<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
DIRECT FOCUS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 3949 943002667
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
</TABLE>
2200 NE 65(TH) AVENUE, VANCOUVER, WASHINGTON 98661
(360) 694-7722
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
ROD W. RICE, CHIEF FINANCIAL OFFICER
DIRECT FOCUS, INC.
2200 NE 65(TH) AVENUE, VANCOUVER, WASHINGTON 98661
(360) 694-7722
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
BRUCE A. ROBERTSON NOLAN S. TAYLOR
MICHAEL J. KING SAMUEL P. GARDINER
Garvey, Schubert & Barer LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1191 Second Avenue, 18th Floor 1000 Kearns Building
Seattle, WA 98101-2939 136 South Main Street
Salt Lake City, UT 84101-1685
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement or the earlier effective registration statement for the
same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of this Prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value............ 1,150,000 $17.82 $20,493,000 $5,698
TOTAL................................. $5,698
</TABLE>
(1) Includes 825,000 shares to be offered by the Company, 175,000 shares to be
offered by the selling shareholders, and up to 150,000 shares issuable upon
the exercise of the underwriter's over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 2, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
1,000,000 SHARES
[COMPANY LOGO]
COMMON STOCK
----------------
Our common stock currently trades on the Toronto Stock Exchange under the
symbol DFX. This is our first public offering in the United States. On February
26, 1999, the last reported price of our common stock on the Toronto Stock
Exchange, stated in U.S. dollars, was $17.82 per share. We have filed an
application for our common stock to be listed on the Nasdaq National Market
under the symbol DFXI.
We are offering 825,000 shares of common stock and the selling shareholders
listed on page 43 of this prospectus are offering an additional 175,000 shares
of common stock. The underwriters also hold an option to purchase up to an
additional 150,000 shares from us to cover over-allotments, which the
underwriters must exercise within 30 days after the date of this prospectus. We
will not receive any proceeds from the sale of common stock by the selling
shareholders.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6 OF
THIS PROSPECTUS.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS THE COMPANY SHAREHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total......................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
D.A. DAVIDSON & CO.
The date of this Prospectus is , 1999
<PAGE>
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 11
Market Price of our Common Stock and Dividend
Policy....................................... 11
Capitalization................................. 12
Selected Financial Data........................ 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 23
<CAPTION>
PAGE
---------
<S> <C>
Management..................................... 37
Certain Relationships and Related
Transactions................................. 42
Principal and Selling Shareholders............. 43
Underwriting................................... 44
Description of Capital Stock................... 46
Shares Eligible for Future Sale................ 47
Legal Matters.................................. 48
Experts........................................ 48
Additional Information......................... 49
Index to Financial Statements.................. F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
As used in this prospectus, the terms "we," "our," "us," "Direct Focus" and
"the Company" refer to Direct Focus, Inc. and its subsidiaries. The names
Bow-Flex-Registered Trademark-, Nautilus-Registered Trademark-, Bowflex
Power-Pro-Registered Trademark-, Motivator-Registered Trademark-,
Versatrainer-Registered Trademark- and Power Rod-Registered Trademark- are
registered trademarks of Direct Focus, Inc. We have filed trademark applications
for the names Direct Focus-TM- and Instant Comfort-TM-. Except where we state
otherwise, we present the information in this prospectus assuming no exercise of
the underwriters' over-allotment option.
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
[Inside cover of prospectus includes the following artwork:
Along the left border of a fold-out page is a shaded column with the Direct
Focus logo atop the column, beneath which is the following text: "A rapidly
growing, direct marketing company that:". Below the logo and text are the
following bullet points: (1) "Develops and markets high-end, branded consumer
products through spot television commercials and infomercials, the internet and
print media"; and (2) "Recently solidified its presence in the health and
fitness market by acquiring the Nautilus product line and brand name."
Adjacent to the first column are three additional columns that depict and
briefly describe the Company's products. Atop the first product column is the
Bowflex logo, beneath which is a picture of a male torso and the following text:
"Fitness, weight loss and muscle building in one convenient, easy to use
machine." Below this are pictures of the Company's eight Bowflex machines,
labeled "Power Pro," "Power Pro XT," "Power Pro XTL," "Power Pro XTLU,"
"Motiviator," "Motivator XT," "Motivator XTL" and "Versatrainer." Adjacent to
the Bowflex images are the following four bullet points: (1) "Seven strength
training machines designed for home use"; (2) "One strength training machine
designed for wheelchair users"; (3) "Patented design and technology"; and (4) "A
complementary line of accessory equipment." Below these bullet points is a
close-up picture of the Company's Bowflex Power Rods with the following text:
"Each Bowflex fitness machine uses our patented Power Rod-Registered Trademark-
technology and comes with 210 pounds of resistance that can be upgraded to
deliver over 400 pounds of resistance."
Atop the second product column is the Nautilus logo. Under the logo is a
picture of a Nautilus fitness machine and a shaded Nautilus shell in the
background, with the following caption: "The equipment that has been making
America stronger for over 30 years." Below the picture and caption are pictures
of ten Nautilus machines, labeled "Pec Fly," "Lateral Raise," "Abdominal," "Low
Back," "Bench Press," "Compound Row," "Leg Extension," "Triceps Ext.," "Preacher
Curl" and "Seated Leg Curl." Adjacent to these pictures are the following bullet
points: (1) "27 all new strength training machines"; (2) "Patented technology
and design"; (3) "A full free weight equipment line"; and (4) "An extensive
consumer fitness accessory line." Below the bullet points are pictures of three
Nautilus fitness accessories (a handgrip, jump rope and dumbbells) with the
following caption: "In addition to high quality commercial fitness equipment,
our Nautilus business offers an extensive line of consumer fitness accessories."
Atop the third product column is the Instant Comfort logo. Below the logo is
a picture of the Company's airbed mattress in a bedroom setting with the
following caption: "Our airbeds allow users to control the comfort and firmness
of their sleeping surface." Below the picture and caption are pictures of the
Company's airbed product line, labeled "The Ultimate Premier Series," "The
Premier Series," "The Signature Series" and "The Basic Series." Adjacent to
these pictures are the following bullet points: (1) "Four luxury air support
sleep systems available in all standard sizes"; (2) "Patent pending technology
and design"; and (3) "A complementary accessory line." Below the bullet points
are pictures of the product components with the following caption: "Inside our
premier air bed sleep system are dual variable firmness support chambers that
allow users to independently control the firmness on each side of the bed. Our
directly connected remote permits easy adjustments."]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does
not contain all of the information that you need to consider before purchasing
our common stock. You should read the entire prospectus carefully, including the
financial statements and related notes appearing elsewhere in this prospectus,
in order to make an informed investment decision.
DIRECT FOCUS, INC.
Direct Focus is a rapidly growing, direct marketing company that develops
and markets high-end, branded consumer products. We market our consumer products
directly to consumers through a variety of direct marketing channels, including
spot television commercials, infomercials, print media, response mailings and
the internet. Our principal and most successful directly marketed product to
date has been our Bowflex line of home fitness equipment, and we recently
developed and began testing a direct marketing campaign for a line of high-end
airbeds. In January 1999, we acquired substantially all of the assets of
Nautilus International, Inc., a manufacturer and marketer of Nautilus brand
commercial fitness equipment and consumer fitness accessories. We believe that
Nautilus is one of the most recognized brand names in the fitness industry.
We have experienced recent rapid sales and earnings growth, based almost
entirely on the strength of our Bowflex products. In 1998, we generated net
income of $12.5 million on net sales of $57.3 million. This represents a 420.8%
increase in net income and a 187.9% increase in net sales from 1997, when we
generated net income of $2.4 million on net sales of $19.9 million.
We believe that we have been successful primarily because of our direct
marketing expertise, comprehensive statistical tracking systems, and extensive
management information systems we have developed and refined while directly
marketing our Bowflex products. We believe this expertise and experience enable
us to:
- Develop proprietary, high-end branded product lines with broad consumer
appeal that can be sold effectively through direct marketing channels;
- Develop and implement effective advertising and marketing strategies;
- Convert consumer interest and inquiries into sales;
- Effectively manage our product sourcing, manufacturing and distribution
operations; and
- Provide excellent customer service.
We believe Direct Focus is well positioned to become a leading direct
marketer of high-end consumer products. Key elements of our growth strategy
include the following:
- Continue to grow sales of our highly successful Bowflex line of home
fitness equipment by expanding our direct marketing campaign and
continuing to introduce enhancements and additions for these products;
- Expand our direct marketing campaign for our newly introduced line of
high-end airbeds;
- Develop and directly market additional high-end consumer products;
- Revitalize sales of Nautilus fitness equipment in the commercial
market;
- Capitalize on the well-recognized Nautilus brand name by introducing
and marketing consumer fitness equipment and related products under the
Nautilus name;
- Capitalize on direct marketing and e-commerce opportunities presented
by the internet, which currently generates 10.0% of our net sales; and
- Explore growth opportunities through strategic acquisitions that would
enhance our direct marketing capabilities or our product lines.
3
<PAGE>
Our principal executive offices are located at 2200 NE 65th Avenue,
Vancouver, Washington 98661, and our telephone number is (360) 694-7722. We
maintain web sites at www.bowflex.com, www.nautilus.com, www.nautilusdirect.com
and www.instantcomfort.com. None of the information on our web sites is part of
this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............................. 1,000,000 shares
Common stock offered by the Company............... 825,000 shares
Common stock offered by the selling
shareholders.................................... 175,000 shares
Common stock to be outstanding after this
offering........................................ 10,357,939 shares(1)
Common stock underlying over-allotment option..... 150,000 shares
Use of proceeds................................... Working capital, capital equipment
purchases and other general corporate
purposes.
Dividend policy................................... We have never declared or paid dividends
on our common stock and do not
anticipate doing so in the foreseeable
future.
Proposed Nasdaq National Market symbol............ DFXI
</TABLE>
- ------------------------
(1) Based on 9,532,939 shares outstanding as of February 26, 1999. Includes
84,416 shares of common stock issued after December 31, 1998, upon the
exercise of options. Excludes: (a) 550,618 shares of common stock issuable
upon the exercise of outstanding options; and (b) 696,961 shares available
for future issuance under our Stock Option Plan. See "Management - Benefit
Plans."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
You should read the following summary financial information together with
the financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
HISTORICAL PRO FORMA(1)
----------------------------------------------------- -------------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 4,415 $ 4,772 $ 8,517 $ 19,886 $ 57,297 $ 76,601
Gross profit.................................. 2,841 3,156 5,914 14,772 44,855 50,211
Operating income (loss)....................... (531) (59) 460 3,616 18,888 15,603
Net income (loss)............................. $ (510) $ 15 $ 693 $ 2,421 $ 12,485 $ 9,756
Basic earnings (loss) per share............... $ (0.06) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 1.04
Diluted earnings (loss) per share............. $ (0.06) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.00
WEIGHTED AVERAGE COMMON SHARES:
Basic outstanding shares...................... 8,132 8,132 8,558 8,987 9,337 9,337
Diluted outstanding shares.................... 8,132 8,132 8,943 9,511 9,726 9,726
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................................... $ 15,682 $
Total assets......................................................................... 24,373
Long-term liabilities................................................................ 67
Total stockholders' equity........................................................... $ 17,651 $
</TABLE>
- ------------------------
(1) The unaudited pro forma statement of operations data was prepared as if the
Nautilus acquisition occurred on January 1, 1998. The data reflects certain
adjustments for the effects of purchase accounting, certain assumptions
regarding financing and cash management and an adjustment for income taxes.
The data is not necessarily indicative of what our actual results would have
been if the Nautilus acquisition had occurred on January 1, 1998, nor does
it purport to indicate the future results of our operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Unaudited Pro Forma Combined Results of Operations."
(2) The unaudited pro forma as adjusted balance sheet data assumes that we
consummated the Nautilus acquisition on December 31, 1998. We also adjusted
the data to give effect to this offering and the application of the net
proceeds as described under "Use of Proceeds."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Our business, financial condition and results of
operations could be materially adversely affected by any of the following risks.
The trading price of our common stock could decline due to any of the following
risks, and you might lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Various factors, including the risks described below and
elsewhere in this prospectus, could cause our actual results to differ
materially from those anticipated in these forward-looking statements.
WE RELY ON SALES OF A FEW KEY PRODUCTS.
Our financial success has resulted almost entirely from marketing our
Bowflex line of home fitness equipment, which has generated substantially all of
our historical net sales. We began diversifying our product line in August 1998
when we started test marketing a line of airbeds. We also recently expanded our
presence in the home and commercial fitness equipment markets by acquiring the
Nautilus product line. Despite these efforts, our financial performance remains
dependent on a few products. Any significant diminished consumer interest in our
Bowflex products would adversely affect our business. We could also experience
adverse financial consequences if we fail to sustain market interest in our
Nautilus commercial fitness equipment. We may not be able to develop successful
new products or implement successful enhancements to existing products. Any
products that we do develop or enhance may not generate sufficient sales to
justify the cost of developing and marketing these products.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR EXISTING OPERATIONS AND ANTICIPATED
GROWTH.
We have grown significantly since 1996 when we began the first widespread
direct marketing campaign for our Bowflex home fitness equipment. Specifically,
our net sales increased from $8.5 million in 1996 to $19.9 million in 1997 and
$57.3 million in 1998. We intend to continue to pursue an aggressive growth
strategy. We have also added substantial operations through our Nautilus
acquisition. Our recent growth and our Nautilus acquisition have strained our
management team, production facilities, information systems and other resources.
To manage our growth effectively, we believe that we must:
- Maintain a high level of manufacturing quality and efficiency;
- Continue to enhance our operational, financial and management systems
and controls;
- Effectively expand, train and manage our employee base;
- Effectively integrate the additional distribution center for our
Bowflex products at our Nautilus facilities in Independence, Virginia;
and
- Maintain an effective and efficient customer call center and inventory
control and distribution system.
Our failure to properly manage any of these or other growth-related
challenges could adversely affect our business. We cannot assure you that we
will succeed in effectively managing our existing operations or our anticipated
growth.
WE DEPEND ON FAVORABLE ECONOMIC CONDITIONS THAT STIMULATE CONSUMER SPENDING.
The success of each of our products depends substantially on how consumers
decide to spend their money. Certain changes in the economy, such as increased
unemployment, higher interest rates, decreased credit availability or higher
inflation, may depress consumer spending. High-end products like ours may be
particularly vulnerable to these changes.
6
<PAGE>
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE THE NAUTILUS BUSINESS INTO OUR
OPERATIONS.
In January 1999, we acquired substantially all of the assets of Nautilus
International, including the Nautilus brand name, its product line, and all
existing equipment, inventory and facilities. The acquisition presents
significant challenges for our management team. To be successful, we must
effectively and efficiently integrate the Nautilus business into our
organization, including the Nautilus product line, marketing and distribution
system, production facilities, product development teams, and administrative and
finance personnel and policies. We must also implement appropriate operational,
financial and management systems and controls. We may encounter significant
difficulties in this process, any one or more of which could adversely affect
our business.
Additional risks relating to the acquisition include the following:
- Prior to the acquisition, Nautilus International had incurred several
years of declining sales and accelerating losses. For the fiscal year
ended June 27, 1998, Nautilus International had a net loss of
approximately $14.8 million, of which $8.8 million constituted a
one-time impairment charge, on net sales of $20.9 million. Unless and
until we reverse these losses, our financial performance will be
materially harmed;
- The key customer base for our current Nautilus product line includes
commercial purchasers such as health clubs, corporate fitness centers,
hotels and rehabilitation clinics. We have little experience marketing
fitness equipment to commercial purchasers and may be unable to
profitably exploit this opportunity; and
- Our manufacturing experience is generally limited to the assembly of
our Bowflex and airbed products. We intend to continue Nautilus
manufacturing operations, which are much more extensive than our own.
We may be unable to operate Nautilus manufacturing operations in a
cost-effective or timely manner.
Because of these and other risks, the Nautilus acquisition could fail to
produce the revenue, earnings and business synergies that we anticipate, in
which case our business would be adversely affected.
WE DEPEND ON CERTAIN KEY EMPLOYEES.
Our success depends on our key technical, marketing, sales and managerial
personnel. The loss of any of our executive officers or other key personnel
could adversely affect our business. All of our executive officers are under
employment contracts, but none for longer than one year. We currently maintain a
key man life insurance policy in the amount of $500,000 on Brian R. Cook, our
President and Chief Executive Officer.
WE FACE REGULATORY RISKS.
We are regulated by various federal, state and local authorities, including
the Federal Trade Commission, the Consumer Products Safety Commission, the
Occupational Safety and Health Administration and the Environmental Protection
Agency. We believe we are in material compliance with all applicable rules and
regulations. If we are incorrect, or if we violate such regulations in the
future, we may be subject to regulatory enforcement efforts. Any regulatory
enforcement efforts, particularly any actions that could interrupt our direct
marketing efforts or result in a product recall, would adversely affect our
business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price for our
common stock. See "Shares Eligible for Future Sale."
7
<PAGE>
A UNITED STATES MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP.
Prior to this offering, the sole public market for our common stock has been
the Toronto Stock Exchange. In connection with this offering, we have applied to
have our common stock listed for trading on Nasdaq under the symbol DFXI.
However, an active United States trading market may not develop.
WE FACE YEAR 2000 RISKS.
We may not accurately identify all potential Year 2000 problems within our
business, and the corrective measures that we implement may be ineffective or
incomplete. Any such problems may adversely affect our business. We also
contract with many third parties that could be affected by the Year 2000
problem, such as telephone companies, carriers, manufacturers, suppliers and our
consumer credit facilitator. If any of these or other third parties on which we
rely experience Year 2000 problems, our business would be adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Compliance."
WE HAVE A LIMITED OPERATING HISTORY.
We altered our business plan in 1993 when we began our current direct
marketing activities. Accordingly, we have only a limited operating history on
which you can base your evaluation of our business and prospects. Despite our
recent growth in sales and net income, we cannot assure you that these trends
will continue or that we will remain profitable.
WE FACE RISKS RELATING TO PENDING LITIGATION WITH SOLOFLEX, INC.
Soloflex, Inc., a company that manufactures and directly markets home
fitness equipment, has filed an action against Direct Focus and Randal R.
Potter, our Vice President of Marketing. Soloflex is claiming that we are
improperly using certain slogans and images to market our Bowflex products and
that we have misappropriated some of its marketing trade secrets. We intend to
vigorously defend against these claims, which we believe lack merit. However, we
cannot assure you that we will prevail in this dispute. If Soloflex successfully
prosecutes any of its claims, the resulting monetary damages and/or injunctive
relief could significantly harm our business. See "Legal Proceedings."
WE FACE RISKS RELATING TO OUR RETURN POLICIES.
We offer a six-week satisfaction guarantee on all sales of Bowflex home
fitness equipment and a similar guarantee on our airbeds. During the guarantee
period, any dissatisfied customer may return these products and obtain a full
refund of the purchase price. We have limited operating experience with our
airbeds, which we began test marketing in August 1998. Any material increase in
product returns could adversely affect our business.
WE FACE RISKS RELATING TO OUR PRODUCT WARRANTIES.
We offer the following warranties on our principal products:
- A two- to five-year limited warranty on our Bowflex home fitness
equipment, depending on the model;
- A 20-year limited warranty on our airbeds; and
- A lifetime warranty on all Nautilus structural frames, welded moving
parts and weight stacks; a 120-day warranty on all Nautilus upholstery,
pads, grips and tethered-weight pin connectors; and a one-year warranty
on all other Nautilus parts.
We have conducted extensive testing on our Bowflex products and airbeds,
which we believe enables us to estimate warranty claims over their warranty
periods. However, if our warranty reserves are inadequate to cover future
warranty claims, our business would be adversely affected.
8
<PAGE>
WE RELY ON UNINTERRUPTED AND RELIABLE CARRIER SERVICE.
We ship most of our products directly to our customers and have used UPS
almost exclusively to perform this service. Accordingly, we were particularly
vulnerable to the UPS labor dispute that lasted much of the third quarter of
1997. During this period, UPS was unable to deliver our products on time, which
caused delivery delays and required us to find and use acceptable alternative
carriers. As a result, we incurred substantially greater freight charges. We
continue to rely on UPS to deliver our Bowflex products. Any similar labor
difficulties at UPS in the future would adversely affect our business.
OUR MARKET IS INTENSELY COMPETITIVE.
Each market in which we participate is intensely competitive. We believe
that more than 75 companies manufacture and market commercial and home fitness
equipment, and more than 700 companies manufacture and market mattresses, of
which four large manufacturers dominate this market. Important competitive
factors in each of these markets include price, product quality and performance,
diversity of features, warranties and customer service. We believe that our
products are competitive in each of these categories. However, many of our
competitors possess greater financial resources, wider brand name recognition,
broader distribution networks and other resources and characteristics that may
give them a competitive advantage. See "Business - Competition."
WE FACE PRODUCT LIABILITY RISKS.
We are subject to potential product liability claims if our products injure
or allegedly injure our customers or other users. We believe that our insurance
coverage and reserves adequately cover potential product liability claims.
However, we may have inaccurately assessed our product liability risk. In
addition, we may be unable to purchase sufficient insurance coverage at an
affordable price, or our insurers may fail to satisfy their obligations. If our
insurance coverage and reserves are inadequate to cover future product liability
claims, our business may be adversely affected.
WE FACE RISKS ASSOCIATED WITH ANY FUTURE ACQUISITIONS.
We intend to explore growth opportunities through strategic acquisitions
that would enhance our direct marketing capabilities or product lines. We
currently have no agreements, understandings or other arrangements with respect
to any acquisition. If we identify and pursue an acquisition opportunity, our
management may be required to devote a significant amount of time and effort to
the process, which could unduly distract them from our existing operations. If
we complete an acquisition, we expect to face significant challenges integrating
the acquired business into our operations. An acquisition may not produce the
revenue, earnings or business synergies that we anticipate, and an acquired
product or technology may not perform as we expect. Any such difficulties would
adversely affect our business. In addition, the size, timing and integration of
any acquisitions could cause substantial fluctuations in our operating results.
To pay for an acquisition, we may use common stock or cash, including the
proceeds of the offering. See "Use of Proceeds." Alternatively, we may borrow
money from banks or other lenders. If we use common stock, the ownership
interest of our shareholders would be diluted. If we use cash or debt, our
financial liquidity will be reduced.
WE FACE RISKS RELATING TO OUR INTERNATIONAL OPERATIONS.
We currently acquire many of our product components from foreign
manufacturers, which subjects us to the general risks of doing business abroad.
These risks include shipment delays or cancellations, work stoppages, increases
in import duties and tariffs, foreign exchange rate fluctuations, changes in
foreign laws and regulations and political instability. We face similar risks in
distributing our Nautilus commercial products internationally. The loss of
certain foreign suppliers, customers or distributors
9
<PAGE>
could adversely affect our business until we can make alternative arrangements.
We currently pay for all of our foreign purchases in United States dollars.
WE DEPEND ON DIRECT MARKETING AND OUR CUSTOMER SERVICE CALL CENTER TO SELL OUR
PRODUCTS.
We depend primarily on 60-second or "spot" television commercials and
television infomercials to market our products. See "Business - Direct
Marketing." Consequently, the price we must pay for our preferred media time
significantly affects our financial performance. If the cost of our preferred
media time increases, it may adversely affect our business. Our dependence on
spot commercials and infomercials also means that our future financial
performance depends substantially on consumers' continued acceptance of and
willingness to purchase products in response to these forms of advertising. We
cannot assure you that this form of advertising will continue to appeal to
consumers.
We receive and process almost all orders for our directly marketed products
through our customer service call center. See "Business - Direct Marketing." Our
call center could stop operating for a number of reasons, including poor
weather, natural disaster, fire or Year 2000 problems. If our backup facilities
and contingency plans are ineffective to handle such problems, we could not sell
our directly marketed products during the affected period. Our business could be
substantially harmed if our call center stops operating for a significant time
period.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We currently hold a number of United States, Canadian and international
patents for certain features of our Bowflex and Nautilus fitness products. We
also have several patent applications pending for certain features of our
Nautilus products and a patent application pending for a certain feature of our
airbed products. We believe that our patents and patent applications are
important factors in maintaining our competitive position in the fitness and
mattress industries. We also rely on a combination of copyright, trademark,
trade secret, unfair competition and other intellectual property laws,
nondisclosure agreements and other protective measures to protect our rights.
Our efforts to protect our intellectual property may be inadequate. Existing
trade secret, copyright and trademark laws offer only limited protection, and
the laws of other countries in which we market or may market our products may
afford little or no effective protection to our intellectual property. In
addition, other companies could independently develop similar or superior
technology without violating our intellectual property rights. Any
misappropriation of our technology or development of competitive technology may
adversely affect our business. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive.
Other third parties may claim that our products or technology infringe their
patents or other intellectual property rights. We could incur substantial costs
defending against such a claim, even if it is invalid, and could distract our
management from our business. A party making such a claim could possibly secure
a judgment requiring us to pay substantial damages. A judgment could also
include a court order that prevents us from selling our products. Any of these
events could adversely affect our business. See "Business - Intellectual
Property."
THE PRICE OF OUR COMMON STOCK MAY DECLINE FOR REASONS UNRELATED TO OUR FINANCIAL
PERFORMANCE.
Like all exchanges, Nasdaq and the Toronto Stock Exchange experience
significant changes in price and volume from time to time for reasons unrelated
to the financial performance of particular companies. These broad market
fluctuations may adversely affect the market price of our common stock. In
addition, the market price of our common stock is likely to be affected by
analysts' recommendations and predictions with respect to our business.
10
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $ in net proceeds from the sale of
the 825,000 shares of common stock in this offering. If the underwriters fully
exercise their over-allotment option, we expect to receive an additional $
in net proceeds. In calculating estimated net proceeds, we assume an offering
price of $ per share and take into account the underwriting discount and
estimated offering expenses. We will not receive any proceeds from the sale of
shares by the selling shareholders.
We intend to use the net proceeds of this offering primarily for additional
working capital, capital equipment purchases and other general corporate
purposes, including increased direct marketing expenditures for our existing
products, increased development expenditures for new consumer products, and
capital expenditures made in the ordinary course of our business. Specifically,
we anticipate higher working capital needs as we grow the Nautilus consumer
product business. We also expect to direct additional funds toward the
development of new consumer products under the Nautilus brand name. As we
continue to grow sales of our Bowflex and airbed products, we anticipate adding
a second product assembly and distribution center in the Western United States.
In addition, we may use a portion of the net proceeds for strategic acquisitions
that would enhance our direct marketing capabilities or our product lines.
Although we evaluate potential acquisitions from time to time, we are not
currently negotiating any acquisitions, nor do we have any specific oral or
written plans, agreements or commitments to enter into or consummate any such
transactions.
The amounts that we actually expend for working capital purposes will vary
significantly depending upon a number of factors, including future revenue
growth, if any, the amount of cash we generate from operations and the progress
of our product development efforts. As a result, we will retain broad discretion
in allocating the net proceeds of this offering. Pending the uses described
above, we will invest the net proceeds in short-term, interest-bearing,
investment grade securities.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
Our common stock has been listed on the Toronto Stock Exchange in the
Province of Ontario, Canada, since January 26, 1993, and currently trades under
the symbol DFX. Currently, there is no established trading market for our common
stock in the United States. However, we have applied to have our common stock
listed on Nasdaq under the symbol DFXI.
The following table summarizes the high and low sales prices for our common
stock as reported on the Toronto Stock Exchange during the preceding two years.
The prices listed below are in Canadian dollars, the currency in which they were
quoted, and in United States dollars, which we calculated based on the currency
exchange rate in effect on the date of each high and low quarterly price.
<TABLE>
<CAPTION>
UNITED STATES
CANADIAN DOLLARS DOLLARS
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997
1(st) Quarter......................................... $ 1.60 $ 1.01 $ 1.16 $ 0.75
2(nd) Quarter......................................... 1.41 1.10 0.99 0.80
3(rd) Quarter......................................... 3.00 1.06 2.17 0.77
4(th) Quarter......................................... $ 4.00 $ 2.39 $ 2.80 $ 1.70
1998
1(st) Quarter......................................... $ 10.05 $ 3.50 $ 7.07 $ 2.45
2(nd) Quarter......................................... 15.00 10.00 10.48 7.05
3(rd) Quarter......................................... 18.00 11.80 12.09 7.67
4(th) Quarter......................................... $ 23.00 $ 10.50 $ 14.95 $ 6.80
</TABLE>
11
<PAGE>
As of February 26, 1999, 9,532,939 shares of our common stock were issued
and outstanding and held of record by 81 shareholders. See "Shares Eligible for
Future Sale."
Payment of any future dividends is at the discretion of our board of
directors, which considers various factors, such as our financial condition,
operating results, current and anticipated cash needs and expansion plans. Our
credit lines do not restrict the payment of dividends. To date, we have never
declared or paid any cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. Instead, we intend to
retain and direct any future earnings to fund our anticipated expansion and
growth.
CAPITALIZATION
The following table describes our capitalization as of December 31, 1998 (1)
on an actual basis, and (2) on an as adjusted basis to reflect our sale of
825,000 shares of common stock under this prospectus at an assumed public
offering price of $ per share (taking into account estimated underwriting
discounts and offering expenses). You should read this information in
conjunction with our financial statements and notes thereto, which appear
elsewhere in this prospectus:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Common Stock, no par value; 50,000,000 shares authorized; 9,448,523 shares issued and
outstanding, actual; 10,273,523 shares issued and outstanding, as adjusted(1)........... $ 3,566 $
Retained earnings......................................................................... 14,085
--------- -----------
Total stockholders' equity.............................................................. 17,651
Total capitalization.................................................................... $ 17,651 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes: (a) 84,416 shares of common stock issued after December 31, 1998,
upon the exercise of options; (b) 550,618 shares of common stock issuable
upon the exercise of outstanding options (of which, options covering 309,199
shares are presently exercisable) under our Stock Option Plan at a weighted
average exercise price of $2.39 per share; and (c) 696,961 shares available
for future issuance under the Stock Option Plan. See "Management - Benefit
Plans."
SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the three years ended December 31, 1998, have been derived from our audited
financial statements included elsewhere in this prospectus. The selected
financial data for, and as of the end of, each of the years ended December 31,
1994, and December 31, 1995, have been derived from our audited financial
statements that are not included herein.
