accumulated amortization Trademarks Patents Other assets Other assets, net N/A 20 1 to 17...

  • Page 57
    ... note requires payments of $150 per quarter beginning September 2005 through December 2006. Operating Leases - The Company has operating leases for various domestic and international properties with functional uses predominantly ranging from, but not limited to, warehousing and distribution, product...

  • Page 58
    ... and 2004 are as follows: 2005 2004 Assets: Accrued liabilities Allowance for doubtful accounts Inventory valuation Uniform capitalization Net operating loss carryforward Other Liabilities: Prepaid advertising Other prepaids Basis difference on long-lived assets Undistributed earnings of foreign...

  • Page 59
    ...U.S. statutory income tax rate State tax, net of federal benefit Tax benefit related to U.S. export sales Qualified domestic production activity deduction Penalties Impact of foreign results Nondeductible operational expenses Tax exempt interest Research and development credit Change in deferred tax...

  • Page 60
    ...through the Pearl Izumi acquisition, for each calendar year ending December 31, 2004, 2005 and 2006. When Nautilus purchased Pearl Izumi, the estimated contingent payments due in 2005 and 2006 were set up as a liability and deducted from the purchase price. The Company incurred royalty expense under...

  • Page 61
    ... filed by ICON Health & Fitness, Inc. ("ICON") claiming false advertising involving the Company's advertising and promotion going back to 1987 for certain elements of its Bowflex home gyms and claiming trademark infringement for the name placed on a treadmill belt sold in 2002. On November 15, 2005...

  • Page 62
    ... "Management Report on Internal Control Over Financial Reporting," the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, the Company's disclosure controls and procedures (as defined in Rules 13a...

  • Page 63
    ..., Report of Independent Registered Public Accounting Firm . Changes in Internal Controls In the fourth quarter, the Company converted its commercial, retail and specialty fitness channels to its existing ERP application which now serves as the general ledger of record for the United States, is used...

  • Page 64
    ... sales and standard margin reporting among numerous other reports. Enhancements to the operation of the system implementation controls are being developed. As such, the implementation of the ERP for International operations has been postponed until 2007 to enable the Company to effectively execute...

  • Page 65
    ... commercial, retail and specialty channels; and, in addition, as a result of the Company's accounting department's efforts to mitigate ERP system set-up issues, data migration issues and reporting limitations, insufficient resources were devoted to controls over analyzing and recording contingencies...

  • Page 66
    ... Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the period ended December 31, 2005, of the Company and our report dated March...

  • Page 67
    ...accounting officer. The Code of Business Conduct and Ethics is available on the Company's website, www.nautilus.com. Item 11. Executive Compensation The information required by this item is included under the caption Executive Compensation in the Company's Proxy Statement for its 2006 Annual Meeting...

  • Page 68
    ... and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item is included under the caption Independent Registered Public Accounting Firm in the Company's Proxy Statement for its 2006 Annual Meeting of Stockholders and is incorporated...

  • Page 69
    ... (a)(1) (a)(2) Financial Statements See the Consolidated Financial Statements in Item 8. Financial Statement Schedule There are no financial statement schedules filed as part of this annual report, since the required information is included in the consolidated financial statements, including the...

  • Page 70
    ...duly authorized. Date: March 16, 2006 N AUTILUS , I NC . By: /s/ G REGGORY C. H AMMANN Greggory C. Hammann, Chief Executive Officer, President and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 71
    ...with the Commission on January 21, 2005. Trademark License Agreement by and between Pacific Direct, LLC and the Company - Incorporated by reference to Exhibit 2.1 of the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2001, as filed with the Commission on November 14...

  • Page 72
    ...Association, dated November 18, 2005. Lease agreement, dated November 23, 2004 between Columbia Tech Center LLC and The Nautilus Group, Inc. - Incorporated by reference to Exhibit 99.1 of the Company's Form 8-K, as filed with the Commission on November 30, 2004. Executive Employment Agreement, dated...

