Nautilus 2010 Annual Report Download - page 45

Table of Contents
(11) BORROWINGS
On December 29, 2009, the Company entered into a Letter of Credit Agreement (the "Letter of Credit Agreement") with Bank of America
("BofA"). The Letter of Credit Agreement provided up to $6.0 million in standby letters of credit, and was scheduled to expire on December 31,
2010 ("Expiration Date"). On December 13, 2010, the Letter of Credit Agreement was modified to reduce the credit limit to $0.6 million and
extend the expiration date to June 30, 2011. During this extended period, BofA will issue no new letters of credit. Existing letters of credit are
secured by a cash collateral account held by BofA in an amount not less than 105% of the amount of the outstanding letters of credit. As of
December 31, 2010, the Company had $0.3 million in standby letters of credit issued under the Letter of Credit Agreement.
On March 8, 2010, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Bank of the West, providing for a
$15.0 million maximum revolving secured credit line. The amount available for borrowings in any given quarter is dependent upon the amount
of qualified accounts receivable and inventory as of the end of the preceding quarter. The Loan Agreement is available for working capital,
standby letters of credit and general corporate purposes through August 2012, assuming the Company satisfies certain terms and conditions at
the time borrowings are requested. The interest rate on any future borrowings under the Loan Agreement will be based on the bank's prime 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 and are
subject to covenant testing. If standby letters of credit are secured by a cash collateral account held by Bank of the West in an amount not less
than 105% of the amount of the outstanding letters of credit and there are no outstanding borrowings under the Loan Agreement, then covenant
testing is not applicable.
In the third quarter of 2010, the Company completed amendments to the Loan Agreement which specify separate, more lenient financial
covenants, compliance with which permits the Company to maintain outstanding standby letters of credit without a requirement for cash
collateral. The amendment to the Loan Agreement restricts the Company's 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 the Company to obtain $5 million of unsecured indebtedness, subordinated to the Loan Agreement, as
additional working capital on or before September 16, 2010. The Company obtained this indebtedness on September 3, 2010.
As of December 31, 2010 , the Company had no outstanding borrowings and $2.9 million in standby letters of credit issued under the Loan
Agreement. As of December 31, 2010 , the Company was in compliance with the financial covenants; however there is no assurance that the
Company would be in compliance with the financial covenants in the foreseeable future such that it could access the credit facility if the need
were to arise or, absent a waiver from the bank, avoid cash collateralizing its outstanding letters of credit.
On September 3, 2010, the Company 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 the Company's largest shareholder and is controlled by Edward J. Bramson, the Company's Chairman and Chief Executive Officer,
and Craig L. McKibben, a member of the Company's Board of Directors.
Pursuant to the Purchase Agreement, the Company issued to the 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 is 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.
The Notes are subordinated to the Loan Agreement with Bank of the West. The Purchase Agreement includes certain negative
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