The unaudited pro forma combined statement of operations data for the fiscal
year ended December 31, 1998, contain certain adjustments and were prepared as
if the Nautilus acquisition had occurred on January 1, 1998. In our management's
opinion, all adjustments necessary to present fairly such pro forma financial
statements have been made. The unaudited pro forma combined balance sheet was
prepared as if the Nautilus acquisition had occurred on December 31, 1998. These
unaudited pro forma financial statements are not necessarily indicative of what
actual results would have been if the acquisition had occurred at the beginning
of the period, nor do they purport to indicate the results of our future
operations.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and unaudited
12
<PAGE>
pro forma balance sheet and statement of operations and related notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------------------------- -----------
1994 1995 1996 1997 1998 1998(1)
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales...................................... $ 4,415 $ 4,772 $ 8,517 $ 19,886 $ 57,297 $ 76,601
Cost of sales.................................. 1,574 1,616 2,603 5,114 12,442 26,390
--------- --------- --------- --------- --------- -----------
Gross profit................................... 2,841 3,156 5,914 14,772 44,855 50,211
Operating expenses
Selling and marketing........................ 2,834 2,644 4,712 9,600 22,643 28,450
General and administrative................... 393 370 473 975 1,701 4,535
Royalties.................................... 145 201 269 581 1,623 1,623
--------- --------- --------- --------- --------- -----------
Total operating expenses................... 3,372 3,215 5,454 11,156 25,967 34,608
--------- --------- --------- --------- --------- -----------
Operating income (loss)........................ (531) (59) 460 3,616 18,888 15,603
Other income (expense)
Interest income.............................. 16 26 37 119 527 --
Interest expense............................. (4) (3) (2) (1) (1) (388)
State business tax and other-net............. (22) (17) (51) (87) (221) (222)
--------- --------- --------- --------- --------- -----------
Total other income (expense)............... (10) 6 (16) 31 305 (610)
--------- --------- --------- --------- --------- -----------
Income (loss) before income taxes.............. (541) (53) 444 3,647 19,193 14,993
Income tax expense (benefit)................... (31) (68) (249) 1,226 6,708 5,237
--------- --------- --------- --------- --------- -----------
Net income (loss).............................. $ (510) $ 15 $ 693 $ 2,421 $ 12,485 $ 9,756
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Basic earnings (loss) per share(2)............. $ (0.06) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 1.04
Diluted earnings (loss) per share(2)........... $ (0.06) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.00
Basic shares outstanding....................... 8,132 8,132 8,558 8,987 9,337 9,337
Diluted shares outstanding..................... 8,132 8,132 8,943 9,511 9,726 9,726
BALANCE SHEET DATA(3)
Cash and cash equivalents...................... $ 603 $ 756 $ 1,154 $ 4,790 $ 18,911 $ 2,911
Working capital................................ 1,015 1,063 1,973 4,100 15,682 2,926
Total assets................................... 1,940 2,150 3,515 7,922 24,373 27,397
Current liabilities............................ 654 858 1,281 3,330 6,655 9,580
Long term liabilities.......................... 27 18 14 -- 67 166
Total stockholders' equity..................... $ 1,259 $ 1,274 $ 2,220 $ 4,592 $ 17,651 $ 17,651
</TABLE>
- ------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Unaudited Pro Forma Combined Results of Operations" for a
discussion of the adjustments included in the pro forma statement of
operations data.
(2) Basic earnings per share have been computed by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share have been computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents (such as stock options) outstanding during each period.
(3) See "Pro Forma Combined Balance Sheet, December 31, 1998," included
elsewhere in this prospectus for a discussion of the adjustments included in
the pro forma balance sheet data.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with the financial statements and related
notes included elsewhere in this prospectus. This section of the prospectus
includes a number of forward-looking statements that reflect our current views
with respect to future events and financial performance. We use words such as
"anticipate," "believe," "expect," "future," "intend" and similar expressions to
identify forward-looking statements. You should not unduly rely on these
forward-looking statements, which apply only as of the date of this prospectus.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical or
anticipated results. For a discussion of some of these risks, see "Risk Factors"
beginning on page 6.
OVERVIEW
HISTORY OF OPERATIONS
We are a rapidly growing, direct marketing company that develops and markets
high-end branded consumer products. We market our consumer products directly to
consumers through a variety of direct marketing channels, including spot
television commercials, infomercials, print media, response mailings and the
internet. We have generated substantial increases in net sales each year since
1996. Net sales increased from $8.5 million in 1996 to $19.9 million in 1997 and
$57.3 million in 1998. A substantial portion of our net sales growth is
attributable to our Bowflex Power Pro home fitness product. We believe this
growth resulted from our expanded direct marketing campaign for our Bowflex
product line and our ability to quickly provide "zero down" financing for our
customers through third-party financing sources. Sales of our Bowflex Power Pro
represented 90.2%, 91.3% and 93.3%, respectively, of our total net sales during
1996, 1997 and 1998. We expect that sales of our Bowflex Power Pro will continue
to account for a substantial portion of our net sales for the foreseeable
future.
We expanded our product base in 1998 by introducing a line of airbeds under
the trade name "Instant Comfort." We are currently developing and testing a
direct marketing campaign for this new product. We intend to expand this direct
marketing campaign in 1999 and anticipate that this expansion will cause our
line of airbeds to generate a material portion of our net sales in 1999.
However, we expect that the gross margin for our airbed products will, at least
initially, be lower than the current gross margin for our Bowflex products.
ACQUISITION OF NAUTILUS BUSINESS
In January 1999, we acquired substantially all of the assets of Nautilus
International, a manufacturer and distributor of commercial fitness equipment
and distributor of fitness accessories. We paid $16.0 million in cash and
assumed approximately $2.5 million in liabilities as consideration for these
assets, which include the following:
- All intellectual property rights to the Nautilus name and its products;
- Warehouse, manufacturing and office facilities in Independence,
Virginia;
- The Nautilus line of commercial fitness equipment;
- The Nautilus line of consumer fitness equipment and fitness
accessories;
- The Nautilus distribution system; and
- All working capital, except cash and finance receivables.
14
<PAGE>
In recent years, Nautilus International suffered from declining revenues and
significant losses. During the fiscal year ended June 27, 1998 Nautilus
International had a net loss of $14.8 million, of which $8.8 million was
attributable to a one-time impairment charge, on net sales of $20.9 million,
compared to a net loss of $6.8 million on net sales of $21.9 million during the
fiscal year ended June 27, 1997. We have identified and begun to implement a
number of initiatives that we believe will effectively integrate Nautilus into
our operations and revitalize its commercial business. These initiatives include
the following:
- We have hired an experienced management team to oversee and revitalize
the sales and marketing operations of our Nautilus commercial business;
- We are currently evaluating and intend to offer creative financing
programs, such as pre-approved leasing;
- We intend to develop and introduce additional Nautilus commercial
products to serve new market segments and expand our customer base;
- We have restructured the management of our Nautilus commercial
manufacturing operations and begun to make other necessary
manufacturing improvements;
- We have implemented and intend to continue to implement general
cost-cutting measures;
- We are using the excess capacity of our Nautilus warehouse facilities
as an East Coast distribution center for our Bowflex products; and
- We are working to improve the data gathering and analytical
capabilities of our Nautilus commercial operations by linking them with
our sophisticated management information systems.
We expect that the integration of the Nautilus commercial product line into
our operations will significantly increase our overall net sales. We also expect
that our overall gross margin as a percentage of net sales will decrease,
principally because we are integrating two different business models: (1) a
direct marketing business that historically has generated a high percentage
gross margin; and (2) a manufacturing and marketing business that operates in an
industry that traditionally generates a lower percentage gross margin.
COMPOSITION OF COST OF SALES AND EXPENSES
Cost of sales primarily consists of: (1) inventory component costs; (2)
manufacturing and distribution salaries and bonuses; (3) distribution expense
and shipping costs; and (4) facility costs.
Selling and marketing expenses primarily consist of: (1) television
advertising expenses; (2) the cost of printed and video marketing materials; (3)
television commercial production and marketing material expenses; (4)
commissions, salaries and bonuses earned by sales and marketing personnel; and
(5) facility and communication costs.
General and administrative expenses primarily consist of salaries, benefits
and related costs for our executive, financial, administrative and information
services personnel and professional services fees.
Royalty expense primarily consists of payments to the inventor of our
Bowflex technology.
Other income (expense) historically has consisted of interest income on our
cash investments and state business tax expenses.
15
<PAGE>
OUR RESULTS OF OPERATIONS
We believe that period-to-period comparisons of our operating results are
not necessarily indicators of future performance. You should consider our
prospects in light of the risks, expenses and difficulties frequently
encountered by companies experiencing rapid growth and, in particular, rapidly
growing companies that operate in evolving markets. We may not be able to
successfully address these risks and difficulties. Although we have experienced
net sales growth in recent years, our net sales growth may not continue, and we
cannot assure you of any future growth or profitability. Our future operating
results will depend on many factors including those factors discussed in "Risk
Factors" beginning on page 6.
The following table presents certain financial data as a percentage of total
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................................................................................ 100.0% 100.0% 100.0%
Cost of sales............................................................................ 30.6 25.7 21.7
--------- --------- ---------
Gross profit............................................................................. 69.4 74.3 78.3
Operating expenses
Selling and marketing.................................................................. 55.3 48.3 39.5
General and administrative............................................................. 5.5 4.9 3.0
Royalties.............................................................................. 3.2 2.9 2.8
--------- --------- ---------
Total operating expenses................................................................. 64.0 56.1 45.3
Operating income......................................................................... 5.4 18.2 33.0
Other income (expense)................................................................... (0.2) 0.2 0.5
--------- --------- ---------
Income before income taxes............................................................... 5.2 18.4 33.5
Income tax expense (benefit)............................................................. (2.9) 6.2 11.7
--------- --------- ---------
Net income............................................................................... 8.1% 12.2% 21.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
COMPARISON OF THE YEARS ENDING DECEMBER 31, 1998, AND DECEMBER 31, 1997
NET SALES
Our net sales grew by 187.9% to $57.3 million in 1998, from $19.9 million in
1997. Sales of our Bowflex Power Pro grew by 199.0% and accounted for 93.3% of
our aggregate net sales in 1998. Sales of our Bowflex Motivator increased by
73.0% and sales of our Bowflex accessories increased by 148.0% in 1998, and
accounted for 1.8% and 4.5% of our aggregate net sales, respectively. We
introduced and began test marketing our airbeds in August 1998, but this product
did not materially contribute to our net sales in 1998.
Our sales growth in 1998 primarily resulted from expanded direct marketing
of our Bowflex products. In 1998, we increased our advertising expenditures by
196.1%, focusing principally on expanded broadcasts of our Bowflex spot
television commercials and television infomercials. Both of these direct
marketing techniques generated strong sales in 1998. We intend to further expand
our use of spot television commercials and infomercials in 1999 by increasing
our market presence in our existing television markets and entering new
television markets.
GROSS PROFIT
Our gross profit grew 203.4% to $44.9 million in 1998, from $14.8 million in
1997. Our gross profit as a percentage of net sales increased by 4.0% to 78.3%
in fiscal 1998, from 74.3% in 1997. We
16
<PAGE>
believe that our improved percentage gross profit in 1998 resulted primarily
from a March 1998 increase in the shipping charge for our Bowflex products, as
well as reduced component costs for our Bowflex products and improved labor and
overhead efficiencies. We benefited from reduced component costs principally
through volume discounts. Our improved labor and overhead efficiencies resulted
primarily from improved manufacturing methods and the implementation of a second
work shift.
We anticipate an increase in the percentage gross profit on our Bowflex
products associated with the opening of our East Coast distribution center in
March 1999. However, we expect our aggregate gross profit as a percentage of net
sales to materially decline in 1999, principally due to the significantly lower
gross profit margin on our Nautilus line of commercial fitness equipment.
Initially, we also expect a lower percentage gross profit on our line of airbeds
as we continue to develop our direct marketing campaign for this product and
increase our marketing efforts.
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses grew to $22.6 million in 1998 from $9.6
million in 1997, an increase of 135.4%. This increase in sales and marketing
expenses resulted primarily from the expansion of our Bowflex direct marketing
campaign and variable costs associated with our sales growth.
As a percentage of net sales, selling and marketing expenses decreased to
39.5% in 1998 from 48.3% in 1997. This decrease in selling and marketing
expenses as a percentage of net sales reflects the improved efficiency of our
Bowflex direct marketing campaign. As we refined our spot commercial and
infomercial advertising policies and our customer response techniques, we were
able to stimulate sales growth at a more rapid rate than the growth in our sales
and marketing expenses. We expect that our selling and marketing expenses will
continue to increase as we:
- Continue to expand our Bowflex direct marketing campaign;
- Expand the direct marketing campaign for our airbeds;
- Integrate the marketing and distribution infrastructure for our
Nautilus line of commercial fitness equipment; and
- Begin marketing new home fitness equipment products and fitness
accessories under the Nautilus brand name.
GENERAL AND ADMINISTRATIVE
General and administrative expenses grew to $1.7 million in 1998 from
$975,000 in 1997, an increase of 74.3%. This increase in general and
administrative expenses was due primarily to increased staffing and
infrastructure expenses necessary to support our continued growth. As a
percentage of net sales, general and administrative expenses decreased to 3.0%
in 1998 from 4.9% in 1997. The decline in general and administrative expenses as
a percentage of our net sales resulted primarily from our substantial increase
in net sales. We believe that our general and administrative expenses will
continue to increase in future periods as we integrate the Nautilus business
into our operations and expand our administrative staff and other resources to
manage growth.
ROYALTY
Royalty expense grew to $1.6 million in 1998 from $581,000 in 1997, an
increase of 175.4%. The increase in our royalty expenses is attributable to the
increased sales of our Bowflex products in 1998. Our royalty expenses will
increase if sales of our Bowflex products continue to increase.
17
<PAGE>
OTHER INCOME (EXPENSE)
In 1998, other income (expense) increased to $305,000 from $31,000 in 1997.
The $274,000 increase resulted primarily from interest income generated by our
cash investments, which was partially offset by a $135,000 increase in our state
business tax expense.
INCOME TAX EXPENSE
Income tax expense increased by $5.5 million in 1998 because of the growth
in our income before taxes. We expect our income tax expense to increase in line
with increases in our income before taxes.
NET INCOME
For the reasons discussed above, net income grew to $12.5 million in 1998
from $2.4 million in 1997, an increase of 420.8%.
COMPARISON OF YEARS ENDING DECEMBER 31, 1997, AND DECEMBER 31, 1996
NET SALES
Net sales grew to $19.9 million in 1997 from $8.5 million in 1996, an
increase of 134.1%. Net sales of our Bowflex Power Pro grew by 137.7% and
accounted for 91.3% of our aggregate net sales in 1997. Sales of our Bowflex
Motivator increased by 766.7% and sales of our Bowflex accessories increased by
60.4% in 1997, and accounted for 3.0% and 5.4% of our aggregate net sales,
respectively. This increase in net sales resulted from increased advertising and
marketing expenditures, increased average sales price and improved marketing
efficiencies.
GROSS PROFIT
Gross profit grew 150.8% to $14.8 million in 1997 from $5.9 million in 1996.
As a percentage of net sales, gross profit grew to 74.3% in 1997 from 69.4% in
1996. The principal reason for this increase was our substantial growth in net
sales, combined with increased production efficiencies and reduced costs
associated with overseas component purchases.
OPERATING EXPENSES
SELLING AND MARKETING
Selling and marketing expenses increased to $9.6 million in 1997 from $4.7
million in 1996, but declined as a percentage of net sales to 48.3% in 1997 from
55.3% in 1996. The growth in selling and marketing expenses resulted primarily
from our expanded direct marketing campaign and increased staffing and
infrastructure expenditures necessary to support our growth. Our selling and
marketing expenses declined as a percentage of net sales principally because our
net sales growth outpaced the growth in our selling and marketing expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $975,000 in 1997 from
$473,000 in 1996, but declined as a percentage of net sales to 4.9% in 1997 from
5.5% in 1996. The increase in general and administrative expenses is primarily
attributable to increased staffing and infrastructure expenses necessary to
support our growth. The decline in general and administrative expense as a
percentage of net sales resulted from our significant net sales growth in 1997.
18
<PAGE>
ROYALTY
Royalty expense increased to $581,000 in 1997 from $269,000 in 1996 but
remained relatively constant as a percentage of net sales. Royalty expense
increased because we sold more Bowflex products in 1997 than in 1996.
OTHER INCOME (EXPENSE)
Other income (expense) was $31,000 in 1997, compared to an expense of
($16,000) in 1996. The $47,000 increase was primarily derived from interest
income and was partially offset by a $36,000 increase in state business tax
expense in 1997.
INCOME TAX EXPENSE
We incurred an income tax expense of $1.2 million in 1997, which was $1.5
million higher than in 1996. The principal reason for this increase was our
higher profitability and the accounting treatment of deferred taxes associated
with tax loss carrybacks.
NET INCOME
For the reasons described above, net income grew to $2.4 million in 1997
from $693,000 in 1996, a 246.0% increase.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
As a result of the Nautilus acquisition, several adjustments and factors
will impact the comparability of our historical financial results with our
future results of operations. We paid $16.0 million in cash for the Nautilus
assets and assumed approximately $2.5 million in liabilities. The unaudited pro
forma combined statements of operations reflect: (1) certain adjustments for the
effects of purchase accounting; (2) certain assumptions described below
regarding financing and cash management; and (3) a provision for income taxes as
if the combined operations had been taxed as a C-corporation for all periods
presented.
In addition, the unaudited pro forma combined statement of operations for
the year ended December 31, 1998 was prepared as if the Nautilus acquisition
occurred on January 1, 1998. The unaudited pro forma financial statements and
the information set forth below should be read in conjunction with our financial
statements and accompanying notes and the financial statements of Nautilus
International and related notes appearing elsewhere in this prospectus. The
following summarizes certain adjustments that are reflected in the unaudited pro
forma combined statement of operations data set forth below and included
elsewhere in this prospectus:
- A $1.1 million decrease in depreciation expense associated with the
depreciation of acquired property having an estimated fair value of
$8.6 million. Depreciation is on a straight-line basis over periods
ranging from 7 to 31.5 years;
- A $211,000 decrease in total operating expenses relating to the reduced
amortization of the estimated intangible asset value of $4.2 million on
a straight-line basis over a period of 20 years and depreciation
expense of $56,000 on acquired assets;
- An $11.1 million adjustment to eliminate the effect of a one-time
impairment charge taken by Nautilus International in connection with
the revaluation of its assets based upon the $18.5 million acquisition
price including assumption of $2.5 million of current liabilities;
- A $2.8 million decrease in interest expense, which we would have
incurred had the acquisition occurred on January 1, 1998;
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- A $608,000 decrease in other income, to reflect interest income
foregone by the use of cash in the acquisition; and
- A $1.5 million decrease in income tax expense, to reflect income tax
expense at our effective tax rates after giving effect to the
adjustments described above.
The following table sets forth the specific components of income and expense
as a percentage of net sales, on a pro forma basis for the period presented. See
the unaudited pro forma combined financial statements and the related notes
thereto included elsewhere in this prospectus.
DIRECT FOCUS, INC. AND AFFILIATE PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
---------------
<S> <C>
Net sales....................................................................... 100.0%
Cost of sales................................................................... 34.5
-----
Gross profit.................................................................. 65.5
Operating Expenses:
Selling and marketing......................................................... 37.1
General and administrative.................................................... 5.9
Royalties..................................................................... 2.1
-----
Total operating expenses.................................................... 45.1
-----
Income from operations.......................................................... 20.4
Other expense................................................................... 0.8
-----
Income before income taxes...................................................... 19.6
Pro forma income taxes.......................................................... 6.8
-----
Pro forma net income............................................................ 12.8%
-----
-----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our growth primarily from cash generated by
our operating activities. During 1998, our operating activities generated over
$15.9 million in net cash, which contributed to an aggregate $14.1 million or
294.8% increase in cash and cash equivalents. This increase was primarily due to
the substantial sales growth associated with our Bowflex products. At December
31, 1998, we had a cash balance of $18.9 million. We used $16.0 million in cash
to fund the Nautilus acquisition in January 1999. We anticipate that our working
capital requirements will increase as a result of increased inventory and
accounts receivable related to our Nautilus operations.
We maintain two $5.0 million lines of credit with Bank of America. Both
lines of credit are secured by our general assets and contain certain financial
covenants. As of the date of this prospectus, we are in compliance with all
material covenants applicable to the lines of credit, and there is no
outstanding balance under either line.
We believe that our existing cash balances, combined with our lines of
credit and the net proceeds of this offering, will be sufficient to meet our
capital requirements for at least the next 12 months. Thereafter, if our capital
requirements increase, we could be required to secure additional sources of
capital. We cannot assure you that we will be able to secure additional capital
or that the terms upon which such capital will be available to us will be
acceptable. If we proceed with any other acquisitions,
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we may be required to use cash to fund the purchase price or fund operations or
expansion of the acquired business.
INFLATION AND PRICE INCREASES
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had or is likely in the
foreseeable future to materially adversely affect our results of operations or
our financial condition. However, increases in inflation over historical levels
or uncertainty in the general economy could decrease discretionary consumer
spending for products like ours. We have not raised the prices on our Bowflex
products since 1994. Consequently, none of our revenue growth is attributable to
price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, which requires
presentation of comprehensive income within an entity's primary financial
statements. Comprehensive income is defined as net income as adjusted for
changes to equity resulting from events other than net income or transactions
related to an entity's capital structure. From 1996 to 1998, our comprehensive
income equaled our net income.
Effective January 1, 1998, we adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes standards
for reporting information regarding an entity's operating activities. SFAS No.
131 requires that operating segments be defined at the same level and in a
similar manner as management evaluates operating performance. We currently
operate under two segments: direct marketing products and Nautilus commercial
products. Through December 31, 1998, we operated as a single segment.
In February 1998, the Financial Accounting Standards Board, (the "FASB")
issued SFAS No. 132, EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS, which revises current disclosure requirements for an
employer's pension and other retiree benefits. The pronouncement does not have a
material impact on our financial statements, because it does not impact the
measurement of pension benefits or other post-retirement benefit costs. Instead,
it impacts only financial statement disclosure.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1 ("SOP 98-1"), ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE, which establishes accounting
requirements for the capitalization of software costs incurred for use by the
organization. We adopted this pronouncement on a prospective basis as of January
1, 1999. We do not anticipate that SOP 98-1 will materially impact our financial
statements.
Effective July 1, 1998, the FASB adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting
requirements for derivative instruments and for activities related to the
holding of such instruments, including hedging activities. SFAS No. 133 expanded
the definition of derivative instruments and revised accounting practices
related to hedging and other activities associated with derivative instruments.
Although we do not currently hold or issue instruments that qualify as
derivative instruments, our future activities could fall within the scope of the
new pronouncement, in which case SFAS No. 133 could materially affect our
business.
YEAR 2000 COMPLIANCE
Many computer software programs, as well as hardware with embedded software,
use a two-digit date field to track and refer to any given year. After, and in
some cases prior to, January 1, 2000, these software and hardware systems will
misinterpret the year "00," which will cause them to perform faulty calculations
or shut down altogether. To the extent that this "Year 2000" problem is present
in
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our internal software and hardware systems, or those of our suppliers or
customers, we could experience material disruptions in such important functions
as:
- Airing our spot commercials and infomercials;
- Receiving and processing customer inquiries and orders;
- Distributing our products; and
- Processing billings and payments.
Such difficulties could result in a number of adverse consequences,
including, but not limited to, delayed or lost revenue, diversion of resources,
damage to our reputation, increased administrative and processing costs and
liability to suppliers and/or customers. Any one or a combination of these
consequences could significantly disrupt our operations and have a material
adverse effect on our business.
Accordingly, we began assessing the scope of our potential Year 2000
exposure both internally and among our suppliers and customers in March 1998,
and started implementing remedial measures soon thereafter. These measures
included testing of all software and hardware systems that we use internally in
our business to determine whether such systems are Year 2000 compliant, and
replacing these systems as required. We are in the process of upgrading our
financial accounting systems and database marketing system with software that we
believe is Year 2000 compliant.
We will continue to test our software and hardware systems and modify and
replace these systems as necessary. We expect to complete our internal
assessment, testing, and remediation program by July 1999. To date, we have
spent approximately $1.3 million to upgrade our computer systems, and we believe
we will need to spend an additional $400,000 to complete our upgrade. Although
we believe that these corrective measures will adequately address our potential
Year 2000 problems, including those affecting our Nautilus operations, we cannot
assure you that we will discover and address every Year 2000 problem or that all
of our corrective measures will be effective. To the extent that Year 2000
problems persist, we could experience the adverse consequences described above,
some or all of which could be material.
We have received assurances from our primary carrier, our primary consumer
finance provider and certain other key suppliers and vendors that their
businesses are Year 2000 compliant. We have requested but have not yet received
such assurances from our other suppliers and vendors, the most important of
which is our local telephone company. We have and will continue to work with all
of our vendors and suppliers to resolve any potential Year 2000 problems.
However, we have no direct control over these third parties and cannot assure
you that such third-party software and hardware systems will be timely
converted. The failure of certain individual vendors or suppliers, or a
combination of vendors or suppliers, to make their systems Year 2000 compliant
could have a material adverse effect on our financial results. We are currently
developing a contingency plan, but cannot finalize the plan until we have
received responses from all of our critical vendors and service providers. We
expect to finalize the plan in July 1999.
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BUSINESS
OVERVIEW
We are a rapidly growing, direct marketing company that develops and markets
high-end, branded consumer products. We market our consumer products directly to
consumers through a variety of direct marketing channels, including spot
television commercials, infomercials, print media, response mailings and the
internet. Our principal and most successful directly marketed product to date
has been our Bowflex line of home fitness equipment, and we recently developed
and began testing a direct marketing campaign for a line of high-end airbeds. In
January 1999, we acquired substantially all of the assets of Nautilus
International, a manufacturer and marketer of Nautilus brand commercial fitness
equipment and consumer fitness accessories.
We believe we have been successful primarily because of the direct marketing
expertise, comprehensive statistical tracking systems and extensive management
information systems we have developed and refined while directly marketing our
Bowflex products. We believe that this expertise and experience enable us to:
- Develop proprietary, high-end branded product lines with broad consumer
appeal that can be sold effectively through direct marketing channels;
- Develop and implement effective advertising and marketing strategies;
- Convert consumer interest and inquiries into sales;
- Effectively manage our product sourcing, manufacturing and distribution
operations; and
- Provide excellent customer service.
We were incorporated in California in 1986 and initially focused on
developing our first line of Bowflex home fitness equipment, the Bowflex 2000X.
We sold the Bowflex 2000X through various channels, including direct marketing
and retail stores. In 1988, we developed a new model, the Schwinn Bowflex, which
we marketed exclusively through Schwinn Bicycle Company until late 1992. When
our exclusive relationship with Schwinn ended, we seized the opportunity to
study and develop our own direct marketing campaign for the next generation
Bowflex product, the Power Pro. Over the next several years, we tested and
refined our direct marketing techniques, developed our customer call center
systems and procedures, and developed our market analysis techniques, media
buying tools and performance tracking measures. Using our market research and
knowledge base, we embarked on our first widespread direct marketing campaign in
1996. Building upon our initial success, in early 1997 we began offering our
current "zero-down" financing program through a third-party finance company, and
in mid-1997 we started airing our first infomercial. Based on positive viewer
response, we accelerated our direct marketing campaign during the remainder of
1997 and throughout 1998. In May 1998, we changed our name to Direct Focus, Inc.
to reflect our transformation from a home fitness equipment company into a
direct marketing company.
In 1997, we also recognized that our direct marketing expertise and
techniques could be used to market other high-end branded products. After a
careful review process that began in late 1997, in August 1998 we began test
marketing a line of high-end airbeds under the brand name "Instant Comfort." We
also recently acquired substantially all of the assets of Nautilus
International, including the Nautilus line of commercial fitness equipment and
the widely recognized Nautilus brand name. Our primary objectives with respect
to Nautilus include revitalizing sales of Nautilus products in the commercial
fitness market and capitalizing on the Nautilus brand name by introducing and
directly marketing a line of Nautilus consumer fitness equipment.
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GROWTH STRATEGY
Our objective is to become a leading direct marketer of high-end consumer
products. Our growth strategy includes the following key elements:
INCREASE SALES OF OUR HIGHLY SUCCESSFUL BOWFLEX PRODUCTS. We intend to
continue to expand the direct marketing campaign for our Bowflex products by
airing our spot commercials and infomercials to broader audiences and by
increasing the frequency of airings on proven cable and network stations.
Consistent with historical practices, we also intend to introduce enhancements
and additions to our Bowflex product line.
EXPAND THE DIRECT MARKETING CAMPAIGN FOR OUR AIRBEDS. We began test
marketing a line of high-end airbeds in August 1998 under the brand name
"Instant Comfort." We are encouraged by our initial test results and intend to
continue testing and refining, and plan to expand, our direct marketing campaign
for this product throughout 1999.
DEVELOP AND DIRECTLY MARKET ADDITIONAL HIGH-END CONSUMER PRODUCTS. We will
continue to evaluate internally and externally generated ideas for high-end
consumer products that have direct marketing potential. Generally, we look for
products that: (1) have patented or patentable features; (2) have a retail price
point between $500 and $2,500; (3) can be marketed as a line that facilitates
upselling; and (4) have the potential for mass consumer appeal, particularly
among members of the "baby boom" generation.
REVITALIZE SALES OF THE NAUTILUS LINE OF COMMERCIAL FITNESS EQUIPMENT. Our
immediate objective for our Nautilus business is to revitalize sales of the
Nautilus line of commercial fitness equipment, which we believe will ultimately
strengthen our ability to market Nautilus branded products. We believe that we
can most effectively achieve this objective by rebuilding our commercial sales
and marketing operations. We have already hired a new management team to oversee
and implement changes in the way we market and sell Nautilus commercial fitness
equipment. Each member of the management team has significant experience in the
industry and a history of sales and marketing success. We intend to focus on
strengthening the domestic market position for our existing Nautilus products.
As we expand our commercial product line, we will attempt to service new market
segments, both domestically and internationally, and thereby broaden our
commercial customer base.
CAPITALIZE ON STRONG CONSUMER RECOGNITION OF THE NAUTILUS BRAND NAME. A
principal motivation in purchasing the Nautilus business was to acquire rights
to the Nautilus brand name, which we believe is one of the most
widely-recognized names in the fitness industry. We also believe that the brand
identity and consumer appeal of the Nautilus name, in combination with our
direct marketing expertise, will enable us to introduce and directly market
innovative consumer fitness equipment and related products under the Nautilus
name. In addition, we intend to introduce and market to specialty fitness and
sporting goods stores more traditional home fitness equipment and accessories
under the Nautilus name, such as treadmills, recumbent bicycles, elliptical
trainers, jump ropes, workout mats and hand grips. In appropriate circumstances,
we may also license the Nautilus name to manufacturers of high-quality consumer
products that do not fit within our current strategic plan, such as clothing and
related accessories.