  • Page 73
    ... to the Company's Current Report on Form 8-K, as filed with the Commission on June 10, 2005. First Amendment Agreement with KeyBank National Association, and U.S. Bank National Association dated March 10, 2006. Subsidiaries of Nautilus, Inc. Consent of Independent Registered Public Accounting Firm...

  • Page 74
    Exhibit 10.13 CREDIT AGREEMENT among NAUTILUS, INC., as Borrower, THE LENDERS NAMED HEREIN, as Lenders , KEYBANK NATIONAL ASSOCIATION, as Lead Arranger, Sole Book Runner and Administrative Agent, and U.S. BANK NATIONAL ASSOCIATION, as Syndication Agent dated as of November 18, 2005

  • Page 75
    ...; INCREASED CAPITAL; TAXES Section 3.1. Requirements of Law Section 3.2. Taxes Section 3.3. Funding Losses Section 3.4. Change of Lending Office Section 3.5. Eurodollar Rate Lending Unlawful; Inability to Determine Rate ARTICLE IV. CONDITIONS PRECEDENT Section 4.1. Conditions to Each Credit Event...

  • Page 76
    ...and Securities Accounts Section 6.20. Accurate and Complete Statements Section 6.21. Investment Company; Holding Company Section 6.22. Defaults ARTICLE VII. EVENTS OF DEFAULT Section 7.1. Payments Section 7.2. Special Covenants Section 7.3. Other Covenants Section 7.4. Representations and Warranties...

  • Page 77
    ... Section 9.2. Note Holders Section 9.3. Consultation With Counsel Section 9.4. Documents Section 9.5. Agent and Affiliates Section 9.6. Knowledge of Default Section 9.7. Action by Agent Section 9.8. Release of a Guarantor of Payment Section 9.9. Notice of Default Section 9.10. Delegation of Duties...

  • Page 78
    ... Credit Pledged Securities Indebtedness Liens Permitted Foreign Subsidiary Loans and Investments Corporate Existence; Subsidiaries; Foreign Qualification Litigation and Administrative Proceedings Locations Employee Benefits Plans Material Agreements Insurance Deposit Accounts and Securities Accounts...

  • Page 79
    ... time to time be amended, restated or otherwise modified, this "Agreement") is made effective as of the 18 th day of November, 2005 among: (a) NAUTILUS, INC., a Washington corporation ("Borrower"); (b) the lenders listed on Schedule 1 hereto and each other Eligible Transferee, as hereinafter defined...

  • Page 80
    ... Agent, dated as of the Closing Date, as the same may from time to time be amended, restated or otherwise modified. "Agreement" shall mean that term as defined in the first paragraph hereof. "Applicable Facility Fee Rate" shall mean: (a) for the period from the Closing Date through November 30, 2005...

  • Page 81
    "Applicable Margin" shall mean: (a) for the period from the Closing Date through November 30, 2005, sixty-five (65.0) basis points for Eurodollar Loans and zero (0.0) basis points for Base Rate Loans; and (b) commencing with the Consolidated financial statements of Borrower for the fiscal quarter ...

  • Page 82
    ..., beneficially or of record, on or after the Closing Date, by any Person or group (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934, as then in effect), of shares representing more than twenty-five percent (25%) of the aggregate ordinary Voting Power represented...

  • Page 83
    ... D . "Consideration" shall mean, in connection with an Acquisition, the aggregate consideration paid, including borrowed funds, cash, the issuance of securities or notes, the assumption or incurring of liabilities (direct or contingent), the payment of consulting fees or fees for a covenant not to...

  • Page 84
    ... and personal property, the component of rental expense or rental income relating to the personal property (other than fixtures) shall be excluded from the determination of Consolidated Rent Expense. "Control Agreement" shall mean a Deposit Account Control Agreement or a Securities Account Control...

  • Page 85
    "Controlled Group" shall mean a Company and each Person required to be aggregated with a Company under Code Section 414(b), (c), (m) or (o). "Credit Event" shall mean the making by the Lenders of a Loan, the conversion by the Lenders of a Base Rate Loan to a Eurodollar Loan, the continuation by the ...

