Nautilus 2011 Annual Report Download - page 42

Table of Contents
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 (as defined in the Loan Agreement) 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 bank 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.
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.
As of December 31, 2011 , the Company had no outstanding borrowings and $3.0 million in standby letters of credit issued under the Loan
Agreement. As of December 31, 2011 , the Company was in compliance with the financial covenants of 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. The 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 on the
original maturity date, 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 by the Company. 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 provide for an automatic extension of the maturity date of up to 180 days in the event we extend the expiration date of the Loan
Agreement. Subsequent to December 31, 2011, the Company extended the expiration date of the Loan Agreement to December 31, 2012,
thereby extending the maturity date of the Notes to May 2, 2013. As of December 31, 2011, the Notes are classified as long-term.
On July 19, 2011, 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, of Messrs. Bramson and McKibben from
their respective positions with Nautilus on May 26, 2011, 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.
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.
(11) INCOME TAXES
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