CAPITALIZE ON INTERNET MARKETING AND E-COMMERCE OPPORTUNITIES. In 1998,
approximately 5.8% of our Bowflex product inquiries and 10.0% of our net sales
were initiated through our Bowflex web site. Our experience in 1998 indicates
that internet-based inquiries are more likely to be converted into sales than
inquiries generated by other media forms, such as television or print media. We
believe that the increasing consumer acceptance of e-commerce and internet-based
marketing will also enhance and complement our direct marketing efforts.
Consequently, we intend to expand and enhance our web sites to more fully
integrate the internet into our direct marketing strategy and facilitate
e-commerce transactions.
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EXPLORE GROWTH THROUGH STRATEGIC ACQUISITIONS. We will continue to explore
growth opportunities through strategic acquisitions that would enhance our
direct marketing capabilities or our product lines. We do not currently have any
oral or written plans, agreements or commitments regarding any acquisitions.
DIRECT MARKETING
We directly market our Bowflex home fitness equipment and airbeds
principally through 60-second or "spot" television commercials, television
infomercials, the internet, response mailings and print media. To date, we have
been highly successful with what we refer to as a "two-step" marketing approach.
In general, our two-step approach focuses first on spot commercials, which we
air to generate consumer interest in our products and requests for product
information. The second step focuses on converting inquiries into sales, which
we accomplish through a combination of response mailings and outbound
telemarketing. We supplement our two-step approach with infomercials, which
generally are designed to provide potential customers with sufficient product
information to stimulate an immediate purchase.
ADVERTISING
SPOT COMMERCIALS AND INFOMERCIALS. Spot television commercials are a key
element of the marketing strategy for all of our directly marketed consumer
products. For directly marketed products that may require further explanation
and demonstration, television infomercials are an important additional marketing
tool. We have developed a variety of spot commercials and infomercials for our
Bowflex product line and several commercials and marketing videos for our airbed
product line. We expect to use spot commercials and, where appropriate,
infomercials to market any Nautilus consumer products that we develop and
determine are appropriate for direct marketing.
When we begin marketing a new product, we typically test and refine our
marketing concepts and selling practices while advertising the product in spot
television commercials. Production costs for these commercials can range from
$40,000 to $130,000. Based on our market research and viewer response to our
spot commercials, we may produce additional spot commercials and, if appropriate
for the product, an infomercial. Production costs for infomercials can range
from $150,000 to $500,000, depending on the scope of the project. Generally, we
attempt to film several infomercial and commercial concepts at the same time in
order to maximize production efficiencies. From this footage we can then develop
several varieties of spot commercials and infomercials and introduce and refine
them over time. We typically generate our own scripts for spot commercials and
hire outside writers to assist with infomercial scripts. We also typically
contract with outside production companies to produce spot commercials and
infomercials. We may outsource all of these functions if we continue to grow.
Once produced, we test spot commercials and infomercials on a variety of
cable television networks that have a history of generating favorable responses
for our existing products. Our initial objective is to determine their marketing
appeal and what, if any, creative or product modifications may be appropriate.
If these initial tests are successful, we then air the spot commercials and
infomercials on an accelerating schedule on additional cable networks.
MEDIA BUYING. An important component of our direct marketing success is our
ability to purchase quality media time at an affordable price. We currently
purchase the majority of our media time on cable networks, through which we
reach more than 70 million homes. We recently began testing the effectiveness of
our spot commercials and infomercials on broadcast networks, through which we
hope to reach a broader viewing audience.
We track the success of each of our spot commercials and infomercials by
determining how many viewers respond to each airing of a spot commercial or
infomercial. We accumulate this information in a database that we use to
evaluate the cost-effectiveness of available media time. In addition, we
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believe that the database enables us to predict with reasonable accuracy how
many product sales and inquiries will result from each spot commercial and
infomercial that we air. We also believe that we can effectively track changing
viewer patterns and adjust our advertising accordingly.
We do not currently purchase media time under long-term contracts. Instead,
we book most of our spot commercial time on a quarterly basis and most of our
infomercial time on a monthly or quarterly basis, as networks make time
available. Networks typically allow us to cancel booked time with two weeks'
advance notice, which enables us to adjust our advertising schedule if our
statistical tracking indicates that a particular network or time slot is no
longer cost effective. Generally, we can increase or decrease the frequency of
our spot commercial and infomercial airings at almost any time.
INTERNET. In 1998, approximately 5.8% of our Bowflex product inquiries and
10.0% of our net sales were initiated through our Bowflex web site, and we
expect the internet to become an increasingly important part of our direct
marketing strategy. In addition, our experience indicates that internet-based
inquiries are more likely to be converted into sales than inquiries generated by
other media forms, such as television or print media. Consequently, we believe
that consumers who visit our web sites are more inclined to purchase our
products than are the consumers we target through other media.
We currently operate two direct marketing-oriented web sites: (1)
www.bowflex.com, which focuses on our Bowflex line of home exercise equipment;
and (2) www.instantcomfort.com, which focuses on our newly introduced line of
high-end airbeds. In an effort to expand and enhance our web presence, we
recently added dedicated web site development and management personnel. Our
immediate internet-related goals include improving the e-commerce capabilities
at our Bowflex web site and adding e-commerce capabilities to our airbed web
site. We also plan to redesign our web sites to enhance their role as a medium
for finalizing sales. Previously, we used our web sites to generate interest in
our products, but limited the information we provided to potential customers in
an effort to induce them to initiate a telephone inquiry. We now believe that we
can achieve a balance between our twin goals of finalizing sales and capturing
consumer information by strategically designing our web pages and carefully
analyzing web page hits, conversion rates, average sales prices and inquiry
counts.
PRINT MEDIA. We advertise our directly marketed products in various print
media when we believe that such advertising can effectively supplement our
direct marketing campaigns. For example, we have advertised our Bowflex home
fitness equipment in health and fitness-related consumer magazines and, to a
limited extent, in entertainment, leisure and specialty magazines. We recently
determined that television advertising and the internet generate more immediate
consumer responses at a lower cost per inquiry and therefore have begun to
reduce the print media advertising expenditures for our Bowflex products. In
contrast, our experience to date suggests that print media can play an effective
role in the direct marketing campaign for our line of airbeds. Consequently, we
intend to devote a higher portion of our overall advertising budget for our
airbed products to print media. We will evaluate print media advertising
expenditures for other directly marketed products on a case-by-case basis.
CONVERSION OF INQUIRIES INTO SALES
CUSTOMER SERVICE CALL CENTER AND ORDER PROCESSING. We operate our own
customer service call center in Vancouver, Washington, which operates 16 hours
per day and receives and processes all infomercial-generated and customer
service-related inquiries regarding our Bowflex and airbed products. We have
developed a skill-based call routing system that automatically routes each
incoming call to the most highly qualified inside sales agent or customer
service representative available. The appropriate representative then answers
product questions, pro-actively educates the potential customer about the
benefits of our product line, promotes financing through our private label
credit card, and typically upsells the benefits of higher priced models in our
product line. This sophisticated system allows us to better utilize our agents,
prioritize call types and improve customer service. We employ
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two large telemarketing companies to receive and process information requests
generated by our spot television advertising 24 hours per day. These companies
also serve as overflow agents for our call center during peak times.
RESPONSE MAILINGS. We forward a "fulfillment kit" in response to each
inquiry regarding our directly marketed products. Each kit contains detailed
literature that describes the product line and available accessories, a
marketing video that demonstrates and highlights the key features of our premium
product in the line, and additional information about how to purchase the
product. If a potential customer does not respond within a certain time period,
we proceed with additional follow-up mailings that convey a different marketing
message and typically offer certain inducements to encourage a sale. The
specific marketing message and offer at each stage will vary on a case-by-case
basis, based on what our statistical tracking indicates is most likely to
trigger a sale.
CONSUMER FINANCE PROGRAMS. We believe that convenient consumer financing is
an important tool in our direct marketing sales efforts and induces many of our
customers to make purchases when they otherwise would not. Currently, we offer
"zero-down" financing to approved customers on all sales of our Bowflex and
airbed products. We arrange this financing through a consumer credit company
with whom we recently signed a new non-recourse consumer financing agreement.
Under this arrangement, our customer service agents can obtain financing
approval in a few minutes over the phone and, if a customer is approved,
immediately ship product without the need for cumbersome paperwork. The consumer
finance company pays us promptly after we submit required documentation and
subsequently sends to each approved customer a Direct Focus private label credit
card that can be used for future purchases of our products. During 1998,
approximately 39.7% of our net sales were financed in this manner, and we
believe that this program will continue to be an effective marketing tool.
NAUTILUS SALES AND MARKETING
We market and sell our Nautilus commercial fitness equipment domestically
through a direct sales force and internationally through various distributors.
We market and sell our Nautilus fitness accessories and consumer fitness
equipment through independent sales representatives.
DIRECT SALES FORCE
We recently hired a new management team to oversee and revitalize the sales
and marketing operations of our Nautilus business. Each member of the management
team has significant industry experience and a history of sales and marketing
success. Our commercial direct sales force will focus on strengthening the
domestic market position of our existing Nautilus product line, which we sell
principally to health clubs, large hotels, assisted living facilities and the
government. As we broaden our product line, our direct sales force will target
new market segments and, if successful, broaden our customer base.
Internationally, we market and sell our Nautilus commercial fitness products
through a worldwide network of distributors.
OTHER SELLING AND MARKETING CHANNELS
We intend to implement additional sales and marketing strategies for our
Nautilus commercial equipment, including the following:
- Offer innovative financing, such as private label leasing that allows
pre-approved commercial customers to lease fitness equipment;
- Hire inside sales personnel to supplement and expand the selling
capabilities of our direct sales force;
- Implement a targeted mailing program directed at our commercial
customers; and
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- Expand the Nautilus trade-in program to induce existing commercial
customers to upgrade their equipment. We intend to donate much of the
used equipment to schools and other youth-oriented organizations and
facilities, which we hope will facilitate future growth and stability
as children grow up using Nautilus fitness equipment.
OUR PRODUCTS
BOWFLEX HOME FITNESS EQUIPMENT
We introduced the first Bowflex home exercise machine in 1986, and since
then have implemented several improvements to its design and functionality. We
now offer three different Bowflex machines and eight different models. The key
feature of all Bowflex machines is our patented "Power Rod" resistance
technology. Each Power Rod is made of a solid polymer material that provides
lineal progressive resistance in both the concentric and eccentric movements of
an exercise. When combined with a bilateral cable pulley system, the machines
provide excellent range and direction of motion for a large variety of
strength-building exercises.
We currently offer the following Bowflex machines:
- The Power Pro (introduced in 1993) is our best selling product,
accounting for approximately 93.3% of our net sales in 1998. The Power
Pro is available in four different models: the basic Power Pro, the XT,
the XTL and the XTLU. Each model offers over 60 different strength
building exercises in one compact, foldable and portable design and
comes with a 210-pound resistance pack that can be upgraded to 410
pounds. We have also incorporated an aerobic rowing exercise feature
into the Power Pro. Prices currently range from $999 to $1,597,
depending on the model and add-on features.
- The Motivator (introduced in 1996) is our entry-level strength training
line. It is available in three different models: the basic Motivator,
the XT and the XTL. Each model offers over 40 different strength
building exercises in one compact, foldable design and comes standard
with a 210-pound resistance pack that can be upgraded to 410 pounds.
Prices currently range from $699 to $1,049, depending on the model and
add-on features.
- The Versatrainer by Bowflex (introduced in 1988) is specifically
designed to accommodate wheelchair-bound users. The Versatrainer's key
advantage is that it permits users to exercise while remaining in their
wheelchair, which offers enhanced independence and esteem. The
Versatrainer can be found in many major rehabilitation hospitals,
universities and institutions. The Versatrainer is currently priced at
$1,699.
NAUTILUS COMMERCIAL FITNESS EQUIPMENT AND FITNESS ACCESSORIES
We currently offer a broad range of Nautilus strength training equipment for
the commercial market. The Nautilus 2ST line of commercial strength equipment
offers 27 high quality, technologically advanced strength building machines,
each of which is specially designed to focus on a particular strength building
exercise, such as leg presses, bench presses, super pullovers, hip abductors and
adductors, and leg curls. We also offer the Nautilus 2ST for Women, which is
designed to meet the special needs of the female body and offers a safer, more
productive workout for women. In addition, we offer a line of specially designed
Nautilus 2ST equipment that we market principally to medical therapy and
rehabilitation clinics.
The key component of each Nautilus machine is its "cam," which builds and
releases resistance as a user moves through an exercise. The resistance is at
its minimum during the initial and final stages of an exercise, and at its
maximum in the middle of an exercise. Each Nautilus machine includes a cam that
is designed to accommodate and maximize the benefits associated with the motion
required for that machine.
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Our Nautilus business also distributes a line of quality consumer fitness
accessories that includes the following products:
<TABLE>
<S> <C>
- - Push-up bars - Ankle/wrist weights
- - Toning bands - Jump ropes
- - Cushioned dumbbells - Workout mats
- - Toning wheels - Wrist and knee wraps
- - Step tubes - Waist wraps
- - Hand grips - Audio packs
</TABLE>
AIRBEDS
In August 1998, we began test marketing a line of high-end airbeds under the
brand name "Instant Comfort." The key feature of each airbed is its variable
firmness support chamber, an air chamber within each airbed that can be
electronically adjusted to regulate firmness. All queen and larger airbeds in
our Signature and Premier Series are equipped with dual air chambers that enable
users to maintain different firmness settings on each side of the bed. We
believe that variable firmness and other comfort-oriented features of our
airbeds favorably differentiate our airbeds from conventional innerspring
mattresses.
We currently offer three airbed models:
- The Premier Series is our top-of-the-line airbed sleep system. It
features dual patent pending interlocking variable support chambers
that permit users to maintain separate firmness settings on each side
of the airbed. The interlocking chambers regulate airflow and pressure
to more effectively maintain support when a user changes position. The
Premier Series comes with a removable wool blend pillow top sleeping
surface, which permits users to easily convert to a "tight top" surface
when they desire extra firmness. The Premier Series is available in
seven sizes and currently ranges in price from $850 for a twin to $1500
for a California king, excluding foundation. Customers can also
purchase an upgraded comfort layer of visco-elastic foam that conforms
to a user's body.
- The Signature Series is designed to appeal to consumers who desire the
flexibility of dual variable firmness support chambers, but at a more
affordable price. Our customers can choose between a tight top and a
pillow top sleeping surface over a one and one-half inch convoluted
foam comfort layer. The Signature Series is available in seven sizes
and currently ranges in price from $500 for a twin to $1100 for a
California king, excluding foundation.
- The Basic Series is our entry-level airbed, which features a single,
head-to-toe variable firmness support chamber and a traditional tight
top sleeping surface over a one and one-half inch thick convoluted foam
comfort layer. The Basic Series is available in five sizes and
currently ranges in price from $250 for a twin to $700 for a California
king, excluding foundation.
We offer foundations that are specifically designed to support and enhance
the performance of our airbeds. We advise consumers to use our foundations
because conventional box springs tend to sag and wear over time, causing an
airbed to eventually mirror the worn box spring. We believe that the majority of
our airbed customers will order a complete sleep system, which includes both a
mattress and a foundation. Our foundations currently range in price from $150
for a twin to $350 for a California king.
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NEW PRODUCT DEVELOPMENT AND INNOVATION
DIRECT MARKETING PRODUCTS
We develop direct marketing products either from internally generated ideas
or by acquiring or licensing patented technology from outside inventors and then
enhancing the technology. During the evaluation phase of product development, we
evaluate the suitability of the product for direct marketing, whether the
product can be developed and manufactured in acceptable quantities and at an
acceptable cost, and whether it can be sold at a price that satisfies our
profitability goals. More specifically, we look for high-quality consumer
products that:
- Have patented or patentable features;
- Will have a retail price between $500 and $2,500;
- Can be marketed as a line of products with materially different
features that facilitate upselling; and
- Have the potential for mass consumer appeal, particularly among members
of the "baby-boom" generation, who are accustomed to watching
television and now have significant disposable income.
In addition, because of our relatively high retail price target, we
typically require that a product have a potential television advertising life
cycle of at least five years and the possibility of an extended life cycle in
retail stores.
Once we determine that a product may satisfy our criteria, we further assess
its direct marketing potential by continuing to research the product and its
probable market and by conducting blind product and focus group studies. If the
results are positive and we do not own the product, we will then attempt to
acquire the product outright or obtain rights to the product through a licensing
arrangement. If we develop the product internally, or if we acquire or license
the rights to the product, we will then proceed to develop and test a direct
marketing campaign for the product. In most cases, our direct marketing
campaigns will emphasize the use of spot commercials and television
infomercials, which we supplement with print media advertisements, written
materials, marketing videos and our web sites. See "Direct Marketing."
NAUTILUS COMMERCIAL FITNESS PRODUCTS
Our Nautilus commercial product development group develops and refines our
commercial fitness products. Its members gather and evaluate ideas from various
departments, including sales and marketing, manufacturing, engineering and
finance, and then determine which ideas will be incorporated into existing
products or will serve as the basis for new products. Based on these ideas, the
group designs new or enhanced products, develops prototypes, tests and modifies
products, develops a manufacturing plan, and finally brings products to market.
The group evaluates, designs and develops each new or enhanced product taking
into consideration our marketing requirements, target price points, target gross
margin requirements and manufacturing constraints. In addition, each new or
enhanced product must maintain the Nautilus standard of quality and reputation
for excellence. We incorporate principles of physiology, anatomy and
biomechanics into all of our Nautilus machines in order to match the movements
of the human body throughout an exercise. Our key objective is to produce
products that minimize the stress on users' skeletal systems and connective
tissues and maximize the safety and efficiency of each workout.
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NAUTILUS CONSUMER FITNESS PRODUCTS
We are currently evaluating design and feature concepts for a new line of
Nautilus consumer fitness products, such as home gyms, treadmills, stationary
bicycles and stair machines. If we elect to proceed with one or more of these
products, we would then assess price points, develop a prototype and determine
the most appropriate manufacturing plan. We do not anticipate introducing any
such products before 2000.
MANUFACTURING AND DISTRIBUTION
BOWFLEX AND AIRBED PRODUCTS
Our primary manufacturing and distribution objectives for our Bowflex and
airbed products are to maintain product quality, reduce and control costs,
maximize production flexibility and improve delivery speed. We use a
computerized inventory management system to forecast our manufacturing
requirements. In general, we attempt to use outside suppliers to manufacture a
majority of our raw materials and finished parts. We select these suppliers
based upon their production quality, cost and flexibility. Whenever possible and
in order to improve flexibility, we will attempt to use at least two suppliers
to manufacture each product component. We currently use overseas suppliers to
manufacture approximately half of our Bowflex components, although we produce
the main component of our Bowflex products, the Power Rods, exclusively in the
United States. We will continue to use overseas suppliers that meet our
manufacturing criteria. All of our airbed components are currently manufactured
domestically.
We assemble, inspect, package and ship our products from our Vancouver,
Washington and Independence, Virginia facilities. We also intend to establish an
additional distribution center in the Western United States. We rely primarily
on UPS to deliver our Bowflex products, and we currently use a private furniture
shipping company to deliver our airbed products. See "Risk Factors."
NAUTILUS COMMERCIAL FITNESS EQUIPMENT, CONSUMER FITNESS EQUIPMENT AND
FITNESS ACCESSORIES
Our Nautilus manufacturing operations are vertically integrated and include
such functions as metal fabrication, powder coating, upholstery and
vacuum-formed plastics processes. By managing our own manufacturing operations,
we can control the quality of our Nautilus products and offer our commercial
customers the opportunity to order certain color variations. We currently
distribute Nautilus commercial fitness equipment from our Independence, Virginia
warehouse facilities directly to consumers through our own truck fleet. This
method of distribution allows us to effectively control the set-up and
inspection of equipment at the end-user's facilities. We intend to outsource the
manufacturing of Nautilus consumer fitness equipment and fitness accessories to
outside manufacturers. We currently distribute our Nautilus fitness accessories
from our Vancouver, Washington facilities.
INDUSTRY OVERVIEW
FITNESS EQUIPMENT
We market our Bowflex home fitness equipment principally in the United
States, which we believe is a large and growing market. According to the
Sporting Goods Manufacturers' Association (the "SGMA"), United States consumers
spent roughly $5.2 billion on home exercise equipment in 1997, which represented
an 8.3% increase from roughly $4.8 billion in 1996.
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We market our Nautilus commercial fitness equipment throughout the world,
including the United States, Europe, the United Kingdom, Asia, the Middle-East,
Latin America and Africa. Within these markets, we target the following
commercial customers, among others:
<TABLE>
<S> <C>
- - Health clubs and gyms - Corporate fitness centers
- - Rehabilitation clinics - Colleges and universities
- - The military - Governmental agencies
- - Hospitals - YMCA's and YWCA's
- - Hotels and motels - Professional sports teams
</TABLE>
According to the SGMA, which has only tracked the commercial market since
1996, aggregate sales of fitness equipment to commercial purchasers in the
United States rose from $450 million in 1996 to $500 million in 1997, an 11.1%
increase.
MATTRESSES
The United States mattress market is large and dominated by four major
manufacturers whose primary focus is the conventional innerspring mattress.
According to the International Sleep Products Association (the "ISPA"), United
States consumers purchased approximately 35.3 million mattress and foundation
units in 1997, generating approximately $3.6 billion in wholesale sales. We
believe that this equates to over $6.0 billion in retail sales. The ISPA
estimates that innerspring mattresses accounted for approximately 90.0% of total
domestic mattress sales in 1997 and the four largest manufacturers (Sealy,
Serta, Simmons and Spring Air) accounted for nearly 62.0% of domestic wholesale
dollar sales. We believe over 700 manufacturers, operating primarily on a
regional basis, serve the balance of the mattress market. We believe that less
than 10.0% of all mattress sales are made through direct marketing channels.
COMPETITION
BOWFLEX HOME FITNESS EQUIPMENT
The market for our Bowflex products is highly competitive. Our competitors
frequently introduce new and/or improved products, often accompanied by major
advertising and promotional programs. We believe that the principal competitive
factors affecting this portion of our business are price, quality, brand name
recognition, product innovation and customer service.
We compete directly with a large number of companies that manufacture,
market and distribute home fitness equipment, and with the many health clubs
that offer exercise and recreational facilities. We also compete indirectly with
outdoor fitness, sporting goods and other recreational products. Our principal
direct competitors include ICON Health & Fitness, Inc. (through its Health
Rider, NordicTrak, Image, Proform, Weider and Weslo brands), Schwinn Fitness,
Precor and Total Gym.
We believe that our Bowflex line of home exercise equipment is competitive
within the market for home fitness equipment and that our direct marketing
activities are effective in distinguishing our products from the competition. In
addition, our recent Nautilus acquisition presents a significant opportunity to
capitalize on the well-known Nautilus brand name by directly marketing existing
Nautilus consumer products and developing and introducing new products. However,
some of our competitors have significantly greater financial and marketing
resources, which may give them and their products an advantage in the
marketplace.
NAUTILUS COMMERCIAL FITNESS EQUIPMENT
The market for commercial fitness equipment is highly competitive. Our
Nautilus products compete against the products of numerous other commercial
fitness equipment companies, including Life
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Fitness, Cybex and Precor. Many of our competitors have greater financial and
marketing resources, significantly more experience in the commercial fitness
equipment industry, and more extensive experience manufacturing their products.
We believe that the key competitive factors in this industry include price,
product quality and durability, diversity of features, financing options and
warranties. Many commercial customers are also interested in product-specific
training programs that educate them regarding how to safely maximize the
benefits of a workout and achieve specific fitness objectives. In addition,
certain commercial customers, such as hotels and corporate fitness centers, have
limited floor space to devote to fitness equipment. These customers tend to
favor multi-function machines that require less floor space.
Our Nautilus commercial fitness products carry a premium price, but we
believe their reputation for quality and durability appeals to a significant
portion of the market that strives for long-term product value. In addition, our
principal line of Nautilus commercial fitness equipment, the Nautilus 2ST,
possesses unique features that appeal to the commercial market, such as low
friction working parts, one-pound incremental weight stacks and hydraulic seat
adjustments. We also offer training programs that are responsive to marketplace
demands.
AIRBEDS
The mattress industry is also highly competitive as evidenced by the wide
range of products available to consumers, such as innerspring mattresses,
waterbeds, futons and other air-supported mattresses. According to the ISPA,
conventional innerspring mattresses presently account for at least 90.0% of all
domestic mattress sales, with waterbeds, futons and other types of mattresses
making up the remainder of the market. We believe that market participants
compete primarily on the basis of price, product quality and durability, brand
name recognition, innovative features, warranties and return policies.
We believe that our most significant competition is the conventional
mattress industry, which is dominated by four large, well-recognized
manufacturers: Sealy (which also owns the Stearns & Foster brand name), Serta,
Simmons and Spring Air. According to the ISPA, these manufacturers were
responsible for approximately 62.0%, or $2.2 billion, of domestic wholesale
dollar mattress sales in 1997. We believe approximately 700 smaller
manufacturers serve the balance of the conventional mattress market. Although we
believe that our airbeds offer consumers an appealing alternative to
conventional mattresses, many of these conventional manufacturers, including
Sealy, Serta, Simmons and Spring Air, possess significantly greater financial,
marketing and manufacturing resources, and better brand name recognition.
Moreover, several manufacturers currently offer beds with firmness
technology similar to our airbeds. We believe that the largest manufacturer in
this niche market is Select Comfort, Inc. Select Comfort offers its airbeds at
company-owned retail stores throughout the United States and engages in a
significant amount of direct marketing, including infomercials, targeted
mailings, and print, radio and television advertising. Select Comfort has an
established brand name and has greater financial, marketing and manufacturing
resources. Select Comfort also has significantly greater experience in marketing
and distributing airbeds. Despite these advantages, we believe that the market
for airbeds is large enough for both companies to be successful. In addition, we
believe that our airbeds possess features that will enable us to effectively
compete against Select Comfort and other airbed companies.
We believe that our success in the mattress business depends in part on
convincing consumers that variable firmness control and other features of our
sleep system favorably differentiate our products from those of our competitors.
We also believe that our experience with direct marketing will enable us to
successfully convey this message. However, the intense competition in the
mattress industry, both from conventional mattress manufacturers and Select
Comfort, may adversely affect our efforts to market and sell our airbeds and,
consequently, may adversely affect our business.
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<PAGE>
INTELLECTUAL PROPERTY
We believe that our intellectual property is an important factor in
maintaining our competitive position in the fitness and mattress industries.
Accordingly, we have taken the following steps to protect our intellectual
property:
- We hold 17 United States patents and have applied for three additional
United States patents with respect to our Nautilus products;
- We hold four patents relating to our Bowflex home fitness equipment;
- We have applied for one patent relating to our airbeds;
- We have obtained United States trademark protection for various names
associated with our products, including "Bow-Flex," "Nautilus," "Power
Rod," "Bowflex Power-Pro," "Motivator" and "Versatrainer";
- We have applied for United States trademark protection for the names
"Direct Focus," "Instant Comfort" and various other names and slogans
associated with our products;
- We have registered the name "Bow-Flex" in Canada and the European
Community and have registered or applied to register the "Nautilus"
trademark in approximately 30 foreign countries;
- We have obtained trademark protection for the "look" of our Bowflex
Power Rods; and
- We hold eight United States copyright registrations relating to our
Nautilus products.
Each federally registered trademark is renewable indefinitely if the mark is
still in use at the time of renewal. We are not aware of any material claims of
infringement or other challenges to our right to use our marks. Despite our
efforts, the steps we have taken to protect our proprietary technology may be
inadequate. See "Risk Factors - Intellectual Property."
ENVIRONMENTAL REGULATION
Environmental regulations most significantly affect our Nautilus facilities
in Independence, Virginia. The Virginia Department of Environmental Quality has
issued an air permit for several point sources at this facility. The sources
include boilers, flash ovens and high solids paint booths. The permit imposes
operation limits based on the length of time each piece of equipment is operated
each day, and we operate the plant within these limits. The town of
Independence, Virginia has issued an industrial user's wastewater permit that
governs our discharge of on-site generated wastewater and storm water. In
addition to the foregoing, we recently completed a Phase I Environmental Site
Assessment and a limited Phase II Soil Analysis Assessment at our Nautilus
facilities in Independence, Virginia. No significant deficiencies or violations
were noted. We do not believe that continued compliance with federal, state and
local environmental laws will have a material effect upon our capital
expenditures, earnings or competitive position.
EMPLOYEES
As of February 1, 1999, we employed 336 full-time employees, including three
executive officers and 34 part-time employees.
PROPERTIES
Our corporate headquarters and our principal warehouse facilities occupy
approximately 74,000 square feet in Vancouver, Washington. We also use these
facilities to house our customer call center and to assemble and distribute our
Bowflex and airbed products. We lease these properties pursuant to
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operating leases that expire at various times, from May 30, 2000, to April 30,
2002. The aggregate base rent is approximately $24,000 per month and some of the
leases are subject to annual adjustments based upon changes in the consumer
price index, but no adjustment may exceed 6.0% in any calendar year.
As part of our recent acquisition of substantially all of the assets of
Nautilus International, we acquired 54 acres of commercial real property in
Independence, Virginia, which includes the following facilities:
- A 124,000 square foot building devoted to fabrication, finishing,
assembly, plastics, upholstery, warehousing and shipping;
- A 100,000 square foot building devoted to fabrication and warehousing;
- A 27,105 square foot building that houses our Nautilus engineering,
prototyping and customer service operations; and
- A 9,187 square foot building that houses our Nautilus administrative
operations.
In general, our properties are well maintained, adequate and suitable for
their purposes. Assuming timely and effective integration of the Nautilus
facilities, we believe that these properties will meet our operational needs for
the foreseeable future. If we need additional warehouse or office space, we
believe that we will be able to obtain such space on commercially reasonable
terms.
LEGAL PROCEEDINGS
On May 1, 1998, Soloflex, Inc., a company that manufactures and directly
markets home fitness equipment, filed an action against Direct Focus and Randal
R. Potter, our Vice President of Marketing, in the United States District Court
for the District of Oregon. The suit is titled Soloflex, Inc. v. Bowflex, Inc.
and Randy Potter, Cause No. 98-557-JO. The judge has set a trial date of July 6,
1999, and both parties are now proceeding with discovery.