  • Page 86
    ... any steps to terminate a Pension Plan in a "distressed termination" as described in ERISA; (i) the failure by a Controlled Group member or an ERISA Plan to satisfy any requirements of law applicable to an ERISA Plan; (j) the commencement, existence or threatening of a claim, action, suit, audit or...

  • Page 87
    ... State of Washington that are imposed on Agent or a Lender by any Governmental Authority located in the jurisdiction where Agent or such Lender is organized or in a state of the United States where such Lender maintains a lending office. "Existing Letter of Credit" shall mean that term as defined in...

  • Page 88
    ... trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the Closing Date. "Financial Officer" shall mean...

  • Page 89
    ... of Payment" shall mean each of the Companies designated a "Guarantor of Payment" on Schedule 2 hereto, each of which is executing and delivering a Guaranty of Payment, and any other Domestic Subsidiary that shall be required to deliver a Guaranty of Payment to Agent subsequent to the Closing Date...

  • Page 90
    ... at least three Business Days prior to the Interest Adjustment Date applicable to such Eurodollar Loan, Borrower shall be deemed to have converted such Eurodollar Loan to a Base Rate Loan at the end of the then current Interest Period. "Landlord's Waiver" shall mean a landlord's waiver or mortgagee...

  • Page 91
    ...). "Maximum Rate" shall mean that term as defined in Section 2.3(d) hereof. "Multiemployer Plan" shall mean a Pension Plan that is subject to the requirements of Subtitle E of Title IV of ERISA. "Non-Credit Party Exposure" shall mean the aggregate amount, incurred on or after the Closing Date, of...

  • Page 92
    ...and other sales taxes, use taxes, value added taxes, charges or similar taxes or levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document. "Participant" shall mean that term as defined in...

  • Page 93
    ...interest rate charged by Agent for commercial or other extensions of credit. Each change in the Prime Rate shall be effective immediately from and after such change. "Register" shall mean that term as described in Section 10.10(i) hereof. "Regularly Scheduled Payment Date" shall mean the last day of...

  • Page 94
    ..., or provision of goods or services related to, fitness, nutrition or apparel, and related activities. "Related Expenses" shall mean all reasonable costs, liabilities and expenses (including, without limitation, losses, damages, penalties, claims, actions, attorneys' fees, legal expenses, judgments...

  • Page 95
    ... Account Control Agreement" shall mean each Securities Account Control Agreement among a Credit Party, Agent and a broker, substantially in the form of the attached Exhibit K , executed and delivered to Agent, for the benefit of the Lenders on or after the Closing Date, as the same may from time...

  • Page 96
    ...terms or written agreement being, in either case, in form and substance satisfactory to Agent and the Required Lenders) in favor of the prior payment in full of the Obligations. "Subsidiary" shall mean (a) a corporation more than fifty percent (50%) of the Voting Power of which is owned, directly or...

  • Page 97
    ... Default occurs. "U.C.C. Financing Statement" shall mean a financing statement filed or to be filed in accordance with the Uniform Commercial Code, as in effect from time to time, in the relevant state or states. "Voting Power" shall mean, with respect to any Person, the exclusive ability to control...

  • Page 98
    ... with the Letter of Credit Exposure and the Swing Line Exposure. Borrower shall have the option, subject to the terms and conditions set forth herein, to borrow Revolving Loans, maturing on the last day of the Commitment Period, by means of any combination of Base Rate Loans or Eurodollar Loans...

  • Page 99
    ... other Credit Party, Borrower agrees to (A) pay to Agent, for the pro rata benefit of the Lenders, a nonrefundable commission based upon the face amount of such Letter of Credit, which shall be paid quarterly in arrears, on each Regularly Scheduled Payment Date, at the rate of the Applicable Margin...

  • Page 100
    ... continuance of a Default or Event of Default, and that each such payment shall be made without any offset, abatement, recoupment, counterclaim, withholding or reduction whatsoever and whether or not such Lender's Revolving Credit Commitment shall have been reduced or terminated. Each Lender shall...

