Nautilus 2010 Annual Report Download - page 26

Table of Contents
In the third quarter of 2010, we completed amendments to the Loan Agreement which specify separate, more lenient financial covenants,
compliance with which permits us to maintain outstanding standby letters of credit without a requirement for cash collateral. The amendment to
the Loan Agreement restricts our ability to borrow under the Loan Agreement absent compliance with the pre-amendment covenants. The
separate financial covenants are applicable for compliance measurement periods through March 31, 2011. The Loan Amendment also required
us to obtain $5 million of unsecured indebtedness, subordinated to the Loan Agreement, as additional working capital on or before September
16, 2010. We obtained this indebtedness on September 3, 2010.
As of December 31, 2010 , we had no outstanding borrowings and $2.9 million in standby letters of credit issued under the Loan Agreement. As
of December 31, 2010 , we were in compliance with the financial covenants; however, there is no assurance that we will be in compliance with
the financial covenants in the foreseeable future such that we could access the credit facility if the need were to arise or, absent a waiver from the
bank, avoid cash collateralizing our outstanding letters of credit.
On September 3, 2010, we entered into a Note Purchase Agreement (the “Purchase Agreement”) by and among Nautilus and certain entities
(collectively, the “Purchasers”) under common control of Sherborne Investors GP, LLC and its affiliates (collectively “Sherborne”).
Sherborne is
our largest shareholder and is controlled by Edward J. Bramson, our Chairman and Chief Executive Officer, and Craig L. McKibben, a member
of our Board of Directors.
Pursuant to the Purchase Agreement, we issued to the 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 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 is approximately 8.7% per annum. Prepayment of amounts due under the Notes is permitted
under the Purchase 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, 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 the
Purchasers may declare all outstanding obligations under the Notes to be due and payable. The accretion rate of the Notes may be increased by
2% per annum during the continuance of an event of default.
Non
-Cancelable Contractual Obligations
Our operating cash flows include the effect of certain non-cancelable, contractual obligations. A summary of such obligations as of
December 31, 2010 , including those related to our discontinued operations, is as follows:
Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2010 , we are
unable to make reasonably reliable estimates of the timing of any cash settlements with the respective taxing authorities. Therefore,
approximately $4.6 million of unrecognized tax benefits, including interest and penalties on uncertain tax positions, have been excluded from the
contractual table above. For further information, see Note 12, Income Taxes, in Notes to the Consolidated Financial Statements.
24
(In thousands) Payments due by period
Total Less than 1
year 1-3 years 3-5 years More than 5
years
Operating lease obligations
$
10,385
$
3,641
$
4,824
$
1,620
$
300
Purchase obligations
(1)
12,933
12,933
—
—
—
Minimum royalty obligations
206
206
—
—
—
Total
$
23,524
$
16,780
$
4,824
$
1,620
$
300
(1)
Our purchase obligations are comprised of inventory purchase commitments. Because our inventory primarily is sourced from Asia, we have long lead times and therefore need to secure factory capacity from our vendors in advance.