Soloflex is pursuing two categories of claims, both of which relate to
activities that allegedly violate its intellectual property rights. First,
Soloflex claims that we violated the Lanham Act, which relates to trademark and
trade dress infringement, and infringed upon several of its copyrights. The
principal basis for these claims is Soloflex's contention that our print and
video advertisements are too similar to its advertisements. For example,
Soloflex asserts that we are prohibited from marketing our products with
advertisements that: (1) feature Mr. Potter, a former model for Soloflex; (2)
feature an image of Mr. Potter removing his shirt; or (3) use phrases with the
words "unlock your body's potential" or "the body you always wanted."
Second, Soloflex claims that we misappropriated certain of its marketing
trade secrets. The principal basis for this claim is Soloflex's allegation that
Mr. Potter had access to marketing knowledge and physical documents while an
employee of Soloflex, and that Mr. Potter improperly used this knowledge and
documentation to our competitive advantage. Soloflex further alleges that we
hired another Soloflex employee, who also possessed this type of information,
for the specific purpose of acquiring such information and obtaining a
competitive advantage.
Soloflex has requested both monetary damages and injunctive relief in
connection with its claims. Specifically, Soloflex is seeking to recover: (1)
any profits it would have earned but for our allegedly improper activities; (2)
any profits we earned during the period when an alleged violation may have
occurred; and/or (3) the cost of corrective advertising to remedy the allegedly
"false impressions" created by our advertising activities. The injunctive relief
that Soloflex is seeking would prohibit us from airing advertisements that
allegedly would infringe upon Soloflex's intellectual property rights. We intend
to vigorously defend against these claims, which we believe lack merit. However,
we cannot
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assure you that we will prevail in this dispute. If Soloflex successfully
prosecutes any of its claims, the resulting monetary damages and/or injunctive
relief would significantly harm our business. See "Risk Factors - Soloflex
Litigation."
We are also involved in various legal proceedings incident to the ordinary
course of our business. We believe that the outcome of these pending legal
proceedings will not, in the aggregate, have a material adverse effect on our
business.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their ages as of the date of this
prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Brian R. Cook................................... 49 President and Chief Executive Officer, Director
Randal R. Potter................................ 31 Vice President of Marketing
Rod W. Rice..................................... 34 Chief Financial Officer, Treasurer and Secretary
C. Reed Brown................................... 52 Director of Business/Legal Affairs, Director
Kirkland C. Aly................................. 42 Director
Gary L. Hopkins................................. 51 Director
Roger J. Sharp.................................. 43 Director
Roland E. Wheeler............................... 50 Director
</TABLE>
BRIAN R. COOK has served as a director and the President and Chief Executive
Officer of Direct Focus since 1986. Mr. Cook received his B.A. in Business
Administration, with a major in accounting, from Western Washington University.
He is a Certified Public Accountant. Mr. Cook is related by marriage to Mr.
Hopkins.
RANDAL R. POTTER joined Direct Focus in 1991 as a Creative Director and
Marketing Manager and was named Vice President of Marketing in December 1995.
Mr. Potter, who received his B.S. in Social Science from Washington State
University, has been involved in the direct marketing industry since 1986.
ROD W. RICE joined Direct Focus in 1994 as Controller and was named Chief
Financial Officer, Treasurer and Secretary in 1995. From 1992 to 1994, Mr. Rice
was a senior assistant accountant with Deloitte & Touche LLP. Mr. Rice received
his B.S. in Business Administration, with a major in Accounting and Economics,
from Portland State University. He is a Certified Public Accountant.
C. REED BROWN joined Direct Focus in 1998 as the Director of Business/Legal
Affairs and has served as a director since 1998. From 1996 to 1997, Mr. Brown
served as Vice President/General Counsel and Director of Business Affairs at
Williams Worldwide Television, and also served briefly as President and Chief
Operating Officer of Stilson & Stilson Advertising and Marketing. From 1992 to
1996, Mr. Brown held various positions at HealthRider, Inc., including General
Counsel/Vice President, Executive Vice President, Corporate Secretary and
President of HealthRider Kiosk, Inc. Mr. Brown received his J.D. in 1973 from
the University of Utah College of Law. Mr. Brown also serves as a director of
Pen Interconnect, Inc.
KIRKLAND C. ALY has been a director of Direct Focus since 1996. Since 1998,
Mr. Aly has been the Vice President of Worldwide Sales & Marketing at Software
Logistix Corporation, a company that develops, implements and manages integrated
supply chains for high technology companies. From 1997 to 1998, Mr. Aly was the
Executive Vice President of Softbank Content Services, Inc., and from 1996 to
1997 was a principal in KDI Capital, LLC. From 1995 to 1997, Mr. Aly was the
President and Chief Executive Officer of Atrieva Corporation. Throughout 1994,
Mr. Aly was the President of Prism Group, Inc. Mr. Aly received his B.A. in
Communications from Washington State University.
GARY L. HOPKINS has been a director of Direct Focus since January 1993. Mr.
Hopkins is currently the Branch Operations Manager of Qpoint Mortgage, a
position he has held since March 1998. Mr. Hopkins previously served as a Senior
Lending Officer at Olympic NW Mortgage from 1996 to 1998, a Senior Loan Officer
at Emerald Mortgage from 1994 to 1996, and as President and CEO of Merit Escrow
from 1990 to 1994. Mr. Hopkins is related by marriage to Mr. Cook.
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ROGER J. SHARP has been a director of Direct Focus since 1995. Since 1993,
he has served as the President of The Sharp Law Firm in Vancouver, Washington, a
general civil legal practice. He received his J.D. from the University of
Washington School of Law in 1981. Mr. Sharp has provided, and from time to time
may continue to provide, legal services to Direct Focus.
ROLAND E. "SANDY" WHEELER has served as a director of Direct Focus since
1986. Since 1998, he has served as the President and CEO of DynaMed, Inc., a
cancer research company. In addition, since 1996, he has served as the President
of V-Care Health Systems, Inc., a medical equipment company. From 1994 to 1995,
Mr. Wheeler served as the Vice President of Marketing of Direct Focus.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has two committees: an audit committee and a Year
2000 committee. Roland Wheeler, Kirkland C. Aly, Gary L. Hopkins and C. Reed
Brown serve on the audit committee. The audit committee has authority to: (1)
make recommendations to the board of directors regarding the selection of
independent auditors; (2) review the results and scope of audits and other
services provided by our independent auditors; and (3) review and evaluate our
audit and control functions. C. Reed Brown and Roland Wheeler serve on the Year
2000 committee, which is charged with developing, overseeing and reviewing our
Year 2000 response and contingency plan. We do not have a compensation
committee. Instead, the full board of directors considers and determines
compensation issues, except that no officer who is a director participates in
board deliberations regarding their own compensation.
DIRECTOR COMPENSATION
All of our nonemployee directors are paid $500 per day plus travel expenses
for each board of directors meeting that they attend in person, and $150 per day
for each board of directors meeting that they attend telephonically. On February
27, 1998, the board granted to each non-employee director an option to purchase
5,000 shares of our common stock at an exercise price equal to the market price
of our common stock at the close of trading on the Toronto Stock Exchange on the
date of grant. On May 8, 1998, the board granted to Mr. Brown an option to
purchase 5,000 shares of our common stock under the same terms. In addition, on
May 8, 1998, the board of directors granted a $10,000 bonus to each director
other than C. Reed Brown.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by the Washington Business Corporation Act or other
applicable law, as then in effect. Consequently, subject to the Washington
Business Corporation Act, no director shall be personally liable to Direct Focus
or its shareholders for monetary damages resulting from his or her conduct as a
director of Direct Focus, except liability for:
- Acts or omissions involving intentional misconduct or knowing
violations of law;
- Unlawful distributions; or
- Transactions from which the director or officer personally receives a
benefit in money, property or services to which the director is not
legally entitled.
Our articles of incorporation and bylaws also provide that we shall
indemnify any individual made a party to a proceeding because that individual is
or was a director or officer of Direct Focus. We must also advance or reimburse
reasonable expenses incurred by such individual prior to the final disposition
of the proceeding to the fullest extent permitted by the Washington Business
Corporation Act or other applicable law, as then in effect. No repeal of or
modification to our articles of incorporation or bylaws may adversely affect any
indemnification rights of a director or officer of Direct Focus
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who is or was a director or officer at the time of such repeal or modification.
To the extent the provisions of our articles of incorporation provide for
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933, those provisions are, in the opinion of the Securities
and Exchange Commission, against public policy as expressed in the Securities
Act and they are therefore unenforceable.
We do not currently maintain a liability insurance policy pursuant to which
our directors and officers may be indemnified against liability that they may
incur for serving in their capacities as directors and officers of Direct Focus.
However, we intend to obtain such a policy in 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors does not have a compensation committee. During 1998,
director Brian R. Cook, who is also the President and Chief Executive Officer of
Direct Focus, participated in board deliberations regarding the compensation of
all executive officers other than himself.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation we paid to our Chief Executive Officer and other executive officers
whose salary and bonus together exceeded $100,000 in 1998. We refer to these
individuals collectively in this prospectus as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) (#)
- ---------------------------------------------------------- --------- ---------- ------------ -------------------
<S> <C> <C> <C> <C>
Brian R. Cook, President & CEO............................ 1998 $ 175,000 $ 175,000 30,000
Randal R. Potter, Vice President, Marketing............... 1998 $ 105,000 $ 105,000 20,000
Rod W. Rice, Chief Financial Officer, Treasurer and
Secretary............................................... 1998 $ 90,000 $ 90,000 25,000
</TABLE>
- ------------------------
(1) The board of directors has sole discretion in establishing bonus awards. All
bonuses awarded in 1998 were in accordance with the performance-based
criteria established by the board of directors in February 1998.
39
<PAGE>
OPTION GRANTS
The following table sets forth information concerning stock option grants to
the Named Executive Officers during the year ended December 31, 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL GRANT DATE VALUE
UNDERLYING OPTIONS GRANTED ------------------
OPTIONS TO EMPLOYEES IN EXERCISE PRICE GRANT DATE PRESENT
NAME GRANTED(1) (#) 1998(2) ($/SH)(3) EXPIRATION DATE VALUE(4) ($)
- ------------------------- --------------- ----------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Brian R. Cook............ 30,000 16.0% $ 4.62 2/28/2003 $ 90,000
Randal R. Potter......... 20,000 10.6% $ 4.62 2/28/2003 $ 60,000
Rod W. Rice.............. 25,000 13.3% $ 4.62 2/28/2003 $ 75,000
</TABLE>
- ------------------------
(1) The options were granted on February 27, 1998. Mr. Cook's option vested in
full on the date of grant. Mr. Potter's and Mr. Rice's options vest in
one-third increments on each of the first three anniversaries of the grant
date.
(2) During 1998, the board of directors granted options to purchase a total of
188,000 shares of Direct Focus common stock.
(3) In accordance with the rules of the Toronto Stock Exchange and our Stock
Option Plan, the exercise price per share equals the closing price (in U.S.
dollars) of our common stock on the Toronto Stock Exchange on the grant
date. The exercise price may be adjusted only upon the occurrence of
specific events that would dilute our share capital.
(4) The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: (a) all options granted will vest as scheduled; (b) no dividend
yield; (c) a risk-free interest rate of 5.0%; and (d) an expected volatility
of 76.0%.
The following table summarizes the number and value of options exercised by
the Named Executive Officers during 1998 and the value of options held by such
persons as of February 26, 1999.
AGGREGATED OPTION EXERCISES IN 1998 AND
YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT YEAR END (#) YEAR END ($)
EXERCISE REALIZED -------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Cook................. -- $ -- 80,000 -- $ 1,026,300 $ --
Randal R. Potter.............. 63,500 $ 333,688 107,500 20,000 $ 1,581,675 $ 211,200
Rod W. Rice................... 37,213 $ 100,705 36,666 48,334 $ 527,791 $ 603,009
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
BRIAN R. COOK is employed as our President and Chief Executive Officer
pursuant to an employment agreement dated as of January 1, 1998 (the "Cook
Agreement"). Mr. Cook's current salary is $225,000 per year, and is subject to
increase at the discretion of our board of directors. He is also entitled to
reimbursement for reasonable out-of-pocket expenses. The Cook Agreement had an
initial term of one year, with automatic renewals for subsequent one-year terms.
We may terminate the Cook
40
<PAGE>
Agreement by providing Mr. Cook with at least six months' notice of such
termination. Upon the receipt of such notice, all unpaid salary that would have
been paid to Mr. Cook during the remaining term of his employment would become
immediately due and payable.
RANDAL R. POTTER is employed as our Vice President of Marketing pursuant to
an employment agreement dated as of January 1, 1998 (the "Potter Agreement").
Mr. Potter's current salary is $150,000 per year, and is subject to increase at
the discretion of our board of directors. He is also entitled to reimbursement
for reasonable out-of-pocket expenses. The Potter Agreement had an initial term
of one year, with automatic renewals for subsequent one-year terms. We may
terminate the Potter Agreement by providing Mr. Potter with at least six months'
notice of such termination. Upon the receipt of such notice, all unpaid salary
that would have been paid to Mr. Potter during the remaining term of his
employment would become immediately due and payable.
ROD W. RICE is employed as our Chief Financial Officer pursuant to an
employment agreement dated as of January 1, 1998 (the "Rice Agreement"). Mr.
Rice's current salary is $120,000 per year, and is subject to increase at the
discretion of our board of directors. He is also entitled to reimbursement for
reasonable out-of-pocket expenses. The Rice Agreement had an initial term of one
year, with automatic renewals for subsequent one-year terms. We may terminate
the Rice Agreement by providing Mr. Rice with at least six months' notice of
such termination. Upon the receipt of such notice, all unpaid salary that would
have been paid to Mr. Rice during the remaining term of his employment would
become immediately due and payable.
BENEFIT PLANS
DIRECT FOCUS, INC. STOCK OPTION PLAN
In 1995, our board of directors and shareholders adopted the Direct Focus,
Inc. Stock Option Plan, which was amended in 1998 and 1999. The principal
purpose of the Stock Option Plan is to enhance shareholder value by offering our
employees, officers, directors and consultants a financial incentive to
stimulate our continued growth and success. Our board of directors has reserved
a total of 1,857,961 shares of Direct Focus common stock for issuance upon the
exercise of options granted under the Stock Option Plan. As of December 31,
1998, options to purchase 550,618 shares of Direct Focus common stock were
outstanding, of which options to purchase 309,199 shares were then exercisable.
The weighted average exercise price of outstanding options was $2.39 per share,
with actual exercise prices ranging between $0.12 and $9.75 per share.
The current plan administrator is our board of directors, although the board
may appoint a committee of two or more directors to administer the Stock Option
Plan. The plan administrator may grant (1) incentive stock options to any
employee of Direct Focus or its subsidiaries, and (2) non-qualified stock
options to any employee, officer, director or consultant of Direct Focus or its
subsidiaries. The plan administrator has the exclusive authority to administer
the Stock Option Plan in accordance with the terms thereof, including the
authority to:
- Select which employees, if any, will be granted incentive stock
options;
- Select which employees, officers, directors and/or consultants, if any,
will be granted non-qualified stock options;
- Specify the terms and conditions of each option granted;
- Designate the number of shares subject to each option granted;
- Designate the exercise price of each option granted (which, for
incentive stock options, must be at least equal to the fair market
value of Direct Focus common stock on the grant date); and
- Designate the vesting schedule.
41
<PAGE>
Unless the plan administrator establishes a shorter term or the holder of an
incentive stock option dies or ceases to be an employee of Direct Focus or one
of our subsidiaries, all incentive stock options granted to persons who
beneficially own more than 10.0% of our outstanding common stock terminate five
years after the grant date, and all other options terminate ten years after the
grant date. If the holder of an incentive stock option dies or ceases to be an
employee of Direct Focus or one of our subsidiaries due to a disability, his or
her option will terminate six months after the date of death or cessation of
employment. If the holder of an incentive stock option ceases to be an employee
of Direct Focus or one of our subsidiaries for any reason other than a
disability, the plan administrator may designate a termination date between 30
days and three months after the cessation of employment.
The plan administrator is required to make proportional adjustments to the
aggregate number of shares issuable under the Stock Option Plan and pursuant to
outstanding options in the event of stock splits or other capital adjustments.
In addition, certain corporate transactions, such as a merger or consolidation
that would cause our shareholders to own less than a majority of the surviving
entity, will cause all outstanding options to become immediately exercisable
without regard for any vesting schedule or other vesting contingencies.
Similarly, all outstanding options will become immediately exercisable if a
person becomes the beneficial owner of 50.0% or more of our voting securities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We acquired the rights to our Bowflex technology from Tessema D. Shifferaw,
the inventor of the technology and an original shareholder, pursuant to an
agreement that provides for royalty payments to Mr. Shifferaw based on net sales
of our Bowflex products. We paid approximately $1.6 million to Mr. Shifferaw in
1998. Pursuant to a separate agreement between Mr. Shifferaw, Brian R. Cook and
Roland E. Wheeler, Mr. Shifferaw is obligated to pay Messrs. Cook and Wheeler
40.0% (20.0% each) of annual royalties in excess of $90,000. For 1998, Messrs.
Cook and Wheeler each expect to receive $302,765 from Mr. Shifferaw under this
arrangement.
42
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of February 26, 1999, and as
adjusted to reflect the sale of common stock in this offering, by: (1) each
director; (2) each executive officer whose name appears in the summary
compensation table; (3) all persons that we know are beneficial owners of more
than 5.0% of our common stock, and (4) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES TO
BE
SHARES BENEFICIALLY SOLD IN SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OFFERING OWNED AFTER OFFERING
DIRECTORS, EXECUTIVE OFFICERS, 5% SHAREHOLDERS --------------------------- --------- ---------------------------
AND SELLING SHAREHOLDERS(1) NUMBER PERCENTAGE(2) NUMBER NUMBER PERCENTAGE(2)
- ------------------------------------------------ ---------- --------------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Brian R. Cook(3)................................ 696,071 7.2% 25,000 671,071 6.4%
Randal R. Potter(4)............................. 173,166 1.8 12,500 160,666 1.5
Rod W. Rice(5).................................. 108,499 1.1 12,500 95,999 *
Kirkland C. Aly(6).............................. 14,000 * -- 14,000 *
C. Reed Brown(7)................................ 5,000 * -- 5,000 *
Gary L. Hopkins(8).............................. 44,000 * -- 44,000 *
Roger J. Sharp(9)............................... 29,140 * -- 29,140 *
Roland E. Wheeler(10)........................... 349,586 3.7 25,000 324,586 3.1
Paul Little(11)................................. 452,610 4.7 100,000 352,610 3.4
All directors and executive officers as a group
(8 persons)................................... 1,419,462 14.6 75,000 1,344,462 12.7
</TABLE>
- ------------------------
* Less than 1%.
(1) The address of all directors and executive officers is our address: 2200
N.E. 65(th) Avenue, Vancouver, Washington 98661.
(2) We have calculated the pre-offering percentages assuming that 9,532,939
shares of our common stock are issued and outstanding, and have calculated
post-offering percentages assuming that 10,357,939 shares of our common
stock will be issued and outstanding. In accordance with SEC regulations,
each percentage calculation with respect to a shareholder assumes the
exercise of all outstanding options that such shareholder holds and that can
be exercised within 60 days after the anticipated effective date of this
offering.
(3) Includes 80,000 shares issuable upon the exercise of options.
(4) Includes 96,416 shares issuable upon the exercise of options.
(5) Includes 8,333 shares issuable upon the exercise of options.
(6) Includes 5,000 shares issuable upon the exercise of options.
(7) Includes 5,000 shares issuable upon the exercise of options.
(8) Includes 15,000 shares issuable upon the exercise of options.
(9) Includes 5,000 shares issuable upon the exercise of options, 4,000 shares
held by Mr. Sharp's spouse and 1,900 shares held by Mr. Sharp's children.
Mr. Sharp's spouse is the custodian for all shares held by their children.
(10) Includes 5,000 shares issuable upon the exercise of options and 18,900
shares held by Mr. Wheeler's daughter.
(11) Includes 202,810 shares held by Westover Investments, Inc., of which Mr.
Little is the sole shareholder and director. Mr. Little's address is 211
Queen's Quay West, Suite 911, Toronto, Ontario, Canada M5J 2M6.
43
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representative, D.A.
Davidson & Co., have severally agreed with the Company and the selling
shareholders, subject to the terms and conditions of the Underwriting Agreement,
to purchase the number of shares of common stock set forth opposite their
respective names below. The underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
D.A. Davidson & Co...............................................................
----------
Total........................................................................ 1,000,000
----------
----------
</TABLE>
D.A. Davidson & Co. has advised the Company and the selling shareholders
that the underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession of not in excess of $
per share, of which $ may be reallowed to other dealers. After the
offering, the public offering price, concession and reallowance to dealers may
be reduced by D.A. Davidson & Co. No such reduction shall change the amount of
proceeds to be received by the Company and the selling shareholders as set forth
on the cover page of this prospectus.
The Company has granted to the underwriters an option, exercisable during
the 30-day period after the date of this prospectus for the offering, to
purchase up to 150,000 additional shares of common stock at the same price per
share as the Company and the selling shareholders will receive for the one
million shares that the underwriters have agreed to purchase. To the extent that
the underwriters exercise such option, each of the underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of such additional shares that the number of shares of common stock
to be purchased by it shown in the above table represents as a percentage of the
one million shares offered hereby. If purchased, the underwriters will sell such
additional shares on the same terms as those on which the one million shares are
being sold.
The following table summarizes the compensation to be paid to the
underwriters by the Company and the selling shareholders, and the expenses
payable by the Company and the selling shareholders.
<TABLE>
<CAPTION>
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by the Company............ $ $ $
Underwriting discounts and commissions paid by the selling
shareholders........................................................ $ $ $
Expenses payable by the Company....................................... $ $ $
</TABLE>
The Underwriting Agreement contains covenants of indemnity among the
underwriters, the Company and the selling shareholders against certain civil
liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of representations and warranties contained in
the Underwriting Agreement.
The Company has applied to have its common stock listed for trading on
Nasdaq.
Each officer and director of the Company and each selling shareholder have
agreed that, for a period of 180 days after the effective date of this
prospectus, they will not, subject to certain exceptions, directly or indirectly
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to, any shares of common stock, or any securities
convertible into or exchangeable for shares of common stock, now owned or
hereafter acquired directly by such holders or
44
<PAGE>
with respect to which they have the power of disposition, without the prior
written consent of D.A. Davidson & Co., which may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. In addition, the Company has agreed that during the 180 days
following the effective date of this prospectus, the Company will not, without
the prior written consent of D.A. Davidson & Co., subject to certain exceptions,
offer, issue, sell, contract to sell, or otherwise dispose of any shares of
common stock, any options or warrants to purchase any shares of common stock, or
any securities convertible into, exercisable for or exchangeable for shares of
common stock other than the Company's sales of shares in the offering.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the offering, there has been no public market in the United States
for the common stock of the Company. Consequently, the public offering price for
the common stock offered hereby will be determined through negotiations among
the Company and D.A. Davidson & Co. Among the factors to be considered in such
negotiations include prevailing market conditions, the market price of the
Company's common stock on the Toronto Stock Exchange, certain financial
information of the Company, market valuations of other companies that the
Company and D.A. Davidson & Co. believe to be comparable to the Company,
estimates of the business potential of the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future revenues of the Company,
the present state of the Company's development and other factors deemed
relevant. The Company's common stock has been listed on the Toronto Stock
Exchange in the Province of Ontario, Canada, since January 26, 1993 and
currently trades under the symbol DFX.
D.A. Davidson & Co. has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids that may have the effect of
stabilizing or maintaining the market price of the common stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or the purchase of the common stock on
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting D.A. Davidson & Co. to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by D.A. Davidson & Co. in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
D.A. Davidson & Co. has advised the Company that such transactions may be
effected on Nasdaq or otherwise and, if commenced, may be discontinued at any
time.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
no par value. As of February 26, 1999, 9,532,939 shares of Direct Focus common
stock were outstanding and held of record by 81 shareholders. Following this
offering, 10,357,939 shares of Direct Focus common stock will be outstanding
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options), all of which will be fully paid and nonassessable.
COMMON STOCK
Our common shareholders are entitled to: (1) one vote per share at all
shareholder meetings; (2) receive dividends ratably, if, as and when declared by
our Board of Directors; and (3) participate ratably in any distribution of
property or assets upon any liquidation, winding up, or dissolution of the
Company. None of our common stock has cumulative voting rights, preemptive
rights or conversion rights, and there are no redemption or sinking fund
provisions applicable to our common stock.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF WASHINGTON LAW
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10.0% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things:
- A merger or consolidation with, disposition of assets to, or issuance
or redemption of stock to or from, the acquiring person;
- Termination of 5.0% or more of the employees of the target corporation
as a result of the acquiring person's acquisition of 10.0% or more of
the shares; or
- Allowing the acquiring person to receive any disproportionate benefit
as a shareholder.
After the five-year period, a "significant business transaction" may occur
if the transaction complies with certain "fair price" provisions of the statute.
A corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Direct Focus.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Direct Focus common stock traded in
Canada is Montreal Trust. The transfer agent and registrar for Direct Focus
common stock traded in the United States will be ChaseMellon Shareholder
Services, L.L.C.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our common stock listed for trading on Nasdaq under
the symbol DFXI.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, the only public market for our common stock was the
Toronto Stock Exchange. We have applied to have our common stock listed for
trading on Nasdaq under the symbol DFXI. However, we cannot provide any
assurance that a significant public market for our common stock will develop on
Nasdaq or be sustained after this offering. Future sales of substantial amounts
of our common stock in the public market, or the possibility of such sales,
could adversely affect prevailing market prices for our common stock or our
future ability to raise capital through an offering of equity securities.
After this offering, approximately 10,357,939 shares of our common stock
will be outstanding (10,507,939 shares if the underwriter's over-allotment
option is fully exercised). Of these shares, the 825,000 newly issued shares
that we are selling in the offering (975,000 shares if the underwriters'
over-allotment option is fully exercised) will be freely tradable in the public
market without restriction under the Securities Act. As explained below, we
believe that as many as 8.3 million additional shares, including the 175,000
shares being offered by the selling shareholders, all of which are currently
issued and outstanding, will be freely tradable in the public market without
restriction under the Securities Act.
Approximately 8.9 million shares that will be outstanding after the offering
were issued in private placement transactions that were exempt from the
registration requirements of the Securities Act, of which 861,000 shares are
currently held by our directors and officers. The majority of these transactions
occurred in 1993 and the last occurred in 1997. All of these shares originally
qualified as "restricted securities" (as such term is defined in Rule 144).
Restricted securities cannot be resold in the public market except in a
registered transaction or in a transaction exempt from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144,
which is discussed below. In addition, restricted securities continue to qualify
as such until they are resold in a registered transaction or in accordance with
Rule 144. All of the shares issued in these transactions have been held beyond
the minimum holding periods set forth in Rule 144, and we believe that many of
these shares have been resold through the Toronto Stock Exchange or otherwise
and no longer qualify as restricted securities. The shares other than those held
by our officers and directors can be freely sold without restriction under the
Securities Act.
Approximately 650,000 additional shares were issued upon the exercise of
options in reliance upon the exemption afforded by Rule 701 of the Securities
Act. Approximately 417,000 of these shares are still held by the optionees,
including 264,000 shares currently held by our officers and directors, and
qualify as restricted securities that may be resold in accordance with Rule 701.
Rule 701 permits resales pursuant to Rule 144 (other than the holding period)
beginning 90 days after the date of this prospectus. Approximately 233,000 of
these shares have been resold on the Toronto Stock Exchange and no longer
qualify as restricted securities.
After the offering, our directors and executive officers will own
approximately 1,125,000 shares of our common stock, some of which they acquired
in private placement transactions or pursuant to option exercises. Pursuant to
certain "lock-up" agreements between the underwriters and each director and
executive officer, shares of common stock held by these individuals cannot be
offered, sold or otherwise disposed of in any way until 180 days after the date
of this prospectus. On the expiration date of this lock-up period, our directors
and executive officers may sell these shares in the public market, subject to
any applicable resale limitations set forth in Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of:
- One percent of the then outstanding shares of the issuer's common
stock; or
47
<PAGE>
- The average weekly trading volume during the four calendar weeks
preceding such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about Direct
Focus. Under Rule 144(k), a person who has not been an affiliate of Direct Focus
during the preceding 90 days and who has beneficially owned the restricted
shares for at least two years is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144. Generally, an affiliate includes all of our officers and
directors and any shareholder who holds 10% or more of our outstanding common
stock. All of our affiliates are subject to continuing volume limitations
described above.
After the effective date of this offering, we intend to file a registration
statement on Form S-8 to register up to approximately 550,618 shares of our
common stock that are reserved for issuance under our Stock Option Plan. The
Form S-8 registration statement will become effective automatically upon filing.
Shares issued under our Stock Option Plan after filing the Form S-8 registration
statements may be freely sold in the open market, subject only to certain Rule
144 limitations applicable to affiliates, the above-referenced lock-up
agreements and the vesting requirements applicable to the options.
LEGAL MATTERS
The legality of the common stock that we and the selling shareholders are
offering hereunder will be passed upon by Garvey, Schubert & Barer, Seattle,
Washington. Certain legal matters in connection with the issuance of the common
stock will be passed upon for the underwriters by LeBoeuf, Lamb, Greene &
MacRae, L.L.P., Salt Lake City, Utah.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of the Nautilus Business as of June 27, 1998, and
June 28, 1997, and for each of the years in the three year period ended June 27,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
48
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of Direct Focus, such references
are not necessarily complete and you should refer to the exhibits attached to
the Registration Statement for copies of the actual contract or document. You
may review a copy of the Registration Statement, including exhibits and
schedules filed therewith, at the Securities and Exchange Commission's public
reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Securities and
Exchange Commission located at 7 World Trade Center, Suite 1300, New York, New
York, 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of such materials from the Public
Reference Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, such as Direct Focus, that file
electronically with the Securities and Exchange Commission.
49
<PAGE>
DIRECT FOCUS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DIRECT FOCUS, INC.