  • Page 101
    ... when required by this Section 2.2(c)(ii) is absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, the occurrence and continuance of a Default or Event of Default, and that its payment to Agent, for the account of the Swing Line Lender...

  • Page 102
    ...pay interest on the unpaid principal amount of a Base Rate Loan outstanding from time to time from the date thereof until paid at the Derived Base Rate from time to time in effect. Interest on such Base Rate Loan shall be payable, commencing December 31, 2005, and on each Regularly Scheduled Payment...

  • Page 103
    ...to Borrower. In determining whether the interest contracted for, charged, or received by Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable law, (i) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (ii...

  • Page 104
    ... is received. On the date that the Credit Event set forth in such Notice of Loan is to occur, each such Lender shall provide to Agent, not later than 2:00 P.M. (Pacific time), the amount in Dollars, in federal or other immediately available funds, required of it. If Agent shall elect to advance the...

  • Page 105
    ...principal amounts of Base Rate Loans, Eurodollar Loans, Swing Loans and Letters of Credit, all prepayments and the applicable dates, including Interest Periods, with respect to the Loans made, and payments received by such Lender, by such method as such Lender may generally employ; provided, however...

  • Page 106
    ..., 2005 and continuing on each Regularly Scheduled Payment Date thereafter, and on the last day of the Commitment Period. (b) Agent Fee . Borrower shall pay to Agent, for its sole benefit, the fees set forth in the Agent Fee Letter. Section 2.9. Reduction of Commitment . Borrower may at any time and...

  • Page 107
    ... kind to Borrower or any Guarantor of Payment. (c) Perfection of Security Interests of Agent and the Lenders . At any time on or after the Triggering Event Date, Agent shall be authorized to take all such action (including, but not limited to, filing U.C.C. Financing Statements and other appropriate...

  • Page 108
    ... Event Date, without providing notice of any kind to Borrower or any Guarantor of Payment. Borrower shall pay all filing and recording fees and taxes in connection with the filing or recordation of such U.C.C. Financing Statements and security interests and shall immediately reimburse Agent...

  • Page 109
    ... that, after the Closing Date, the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether...

  • Page 110
    ...Form W-8BEN, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by Credit Parties under this Agreement and the other Loan Documents...

  • Page 111
    ... Lender and the Swing Line Lender to participate in any Credit Event shall be conditioned, in the case of each Credit Event, upon the following: (a) all conditions precedent as listed in Section 4.2 hereof required to be satisfied prior to the first Credit Event shall have been satisfied prior...

  • Page 112
    ... of Payment shall have executed and delivered to Agent, for the benefit of the Lenders, a Security Agreement, a Pledge Agreement (with respect to the Pledged Securities) and Control Agreements (with respect to the deposit and securities accounts set forth in Schedule 6.19 hereto). (d) Officer...

  • Page 113
    ...) no Default or Event of Default exists nor immediately after the first Credit Event will exist, and (iii) each of the representations and warranties contained in Article VI hereof are true and correct as of the Closing Date. (l) Letter of Direction . Borrower shall have delivered to Agent a letter...

  • Page 114
    ... the stock certificates representing the Pledged Securities and corresponding stock transfer powers. (c) UCC Termination Statements . Within thirty (30) days after the Closing Date (unless a longer period is agreed to in writing by Agent), Borrower shall have delivered to Agent evidence, in form and...

  • Page 115
    ... to be sent to Agent through the SEC website (or similar service) with respect to any notices, reports or other statements filed on such website. (e) Financial Information of Companies . Borrower shall deliver to Agent and the Lenders, within ten days of the written request of Agent or any Lender...

  • Page 116
    ... Financial Officer of such Company setting forth the details of the event and the action such Company or another Controlled Group member proposes to take with respect thereto. Borrower shall, at the request of Agent or any Lender, deliver or cause to be delivered to Agent or such Lender, as the case...

  • Page 117
    ...so long as such Hedge Agreement shall have been entered into in the ordinary course of business and not for speculative purposes; (f) Permitted Foreign Subsidiary Loans and Investments; and (g) other unsecured Indebtedness, in addition to the Indebtedness listed above, so long as no Default or Event...

  • Page 118
    ...Liens on fixed assets securing the loans and Capitalized Lease Obligations pursuant to Section 5.8 (b) hereof, provided that such Lien is limited to the purchase price and only attaches to the property being acquired; (e) the Liens existing on the Closing Date as set forth in Schedule 5.9 hereto and...

  • Page 119
    ... Guarantor of Payment; (v) loans to a Company from a Company so long as each such Company is a Credit Party; (vi) any Permitted Foreign Subsidiary Loans and Investments or Permitted Investment, so long as no Default or Event of Default shall then exist or would result therefrom; (vii) the holding of...

  • Page 120
    ... paid for Acquisitions completed prior to the Closing Date. Section 5.14. Notice . Borrower shall cause a Financial Officer of Borrower to promptly notify Agent and the Lenders, in writing, whenever a Default or Event of Default may occur hereunder or any representation or warranty made in...

  • Page 121
    ... for working capital and other general corporate purposes (including Acquisitions) of the Companies. Section 5.19. Corporate Names . No Company shall change its corporate name or its state, province or other jurisdiction of organization, unless, in each case, Borrower shall have provided Agent and...

  • Page 122
    ... Triggering Event Date, Agent shall at all times, in the discretion of Agent or the Required Lenders, have the right to perfect, at Borrower's cost, payable upon request therefor (including, without limitation, any foreign counsel, or foreign notary, filing, registration or similar, fees, costs or...

  • Page 123
    ... documents, instruments or agreements as Agent may reasonably require. Borrower shall pay all recordation, legal and other expenses in connection therewith. Section 5.25. Amendment of Organizational Documents . No Company shall amend its Organizational Documents to change its name or state, province...

  • Page 124
    ...on or after the Closing Date that would prohibit Agent or the Lenders from acquiring a Lien on, or a collateral assignment of, any of the property or assets of any Company. Section 6.7. Tax Returns . All federal, state and local tax returns and other reports required by law to be filed in respect of...

  • Page 125
    ... of the Closing Date, the Companies have places of business or maintain their accounts, inventory and equipment, other than inventory and equipment that is in transit or in temporary storage, at the locations set forth on Schedule 6.9 hereto, and each Company's chief executive office is set forth on...

  • Page 126
    ...-pay clauses thereunder, or increases in costs imposed by plan providers or administrators). With respect to each ERISA Plan that is intended to be qualified under Code Section 401(a), (a) the ERISA Plan and any associated trust operationally comply with the material applicable requirements of Code...

  • Page 127
    ...from time to time reasonably request. Section 6.19. Deposit and Securities Accounts . Schedule 6.19 hereto lists all banks and other financial institutions at which any Company maintains deposit or other accounts as of the Closing Date, and Schedule 6.19 hereto correctly identifies the name, address...

  • Page 128
    ... Company's part to be complied with, and that Default shall not have been fully corrected within thirty (30) days after the earlier of (a) any Financial Officer of such Company becomes aware of the occurrence thereof, or (b) the giving of written notice thereof to Borrower by Agent or the Required...

  • Page 129
    ... Company, (e) be adjudicated a debtor or insolvent or have entered against it an order for relief under Title 11 of the United States Code, or under any other bankruptcy insolvency, liquidation, winding-up, corporate or similar statute or law, foreign, federal state or provincial, in any applicable...

  • Page 130
    ... for a period of thirty (30) days from commencement of such proceeding or case, or file a petition or an answer or an application or a proposal seeking reorganization or an arrangement with creditors or seeking to take advantage of any other law (whether federal, provincial or state, or, if...

  • Page 131
    ... located) to or for the credit or account of any Credit Party, as security for the obligations of Borrower and any Guarantor of Payment to reimburse Agent and the Lenders for any then outstanding Letters of Credit. Section 8.4. Offsets . If there shall occur or exist any Event of Default referred...