Report of Deloitte & Touche LLP, Independent Auditors.................................................... F-2
Balance Sheets as of December 31, 1997 and 1998.......................................................... F-3
Statements of Income for the three years ended December 31, 1998......................................... F-5
Statements of Stockholders' Equity for the three years ended December 31, 1998........................... F-6
Statements of Cash Flows for the three years ended December 31, 1998..................................... F-7
Notes to Financial Statements............................................................................ F-8
DIRECT FOCUS, INC. AND AFFILIATE PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation.................................................................................... F-16
Pro Forma Combined Balance Sheet......................................................................... F-17
Pro Forma Combined Statement of Operations............................................................... F-19
NAUTILUS BUSINESS
Report of KPMG Peat Marwick LLP, Independent Auditors.................................................... F-20
Combined Balance Sheets as of June 28, 1997 and June 27, 1998............................................ F-21
Combined Statements of Operations and Accumulated Deficit for the years ended June 29, 1996, June 28,
1997 and June 27, 1998................................................................................. F-22
Combined Statements of Cash Flows for the years ended June 29, 1996, June 28, 1997 and June 27, 1998..... F-23
Notes to Combined Financial Statements................................................................... F-24
NAUTILUS BUSINESS COMBINED FINANCIAL STATEMENTS
Balance Sheets as of June 27, 1998 and December 31, 1998 (Unaudited)..................................... F-33
Unaudited Combined Statements of Operation and Accumulated Deficit for the six month periods ended
December 27, 1997 and December 31, 1998................................................................ F-34
Unaudited Combined Statements of Cash Flows for the six month periods ended December 27, 1997 and
December 31, 1998...................................................................................... F-35
Notes to Combined Financial Statements................................................................... F-36
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
of Direct Focus, Inc.:
We have audited the accompanying balance sheets of Direct Focus, Inc. as of
December 31, 1997 and 1998 and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Direct Focus, Inc. at December 31, 1997 and
1998 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
February 26, 1999
F-2
<PAGE>
DIRECT FOCUS, INC.
BALANCE SHEETS,
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 4,790,316 $ 18,910,675
Trade receivables (less allowance for doubtful accounts of: 1997, $85,000 and 1998,
$40,000)......................................................................... 259,543 218,207
Inventories........................................................................ 1,945,773 2,614,673
Prepaid expenses and other current assets.......................................... 212,382 378,409
Current deferred tax asset......................................................... 222,139 215,737
------------ -------------
Total current assets............................................................. 7,430,153 22,337,701
------------ -------------
Furniture and Equipment:
Equipment.......................................................................... 587,661 1,822,205
Furniture and fixtures............................................................. 257,325 459,297
------------ -------------
844,986 2,281,502
Less accumulated depreciation...................................................... (446,922) (438,790)
------------ -------------
Total furniture and equipment.................................................... 398,064 1,842,712
------------ -------------
Long-Term Deferred Tax Asset......................................................... 26,202 --
------------ -------------
Other Assets (Less accumulated amortization of: 1997, $39,242 and 1998, $49,967)..... 67,821 192,859
------------ -------------
Total............................................................................ $ 7,922,240 $ 24,373,272
------------ -------------
------------ -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
DIRECT FOCUS, INC.
BALANCE SHEETS,
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables..................................................................... $ 1,178,255 $ 3,602,074
Income taxes payable............................................................... 801,128 504,775
Accrued liabilities................................................................ 1,089,134 1,851,253
Royalty payable to stockholders.................................................... 210,511 548,211
Customer deposits.................................................................. 41,853 148,937
Current portion of capital lease obligation........................................ 9,167 --
------------ -------------
Total current liabilities........................................................ 3,330,048 6,655,250
------------ -------------
Long-term Deferred Tax Liability..................................................... -- 66,880
------------ -------------
Commitments and Contingencies (Note 5)............................................... -- --
------------ -------------
Stockholders' Equity:
Common stock--authorized, 50,000,000 shares of no par value; outstanding, 1997:
9,005,328 shares, 1998: 9,448,523 shares......................................... 2,992,172 3,565,628
Retained earnings.................................................................. 1,600,020 14,085,514
------------ -------------
Total stockholders' equity....................................................... 4,592,192 17,651,142
------------ -------------
Total............................................................................ $ 7,922,240 $ 24,373,272
------------ -------------
------------ -------------
</TABLE>
F-4
<PAGE>
DIRECT FOCUS, INC.
STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Net Sales............................................................ $ 8,516,584 $ 19,886,354 $ 57,296,880
Cost of Sales........................................................ 2,602,717 5,113,980 12,442,307
------------ ------------- -------------
Gross profit..................................................... 5,913,867 14,772,374 44,854,573
------------ ------------- -------------
Operating Expenses:
Selling and marketing.............................................. 4,712,365 9,600,076 22,642,885
General and administrative......................................... 472,661 974,887 1,700,956
Royalties.......................................................... 269,123 580,677 1,622,726
------------ ------------- -------------
Total operating expenses......................................... 5,454,149 11,155,640 25,966,567
------------ ------------- -------------
Operating Income..................................................... 459,718 3,616,734 18,888,006
------------ ------------- -------------
Other Income (Expense):
Interest income.................................................... 37,524 118,541 526,961
Interest expense................................................... (2,225) (1,381) (455)
State business tax and other-net................................... (51,113) (86,660) (221,434)
------------ ------------- -------------
Total other income (expense)-net................................. (15,814) 30,500 305,072
------------ ------------- -------------
Income Before Income Taxes........................................... 443,904 3,647,234 19,193,078
Income Tax Expense (Benefit)......................................... (249,000) 1,226,068 6,707,584
------------ ------------- -------------
Net Income........................................................... $ 692,904 $ 2,421,166 $ 12,485,494
------------ ------------- -------------
------------ ------------- -------------
Basic Earnings Per Share............................................. $ 0.08 $ 0.27 $ 1.34
------------ ------------- -------------
------------ ------------- -------------
Diluted Earnings Per Share........................................... $ 0.08 $ 0.25 $ 1.28
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
DIRECT FOCUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
-------------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996.............................. 8,131,541 $ 2,788,535 $ (1,514,050) $ 1,274,485
Common shares issued................................. 750,000 247,090 -- 247,090
Options exercised.................................... 40,000 4,800 -- 4,800
Net income........................................... -- -- 692,904 692,904
------------ ------------ ------------- -------------
Balances, December 31, 1996............................ 8,921,541 3,040,425 (821,146) 2,219,279
Options exercised.................................... 129,887 15,586 -- 15,586
Stock repurchased.................................... (46,100) (98,120) -- (98,120)
Tax benefit of exercise of nonqualified options...... -- 34,281 -- 34,281
Net income........................................... -- -- 2,421,166 2,421,166
------------ ------------ ------------- -------------
Balances, December 31, 1997............................ 9,005,328 2,992,172 1,600,020 4,592,192
Options exercised.................................... 443,195 134,004 -- 134,004
Tax benefit of exercise of nonqualified options...... -- 439,452 -- 439,452
Net income........................................... -- -- 12,485,494 12,485,494
------------ ------------ ------------- -------------
Balances, December 31, 1998............................ 9,448,523 $ 3,565,628 $ 14,085,514 $ 17,651,142
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
DIRECT FOCUS, INC.
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 692,904 $ 2,421,166 $ 12,485,494
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 88,460 96,133 301,913
Loss on equipment disposal........................................ 230 -- --
Deferred income taxes............................................. (249,000) 140,659 99,484
Write-off of investment........................................... 6,676 -- --
Changes in:
Trade receivables............................................... 297,211 (29,128) 41,336
Inventories..................................................... (311,845) (1,156,643) (668,900)
Prepaid expenses and other current assets....................... (565,669) 373,807 (166,027)
Trade payables.................................................. 305,776 277,909 2,423,819
Income taxes payable............................................ -- 835,409 143,099
Accrued liabilities and royalty payable to stockholders......... 111,514 944,547 1,099,819
Customer deposits............................................... 5,126 25,473 107,084
------------ ------------- -------------
Net cash provided by operating activities..................... 381,383 3,929,332 15,867,121
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of investment in certificate of deposit............. (100,000) 100,000 --
Additions to furniture and equipment................................ (123,516) (278,886) (1,738,836)
Additions to other assets........................................... (3,201) (22,514) (12,309)
Prepaid acquisition cost of Nautilus................................ -- -- (120,454)
------------ ------------- -------------
Net cash used in investing activities......................... (226,717) (201,400) (1,871,599)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation................... (8,269) (9,113) (9,167)
Proceeds from issuing common stock.................................. 251,890 15,586 134,004
Stock repurchased................................................... -- (98,120) --
------------ ------------- -------------
Net cash provided by (used in) financing activities........... 243,621 (91,647) 124,837
------------ ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 398,287 3,636,285 14,120,359
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................... 755,744 1,154,031 4,790,316
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR................................ $ 1,154,031 $ 4,790,316 $ 18,910,675
------------ ------------- -------------
------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 2,225 $ 1,381 $ 455
Cash paid for income taxes.......................................... -- 250,000 6,465,006
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS--Tax benefit
of exercise of nonqualified options................................. $ -- $ 34,281 $ 439,452
</TABLE>
See notes to financial statements.
F-7
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Direct Focus, Inc. (the "Company") is a direct marketing company that
develops and markets high-end, branded consumer products. The Company markets
consumer products directly to consumers through a variety of direct marketing
channels, including spot television commercials, infomercials, print media,
response mailings, and the internet. The Company's principal products are the
Bowflex line of home fitness equipment and recently the Company has introduced a
direct marketing campaign for a line of high-end airbeds.
The Company is registered under the laws of the State of Washington and is
subject to the securities laws of Ontario (Ontario Securities Commission),
Canada and the regulations of the Toronto Stock Exchange.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash deposited with banks
and financial institutions and highly liquid debt instruments purchased with
maturity date of three months or less at date of acquisition. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
INVENTORIES
Inventories, which include assembly and testing labor, are stated at the
lower of average cost or market.
ADVERTISING
The Company expenses the production costs of advertising the first time the
advertising takes place.
FURNITURE AND EQUIPMENT
Furniture and Equipment is stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to seven years,
except for the capital lease equipment which is being depreciated over the life
of the lease.
Management reviews investment in long-lived assets for possible impairment
whenever events or circumstances indicate the carrying amount of an asset may
not be recoverable. There have been no such events or circumstances in the three
years ended December 31, 1998. If there were an indication of impairment,
management would prepare an estimate of future cash flows (undiscounted and
without
F-8
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest charges) expected to result from the use of the asset and its eventual
disposition. If these cash flows were less than the carrying amount of the
asset, an impairment loss would be recognized to write down the asset to its
estimated fair value.
OTHER ASSETS
Other Assets consist specifically of acquisition costs, license agreements
and patents and trademarks. Amortization is computed using the straight-line
method over estimated useful lives of 3 to 17 years.
WARRANTY COSTS
The Company's warranty policy provides for coverage for defects in material
and workmanship. Warranty periods on the Company's products range from two to
five years on Bowflex line of home fitness products and twenty years on airbeds.
A provision for estimated warranty costs has been provided and is included in
accrued liabilities.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. The
Company has established reserves for potential sales returns for 1997 and 1998
of $285,000 and $600,704, respectively, based upon historical experience.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, which
requires presentation of comprehensive income within an entity's primary
financial statements. Comprehensive income is defined as net income as adjusted
for changes to equity resulting from events other than net income or
transactions related to an entity's capital structure. Comprehensive income
equaled net income for all periods presented.
SEGMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
which establishes standards for reporting information regarding an entity's
operating activities. SFAS No. 131 requires that operating segments
F-9
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
be defined at the same level and in a similar manner as management evaluates
operating performance. Currently, the Company is operating as a single segment.
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and for hedging activities. Currently, the
Company does not engage in any derivative or hedging activities.
RECLASSIFICATIONS
Certain amounts from the 1996 and 1997 have been reclassified to conform to
the 1998 presentation.
(2) ACQUISITION
Effective January 4, 1999, the Company acquired substantially all of the net
assets of Nautilus International, Inc. ("Nautilus"), a manufacturer and
distributor of commercial fitness equipment. The acquisition has been accounted
for under the purchase method of accounting. The Company paid approximately
$16.0 million for the assets and intellectual property of Nautilus and assumed
$2.5 million in current liabilities.
The unaudited pro forma financial information below for the fiscal year
ended December 31, 1998 was prepared as if the transaction had occurred on
January 1, 1998:
<TABLE>
<CAPTION>
<S> <C>
Revenue........................................................................ $ 76,600,696
Net income..................................................................... $ 9,755,812
Basic earnings per share....................................................... $ 1.04
Diluted earnings per share..................................................... $ 1.00
</TABLE>
The unaudited pro forma financial information is not necessarily indicative
of what actual results would have been had the transaction occurred at the
beginning of the respective year nor do they purport to indicate the results of
future operations of the Company.
(3) INVENTORIES
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Finished goods.................................................... $ 1,156,862 $ 1,758,171
Parts and components.............................................. 788,911 856,502
------------ ------------
Total......................................................... $ 1,945,773 $ 2,614,673
------------ ------------
------------ ------------
</TABLE>
F-10
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(4) ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Accrued expenses.................................................. $ 162,261 $ 127,970
Accrued payroll................................................... 114,569 357,033
Accrued payroll taxes............................................. 60,515 185,996
Sales return reserve.............................................. 285,000 600,704
Accrued advertising............................................... 92,144 275,298
Accrued bonus..................................................... 175,000 20,411
Accrued other..................................................... 199,645 283,871
------------ ------------
Total......................................................... $ 1,089,134 $ 1,851,253
------------ ------------
------------ ------------
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
LINES OF CREDIT
During 1998, the Company obtained two lines of credit for $5,000,000 each
with a bank. Both lines are secured by the Company's general assets, and
interest is payable on outstanding borrowings under each line at the bank's
prime rate (7.75% at December 31, 1998). There were no outstanding borrowings on
these lines of credit at December 31, 1998.
OPERATING LEASES
The Company leases its office and warehouse facilities under an operating
lease which expires April 30, 2002. The lease commitment is subject to an annual
rent adjustment based upon changes in the consumer price index, limited to a
6.0% annual change. The agreement provides for an annual cancellation provision
by the Company upon proper notification. Under a separate agreement in 1997,
which was amended in 1998, the Company leased additional warehouse facilities.
This operating lease expires May 31, 2000. Rent expense under these leases was
$66,714 in 1996, $107,361 in 1997, and $239,197 in 1998.
OBLIGATIONS
Future minimum lease payments under the operating leases during the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999.............................................................................. $ 300,324
2000.............................................................................. 186,664
2001.............................................................................. 73,644
2002.............................................................................. 24,548
----------
Total minimum lease payments.................................................. $ 585,180
----------
----------
</TABLE>
F-11
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT CONTRACTS
Three officers of the Company are employed under employment contracts.
LITIGATION
A competitor has filed an action against the Company and one of its
officers, alleging violations of the competitor's intellectual property rights.
The competitor seeks, among other things, monetary damages and injunctive relief
in connection with its claims. The Company believes the claims lack merit and
intends to vigorously defend against the claims. However, if the competitor
successfully prosecutes any of its claims against the Company, the resulting
monetary damages and/or injunctive relief would have a material adverse effect
on the Company's financial position, results of operations and/or cash flows.
Additionally, in the normal course of business, the Company is a party to
various other legal claims, actions, and complaints.
Although it is not possible to predict with certainty whether the Company
will ultimately be successful in any of these legal matters, or what the impact
might be, the Company believes that disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
(6) PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT
During 1996, the Company entered into a Private Placement Subscription
Agreement (the "Agreement") to issue 750,000 shares of common shares at $0.33
per share. Net proceeds, after deducting expenses of $2,910 were $247,090. In
addition, upon meeting certain conditions the Agreement would grant to the
subscriber nontransferable common share purchase warrants to purchase up to
1,280,000 common shares subject to certain conditions. These conditions were not
met in 1997 and the warrants expired.
(7) STOCK OPTIONS
The Company's stock-based compensation plan was adopted in June 1995. The
Company can issue both nonqualified stock options to the Company's officers and
directors and qualified options to the Company's employees. The plan was amended
in June 1998 so the Company may grant options for up to 1,857,961 shares of
common stock. The plan is administered by the Company's Board of Directors which
determines the terms and conditions of the various grants awarded under these
plans. Stock options granted generally have an exercise price equal to the
market price of the Company's stock on the date of the grant, and vesting
periods vary by option granted, generally no longer than three years.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which encouraged (but did not
require) that stock-based compensation cost be recognized and measured by the
fair value of the equity instrument awarded. The Company did not change its
method of accounting for its stock-based compensation plans and will continue to
apply Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK-BASED
COMPENSATION PLANS ISSUED TO EMPLOYEES, and related interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized for these plans in the financial statements. If compensation cost on
stock
F-12
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(7) STOCK OPTIONS (CONTINUED)
options granted in 1996, 1997, and 1998 under these plans had been determined
based on the fair value of the options consistent with that described in SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below for the years ended December 31, 1996,
1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ -------------
<S> <C> <C> <C>
Net income, as reported............................. $ 692,904 $ 2,421,166 $ 12,485,494
Net income, pro forma............................... 671,452 2,334,082 12,274,208
Diluted earnings per share, as reported............. $ 0.08 $ 0.25 $ 1.28
Diluted earnings per share, pro forma............... $ 0.08 $ 0.25 $ 1.26
</TABLE>
The pro forma amounts may not be indicative of the effects on reported net
income for future years due to the effect of options vesting over a period of
years and the awarding of stock compensation awards in future years.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996, 1997, and 1998, respectively; all options
granted will vest as scheduled; no dividend yield for all three years; risk-free
interest rate of 5.9%, 5.5%, and 5%; expected volatility of 178%, 93% and 76%;
expected lives of five years for all three years.
A summary of the status of the Company's stock option plans as of December
31, 1996, 1997, and 1998, and changes during the years ended on those dates is
presented below.
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at beginning of year............. 535,000 $ 0.43 646,500 $ 0.18 813,113 $ 0.47
Granted...................................... 356,500 0.20 386,500 0.96 188,000 5.70
Forfeited or canceled........................ (205,000) 0.87 (90,000) .98 (10,000) 0.96
Exercised.................................... (40,000) 0.12 (129,887) 0.12 (440,495) 0.30
---------- ----- ---------- ----- ---------- -----
Outstanding at end of year................... 646,500 $ 0.18 813,113 $ 0.47 550,618 $ 2.39
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Options exercisable of end of year........... 465,000 504,779 309,199
---------- ---------- ----------
---------- ---------- ----------
Weighted average for value of options granted
in current year............................ $ 0.26 $ 0.91 $ 3.72
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-13
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(7) STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------- ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER OF AVERAGE
NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.12 - $0.98 362,618 3.0 $ 0.68 264,617 $ 0.64
$4.62 - $9.75 188,000 4.3 5.70 44,582 4.94
--
----------- ----- ----------- -----
$0.12 - $9.75 550,618 3.4 $ 2.39 309,199 $ 1.26
--
--
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
(8) INCOME TAXES
The tax effect of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1997 and 1998 can be summarized as
follows:
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
<S> <C> <C> <C> <C>
CURRENT LONG-TERM CURRENT LONG-TERM
DEFERRED DEFERRED DEFERRED DEFERRED
---------- ----------- ---------- -----------
Deferred tax assets.............................................. $ 222,139 $ 26,202 $ 311,426 $ --
Deferred tax liabilities......................................... -- -- (95,689) (66,880)
---------- ----------- ---------- -----------
Deferred income taxes, net................................... $ 222,139 $ 26,202 $ 215,737 $ (66,880)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The expense (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ 1,085,409 $ 6,608,100
Deferred:
Federal............................................ (249,000) 140,659 99,484
----------- ------------ ------------
Total income tax expense (benefit)............... $ (249,000) $ 1,226,068 $ 6,707,584
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The principal differences between taxes on income computed at the statutory
federal income tax rate and recorded income tax expense (benefit) for 1996,
1997, or 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Tax computed at statutory rate....................... $ 155,366 $ 1,240,060 $ 6,717,577
Change in valuation allowance........................ (385,000) -- --
Other................................................ (19,366) (13,992) (9,993)
----------- ------------ ------------
Income tax expenses (benefit).................... $ (249,000) $ 1,226,068 $ 6,707,584
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-14
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(9) EARNINGS PER SHARE
Effective for the year beginning January 1, 1997, the Company adopted SFAS
No. 128, EARNINGS PER SHARE. SFAS No. 128 established new standards for
computing and presenting earnings per share and, accordingly, all periods have
been restated. The per share amounts are based on the weighted average number of
basic and dilutive common equivalent shares assumed to be outstanding during the
period of computation. Net income for the calculation of both basic and diluted
earnings per share is the same for all periods.
The calculation of weighted average outstanding shares is as follows:
<TABLE>
<CAPTION>
AVERAGE SHARES
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Basic shares outstanding............................... 8,558,227 8,986,655 9,336,525
Common stock equivalents............................... 385,058 524,213 389,433
---------- ---------- ----------
Diluted shares outstanding............................. 8,943,285 9,510,868 9,725,958
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(10) RELATED-PARTY TRANSACTIONS
The Company incurred royalty expense under an agreement with a stockholder
of the Company of $220,397 in 1996, $530,805 in 1997, and $1,603,821 in 1998, of
which $210,511 and $548,211 was payable at December 31, 1997 and 1998,
respectively.
The Company incurred royalty expense under an agreement with a stockholder
who is a director of the Company of $41,048, $36,722, and zero in 1996, 1997,
and 1998, respectively.
The Company incurred investment consulting expense under an agreement with a
director of the Company of $30,000 in 1997, all of which was paid in 1997. This
agreement expired in 1997.
The Company incurred attorney fees to a director of the Company of $2,692,
$4,401, and $5,545 in 1996, 1997, and 1998, respectively.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosure of fair value information about financial
instruments when it is practicable to estimate that value. The carrying amount
of the Company's cash, trade receivables, trade payables, royalty payables, and
accrued liabilities approximates their estimated fair values due to the
short-term maturities of those financial instruments.
F-15
<PAGE>
DIRECT FOCUS, INC. AND AFFILIATE
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Effective January 4, 1999, Direct Focus, Inc. ("Direct Focus") acquired
substantially all of the assets of Nautilus International, Inc. ("Nautilus").
Direct Focus accounted for the acquisition using the purchase method of
accounting. Direct Focus paid $16.0 million in cash for the assets and assumed
approximately $2.5 million in current liabilities. Because of the Nautilus
acquisition, several adjustments and factors will impact the comparability of
our historical financial results with our future results of operations. The
following unaudited pro forma combined financial statements reflect: (1) certain
adjustments for the effects of purchase accounting; (2) certain assumptions
described below regarding financing and cash management aspects of the
transaction; and (3) a provision for income taxes as if the combined operations
had been taxed as a C-corporation for all periods presented.
In addition, the unaudited pro forma combined balance sheet has been
prepared as if the Nautilus acquisition had occurred on December 31, 1998. The
unaudited pro forma combined statement of operations was prepared as if the
Nautilus acquisition were consummated on January 1, 1998. Direct Focus believes
that all adjustments necessary to present fairly the unaudited pro forma
combined financial statements have been made. These financial statements are not
necessarily indicative of what actual results would have been had the
transaction occurred on January 1, 1998, nor do they purport to indicate the
future results of Direct Focus's operations. The unaudited pro forma combined
financial statements should be read in conjunction with our financial statements
and accompanying notes and the financial statements of Nautilus and related
notes appearing elsewhere in this prospectus.
The costs of the acquisition have been allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition as
determined by management. The allocation of the costs of acquisitions is
preliminary while the Company obtains final information regarding the fair
values of all assets acquired; however, management believes that any adjustments
to the amounts allocated will not have a material effect on the Company's
financial position or results of operations.
F-16
<PAGE>
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
DIRECT FOCUS,
INC. NAUTILUS ADJUSTMENTS PRO FORMA
---------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents............... $ 18,910,675 13,309 $ (16,013,309 (1) $ 2,910,675
Trade Receivables....................... 218,207 3,226,325 (193,332 (2) 3,251,200
Inventories............................. 2,614,673 4,024,132 (1,000,000 (2) 5,638,805
Prepaid expenses and other current
assets................................ 594,146 111,551 -- 705,697
---------------- ------------- --------------- -------------
Total current assets.................. 22,337,701 7,375,317 17,206,641 12,506,377
Property:................................. 1,842,712 10,692,938 (2,058,585 (2) 10,477,065
Other Assets.............................. 192,859 618,808 3,601,764 )(3 4,413,431
---------------- ------------- --------------- -------------
Total..................................... $ 24,373,272 $ 18,687,063 $ (15,663,462) $ 27,396,873
---------------- ------------- --------------- -------------
---------------- ------------- --------------- -------------
Current Liabilities:
Trade payables.......................... $ 3,602,074 $ 348,175 408,664(2) $ 4,358,913
Income taxes payable.................... 504,775 -- -- 504,775
Accrued liabilities..................... 2,548,401 2,168,174 -- 4,716,575
Due to affiliate........................ -- 39,733,312 (39,733,312 (4) --
---------------- ------------- --------------- -------------
Total current liabilities............. 6,655,250 42,249,661 (39,324,648) 9,580,263
Long-term Liabilities..................... 66,880 98,588 -- 165,468
Total Stockholders' Equity................ 17,651,142 (23,661,186) 23,661,186(4) 17,651,142
---------------- ------------- --------------- -------------
Total..................................... $ 24,373,272 $ 18,687,063 $ (15,663,462) $ 27,396,873
---------------- ------------- --------------- -------------
---------------- ------------- --------------- -------------
</TABLE>
- ------------------------
(1) Represents $16.0 million cash paid for Nautilus and cash not acquired from
Nautilus.
(2) To record the estimated fair value of assets acquired and liabilities
assumed in the Nautilus acquisition. The purchase price was comprised of
$16.0 million in cash and $2.5 million in assumed current liabilities.
<TABLE>
<CAPTION>
NAUTILUS
HISTORICAL
NET ASSETS ACQUIRED DECEMBER 31, 1998 FAIR VALUE
- ----------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Accounts receivables....................................... $ 3,226,325 $ 3,032,993(a)
Inventories................................................ 4,024,132 3,024,132(b)
Prepaid expenses and other current assets.................. 111,551 111,551
Furniture and equipment.................................... $ 10,692,938 8,634,353
Liabilities assumed........................................ (2,614,937) (2,523,601)(c)
----------------- -------------
Total...................................................... $ 15,440,009 $ 12,279,428
----------------- -------------
----------------- -------------
</TABLE>
(a) Excludes $193,332 of current receivables not purchased.
(b) Reflects $1 million of inventories related to Nautilus products which
will be discontinued.
(c) Excludes $91,336 of liabilities not assumed and includes $500,000 of
acquisition costs.
F-17
<PAGE>
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
(3) Includes $4,220,572 representing the estimated fair value of the Nautilus
brand trademark, less $618,808 of finance notes receivable not acquired by
Direct Focus.
(4) Reflects the elimination of Nautilus' deficit and amounts due to an
affiliate, which Direct Focus did not assume.
F-18
<PAGE>
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
DIRECT FOCUS, PRO FORMA
INC. NAUTILUS ADJUSTMENTS PRO FORMA
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales................................ $ 57,296,880 $ 19,303,816 $ -- $ 76,600,696
Cost of Sales............................ 12,442,307 15,016,987 (1,069,827)(1) 26,389,467
---------------- -------------- ----------------- -----------------
Gross profit........................... 44,854,573 4,286,829 1,069,827 50,211,229
Total Operating Expenses................. 25,966,567 8,908,559 (267,336)(2) 34,607,790
Impairment Charges....................... -- 11,100,000 (11,100,000)(3) --
---------------- -------------- ----------------- -----------------
Operating income (loss)................ 18,888,006 (15,721,730) 12,437,163 15,603,439
Interest Expense......................... (455) (3,142,238) 2,754,256(4) (388,437)
Other Income (Expense)................... 305,527 81,244 (608,205)(5) (221,434)
---------------- -------------- ----------------- -----------------
Net income (loss) before income
taxes................................ 19,193,078 (18,782,724) 14,583,214 14,993,568
Income Taxes............................. 6,707,584 -- (1,469,829)(6) 5,237,755
---------------- -------------- ----------------- -----------------
Net Income (Loss)........................ $ 12,485,494 $ (18,782,724) $ 16,053,042 $ 9,755,812
---------------- -------------- ----------------- -----------------
---------------- -------------- ----------------- -----------------
Basic Earnings Per Share................. $ 1.34 $ 1.04
---------------- -----------------
---------------- -----------------
Diluted Earnings Per Share............... $ 1.28 $ 1.00
---------------- -----------------
---------------- -----------------
Basic Outstanding Shares................. 9,336,525 9,336,525
---------------- -----------------
---------------- -----------------
Diluted Outstanding Shares............... 9,725,958 9,725,958
---------------- -----------------
---------------- -----------------
</TABLE>
- ------------------------
(1) Reflects a $1.1 million decrease in depreciation expense associated with the
depreciation of acquired property with an estimated fair value of $8.6
million. The depreciation is on a straight-line basis over periods ranging
from 7 to 31.5 years.
(2) Reflects a $211,000 decrease in total operating expenses relating to the
reduced amortization of the estimated intangible asset value of $4.2 million
on a straight-line basis over a period of 20 years and depreciation expense
of $56,000 on acquired assets.
(3) The $11.1 million adjustment eliminates the effect of a one-time impairment
charge taken by Nautilus International in connection with the revaluation of
its assets based upon the $18.5 million acquisition price (including
assumption of $2.5 million of current liabilities.)
(4) Reflects a $2.8 million decrease in interest expense, which would have
resulted had the acquisition occurred on January 1, 1998.
(5) Reflects a $608,000 decrease in other income relating to interest income
that we would have foregone by using cash in the acquisition.