  • Page 132
    ...and records of Agent) until written notice of transfer shall have been filed with Agent, signed by such payee and in form satisfactory to Agent. Section 9.3. Consultation With Counsel . Agent may consult with legal counsel selected by Agent and shall not be liable to the Lenders for any action taken...

  • Page 133
    ... Notice of Default . In the event that Agent shall have acquired actual knowledge of any Default or Event of Default, Agent shall promptly notify the Lenders and shall take such action and assert such rights under this Agreement as the Required Lenders shall direct and Agent shall inform the other...

  • Page 134
    ... notice to Borrower and the Lenders. If Agent shall resign under this Agreement, then either (a) the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders (with the consent of Borrower so long as an Event of Default has not occurred and which consent shall not...

  • Page 135
    ...of maturity of the Loans, the payment date of interest or scheduled principal thereunder, or the payment date of facility or other fees payable hereunder, (iii) any reduction in the rate basis of interest on the Loans (provided that the institution of the Default Rate and a subsequent removal of the...

  • Page 136
    ...Taxes . Borrower agrees to pay on demand all costs and expenses of Agent and all Related Expenses, including, but not limited to, (a) syndication, administration, travel and out-of-pocket expenses, including but not limited to attorneys' fees and expenses, of Agent in connection with the preparation...

  • Page 137
    ... in Section 3.5(a) hereof), which consent of Borrower and Agent shall not be unreasonably withheld; provided, however, that Borrower's consent shall not be required if, at the time of the proposed assignment, any Default or Event of Default shall then exist. Anything herein to the contrary...

  • Page 138
    ... in the Register (as defined below), Agent and Borrower) either U.S. Internal Revenue Service Form W-8ECI or U.S. Internal Revenue Service Form W-8BEN, as applicable (wherein such assignee claims entitlement to complete exemption from U.S. federal withholding tax on all payments hereunder), and (iii...

  • Page 139
    .... Sale of Participations . Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell participations to one or more Eligible Transferees (each a "Participant") in all or a portion of its rights or obligations under this Agreement...

  • Page 140
    ... Lender and Agent are required to obtain, verify and record information that identifies the Credit Parties, which information includes the name and address of the Credit Parties and other information that will allow such Lender or Agent, as applicable, to identify the Credit Parties in accordance...

  • Page 141
    ...proceeding arising out of or relating to this Agreement, the Obligations or any Related Writing, and Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Washington state or federal court. Borrower, on behalf of itself and its...

  • Page 142
    ..., DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. IN WITNESS WHEREOF, the parties have executed and delivered this Credit Agreement as of the date first set forth above. Address: 16400 SE Nautilus Drive Vancouver, Washington 98683 Attention...

  • Page 143
    ... entered into as of June 30, 2005, by and between Nautilus, Inc., a Washington corporation (the "Company" or "Employer"), and Juergen Eckmann ("Employee"). In consideration of the premises and the mutual covenants and agreements hereinafter set forth, the Company and Employee hereby agree as follows...

  • Page 144
    ... written document signed by the President and Chief Executive Officer. 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...

  • Page 145
    ... under the terms of this Agreement), this Agreement shall not affect any payments due to Employee under applicable law as a result of the termination of his employment (such as payment of earned wages). 1 The average annual monthly base salary shall be calculated using the average of the cash...

  • Page 146
    ... acceptable to the Company and generally then in use for employees who are terminated. 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...

  • Page 147
    ... shall replace the Employment Agreement dated August 1, 2004 between Employee and DashAmerica, Inc., which Employment Agreement shall have no further force and effect. This Agreement may be changed only by a written document signed by Employee and the Company. 16. Governing Law/Jurisdiction/Venue...

  • Page 148
    ... will be paid at time of termination. 19. Miscellaneous Benefits . Company will provide appropriate legal advice and support to enable Employee's spouse to be legally employed pursuant to US laws, and will provide professional job search and outplacement assistance in connection with a job search in...