(6) The $1.5 million decrease in income tax expense reflects income tax expense
at our effective tax rates after giving effect to the adjustments described
above.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors of
Delta Woodside, Inc.:
We have audited the accompanying combined balance sheets of the Nautilus
Business (the "Business"), as described in Note 1, as of June 28, 1997 and June
27, 1998, and the related combined statements of operations and accumulated
deficit and cash flows for each of the years in the three-year period ended June
27, 1998. These combined financial statements are the responsibility of the
Business' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Business as of
June 28, 1997 and June 27, 1998, and the results of its operations and cash
flows for each of the years in the three-year period ended June 27, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
October 2, 1998
F-20
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1997 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash............................................................................ $ 1,790 $ 1,600
Accounts receivable (notes 3 and 9):
Customer........................................................................ 4,196,491 4,414,042
Financed notes.................................................................. 792,438 473,171
Other........................................................................... 155,049 74,912
Less allowance for doubtful accounts............................................ (1,723,982) (1,604,407)
-------------- --------------
3,419,996 3,357,718
-------------- --------------
Inventories (notes 2 and 9):
Raw materials................................................................. 2,078,598 1,730,295
Work in process............................................................... 1,597,676 1,614,862
Finished goods................................................................ 702,141 970,206
Supplies...................................................................... 25,574 20,661
-------------- --------------
4,403,989 4,336,024
-------------- --------------
Prepaids and other current assets (note 2)...................................... 125,544 122,103
-------------- --------------
Total current assets.......................................................... 7,951,319 7,817,445
-------------- --------------
Property, plant and equipment, net (note 4)....................................... 12,897,432 11,522,745
Financed notes receivable (note 3)................................................ 2,241,777 1,771,773
Intangible assets, net (note 5)................................................... 11,476,601 1,987,961
-------------- --------------
$ 34,567,129 $ 23,099,924
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................ 271,892 515,223
Bank overdraft.................................................................. 552,658 469,963
Accrued employee compensation................................................... 824,194 1,084,480
Other accrued expenses (note 6)................................................. 1,946,448 1,046,636
Due to affiliates, net (note 9)................................................. 33,011,924 36,992,270
Current bond obligations........................................................ 116,566 --
-------------- --------------
Total current liabilities..................................................... 36,723,682 40,108,572
-------------- --------------
Other liabilities................................................................. 70,000 13,138
-------------- --------------
Total liabilities............................................................. 36,793,682 40,121,710
-------------- --------------
Stockholder's deficit:
Common stock, $1 par value, authorized, issued and outstanding 100 shares......... 100 100
Additional paid in capital...................................................... 10,692,506 10,692,506
Accumulated deficit............................................................. (12,919,159) (27,714,392)
-------------- --------------
Total stockholder's deficit................................................... (2,226,553) (17,021,786)
-------------- --------------
Commitments and contingencies
$ 34,567,129 $ 23,099,924
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to combined financial statements
F-21
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales........................................................ $ 28,591,447 $ 21,935,298 $ 20,851,063
Cost of goods sold............................................... 19,914,644 17,134,933 16,291,581
-------------- -------------- --------------
Gross profit................................................... 8,676,803 4,800,365 4,559,482
-------------- -------------- --------------
Selling, general and administrative expenses..................... (13,463,038) (11,014,925) (7,704,677)
Impairment charges (note 2)...................................... -- -- (8,800,000)
Intercompany management fees..................................... (228,000) (302,428) (194,471)
Royalty income (note 2).......................................... 474,125 445,121 268,779
Other income (expense)........................................... 4,028 90,265 (42,871)
-------------- -------------- --------------
Operating loss................................................. (4,536,082) (5,981,602) (11,913,758)
-------------- -------------- --------------
Interest income (expense):
Interest income................................................ 662,615 160,913 112,966
Interest expense............................................... (67,656) (19,141) (24,774)
Intercompany interest expense.................................. (1,879,433) (2,158,509) (2,969,667)
-------------- -------------- --------------
(1,284,474) (2,016,737) (2,881,475)
-------------- -------------- --------------
Loss before taxes................................................ (5,820,556) (7,998,339) (14,795,233)
Income tax benefit (note 8)...................................... (2,495,057) (1,202,379) --
-------------- -------------- --------------
Net loss (3,325,499) (6,795,960) (14,795,233)
Accumulated deficit, beginning of year........................... (2,797,700) (6,123,199) (12,919,159)
-------------- -------------- --------------
Accumulated deficit, end of year................................. $ (6,123,199) $ (12,919,159) $ (27,714,392)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements
F-22
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net loss....................................................... $ (3,325,499) $ (6,795,960) $ (14,795,233)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation................................................. 1,351,164 1,469,573 1,486,652
Amortization................................................. 692,753 689,846 688,640
Deferred taxes............................................... (1,944,345) (1,185,199) --
Impairment charges........................................... -- -- 8,800,000
Provision for losses on accounts receivable.................. 123,426 283,626 (119,575)
(Gain) loss on sale of property and equipment................ -- (83,267) 1,595
Changes in operating assets and liabilities:
Accounts receivable........................................ 2,595,441 1,543,410 651,857
Inventories................................................ (292,303) (231,699) 67,965
Prepaids and other current assets.......................... 73,130 317,671 3,441
Other noncurrent assets.................................... 111,268 -- --
Accounts payable........................................... (333,376) (658,453) 243,331
Bank overdraft............................................. 406,725 20,710 (82,695)
Accrued employee compensation.............................. 53,057 159,367 260,286
Other accrued expenses..................................... 478,266 412,894 (899,812)
Other liabilities.......................................... 15,664 (669,103) (56,862)
-------------- -------------- --------------
Net cash provided (used) by operating activities......... 5,371 (4,726,584) (3,750,410)
-------------- -------------- --------------
Investing activities:
Purchases of property, plant and equipment..................... (863,354) (620,288) (121,185)
Proceeds from sale of property, plant and equipment............ -- 266,386 7,625
-------------- -------------- --------------
Net cash used by investing activities.................... (863,354) (353,902) (113,560)
-------------- -------------- --------------
Financing activities:
Principal payments on bond obligations......................... (9,576) (58,661) (116,566)
Change in due to affiliates, net............................... 874,811 5,131,415 3,980,346
-------------- -------------- --------------
Net cash provided by financing activities................ 865,235 5,072,754 3,863,780
-------------- -------------- --------------
Increase (decrease) in cash...................................... 7,252 (7,732) (190)
Cash at beginning of year........................................ 2,270 9,522 1,790
-------------- -------------- --------------
Cash at end of year.............................................. $ 9,522 $ 1,790 $ 1,600
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Interest paid.................................................. $ 1,879,433 $ 2,158,509 $ 2,969,667
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 27, 1998
(1) BASIS OF PRESENTATION
The combined financial statements include the operations and accounts of
Nautilus International, Inc., a Virginia corporation, and the Nautilus
trademark, combined and referred to herein as the Business. The Business is
owned by Alchem Capital Corporation, a wholly owned subsidiary of Delta Woodside
Industries, Inc. ("DWI"). The accompanying combined financial statements have
been prepared for purposes of depicting the combined financial position and
results of operations of the Business on a historical cost basis.
All balances and transactions among the Business have been eliminated in
combination. Balances and transactions with other affiliates have not been
eliminated in the combination and are reflected as affiliate balances and
transactions.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
The Business designs, manufactures, markets and services fitness
equipment. The Business sells its products and services in the domestic
market through direct sales representatives, distributors and dealers.
Internationally, the Business sells its products and services through a
network of distributors.
(B) FISCAL YEAR
The Business' operations are based upon a fifty-two, fifty-three week
fiscal year ending on the Saturday closest to June 30. Fiscal years 1996,
1997 and 1998 each consist of 52 weeks.
(C) INVENTORIES
Inventories are stated at the lower of cost or market determined using
the first-in, first-out (FIFO) method.
Included in finished goods inventories are consignment inventory balances
which represent equipment which is used by customers on a trial basis.
The Business does not record revenue for trial equipment until the
customer agrees to purchase the items. However, in order to account for
the risk of loss if this equipment is not returned to the Business, a
reserve has been established where this equipment is depreciated over 3
years. The net book value of this consignment inventory is approximately
$49,000 and $43,000 as of June 28, 1997 and June 27, 1998, respectively.
Included in finished goods inventories are used equipment which customers
trade-in when purchasing new equipment. The Business values this
equipment at the trade-in allowance and attempts to sell these items to
customers in the used fitness equipment market. The net book value of
this inventory is approximately $202,000 and $177,000 as of June 28, 1997
and June 27, 1998, respectively.
(D) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated on the basis of cost.
Depreciation is computed by the straight-line method for financial
reporting based on estimated useful lives of 3 to 31.5 years, and by
accelerated methods for income tax reporting.
F-24
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Business adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, in fiscal year 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets.
The Business' assets held for sale include all net assets except for
intercompany balances with affiliates. The net value of assets held for
sale have been written down to their estimated fair market value, which
is the net estimated purchase price of the Business of approximately
$20.0 million. Therefore, in order to value these assets held for sale at
their estimated fair market value, the Business has recorded an
impairment charge of $8.8 million during 1998 which was recorded as a
reduction in intangible assets, net.
(F) OTHER ASSETS
Other assets consist principally of prepaid insurance and prepaid
expenses for booth space related to future trade shows.
(G) RESEARCH AND DEVELOPMENT, AND ADVERTISING
Research and development, and advertising costs are expensed as incurred.
Research and development costs amounted to approximately $666,000,
$692,000 and $593,000 in 1996, 1997 and 1998, respectively. Advertising
costs amounted to approximately $2,820,000, $1,142,000 and $600,000 in
1996, 1997 and 1998, respectively.
(H) REVENUE RECOGNITION
Sales are recorded upon shipment if the products are shipped with a
common carrier or upon installation if the Business' truck fleet is used
for delivery of the products.
(I) ROYALTY INCOME
The Business licenses its products through International Apparel
Marketing Corporation, a subsidiary of the Business' parent, Delta
Woodside Industries, Inc. The Business receives 35% of the royalties
earned by International Apparel Marketing Corporation on the Nautilus
licensees. The Business' current licensing agreements expire at various
intervals from September 30, 1998 to January 31, 2000, with renewal
options ranging from zero to three years. In addition, the Business
receives royalty income directly from various customer sources which is
primarily due to licensing fees for use of the Nautilus name in fitness
clubs.
(J) INCOME TAXES
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
F-25
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) YEAR 2000
In 1998, the Business recognized its computer programs are not Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
As of June 27, 1998, the Business has not begun to convert its systems to
be Year 2000 compliant. If the Business were to not become Year 2000
compliant by January 1, 2000, it may have a material adverse impact on
the Business' operations.
(L) WARRANTY COSTS
The Business offers product warranties to all its customers. These
warranties include a lifetime warranty on the structural frame, welded
moving parts and weight stacks, a 120 day warranty on upholstery and
padded items, and a one-year warranty on all other parts. Warranty
expense was approximately $373,000, $287,000 and $367,000 for fiscal
years 1996, 1997 and 1998, respectively. Accrued warranty expense, which
is included in other accrued expenses, was approximately $177,000 as of
June 28, 1997 and June 27, 1998.
(M) COMMITMENTS AND CONTINGENCIES
The Business has been named as a "potentially responsible party" under
the Comprehensive Environmental Response, Compensation, and Liability Act
with respect to three hazardous waste sites. To the Business' knowledge,
all of the transactions with these sites were conducted by a corporation
whose assets were sold in 1990 pursuant to the terms of an order of the
United States Bankruptcy Court to another corporation, the stock of which
was subsequently acquired by the Business in January 1993. The Business,
therefore, has denied any responsibility at the sites and has declined to
participate in any settlements. Accordingly, the Business has not
provided for any reserves for costs or liabilities attributable to the
previous corporation. At two sites, the previous company is listed as a
"de minimis" party. At the third site, the previous company is ranked
eleventh out of a total of over 300 potentially responsible parties based
on the company's volume of contribution of about 3.0%. Latest estimates
of certain costs to clean up the site range up to $4 million. Although
there is uncertainty as to several legal issues, the Business believes
that it has certain defenses to liability at these sites and the
potential liabilities arising from these three sites will not have a
materially adverse impact on the Business.
From time to time, the Business is a defendant in legal actions involving
claims arising in the normal course of business, including product
liability claims. The Business believes that, as a result of legal
defenses, insurance arrangements and indemnification provisions with
parties believed to be financially capable, none of these actions should
have a material effect on its operations or financial condition.
(N) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-26
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(3) ACCOUNTS RECEIVABLE
The Business' customer receivable balances are due in a lump-sum from
various customers.
The Business' financed receivable balances relate to customer receivable
balances which are due in equal installments over periods of time ranging up to
60 months. This program was used as an additional incentive to promote
purchasing of the Business' products by domestic customers. This program was
discontinued in May 1996 and all sales transactions are now payable within
normal trade credit terms.
In May 1996, the Business sold approximately $5.8 million of its financed
receivable balances to a financial institution under a purchase agreement.
Approximately $0.9 million of these receivable balances were sold without
recourse while approximately $4.9 million of these receivable balances were sold
with recourse. The receivable balances sold with recourse have been accounted
for as a sale, in accordance with Statement of Financial Standards No. 77
"Reporting by Transferors for Transfers of Receivables with Recourse." The net
loss on this sale was approximately $150,000 after a contingency of $250,000 for
the Business' estimated future obligations related to the sale was accrued as of
the sale date. The remaining contingency reserve as of June 28, 1997 and June
27, 1998 was $180,000 and $108,000, respectively. As of June 28, 1997 and June
27, 1998, the outstanding balance of these receivables sold with recourse was
approximately $3,558,000 and $1,973,000, respectively.
Other receivable balances are principally due to royalty and employee
receivables.
Changes in the reserve for doubtful accounts are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year.............................................. $ 1,316,930 $ 1,440,356 $ 1,723,982
Charged to expense...................................................... 307,379 532,564 102,803
Balances written-off.................................................... (183,953) (248,938) (222,378)
------------ ------------ ------------
Balances, end of year................................................... $ 1,440,356 $ 1,723,982 $ 1,604,407
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT, NET
Details of property, plant and equipment, net are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1997 1998
----------- ------------- -------------
<S> <C> <C> <C>
Land and land improvements............................................. N/A $ 204,813 $ 204,813
Buildings.............................................................. 31.5 6,289,177 6,332,855
Machinery and equipment................................................ 10 9,387,138 9,781,880
Computers and software................................................. 3-5 706,565 737,621
Furniture and fixtures................................................. 7 356,192 356,192
Leasehold improvements................................................. 4 138,286 138,286
Automobiles............................................................ 7 83,520 83,520
Construction in progress............................................... N/A 363,334 --
------------- -------------
17,529,025 17,635,167
Less accumulated depreciation and amortization......................... (4,631,593) (6,112,422)
------------- -------------
Property, plant and equipment, net..................................... $ 12,897,432 $ 11,522,745
------------- -------------
------------- -------------
</TABLE>
F-27
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(4) PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED)
Property, plant and equipment balances are stated at cost. Depreciation on
plant and equipment is calculated on the straight-line method over the estimated
useful lives of the assets.
(5) INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Goodwill............................................................................ $ 4,957,682 $ --
Trademark........................................................................... 6,553,000 6,553,000
Non-compete agreements.............................................................. 1,708,831 1,708,831
Other............................................................................... 1,025,622 1,025,622
------------- -------------
14,245,135 9,287,453
Less accumulated amortization....................................................... (2,768,534) (7,299,492)
------------- -------------
Intangible assets, net.............................................................. $ 11,476,601 $ 1,987,961
------------- -------------
------------- -------------
</TABLE>
During 1998, an impairment charge was recorded in accordance with SFAS 121
and resulted in a write-off of net goodwill of approximately $4.3 million and
accumulated amortization on the remaining intangible assets was increased by
approximately $4.5 million.
Normal amortization of intangible assets is computed using the straight-line
method. The excess of cost over assigned value of net assets acquired relating
to certain business combinations was amortized to expense over 40 years. Other
intangible assets are being amortized over periods of 5 to 40 years, but
averaging approximately 16 years.
(6) OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Customer deposits..................................................................... $ 290,433 $ 330,571
Accrued loss on sale of receivables................................................... 180,000 108,000
Accrued insurance..................................................................... 92,060 113,866
Accrued warranty costs................................................................ 177,401 177,401
Deferred compensation................................................................. 646,420 13,138
Accrued commissions................................................................... 146,988 36,587
Accrued legal......................................................................... 129,371 86,745
Other................................................................................. 283,775 180,328
------------ ------------
$ 1,946,448 $ 1,046,636
------------ ------------
------------ ------------
</TABLE>
(7) LEASES
The Business also has several noncancelable operating leases relating to
buildings, machinery and equipment, computer systems, and trailers.
F-28
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(7) LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
June 27, 1998 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 252,134
2000.............................................................................. 225,494
2001.............................................................................. 218,066
2002.............................................................................. 80,446
2003.............................................................................. 20,128
Thereafter........................................................................ --
----------
$ 796,268
----------
----------
</TABLE>
Rent expense for all operating leases was approximately $603,000, $480,000
and $364,000 for fiscal years 1996, 1997 and 1998, respectively.
(8) INCOME TAXES
The Business reports Federal income taxes in the consolidated return of
Delta Woodside Industries, Inc. (DWI) and had taxable losses of $5.9 million
which will be reported in the fiscal 1998 consolidated Federal income tax return
of its parent, DWI. The consolidated group had a tax loss of $27 million, which
will be carried forward to offset future taxable income. The Federal income tax
obligation or refund under the corporate tax sharing agreement that is allocated
to the Business is substantially determined as if the Business were filing a
separate Federal income tax return. The Business' Federal tax liability or
receivable is paid to or is a receivable from the parent company.
Federal and state income tax benefit was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- ----------
<S> <C> <C> <C>
Current:
Federal............................................................... $ -- $ -- $ --
State................................................................. (550,712) (17,180) --
------------- ------------- ----------
Total current..................................................... (550,712) (17,180) --
Deferred:
Federal............................................................... (1,881,000) (1,027,225) --
State................................................................. (63,345) (157,974) --
------------- ------------- ----------
Total deferred.................................................... (1,944,345) (1,185,199) --
------------- ------------- ----------
Income tax benefit...................................................... $ (2,495,057) $ (1,202,379) $ --
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
F-29
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(8) INCOME TAXES (CONTINUED)
A reconciliation between income tax benefit computed using the effective
income tax rate and the federal statutory income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Income tax benefit at the statutory rate............................. $ (1,978,989) $ (2,719,435) $ (5,030,379)
State income tax benefit, net of federal income taxes................ (41,806) (115,602) --
Valuation allowance adjustments...................................... 160,196 2,191,404 3,681,592
Non-deductible amortization.......................................... -- -- 1,462,000
Other................................................................ (634,458) (558,746) (113,213)
------------- ------------- -------------
Income tax benefit................................................... $ (2,495,057) $ (1,202,379) $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Significant components of the Business' deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................................................... $ 4,994,065 $ 7,407,672
Inventory......................................................................... 222,047 181,034
Allowance for doubtful accounts................................................... 539,780 196,843
Accrued vacation.................................................................. 142,088 129,563
Other............................................................................. 667,449 616,135
------------- -------------
Gross deferred tax assets........................................................... 6,565,429 8,531,247
Less valuation allowance............................................................ (2,618,647) (6,300,239)
------------- -------------
Net deferred tax assets............................................................. 3,946,782 2,231,008
------------- -------------
Deferred tax liabilities:
Depreciation...................................................................... 2,006,063 1,833,039
Intangibles....................................................................... 1,914,149 127,845
Other............................................................................. 26,570 270,124
------------- -------------
Deferred tax liabilities............................................................ 3,946,782 2,231,008
------------- -------------
Net deferred tax asset (liability)............................................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Business' gross deferred tax assets are reduced by a valuation allowance
to net deferred tax assets considered by management to be more likely than not
realizable. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which these
temporary differences become deductible. The change in the valuation allowance
was an increase of $2,191,404 and $3,681,592 during fiscal year 1997 and 1998,
respectively.
As of June 27, 1998, the Business had approximately regular tax loss
carryforwards of $18.2 million for federal purposes as calculated under the
corporate tax sharing agreement and state net operating losses of approximately
$21 million. These carryforwards expire at various intervals through 2011. In
the event of a sale of the Business, these carryovers most likely will not be
available to the new owner, or their use may be subject to limitation.
F-30
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(9) AFFILIATED PARTY TRANSACTIONS
The Business participates in a cash management system maintained by DWI.
Under this system, excess cash was forwarded to DWI each day, reducing the
current loan payable to affiliate. Likewise, cash requirements were funded daily
by DWI, increasing the current loan payable to affiliate. Interest is charged on
loan payable to DWI balances based on the weighted average cost of DWI's
borrowings. In addition, the Business incurs management fees from DWI for
various corporate services including management, treasury, computer, benefits,
payroll, auditing, accounting and tax services. For these services DWI charges
actual cost based on relative usage and other factors.
The balance with International Apparel Marketing Corporation is due to the
unpaid portion of the Company's 35% of the royalties earned by International
Apparel Marketing Corporation on the Nautilus licenses. The balance with Alchem
Capital Corporation is primarily due to the Nautilus trademark.
Due to (from) affiliates, net balances consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Delta Woodside Industries, Inc..................................................... $ 29,838,338 $ 33,560,436
International Apparel Marketing Corporation........................................ (145,053) (81,665)
Alchem Capital Corporation......................................................... 3,318,639 3,513,499
------------- -------------
Due to affiliates, net............................................................. $ 33,011,924 $ 36,992,270
------------- -------------
------------- -------------
</TABLE>
In May 1998, DWI replaced a $20 million line of credit with a $30 million
revolving credit facility (subject to borrowing base limitations) which is due
in May of 1999. This new facility is backed by certain accounts receivable and
inventory, as defined in the credit agreement, of the Business, Delta Apparel
and Duck Head Apparel, all subsidiaries of DWI.
(10) EMPLOYEE BENEFIT PLANS
The Business participates in the Delta Woodside Industries, Inc. retirement
and 401(k) plans. On September 27, 1997, the Delta Woodside Industries Employee
Retirement Plan ("Retirement Plan") merged into the Delta Woodside Employee
Savings and Investment Plan ("401(k) Plan"). Future contributions to the 401(k)
Plan in lieu of a contribution to the Retirement Plan will be made in cash and
not in stock. In the 401(k) Plan, employees may elect to convert Delta Woodside
Industries (DWI) stock to other funds, but may not increase the amount of stock
in their account. Each participant has the right to direct the trustee as to the
manner in which shares held are to be voted. The Retirement Plan qualified as an
Employee Stock Ownership Plan ("ESOP") under the Internal Revenue Code as a
defined contribution plan. The Business contributed approximately $23,000,
$29,000 and $26,000 to the 401(k) Plan during fiscal 1996, 1997 and 1998,
respectively. The Business contributed approximately $16,000, $52,000 and
$20,000 to the Retirement Plan during fiscal 1996, 1997 and 1998, respectively.
The Business also participates in a 501(c)(9) trust, the Delta Woodside
Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer and
employee contributions from the Business and makes disbursements for health
claims and other qualified benefits.
The Business participates in a Deferred Compensation Plan, managed by DWI,
which permits certain management employees to defer a portion of their
compensation. Deferred compensation
F-31
<PAGE>
NAUTILUS BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1998
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
accounts are credited with interest and are distributed after retirement,
disability or employment termination. As of June 28, 1997 and June 27, 1998, the
Business' liability was approximately $646,000 and $13,000, respectively.
The Business also participates in the Delta Woodside Industries, Inc.
Incentive Stock Award Plan and Stock Option Plan. Under both Plans, the Business
recognized expense of approximately $0, $9,000 and $6,000 for fiscal years 1996,
1997 and 1998, respectively.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values approximate fair values for financial instruments that are
short-term in nature, such as cash, accounts receivable, accounts payable and
accrued expenses. The Business estimates that the fair value of the financed
notes receivable are not materially different than the carrying value.
(12) PENDING SALE
The parent company, DWI, has identified a potential buyer for the Business
and is negotiating the purchase agreement. DWI has committed to fund the
Business' cash deficiency, operations and necessary capital improvements,
including expenses necessary to allow the Business to become Year 2000
compliant, at least until December 31, 1999 in the event that DWI is unable to
complete the sale of the Business.
F-32
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 27,
1998
-------------- DECEMBER 31,
1998
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 1,600 $ 13,309
Accounts receivable:
Customer...................................................................... 4,414,042 3,431,678
Financed notes................................................................ 473,171 380,885
Other......................................................................... 74,912 51,315
Less allowance for doubtful accounts.......................................... (1,604,407) (637,553)
-------------- --------------
3,357,718 3,226,325
-------------- --------------
Inventories..................................................................... 4,336,024 4,024,132
Prepaids and other current assets............................................... 122,103 111,551
-------------- --------------
Total current assets.......................................................... 7,817,445 7,375,317
-------------- --------------
Property, plant and equipment, net................................................ 11,522,745 10,692,938
Financed notes receivable......................................................... 1,771,773 618,808
Intangible assets, net............................................................ 1,987,961 --
-------------- --------------
$ 23,099,924 $ 18,687,063
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................ $ 515,223 $ 256,839
Bank overdraft.................................................................. 469,963 91,336
Accrued employee compensation................................................... 1,084,480 882,699
Other accrued expenses.......................................................... 1,046,636 1,285,475
Due to affiliates, net.......................................................... 36,992,270 39,733,312
-------------- --------------
Total current liabilities..................................................... 40,108,572 42,249,661
-------------- --------------
Other liabilities................................................................. 13,138 98,588
-------------- --------------
Total liabilities............................................................. 40,121,710 42,348,249
-------------- --------------
Stockholder's deficit:
Common stock, $1 par value, authorized, issued and outstanding 100 shares....... 100 100
Additional paid in capital...................................................... 10,692,506 10,692,506
Accumulated deficit............................................................. (27,714,392) (34,353,792)
-------------- --------------
Total stockholder's deficit................................................... (17,021,786) (23,661,186)
-------------- --------------
Commitments and contingencies
$ 23,099,924 $ 18,687,063
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to combined financial statements
F-33
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
------------------------------
DECEMBER 27, DECEMBER 31,
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Net sales......................................................................... $ 10,719,671 $ 9,172,424
Cost of goods sold................................................................ (8,630,779) (7,356,185)
-------------- --------------
Gross profit.................................................................... 2,088,892 1,816,239
-------------- --------------
Selling, general and administrative expenses...................................... (3,426,338) (4,483,635)
Impairment charges................................................................ -- (2,300,000)
Intercompany management fees...................................................... (125,535) (3,573)
Royalty income.................................................................... 181,572 97,724
Other income (expense)............................................................ 58,120 (158,016)
-------------- --------------
Operating loss.................................................................. (1,223,289) (5,031,261)
-------------- --------------
Interest income (expense):
Interest income................................................................. 62,579 34,363
Interest expense................................................................ (24,774) (3,506)
Intercompany interest expense................................................... (1,466,425) (1,638,996)
-------------- --------------
(1,428,620) (1,608,139)
-------------- --------------
Loss before taxes................................................................. (2,651,909) (6,639,400)
Income tax benefit................................................................ -- --
-------------- --------------
Net loss.......................................................................... (2,651,909) (6,639,400)
Accumulated deficit, beginning of period.......................................... (12,919,159) (27,714,392)
-------------- --------------
Accumulated deficit, end of period................................................ $ (15,571,068) $ (34,353,792)
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to combined financial statements
F-34
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
----------------------------
DECEMBER 27, DECEMBER 31,
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss.......................................................................... $ (2,651,909) $ (6,639,400)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation.................................................................... 777,627 795,733
Amortization.................................................................... 346,036 200,454
Impairment charges.............................................................. -- 2,300,000
Provision for losses on accounts receivable..................................... (145,278) (249,594)
Changes in operating assets and liabilities:
Accounts receivable........................................................... (989,531) 1,533,952
Inventories................................................................... 441,280 311,892
Prepaids and other current assets............................................. 8,858 10,552
Accounts payable, bank overdraft, accrued employee compensation and other
accrued expenses............................................................ 461,165 (599,953)
Other liabilities............................................................. 598,054 85,450
------------- -------------
Net cash provided (used) by operating activities............................ (1,153,698) (2,250,914)
------------- -------------
Investing activities:
Purchases of property, plant and equipment........................................ (79,251) (57,419)
------------- -------------
Net cash used by investing activities....................................... (79,251) (57,419)
------------- -------------
Financing activities:
Principal payments on bond obligations............................................ (24,332) --
Change in due to affiliates, net.................................................. 1,257,291 2,320,042
------------- -------------
Net cash provided by financing activities................................... 1,232,959 2,320,042
------------- -------------
Increase (decrease) in cash......................................................... 10 11,709
Cash at beginning of year........................................................... 1,790 1,600
------------- -------------
Cash at end of year................................................................. $ 1,800 $ 13,309
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Interest paid..................................................................... $ 1,466,425 $ 1,638,996
------------- -------------
------------- -------------
Noncash investing and financing activities:
Increase in intangible assets and due to affiliates, net............................ $ -- $ 421,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The combined financial statements include the operations and accounts of
Nautilus International, Inc., a Virginia corporation, and the Nautilus
trademark, combined and referred to herein as the Business. The Business is
owned by Alchem Capital Corporation, a wholly owned subsidiary of Delta Woodside
Industries, Inc. (DWI). The accompanying combined financial statements have been
prepared for purposes of depicting the combined financial position and results
of operations of the Business on a historical cost basis.
The parent company, DWI, has sold certain assets and liabilities of the
Business (as defined in the Asset Purchase Agreement dated November 10, 1998) to
Direct Focus, Inc. The transaction closed on January 4, 1999.
All balances and transactions among the Business have been eliminated in
combination. Balances and transactions with other affiliates have not been
eliminated in the combination and are reflected as affiliate balances and
transactions.
(2) SIGNIFICANT ACCOUNTING POLICIES
The condensed financial statements included herein as of June 27, 1998 and
December 31, 1998 and for the six month periods ended December 27, 1997 and
December 31, 1998 have been prepared by the Business, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments necessary for a fair presentation have been
included, herein and are of a normal, recurring nature.
(3) IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal year 1998, the Business' assets held for sale include all net
assets except for intercompany balances with affiliates. The net value of assets
held for sale have been written down to their estimated fair market value, which
is the net estimated purchase price of the Business of approximately $20.0
million. Therefore, in order to value these assets held for sale at their
estimated fair market value, the Business has recorded an impairment charge of
$8.8 million during 1998, which was recorded as a reduction in intangible
assets, net. However in 1999, the purchase price of certain assets of the
Business was finalized at $16 million plus the assumption of certain
liabilities. Therefore, in order to value these assets held for sale at their
estimated fair market value, the Business recorded an additional impairment
charge of $2.3 million during the period ended December 31, 1998, which was
recorded as a $2.2 million reduction in intangible assets, net and a $.1 million
reduction in property, plant and equipment, net.
F-36
<PAGE>
[Inside back cover of the prospectus includes the following artwork:
In the top left corner of this single page layout is the Bowflex logo,
beneath which is a picture of a male torso surrounded by a picture of the
Bowflex Power Pro XTLU and two pictures of individuals using the Company's
Bowflex machines. The top right corner includes the Direct Focus logo and the
following bullet points: (1) "High quality, branded products"; and (2) "Direct
marketing to control and enhance our image." Immediately below these two images
is the Nautilus logo and a picture of a Nautilus fitness machine with a shaded
Nautilus shell in the background. Below the Nautilus image is the Instant
Comfort logo, together with a picture of the product components and a complete
airbed in a bedroom setting.]
<PAGE>
[OUTSIDE BACK COVER]
[COMPANY LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered, other than the
underwriting discount, all of which shall be borne by the Company. All amounts
shown are estimates except the Securities and Exchange Commission registration
fee, the National Association of Securities Dealers, Inc. filing fee and the
Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
FEES AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Securities and Exchange Commission registration fee............................... $ 5,698
National Association of Securities Dealers, Inc. filing fee....................... $ 2,549
Nasdaq National Market listing fee................................................ $ 78,875
Printing and engraving expenses................................................... $ 100,000
Transfer agent fees............................................................... $ 5,000
Accounting fees and expenses...................................................... $ 60,000
Legal fees and expenses........................................................... $ 150,000
Blue Sky fees and expenses (including related legal fees)......................... $ 5,000
Miscellaneous..................................................................... $ 35,000
----------
Total......................................................................... $ 442,122
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article IX of the registrant's Articles of Incorporation
(Exhibit 3.1 hereto) and Article X of the registrant's Bylaws (Exhibit 3.2
hereto) provide for indemnification of the registrant's directors, officers,
employees and agents to the maximum extent permitted by Washington law. The
directors and officers of the registrant also may be indemnified against
liability they may incur for serving in that capacity pursuant to a liability
insurance policy maintained by the registrant for such purpose. However, the
registrant does not currently have such an insurance policy.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction for which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Section 8.4 of the registrant's Articles of Incorporation contains
provisions implementing, to the fullest extent permitted by the WBCA, such
limitations on a director's liability to the registrant and its shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1996, the Company issued 750,000 shares of its common stock to an
investor with whom the Company had a business relationship, for an aggregate
purchase price of $250,000. As part of the same transaction, the investor could
have acquired warrants to purchase up to 1,280,000 shares of the Company's
common stock at a price of $1.25 per share for one year and then $2.50 per
share, subject to certain conditions. These conditions were not satisfied in
1997 and the warrants were never issued.
II-1
<PAGE>
The Company issued the shares in reliance upon the registration exemption
afforded by Rule 504 of Regulation D.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of registrant.
3.2 Articles of Merger of registrant.
3.3 Articles of Amendment of registrant.
3.4 Bylaws of registrant.
3.5 Amendment to Bylaws of registrant.
5.1* Opinion of Garvey, Schubert & Barer as to the legality of the shares.
10.1 Direct Focus, Inc. Stock Option Plan, as amended.
10.2 Form of Nonstatutory Option Agreement.
10.3 Form of Incentive Stock Option Agreement.
10.4 Lease Agreement dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen Group, Inc.
10.5 First Amendment to Lease dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen
Group, Inc.
10.7 Amendment to Bowflex, Inc. Lease Extension, dated August 27, 1996, between Bowflex, Inc. and Ogden
Business Park Partnership.
10.8 First Amendment to Lease, dated December 10, 1996, between Bowflex, Inc. and Ogden Business Park
Partnership
10.9 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc. and Hart Enterprises
10.10 Amendment to Lease, dated as of October 20, 1998, between Direct Focus, Inc. and LeRoy Hart Rentals.
10.11 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
10.12 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
10.13 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of America, Inc. and Tessema D.
Shifferaw.
10.14 Royalty Payment Agreement, dated as of June 18, 1992, between Tessema D. Shifferaw, Brian R. Cook and
R.E. 'Sandy' Wheeler.
10.15 First Amended and Restated Merchant Agreement dated as January 27, 1999, between Direct Focus, Inc. and
Household Bank (SB), N.A.**
10.16 Exclusive Sales Agreement dated as of January 1, 1996, between Delta Consolidated Corporation and
Novacare, Inc.**
21.1 Subsidiaries of Direct Focus, Inc.
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.2 Consent of KPMG Peat Marwick LLP.
23.3* Consent of Garvey, Schubert & Barer (included in Exhibit 5.1).
24.1 Power of Attorney of Kirland C. Aly.
24.2 Power of Attorney of C. Reed Brown.
24.3 Power of Attorney of Gary L. Hopkins.
24.4 Power of Attorney of Roger J. Sharp.
24.5 Power of Attorney of Roland E. Wheeler.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment
** We have requested confidential treatment for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, we have omitted these confidential portions from this exhibit
and filed them separately with the Commission.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vancouver, State of Washington, on March 1, 1999.
<TABLE>
<S> <C> <C>
DIRECT FOCUS, INC.
By: /s/ BRIAN R. COOK
-----------------------------------------
Brian R. Cook,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
Chairman of the Board,
/s/ BRIAN R. COOK Director, President and
- ------------------------------ Chief Executive Officer March 1, 1999
Brian R. Cook (Principal Executive
Officer)
/s/ ROD W. RICE Chief Financial Officer
- ------------------------------ (Principal Financial and March 1, 1999
Rod W. Rice Accounting Officer)
/s/ KIRKLAND C. ALY*
- ------------------------------ Director March 1, 1999
Kirkland C. Aly
/s/ C. REED BROWN*
- ------------------------------ Director March 1, 1999
C. Reed Brown
/s/ GARY L. HOPKINS*
- ------------------------------ Director March 1, 1999
Gary L. Hopkins
/s/ ROGER J. SHARP*
- ------------------------------ Director March 1, 1999
Roger J. Sharp
/s/ ROLAND E. WHEELER*
- ------------------------------ Director March 1, 1999
Roland E. Wheeler
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROD W. RICE
-------------------------
Rod W. Rice March 1, 1999
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of registrant.
3.2 Articles of Merger of registrant.
3.3 Articles of Amendment of registrant.
3.4 Bylaws of registrant.
3.5 Amendment to Bylaws of registrant.
5.1* Opinion of Garvey, Schubert & Barer as to the legality of the shares.
10.1 Direct Focus, Inc. Stock Option Plan, as amended.
10.2 Form of Nonstatutory Option Agreement.
10.3 Form of Incentive Stock Option Agreement.
10.4 Lease Agreement dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen
Group, Inc.
10.5 First Amendment to Lease dated September 16, 1992, between Bow-Flex of America, Inc. and
Christensen Group, Inc.
10.7 Amendment to Bowflex, Inc. Lease Extension, dated August 27, 1996, between Bowflex, Inc. and
Ogden Business Park Partnership.
10.8 First Amendment to Lease, dated December 10, 1996, between Bowflex, Inc. and Ogden Business
Park Partnership.
10.9 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc. and LeRoy Hart Rentals.
10.10 Amendment to Lease, dated as of October 20, 1998, between Direct Focus, Inc. and LeRoy Hart
Rentals.
10.11 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
10.12 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
10.13 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of America, Inc. and Tessema D.
Shifferaw.
10.14 Royalty Payment Agreement, dated as of June 18, 1992, between Tessema D. Shifferaw, Brian R.
Cook and R.E. 'Sandy' Wheeler.
10.15 First Amended and Restated Merchant Agreement, dated as January 27, 1999, between Direct
Focus, Inc. and Household Bank (SB), N.A.**
10.16 Exclusive Sales Agreement dated as of January 1, 1996, between Delta Consolidated Corporation
and Novacare, Inc.**
21.1 Subsidiaries of Direct Focus, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3* Consent of Garvey, Schubert & Barer (included in Exhibit 5.1).
24.1 Power of Attorney of Kirland C. Aly.
24.2 Power of Attorney of C. Reed Brown.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
24.3 Power of Attorney of Gary L. Hopkins.
24.4 Power of Attorney of Roger J. Sharp.
24.5 Power of Attorney of Roland E. Wheeler.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment
** We have requested confidential treatment for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, we have omitted these confidential portions from this exhibit
and filed them separately with the Commission.
<PAGE>
UNDERWRITING AGREEMENT
_____________, 1999
D.A. DAVIDSON & CO.
As the Representative of the several Underwriters
named on Schedule A hereto
c/o D.A. Davidson & Co.
8 Third Street North
Great Falls, Montana 59403
Ladies and Gentlemen:
Direct Focus, Inc., a Washington corporation (the "COMPANY"), and certain
shareholders of the Company named in Schedule B hereto (hereinafter called the
"SELLING SHAREHOLDERS") address you as the Representative of each of the
persons, firms and corporations listed in Schedule A hereto (hereinafter
collectively called the "UNDERWRITERS") and hereby confirm their respective
agreements with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 825,000
shares of its authorized and unissued Common Stock, having no par value, to the
several Underwriters. The Selling Shareholders, acting severally and not
jointly, propose to sell an aggregate of 175,000 shares of the Company's
authorized and outstanding Common Stock to the several Underwriters. The
825,000 shares of Common Stock of the Company to be sold by the Company are
hereinafter called the "COMPANY SHARES" and the 175,000 shares of Common Stock
to be sold by the Selling Shareholders are hereinafter called the "SELLING
SHAREHOLDER SHARES." The Company Shares and the Selling Shareholder Shares are
hereinafter collectively referred to as the "FIRM SHARES." The Company also
grants to the Underwriters an option to purchase up to 150,000 additional shares
of the Company's Common Stock (the "OPTION SHARES"), as provided in Section 8
hereof. As used in this Agreement, the term "SHARES" shall include the Firm
Shares and the Option Shares. All shares of Common Stock of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "COMMON STOCK."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents and warrants to and agrees with each Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "ACT"), and the applicable rules and regulations
(the "RULES AND REGULATIONS") of the Securities and Exchange Commission (the
"COMMISSION") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "PRELIMINARY
PROSPECTUSES") and of any abbreviated registration statement
<PAGE>
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if D.A. Davidson & Co., on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if D.A.
Davidson & Co., on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "REGISTRATION STATEMENT" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"PROSPECTUS" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of D.A. Davidson & Co., on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the term "PROSPECTUS" shall
mean the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration Statement at
the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "PROSPECTUS" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
D.A. Davidson & Co., on behalf of the several Underwriters, the Company shall
have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c),
as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, at
the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date
(hereinafter defined) and on any later date on which Option Shares are to be
purchased, (i) the Registration Statement and the Prospectus, and any amendments
or supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
-2-
<PAGE>
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that none of the
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter or Selling
Shareholder furnished to the Company by such Underwriter or Selling Shareholder
specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest other than the lien in favor
of Bank of America as the successor to SeaFirst Bank; each of the Company and
its subsidiaries is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which the ownership or leasing of
its properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would not
have a material adverse effect on the condition (financial or otherwise),
results of operations, earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise; no proceeding has
been instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification;
each of the Company and its subsidiaries is in possession of and operating in
compliance with all authorizations, licenses, certificates, consents, orders and
permits from state, federal and other regulatory authorities which are material
to the conduct of its business, all of which are valid and in full force and
effect; neither the Company nor any of its subsidiaries is in violation of its
respective articles of incorporation or bylaws or in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture orother material agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or any of
its subsidiaries or their respective properties may be bound; and neither the
Company nor any of its subsidiaries is in material violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or over their respective properties of
which it has knowledge. The Company does not own or control, directly or
indirectly, any corporation, partnership, limited liability company, joint
venture, association or other entity other than Nautilus Fitness Products, Inc.,
Nautilus, Inc., Nautilus Human Performance Systems, Inc., Direct Focus Sales
Corporation, Instant Comfort Corporation, Direct Focus FSC, Inc., DFI
Properties, LLC and DFI Advertising, Inc.
-3-
<PAGE>
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification and contribution
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, (i) any material bond, debenture, note or other evidence of indebtedness,
or under any material lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other material agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective properties may be bound, (ii) the articles of
incorporation or bylaws of the Company or any of its subsidiaries, or (iii) any
law, order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties is required for the execution
and delivery of this Agreement and the consummation by the Company or any of its
subsidiaries of the transactions herein contemplated, except such as may be
required under the Act, the Securities Exchange Actof 1934, as amended (the
"EXCHANGE ACT"), state or other securities or blue sky laws or the bylaws, rules
and regulations of the National Association of Securities Dealers, Inc. (the
"NASD"), all of which requirements have been satisfied in all material respects.
(e) Except as disclosed in the Prospectus, there is not any pending
or, to the best of the Company's knowledge, threatened action, suit, claim or
proceeding against the Company, any of its subsidiaries or any of their
respective officers or any of their respective properties, assets or rights
before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective officers or properties or otherwise which (i) might result in
any material adverse change in the condition (financial or otherwise), results
of operations, earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise or might materially
and adversely affect their properties, assets or rights, (ii) might prevent
consummation of the transactions provided herein, or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so disclosed;
and there are no agreements, contracts, leases or documents of the Company or
any of its subsidiaries of a character required to be described or referred to
in the Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company (including
the Selling Shareholder Shares) have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal, provincial, and state securities laws, were not issued in violation of
or subject to any pre-emptive rights or other rights to subscribe for or
purchase securities, and the authorized and (as of the date set forth therein)
the outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" and conforms in all material respects to the
statements relating thereto contained in the Registration Statement and the
Prospectus (and such statements correctly state the substance of the instruments
defining the capitalization of the Company in all material respects); the Firm
Shares and the Option Shares to be purchased from the Company hereunder have
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest other than the
lien in favor of Bank of America as the successor in interest to SeaFirst Bank;
and no pre-emptive right, co-sale right, registration right, right of first
refusal or other similar right of shareholders exists with respect to any of the
Firm Shares or Option Shares to be purchased from the Company hereunder or the
issuance and sale thereof other than those that have been expressly waived prior
to the date hereof and those that will automatically expire upon or will not
apply to the consummation of the transactions contemplated on the Closing Date
(as defined in Section 4 hereof). No further approval or authorization of any
shareholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be
-4-
<PAGE>
required under the Act, state or other securities or blue sky laws or the
bylaws, rules and regulations of the NASD. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any pre-emptive right, or other rights to subscribe
for or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, neither the
Company nor any of its subsidiaries has outstanding any options to purchase, or
any pre-emptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) Deloitte & Touche LLP which has audited the financial statements
of the Company, together with the related notes, as of December 31, 1997 and
December 31, 1998 and for each of the years in the three (3) years ended
December 31, 1998 filed with the Commission as a part of the Registration
Statement and which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; KPMG Peat Marwick
LLP, which has examined the financial statements of the Nautilus Business
("NAUTILUS"), substantially all the assets of which having been acquired by the
Company in a transaction consummated on January 4, 1999, together with the
related schedules and notes, as of June 28, 1997 and June 27, 1998 and for each
of the two (2) years ended June 27, 1998, filed with the Commission as part of
the Registration Statement and which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited financial statements of the Company, together with the
related schedules and notes, and the unaudited pro forma financial information,
together with the related explanatory notes, forming part of the Registration
Statement and Prospectus, fairly present the financial position and the results
of operations of the Company and its subsidiaries at the respective dates and
for the respective periods to which they apply; and all audited financial
statements of the Company, together with the related schedules and notes, and
the unaudited pro forma financial statements (other than the selected and
summary financial and statistical data included in the Registration Statement),
filed with the Commission as part of the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), results of
operations, earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (ii) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or (other than through the exercise of
options or warrants disclosed in the Prospectus) outstanding indebtedness of the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise, (v) any dividend or distribution of
any kind declared, paid or made on the capital stock of the Company or any of
its subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the condition
(financial or otherwise), results of operations, earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise.
(i) Except as set forth in the Registration Statement and Prospectus,
(i) each of the Company and its subsidiaries has good and marketable title to
all properties and assets described in the Registration Statement and Prospectus
as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than the lien in favor of
SeaFirst Bank or its successor and, other than such as would not have a material
adverse
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effect on the condition (financial or otherwise), results of operations,
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) the agreements to which the
Company or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company and
its subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its subsidiaries has valid and enforceable leases for all properties described
in the Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), results of operations, earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; and all tax liabilities are adequately provided for on the books
of the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with insurers
of recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, (i) insurance covering real and personal property owned or
leased by the Company or its subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, and (ii)
product liability insurance concerning the products sold by the Company, all of
which insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), results of operations,
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(l) To the best of the Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is imminent;
and the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers, value added resellers,
authorized dealers or international distributors that might be expected to
result in a material adverse change in the condition (financial or otherwise),
results of operations, earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise. No collective
bargaining agreement exists with any of the Company's employees and, to the best
of the Company's knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), results of operations,
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise; except to the extent described in the
Registration Statement and the Prospectus, the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and except to the extent described in the Registration
Statement and the Prospectus, the Company has not received any notice of, and
has no knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights,
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inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
condition (financial or otherwise), results of operations, earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(n) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is approved for quotation on the Nasdaq National Market, and
the Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the 1934 Act or delisting
the Common Stock from the Nasdaq National Market, nor has the Company received
any notification that the Commission or the NASD is contemplating terminating
such registration or listing.
(o) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 ACT"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) the completion of the distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(q) Neither the Company nor any of its subsidiaries has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
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<PAGE>
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company and each Selling
Shareholder has agreed in writing that each such person will not, for a period
of 180 days from the date that the Registration Statement is declared effective
by the Commission (the "LOCK-UP PERIOD"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "DISPOSITION") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "SECURITIES") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, or (ii) with the prior written consent
of D.A. Davidson & Co. The foregoing restriction has been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the agreements pursuant to which
its officers, directors and shareholders have agreed to such or similar
restrictions (the "LOCK-UP AGREEMENTS") presently in effect or effected hereby.
The Company hereby represents and warrants that it will not release any of its
officers, directors or other shareholders from any Lock-up Agreements currently
existing or hereafter effected without the prior written consent of D.A.
Davidson & Co.
(t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in material compliance with all rules, laws and regulations
applicable to its business, including, without limitation, laws, rules and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws"),
(ii) the Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is required to
be disclosed in the Registration Statement and the Prospectus, (iii) the Company
will not be required to make future material capital expenditures to comply with
Environmental Laws, and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
(u) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) The minute books of the Company provided to the Underwriters'
counsel contain a complete
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summary of all meetings, consents and actions of the Board of Directors and
shareholders of the Company since January 1, 1997, accurately reflecting all
transactions referred to in such minutes in all material respects.
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE SELLING
SHAREHOLDERS. Each Selling Shareholder, severally and not jointly, represents
and warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Shareholder now has and on the Closing Date will
have valid marketable title to the Shares to be sold by such Selling
Shareholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest other than pursuant to this Agreement; and upon
delivery of such Shares hereunder and payment of the purchase price as herein
contemplated, each of the Underwriters will obtain valid marketable title to the
Shares purchased by it from such Selling Shareholder, free and clear of any
pledge, lien, security interest pertaining to such Selling Shareholder or such
Selling Shareholder's property, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Shareholder.
(b) Such Selling Shareholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the Representative,
an irrevocable Power of Attorney (the "POWER OF ATTORNEY") appointing Brian R.
Cook and Rod W. Rice as attorneys-in-fact (collectively, the "ATTORNEYS" and
individually, an "ATTORNEY") and a Letter of Transmittal and Custody Agreement
(the "CUSTODY AGREEMENT") with ______________________________, as custodian (the
"CUSTODIAN"); each of the Power of Attorney and the Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Shareholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 7(h) hereof on behalf of
such Selling Shareholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Shareholder as provided in Section 4
hereof, to authorize the delivery of the Selling Shareholder Shares under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Shareholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Shareholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of such
Selling Shareholder of this Agreement and the sale and delivery of the Selling
Shareholder Shares under this Agreement, the issuance of the order of the
Commission declaring the Registration Statement effective and such consents,
approvals, authorizations or orders as may be necessary under state or other
securities or Blue Sky laws and the bylaws, rules and regulations of the NASD)
have been obtained and are in full force and effect; such Selling Shareholder,
if other than a natural person, has been duly organized and is validly existing
in good standing under the laws of the jurisdiction of its organization as the
type of entity that it purports to be; and such Selling Shareholder has full
legal right, power and authority to enter into and perform its obligations under
this Agreement and such Power of Attorney and Custody Agreement, and to sell,
assign, transfer and deliver the Shares to be sold by such Selling Shareholder
under this Agreement.
(d) Such Selling Shareholder will not, during the Lock-up Period,
effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Shareholder or with respect to which such Selling
Shareholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, or (ii) with the prior written consent
of D.A. Davidson & Co. The foregoing restriction is expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the Selling Shareholder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option)
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with respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Such Selling Shareholder also
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
Selling Shareholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares and securities
which are convertible into Shares to be sold by such Selling Shareholder under
this Agreement, together with a stock power or powers duly endorsed in blank by
such Selling Shareholder, have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any material bond, debenture, note
or other evidence of indebtedness, or under any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder, or any Selling Shareholder Shares hereunder, may be
bound or, to the best of such Selling Shareholders' knowledge, result in any
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over such Selling Shareholder or over the
properties of such Selling Shareholder, or, if such Selling Shareholder is other
than a natural person, result in any violation of any provisions of the charter,
bylaws or other organizational documents of such Selling Shareholder.
(g) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling Shareholder
Shares that is contained in the representations and warranties of such Selling
Shareholder in such Selling Shareholder's Power of Attorney or set forth in the
Registration Statement or the Prospectus is, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date, was or will be, true, correct
and complete, and does not, and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(j) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date and
will advise one of its Attorneys and D.A. Davidson & Co. prior to the Closing
Date if any statement to be made on behalf of such Selling Shareholder in the
certificate contemplated by Section 7(i) would be inaccurate if made as of the
Closing Date.
(k) Such Selling Shareholder does not have, or has waived prior to
the date hereof, any pre-emptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Shareholders to the Underwriters pursuant to
this Agreement; such Selling Shareholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to
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participate in the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such Selling
Shareholder in the transactions to which this Agreement relates in accordance
with the terms of this Agreement; and such Selling Shareholder does not own any
warrants, options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or other
securities from the Company, other than those described in the Registration
Statement and the Prospectus.
(l) Such Selling Shareholder is not aware (without having conducted
any investigation or inquiry) that any of the representations and warranties of
the Company set forth in Section 2 above is untrue or inaccurate in any material
respect.
4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Shareholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Shareholders, respectively, at a purchase price of $_____ per share
(the per share price to public as set forth in the Registration Statement less
the per share underwriting discounts and commissions) the respective number of
Firm Shares set forth on Schedule A hereto. The obligation of each Underwriter
to the Company and to each Selling Shareholder shall be to purchase from the
Company or such Selling Shareholder that number of Company Shares or Selling
Shareholder Shares, as the case may be, which (as nearly as practicable, as
determined by you) is in the same proportion to the number of Company Shares or
Selling Shareholder Shares, as the case may be, set forth opposite the name of
the Company or such Selling Shareholder in Schedule B hereto as the number of
Firm Shares which is set forth opposite the name of such Underwriter in Schedule
A hereto (subject to adjustment as provided in Section 11) is to the total
number of Firm Shares to be purchased by all the Underwriters under this
Agreement.
The certificates in negotiable form for the Selling Shareholder Shares
(or certificates representing securities convertible into such Shares) have been
placed in custody (for delivery under this Agreement) under the Custody
Agreement. Each Selling Shareholder agrees that the certificates for the
Selling Shareholder Shares of such Selling Shareholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Shareholder for such custody, including the Power of
Attorney, is to that extent irrevocable and that the obligations of such Selling
Shareholder hereunder shall not be terminated by the act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of such
Selling Shareholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Shareholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Shareholder Shares hereunder, the
Selling Shareholder Shares to be sold by such Selling Shareholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 4 shall be made against
payment of the purchase price therefor by the several Underwriters drawn in
same-day funds, payable to the order of the Company with regard to the Shares
being purchased from the Company, and to the order of the Custodian for the
respective accounts of the Selling Shareholders with regard to the Shares being
purchased from such Selling Shareholders, at the offices of
________________________________________________________________ (or at such
other place as may be agreed upon among the Representative and the Company), at
_:__ _.M., _____________ time (a) on the third (3rd) full business day following
the first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., Vancouver, Washington time, the fourth (4th) full
business day following the day that this Agreement is executed and delivered or
(c) at such other time and date not later than seven (7) full business days
following the first day that Shares are traded as the Representative and the
Company and the Attorneys may agree (or at such time and date to which payment
and delivery shall have been postponed pursuant to Section 11 hereof), such time
and date of payment and delivery being herein called the "CLOSING DATE;"
provided, however, that if the Company has not made available to the
Representative copies of the Prospectus within the time provided in Section
5(d) hereof, the Representative may,
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in their sole discretion, postpone the Closing Date until no later than two (2)
full business days following delivery of copies of the Prospectus to the
Representative. The certificates for the Firm Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
(2) full business days prior to the Closing Date. If the Representative so
elects, delivery of the Firm Shares may be made by credit through full fast
transfer to the account at The Depository Trust Company designated by the
Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 12 hereof) of the Firm Shares at an initial public offering
price of $_____ per share.
The information set forth in the second to last paragraph on the front
cover page (insofar as such information relates to the Underwriters), and under
all the paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished by
the Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company and the Selling Shareholders
that the statements made therein do not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereto, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; as promptly as practicable upon your
request, it will prepare and file with the Commission any amendments or
supplements to the Registration Statement or Prospectus which, in the reasonable
opinion of counsel for the several Underwriters ("UNDERWRITERS' COUNSEL"), may
be necessary or advisable in connection with the distribution of the Shares by
the Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time
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when a prospectus relating to the Shares is required to be delivered under the
Act, any event shall have occurred as a result of which the Prospectus or any
other prospectus relating to the Shares as then in effect would include any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare as promptly
as practicable upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434 of the Rules and Regulations, in no event later than the first (1st)
full business day following the first day that Shares are traded, copies of the
Registration Statement (three of which will be signed and which will include all
exhibits), each Preliminary Prospectus, the Prospectus and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request. Notwithstanding the foregoing, if D.A.
Davidson & Co., on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time reasonably
request.
(e) Unless the requirement has otherwise been satisfied in full, the
Company will make generally available to its security holders as soon as
practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to you and the other several Underwriters hereunder, upon
request (i) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, any securities exchange or
the NASD, (ii) every material press release and every material news item or
article in respect of the Company or its affairs which was prepared by the
Company or any of its subsidiaries and generally released to shareholders; and
(iii) any additional information of a public nature concerning the Company or
its subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
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<PAGE>
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or any
Selling Shareholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
12(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 12(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares within fifteen (15) days of the determination that the
transactions contemplated hereby will not be consummated, provided that the
amount of such reimbursement shall not exceed $100,000.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith consult with you concerning the timing and substance of a press
release or other public statement, if any, responding to or commenting on such
rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of D.A. Davidson & Co., effect the Disposition of,
directly or indirectly, any Securities other than (i) the sale of the Firm
Shares and the Option Shares to be sold by the Company hereunder, (ii) the
issuance of shares pursuant to the exercise of outstanding options or warrants,
(iii) the granting of options pursuant to a stock incentive plan approved by the
Company's board of directors or (iv) the issuance of shares of Common Stock as
consideration for the acquisition of one or more corporations or entities
provided that (1) such shares in the aggregate represent less than 5% (or,
following 90 days after the date of the Prospectus, 7.5%) of the total number of
shares of the Company's Common Stock outstanding immediately after giving effect
to the sales of Common Stock pursuant to this Agreement and (2) subject to
applicable pooling of interests rules, the Company has taken reasonable steps to
ensure that such shares may not be resold during the 180 days after the date of
the Prospectus (provided that during the Lock-Up Period, the Company will in any
event consult with D.A. Davidson & Co. concerning any such acquisition a
reasonable time in advance thereof).
(l) During a period of ninety (90) days from the effective date of
the Registration Statement, the Company will not file a registration statement
registering shares under any employee benefit plan other than a stock incentive
plan approved by the Company's Board of Directors.
6. EXPENSES.
(a) The Company and the Selling Shareholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
issuance and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates representing the
Shares and transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's independent
certified public accountants; the cost of furnishing to the several Underwriters
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectus and the Prospectus, and any amendments or supplements to
any of the foregoing; NASD filing fees and the cost of qualifying the Shares
under
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the laws of such jurisdictions as you may designate (including filing fees and
fees and disbursements of Underwriters' Counsel in connection with such NASD
filings and blue sky qualifications); and all other expenses directly incurred
by the Company and the Selling Shareholders in connection with the performance
of their obligations hereunder. Any additional expenses incurred as a result of
the sale of the Shares by the Selling Shareholders will be borne by the Company.
The provisions of this Section 6(a)(i) are intended to relieve the Underwriters
from the payment of the expenses and costs which the Selling Shareholders and
the Company hereby agree to pay, but shall not affect any agreement which the
Selling Shareholders and the Company may make, or may have made, for the sharing
of any of such expenses and costs. Such agreements shall not impair the
obligations of the Company and the Selling Shareholders hereunder to the several
Underwriters.