  • Page 149
    ... -The Nautilus Group Sales Corporation -DFI Properties, LLC -BFI Advertising, Inc. -Nautilus/Schwinn Fitness Group Inc. -DF Hebb Industries, Inc. -Stairmaster Health & Fitness Products, Inc. -Nautilus Human Performance Systems, Inc. WHEREAS, Borrower, Agent and the Lenders desire to amend the Credit...

  • Page 150
    ... the first date that an Event of Default shall occur after March 10, 2006. 2. Amendment to Definitions . Article I of the Credit Agreement is hereby amended to delete the definition of "Restricted Payment" therefrom and to insert in place thereof the following: "Restricted Payment" shall mean, with...

  • Page 151
    ...applicable Default Rate shall apply without any election or action on the part of Agent or any Lender. 5. Retroactive Amendment to Post-Closing Items . Section 4.3(a) of the Credit Agreement is hereby retroactively amended, effective as of the Closing Date, to delete the phrase "forty-five (45) days...

  • Page 152
    ... to add the following new subsections (d), (e) and (f) at the end thereto: (d) has ensured that no Person who owns a controlling interest in or otherwise controls a Company is (i) listed on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control...

  • Page 153
    ...; (b) cause each Guarantor of Payment to execute the attached Acknowledgement and Agreement; and (c) pay all legal fees and expenses of Agent in connection with this Amendment. 15. Post-Closing Items . Within thirty (30) days after the First Amendment Effective Date (unless a longer period is agreed...

  • Page 154
    ...executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. 20. Headings . The headings, captions and arrangements used.... Governing Law . The rights and obligations of all parties hereto shall be governed by the laws of the...

  • Page 155
    .... IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the date first set forth above. NAUTILUS, INC. By: /s/ William D. Meadowcroft Name: William D. Meadowcroft Title: Secretary-Treasurer KEYBANK NATIONAL ASSOCIATION, as Agent and as a Lender By: /s/ Jeffrey R. Dincher...

  • Page 156
    ... Amendment Agreement dated as of March 10, 2006. The undersigned further agree that the obligations of the undersigned pursuant to the Guaranty of Payment executed by the undersigned shall remain in full force and effect and be unaffected hereby. The undersigned hereby waive and release Agent and...

  • Page 157
    ..., a Washington limited liability company Nautilus/Schwinn Fitness Group, Inc., a Colorado corporation DF Hebb Industries, Inc., a Texas corporation StairMaster Health & Fitness Products, Inc., a Washington corporation Nautilus International Holdings, S.A., a Swiss corporation Nautilus International...

  • Page 158
    ... expresses an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of material weaknesses) appearing in this Annual Report on Form 10-K of Nautilus, Inc. for the year ended December 31, 2005. DELOITTE & TOUCHE LLP Portland, Oregon March 16, 2006

  • Page 159
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 160
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 161
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 162
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 163
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 164
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 165
    ..., his true and lawful attorney-in-fact and agent, for him and his name, place and stead, in any and all capacities, to sign the Form 10-K of Nautilus, Inc., a Washington corporation, for the fiscal year ended December 31, 2005, and any amendments or supplements thereto, and to file this Power of...

  • Page 166
    ... 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 Any fraud, whether or not material, that involves management or other...

  • Page 167
    ... 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 Any fraud, whether or not material, that involves management or other...

  • Page 168
    ..., United States Code), the undersigned officer of Nautilus, Inc., a Washington corporation (the "Company"), does hereby certify that: To my knowledge, the Annual Report on Form 10-K for the year ended December 31, 2005 (the "Form 10-K") of the Company fully complies with the requirements of Section...

  • Page 169
    ..., United States Code), the undersigned officer of Nautilus, Inc., a Washington corporation (the "Company"), does hereby certify that: To my knowledge, the Annual Report on Form 10-K for the year ended December 31, 2005 (the "Form 10-K") of the Company fully complies with the requirements of Section...