(ii) In addition to its other obligations under Section 6(a)(i)
hereof, the Company will pay to you a non-accountable expense allowance equal to
one half of one percent (0.5%) of the gross sales price of the Shares to the
public. This non-accountable expense allowance with respect to the Firm Shares
shall be paid to you on the Closing Date and the non-accountable expense
allowance with respect to the Option Shares shall be paid to you on the closing
of the sale to you of the Option Shares.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than _:__ _.M., _________ time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Shareholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section 7.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), results of operations, earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of Garvey, Schubert & Barer, counsel for the Company and the Selling
Shareholders, dated the Closing Date or such later date on which Option Shares
are to be purchased, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters (and stating that it
might be relied upon by LeBoeuf, Lamb, Greene & MacRae, L.L.P., Underwriters
Counsel, in rendering its opinion pursuant to Section 7(e) of this Agreement),
to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and corporate authority
to own, lease and operate
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its properties and to conduct its business as described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or maintenance of an office requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), results of operations, earnings, operations or business of the
Company and its subsidiaries considered as one enterprise. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than Nautilus Fitness Products,
Inc., Nautilus, Inc., Nautilus Human Performance Systems, Inc., Direct Focus
Sales Corporation, Instant Comfort Corporation, Direct Focus FSC, Inc., DFI
Properties, LLC and DFI Advertising, Inc.;
(iv) The authorized and, to such counsel's knowledge, issued and
outstanding capital stock of the Company is as set forth in the Prospectus under
the caption "Capitalization" as of the dates stated therein; the issued and
outstanding shares of capital stock of the Company (including the Selling
Shareholder Shares) have been duly and validly issued, are fully paid and
nonassessable and, to such counsel's knowledge, have not been issued in
violation of or subject to any pre-emptive right, co-sale right, registration
right, right of first refusal, or other similar right;
(v) The Firm Shares or the Option Shares, as the case may be, to
be issued by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, and, to such counsel's knowledge, will not have been issued
in violation of or subject to any pre-emptive right, co-sale right, registration
right, right of first refusal or other similar right;
(vi) The Company has the corporate power and corporate authority
to enter into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(viii) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, (a) no stop order suspending the
effectiveness of the Registration Statement has been issued and (b) no
proceedings for that purpose have been instituted or are pending or threatened
under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (in each case other than the financial
statements (including notes and supporting schedules) and financial and
statistical data included therein, as to which such counsel need express no
opinion), as of the effective date of the Registration Statement, complied as to
form in all material respects with the requirements of the Act and the
applicable Rules and Regulations;
(x) The information in the Prospectus under the captions (a)
"Management--Directors and Officers Indemnification and Liability" and
"Management--Benefit Plans," and "Description of Capital Stock" and "Shares
Eligible For Future Sale," to the extent that the same constitutes a matter of
law or a legal conclusion, has been reviewed by such counsel and is a fair
summary of such matters and conclusions;
(xi) The form of certificate evidencing the Common Stock and
filed as an exhibit to the Registration Statement complies with Washington law;
(xii) The description in the Registration Statement and the
Prospectus of the articles of
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<PAGE>
incorporation and bylaws of the Company and of any statutes are accurate and
fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xiv) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the Company's
indemnification and contribution obligations hereunder, concerning which no
opinion need be expressed) does not as of the Closing Date (a) result in any
violation of the Company's articles of incorporation or bylaws or (b) to such
counsel's knowledge, result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any agreement, instrument or
document known to such counsel to which the Company is a party or by which its
properties or assets are bound, or any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ or decree
of any court, government or governmental agency or governmental body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties, assets or operations;
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or blue sky laws or the bylaws, rules or regulations of the NASD in
connection with the purchase and the distribution of the Shares by the
Underwriters;
(xvi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations, other than
those described therein and the information contained in the Prospectus fairly
summarizes such proceedings;
(xvii) To such counsel's knowledge, neither the Company nor any of
its subsidiaries is presently (a) in material violation of its respective
articles of incorporation or bylaws, or (b) in material breach of any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties, assets or operations;
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights;
(xix) Each Selling Shareholder which is not a natural person has
full right, power and authority to enter into and to perform its obligations
under the Power of Attorney and Custody Agreement to be executed and delivered
by it in connection with the transactions contemplated herein; the Power of
Attorney and Custody Agreement of each Selling Shareholder that is not a natural
person has to such counsel's knowledge, been duly authorized by such Selling
Shareholder; the Power of Attorney and Custody Agreement of each Selling
Shareholder has been duly executed and delivered by or on behalf of such Selling
Shareholder;
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<PAGE>
(xx) The Power of Attorney and Custody Agreement of each Selling
Shareholder constitutes the valid and binding agreements of such Selling
Shareholder, enforceable in accordance with their terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(xxi) To such counsel's knowledge, each of the Selling
Shareholders has full right, power and authority to enter into and to perform
its obligations under this Agreement and to sell, transfer, assign and deliver
the Shares to be sold by such Selling Shareholder hereunder;
(xxii) To such counsel's knowledge, this Agreement has been duly
authorized by each Selling Shareholder that is not a natural person and has been
duly executed and delivered by or on behalf of each Selling Shareholder; and
(xxiii) Upon the delivery of and payment for the Shares to be sold
by the Selling Shareholders as provided in this Agreement, and upon registration
of such Shares in the stock records of the Company in the names of the
Underwriters or their nominees and the issuance by the Company of stock
certificates therefor, each of the Underwriters will receive valid title to the
Shares purchased by it from such Selling Shareholder, free and clear of any
adverse claim as defined in RCW 62A.8.102(1)(a) (other than any right, title or
interest in or to the Shares granted by the Underwriters to any person or entity
in connection with the sale of such Shares to the public), provided that (a) the
Underwriters are purchasing such Shares in good faith, and (b) the Underwriters,
together with their nominees (if any), hold such Shares without notice of any
adverse claim.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representative, Underwriters' Counsel and the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and Prospectus and related matters were discussed,
and although they have not verified the accuracy or completeness of the
statements contained in the Registration Statement or the Prospectus, nothing
has come to the attention of such counsel which causes them to believe that, at
the time the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and (in the case of an Option Closing) on
any later date on which Option Shares are to be purchased, the Registration
Statement and any amendment or supplement thereto (other than the financial
statements including notes and supporting schedules and the other financial and
statistical information therein, as to which such counsel need express no
comment) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or (in the case of an Option
Closing) any later date on which the Option Shares are to be purchased, as the
case may be, the Prospectus and any amendment or supplement thereto (except as
aforesaid) contained any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the State of Washington
upon opinions of local counsel, and as to questions of fact upon representations
or certificates of officers of the Company, the Selling Shareholders or officers
of the Selling Shareholders (when the Selling Shareholder is not a natural
person), and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as the Representative of the Underwriters, and to
Underwriters' Counsel.
In rendering their opinions, such counsel may rely solely and
state that they are relying solely upon the representations and warranties of
such Selling Shareholders in this Agreement and the Power of Attorney and
Custody Agreement referred to in paragraph (xix), insofar as any of the same
relate to factual matters, above, provided such counsel shall state that they
believe that both you and they are justified in relying upon such
representations and warranties.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are
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<PAGE>
to be purchased, as the case may be, an opinion of LeBoeuf, Lamb, Greene &
MacRae, L.L.P., in form and substance satisfactory to you, with respect to the
sufficiency of all such corporate proceedings and other legal matters relating
to this Agreement and the transactions contemplated hereby as you may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may have reasonably requested for the purpose of enabling them to pass upon
such matters.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
Deloitte & Touche LLP addressed to the Underwriters, dated the Closing Date and
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"DELOITTE ORIGINAL LETTER"), but carried out to a date not more than five (5)
business days prior to the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, (i) confirming, to the extent
true, that the statements and conclusions set forth in the Deloitte Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Deloitte Original Letter which are necessary to reflect any changes in the facts
described in the Deloitte Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not indicate that there has been any change in
the condition (financial or otherwise), results of operations, earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Deloitte Original Letter shall be addressed to or for the use of the
Underwriters in form and shall be in substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations, (ii) set forth their opinion
with respect to their audit of the balance sheets of the Company as of December
31, 1997 and 1998 and related statements of operations, shareholders' equity,
and cash flows for the three (3) years ended December 31, 1998, (iii) state that
they have read the unaudited pro forma condensed balance sheet as of December
31, 1998 and the unaudited pro forma condensed statements of operations for the
year ended December 31, 1998 included in the Registration Statement and the pro
forma information included in the Summary and Selected Financial Data sections
and the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Registration Statement and
that they have inquired of certain officials of the Company and of Nautilus who
have responsibility for financial and accounting matters about the basis for
their determination of the pro forma adjustments and whether all significant
assumptions regarding the business combinations have been reflected in the pro
forma adjustments and whether the unaudited pro forma condensed financial
statements referred to herein comply as to form in all material respects with
the applicable accounting requirements of Rule 11-02 of Regulation S-X and they
have proved the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the unaudited pro forma condensed
financial statements; and (iv) address other matters agreed upon by Deloitte &
Touche LLP and you. In addition, you shall have received from Deloitte & Touche
LLP a letter addressed to the Company stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of December 31, 1998, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
KPMG Peat Marwick LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to Nautilus within the meaning of the Act and the applicable published Rules and
Regulations and based upon the procedures described in such letter delivered to
you concurrently with the execution of this Agreement (herein called the "PEAT
MARWICK ORIGINAL LETTER"), but carried out to a date not more than five (5)
business days prior to the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, (i) confirming, to the extent
true, that the statements and conclusions set forth in the Peat Marwick
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Original Letter are accurate as of the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, and (ii) setting forth
any revisions and additions to the statements and conclusions set forth in the
Peat Marwick Original Letter which are necessary to reflect any changes in the
facts described in the Peat Marwick Original Letter since the date of such
letter, or to reflect the availability of more recent financial statements, data
or information. The letter shall not indicate that there has been any change in
the condition (financial or otherwise), results of operations, earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The Peat
Marwick Original Letter shall be addressed to or for the use of the Underwriters
in form and shall be in substance satisfactory to the Underwriters and shall (i)
represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the consolidated balance sheets of Nautilus as
of December 27, 1997 and January 4, 1999 and related consolidated statements of
operations, shareholders' equity, and cash flows for the two (2) years ended
January 4, 1999, and (iii) address other matters agreed upon by KPMG Peat
Marwick LLP and you. In addition, you shall have received from KPMG Peat
Marwick LLP a letter addressed to the Company stating that their review of
the Nautilus' system of internal accounting controls, to the extent they
deemed necessary in establishing the scope of their examination of Nautilus'
consolidated financial statements as of and for the period ended January 4,
1999, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on and as of
the Closing Date or any later date on which Option Shares are to be purchased,
as the case may be, and the Company has complied in all material respects with
all the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement did not, and any amendment or supplement thereto, does not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
the Prospectus did not, and any amendment or supplement thereto, does not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (a)
any material adverse change in the condition (financial or otherwise), results
of operations, earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any transaction
that is material to the Company and its subsidiaries considered as one
enterprise, except transactions entered into in the ordinary course of business,
(c) any obligation, direct or contingent, that is material to the Company and
its subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(d) any change in the capital stock (other than exercises
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of options and warrants) or outstanding indebtedness of the Company or any of
its subsidiaries that is material to the Company and its subsidiaries considered
as one enterprise, (e) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company or any of its subsidiaries, or (f)
any loss or damage (whether or not insured) to the property of the Company or
any of its subsidiaries which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
results of operations, earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise.
(i) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, from the Attorneys for each Selling
Shareholder to the effect that, as of the Closing Date, they have not been
informed that:
(i) The representations and warranties made by such Selling
Shareholder herein are not true or correct in any material respect on the
Closing Date; or
(ii) Such Selling Shareholder has not complied, in any material
respect, with any obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Shareholder at or prior to
the Closing Date.
(j) The Company shall have obtained and delivered to you a written
agreement from each officer and director of the Company and each Selling
Shareholder that each such person will not, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction, or
(ii) with the prior written consent of D.A. Davidson & Co. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the such holder. Such prohibited hedging or other
transactions would including, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(k) The Company and the Selling Shareholders shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Shareholders or
officers of the Selling Shareholders (when the Selling Shareholder is not a
natural person)) as to the accuracy of the representations and warranties of the
Company and the Selling Shareholders herein, as to the performance by the
Company and the Selling Shareholders of its their respective obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder. All such opinions, certificates,
letters and documents will be in compliance with the provisions hereof only if
they are reasonably satisfactory to Underwriters' Counsel. The Company and the
Selling Shareholders will furnish you with such number of conformed copies of
such opinions, certificates, letters and documents as you shall reasonably
request.
8. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 150,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
4 hereof. Such option may be exercised by the Representative on behalf of the
several Underwriters on one or more occasions in whole or in part during the
period of thirty days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
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purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representative
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 8 shall be made against payment of the purchase price
therefor by the several Underwriters drawn in same-day funds, payable to the
order of the Company. In the event of any breach of the foregoing, the Company
shall reimburse the Underwriters for the interest lost and any other expenses
borne by them by reason of such breach. Such delivery and payment shall take
place at the offices of _____________________________________________ or at such
other place as may be agreed upon among the Representative and the Company (i)
on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives written notice of the
exercise of such option, if such notice is received by the Company less than two
(2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representative so elects, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 8(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 7 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be reasonably satisfactory in
form and substance to you and to Underwriters' counsel, and you shall have been
furnished with all such documents, certificates and opinions as you may
reasonably request in order to evidence the accuracy and completeness of any of
the representations, warranties or statements, the performance of any of the
covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the
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light of the circumstances under which they were made, not misleading, and
agrees to promptly reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter or Selling Stckholder furnished
to the Company by such Underwriter or Selling Shareholder, directly or through
you, specifically for use in the preparation thereof and, provided further, that
the indemnity agreement provided in this Section 9(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been sent or
given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 5(d) hereof. The indemnity agreement in this Section 9(a) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities (or actions in respect thereof), joint or several, to which such
Underwriter may become subject (including, without limitation, in its capacity
as an Underwriter or as a "qualified independent underwriter" within the meaning
of Schedule E or the Bylaws of the NASD) under the Act, or otherwise, arising
out of or based upon (i) any breach of any representation, warranty, agreement
or covenant of such Selling Shareholder herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii) of
this Section 9(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished about such
shareholder to the Company or such Underwriter by such Selling Shareholder,
directly or through such Selling Shareholder's representatives, specifically for
use in the preparation thereof, and agrees to promptly reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that (i) the indemnity agreement
provided in this Section 9(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act and the Rules and Regulations, unless such failure
is the result of noncompliance by the Company with Section 5(d) hereof, and (ii)
the aggregate liability of each Selling Shareholder under this Section 9(b)
shall be limited to an amount equal to the net proceeds (after deducting the
aggregate Underwriters' discount, but before deducting expenses) received by
such Selling Shareholder from the sale of his or her Securities pursuant to this
Agreement. The indemnity agreement in this Section 9(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
such Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Shareholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
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representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 9(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Shareholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action. The indemnity agreement in this Section 9(c) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Reistration Statement and each director of
the Company, each Selling Shareholder and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 9, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 9. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 9 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 9(a),
9(b) or 9(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 9
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal)
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that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 9 provides for indemnification in such case, all the
parties hereto shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that, except as set forth in Section 9(f) hereof, the
Underwriters severally and not jointly are responsible pro rata for the portion
represented by the percentage that the underwriting discount bears to the
initial public offering price, and the Company and the Selling Shareholders are
responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the amount
by which the underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of damages which such Underwriter has otherwise
required to pay, and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 9(e) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter, the Company or any Selling
Shareholder within the meaning of the Act or the Exchange Act and each officer
of the Company who signed the Registration Statement and each director of the
Company.
(f) The aggregate liability of each Selling Shareholder under the
representations, warranties and agreements contained herein and under the
indemnity, contribution and reimbursement agreements contained in the provisions
of this Section 9 shall be limited to an amount equal to the lesser of (i) the
initial public offering price of the Selling Shareholder Shares sold by such
Selling Shareholder to the Underwriters minus the amount of the underwriting
discount paid thereon to the Underwriters by such Selling Shareholder (the
"SELLING SHAREHOLDER PROCEEDS"), less (if and only if clause (ii) immediately
below is applicable) the amount of any income taxes described in clause (y)
immediately below, and (ii) solely in the case of an indemnity, contribution or
reimbursement claim arising out of or based upon any breach of the
representation and warranty contained in Section 3(l) hereof, the result
obtained by (x) multiplying the aggregate liability of all indemnifying parties
by the proportion which such Selling Shareholder's Selling Shareholder Proceeds
bear to the total of all Selling Shareholder Proceeds of all Selling
Shareholders and (y) subtracting therefrom any applicable United States federal
and state income taxes incurred by such Selling Shareholder as a result of the
sale of such Selling Shareholder's Selling Shareholder Shares pursuant to this
Agreement. The Company and such Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 9, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 9 and further agree not to attempt to
assert any such defense.
10. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company, the Selling Shareholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 9 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Shareholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
11. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining
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Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such defaulting
Underwriter or Underwriters.
If any Underwriter (or Underwriters) so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any non-defaulting
Underwriter) satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid by such postponed Closing
Date, the Closing Date may, at the option of the Company, be postponed for a
further twenty-four (24) hours, if necessary, to allow the Company the privilege
of finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 11, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, neither the Company nor any Selling
Shareholder shall be liable to any Underwriter (except as provided in Sections 6
and 9 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to the
extent provided in Sections 6 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) _:__
_.M., _____________ time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telecopy or electronic mail transmission, with each telephone, telecopy or
electronic mail transmission confirmed by letter, whichever shall first occur.
By giving notice as set forth in Section 13 before the time this Agreement
becomes effective, you, as the Representative of the several Underwriters, or
the Company, may prevent this Agreement from becoming effective without
liability of any party to any other party, except as provided in Sections 5(i),
6 and 9 hereof.
(b) You, as the Representative of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later
-26-
<PAGE>
date on which Option Shares are to be purchased, as the case may be, (i) if the
Company or any Selling Shareholder shall have failed, refused or been unable to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled is
not fulfilled, including, without limitation, any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York, California, Washington
or Montana authorities, or (iii) if the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
to interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbeak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representative, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event
of termination pursuant to subparagraph (b)(i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 5(i), 6 and 9 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
6 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy, telegram or electronic mail
transmission, in each case confirmed by letter. If the Company shall elect to
prevent this Agreement from becoming effective, the Company shall promptly
notify you by telephone, telecopy, or electronic mail transmission, in each
case, confirmed by letter.
13. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, or telecopied (and confirmed by letter) or sent by electronic
mail (and confirmed by letter) to you c/o D.A. Davidson & Co., 8 Third Street
North, Great Falls, Montana 59403, telecopy number (406) 791-7380, Attention:
_____________; if sent to the Company, such notice shall be mailed, delivered,
or telecopied (and confirmed by letter) or sent by electronic mail (and
confirmed by letter) to Direct Focus, Inc., 2200 NE 65th Avenue, Vancouver,
Washington 98661, telecopy number (360) 906-6204, Attention: Brian R. Cook,
President and Chief Executive Officer; if sent to one or more of the Selling
Shareholders, such notice shall be sent mailed, delivered, or telecopied (and
confirmed by letter) to Brian R. Cook and Rod W. Rice, as Attorneys-in-Fact for
the Selling Shareholders, at 2200 NE 65th Avenue, Vancouver, Washington 98661,
telecopy number (360) 906-6204.
14. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and the Selling Shareholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 9 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Shareholders shall be entitled to act and
-27-
<PAGE>
rely upon any statement, request, notice or agreement made or given by you
jointly or by D.A. Davidson & Co. on behalf of you.
15. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington.
16. COUNTERPARTS. This Agreement may be signed by facsimile and in
several counterparts, each of which will constitute an original.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-28-
<PAGE>
If the foregoing correctly sets forth the understanding among the Company
the Selling Shareholders and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Shareholders and the several
Underwriters.
Very truly yours,
DIRECT FOCUS, INC.
By:
-------------------------------------
Brian R. Cook
Its: President and Chief Executive Officer
SELLING SHAREHOLDERS
By:
---------------------------------------
Brian R. Cook
By:
---------------------------------------
Rod W. Rice
Attorneys-in-Fact for the Selling
Shareholders named in Schedule B hereto
ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
D.A. DAVIDSON & CO.,
on its behalf and on behalf of each of the several
Underwriters named in Schedule A attached hereto.
By:
---------------------------------
Name:
--------------------------------
Its:
---------------------------------
-29-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
- ------------- ---------------------
<S> <C>
D.A. Davidson & Co................................
---------------
[NAMES OF OTHER UNDERWRITERS].....................
---------------
TOTAL........................................ 1,000,000
---------------
---------------
</TABLE>
-30-
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
COMPANY SHARES
COMPANY TO BE SOLD
- ------- -------------
<S> <C>
Direct Focus, Inc.........................................
----------
TOTAL................................................ 825,000
----------
----------
<CAPTION>
NUMBER OF
SELLING SHAREHOLDER
SELLING SHAREHOLDERS SHARES TO BE SOLD
- -------------------- -------------------
<S> <C>
Brian R. Cook............................................. 25,000
Roland E. Wheeler......................................... 25,000
Paul Little and Westover Investments, Inc................. 100,000
Randal R. Potter.......................................... 12,500
Rod W. Rice............................................... 12,500
TOTAL................................................ 175,000
-------
-------
</TABLE>
-31-
<PAGE>
EXACT COPY
FILED
STATE OF WASHINGTON
SEP 22 1992
RALPH MUNRO
SECRETARY OF STATE
ARTICLES OF INCORPORATION
OF
STRATFORD SOFTWARE CORPORATION, USA
ARTICLE I
NAME
The name of this corporation is Stratford Software Corporation, USA.
ARTICLE II
DURATION
This corporation is organized under the Washington Business Corporation
Act and shall have perpetual existence.
ARTICLE III
PURPOSE
This corporation is organized for the purpose of engaging in any
business, trade or activity which may be conducted lawfully by a corporation
formed under the Washington Business Corporation Act.
ARTICLE IV
CAPITAL STOCK
4.1 The corporation shall have authority to issue in the aggregate
50,000,000 shares of common stock.
4.2 The Board of Directors shall have the authority to issue shares of
this corporation's capital stock and the certificates therefor, subject to such
transfer restrictions and other limitations as it may deem necessary to promote
compliance with applicable federal and state securities laws, and to regulate
the transfer thereof in such manner as may be calculated to promote such
compliance.
ARTICLE V
CUMULATIVE VOTING
Shareholders entitled to vote at any election of directors shall have the
right to vote, in person or by proxy, the number of shares they are entitled to
cast for as many persons as there are directors to be elected. No cumulative
voting for directors shall be permitted.
<PAGE>
ARTICLE VI
PREEMPTIVE RIGHTS
No shareholder of this corporation shall have, as such holder, any
preemptive or preferential right or subscription right to any stock of this
corporation or to any obligations convertible into stock of this corporation, or
to any warrant or option for the purchase thereof, except to the extent provided
by resolution or resolutions of the Board of Directors establishing a series of
preferred stock or by written agreement with this corporation.
ARTICLE VII
SHAREHOLDER VOTING REQUIREMENTS FOR CERTAIN TRANSACTIONS;
TRANSACTIONS WITH INTERESTED SHAREHOLDERS
7.1 To be adopted by the shareholders, the following actions must be
approved by each voting group of shareholders entitled to vote thereon by
two-thirds (2/3rds) of all the votes entitled to be cast by that voting group;
(a) Amendment of the Articles of Incorporation;
(b) A plan of merger or share exchange;
(c) The sale, lease, exchange or other disposition of all or
substantially all of the corporation's assets, other than
in the usual and regular course of business; or
(d) Dissolution of the corporation.
7.2 This corporation elects to be covered by the provisions of Section
23B.17.020 of the Washington Business Corporation Act concerning transactions
with interested shareholders, as therein defined, and as such Section may be
amended or replaced, whether or not this corporation may at any time have fewer
than three hundred (300) holders of record of its shares.
ARTICLE VIII
DIRECTORS
8.1 The number of directors of the corporation shall be fixed as
provided in the Bylaws and may be changed from time to time by amending the
Bylaws.
8.2 The Board of Directors is expressly authorized to make, alter, and
repeal the Bylaws of the corporation, subject to the power of the shareholders
of the corporation to change or repeal such Bylaws.
8.3 Any vacancy occurring in the Board of Directors (whether caused by
resignation, death, an increase in the number of directors, or otherwise) may be
filled as specified in the Bylaws.
-2-
<PAGE>
8.4 To the fullest extent permitted by the Washington Business
Corporation Act, as it exists on the date hereof or may hereafter be amended, a
director of this corporation shall not be personally liable to the corporation
or its shareholders for monetary damages for conduct as a director. Any
amendment to or repeal of this Article shall not adversely affect a director of
this corporation with respect to any conduct of such director occurring prior to
such amendment or repeal.
ARTICLE IX
INDEMNIFICATION
9.1 RIGHT TO INDEMNIFICATION. Each individual (hereinafter an
"indemnitee") who was or is made a party or is threatened to be made a party to
or is otherwise involved (including, without limitation, as a witness) in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or
officer of the corporation or, that while serving as a director or officer of
the corporation, he or she is or was also serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation or of a foreign or domestic partnership,
joint venture, trust, employee benefit plan or other enterprise, whether the
basis of the proceeding is alleged action in an official capacity as such a
director, officer, employee, partner, trustee, or agent or in any other capacity
while serving as such director, officer, employee, partner, trustee, or agent,
shall be indemnified and held harmless by the corporation to the full extent
permitted by applicable law as then in effect, against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts to be paid in settlement) incurred or suffered by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a director, officer, employee, partner,
trustee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that no indemnification shall
be provided to any such indemnitee if the corporation is prohibited by the
Washington Business Corporation Act or other applicable law as then in effect
from paying such indemnification; and provided, further, that except as provided
in Section 9.2 of this Article with respect to proceedings seeking to enforce
rights to indemnification, the corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if a proceeding (or part thereof) was authorized or ratified by the Board
of Directors. The right to indemnification conferred in this Section 9.1 shall
be a contract right and shall include the right to be paid by the corporation
the expenses incurred in defending any proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"). Any advancement of
expenses shall be made only upon delivery to the corporation of a
-3-
<PAGE>
written undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this Section 9.1 and upon delivery to the corporation of a written
affirmation (hereinafter an "affirmation") by the indemnitee of his or her good
faith belief that such indemnitee has met the standard of conduct necessary for
indemnification by the corporation pursuant to this Article.
9.2 RIGHT OF INDEMNITEE TO BRING SUIT. If a written claim for
indemnification under Section 9.1 of this Article is not paid in full by the
corporation within sixty days after the corporation's receipt thereof, except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty days, the indemnitee may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim. If
successful in whole or in part, in any such suit or in a suit brought by the
corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. The indemnitee shall be presumed to be
entitled to indemnification under this Article upon submission of a written
claim (and, in an action brought to enforce a claim for an advancement of
expenses, where the required undertaking and affirmation have been tendered to
the corporation) and thereafter the corporation shall have the burden of proof
to overcome the presumption that the indemnitee is so entitled. Neither the
failure of the corporation (including the Board of Directors, independent legal
counsel or the shareholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances nor an actual determination by the corporation (including the
Board of Directors, independent legal counsel or the shareholders) that the
indemnitee is not entitled to indemnification shall be a defense to the suit or
create a presumption that the indemnitee is not so entitled.
9.3 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
advancement of expenses conferred in this Article IX shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation or Bylaws of the
corporation, general or specific action of the Board of Directors, contract or
otherwise.
9.4 INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain
insurance, at its expense, to protect itself and any individual who is or was a
director, officer, employee or agent of the corporation or who, while a
director, officer, employee or agent of the corporation, is or was serving at
the request of the corporation as a agent of another foreign or domestic
corporation,
-4-
<PAGE>
partnership, joint venture, trust, employee benefit plan or other enterprise
against any expense, liability or loss asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee or agent, whether or not the corporation would have
the power to indemnify such person against such expense, liability or loss under
the Washington Business Corporation Act. The corporation may enter into
contracts with any director, officer, employee or agent of the corporation in
furtherance of the provisions of this Article and may create a trust fund, grant
a security interest or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article.
9.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
corporation may, by action of the Board of Directors, grant rights to
indemnification and advancement of expenses to employees and agents of the
corporation with the same scope and effect as the provisions of this Article
with respect to the indemnification and advancement of expenses of directors and
officers of the corporation or pursuant to rights granted pursuant to, or
provided by, the Washington Business Corporation Act or otherwise.
9.6 PERSONS SERVING OTHER ENTITIES. Any individual who is or was a
director, officer or employee of the corporation who, while a director, officer
or employee of the corporation, is or was serving (a) as a director or officer
of another foreign or domestic corporation of which a majority of the shares
entitled to vote in the election of its directors is held by the corporation,
(b) as a trustee of an employee benefit plan and the duties of the director
or officer to the corporation also impose duties on, or otherwise involve
services by, the director or officer to the plan or to participants in or
beneficiaries of the plan or (c) in an executive or management capacity in a
foreign or domestic partnership, joint venture, trust or other enterprise of
which the corporation or a wholly owned subsidiary of the corporation is a
general partner or has a majority ownership or interest shall be deemed to be
so serving at the request of the corporation and entitled to indemnification
and advancement of expenses under this Article.
ARTICLE X
OTHER MATTERS
10.1 The initial Board of Directors of this corporation shall
consist of the following person:
-5-
<PAGE>
Name Address
---- -------
Tom McKie c/o Michael Varabioff
999 Canada Place, Suite 500
Vancouver, B.C., Canada V6C 3C8
10.2 The initial registered office of the corporation shall be 1011
Western Avenue, 10th Floor, Seattle, Washington, 98104-1023; and the registered
agent at such address shall be Keven J. Davis.
10.3 The incorporator is Keven J. Davis, whose address is 1011 Western
Avenue, 10th Floor, Seattle, Washington, 98104-1023. The powers and liabilities
of the incorporator shall terminate upon the filing of these Articles of
Incorporation.
10.4 Except as otherwise provided in these Articles, as amended from
time to time, the corporation reserves the right to amend, alter, change, or
repeal any provision contained in these Articles in any manner now or hereafter
prescribed or permitted by statute. All rights of shareholders of the
corporation are subject to this reservation.
Executed this 21st day of September, 1992.
/s/ Keven J. Davis
---------------------------------
Keven J. Davis, Incorporator
CONSENT TO SERVE AS REGISTERED AGENT
I hereby consent to serve as Registered Agent in the State of Washington
for the above-named corporation. I understand that as agent for the corporation
it will be my responsibility to receive service of process in the name of the
corporation, to forward all mail to the corporation, and immediately to notify
the office of the Secretary of State in the event of my resignation or of any
change in the registered office address of the corporation for which I am agent.
/s/ Keven J. Davis
---------------------------------
Keven J. Davis, Registered Agent
1011 Western Avenue, 10th Floor
Seattle, WA 98104-1023
-6-
<PAGE>
[STAMP]
ARTICLES OF MERGER
The undersigned corporations, pursuant to RCW 23B.11.050, hereby execute
in triplicate the following Articles of Merger, pertaining to the merger
("Merger") of Bow-Flex of America, Inc., a California corporation
("Bow-Flex") and Stratford Software Corporation, a corporation organized
under the laws of Wyoming ("Stratford") into and with Stratford Software
Corporation, USA, a Washington corporation and a wholly-owned subsidiary of
Stratford ("Subsidiary").
1. The merging corporations shall be merged into a single corporation
by Bow-Flex and Stratford merging into and with the Subsidiary (the Surviving
Corporation) which shall survive the merger pursuant to the provisions of RCW
23B.11.010 ET SEQ. The Agreement and Plan of Merger (the "Plan") is attached
hereto as Exhibit A and incorporated herein by this reference.
2. As to each of the undersigned corporations, the number of
outstanding shares is as follows:
<TABLE>
<CAPTION>
Name of
Corporation Number of Shares Outstanding
----------- ----------------------------
<S> <C>
Bow-Flex Common stock (no par value) 1,015,200
Total 1,015,200
Stratford Common (no par value) 3,592,267
Preferred Stock ($1.00 par value) 0
Total 3,592,267
Subsidiary Common stock 1
Total 1
</TABLE>
3. As to each of the applicable undersigned corporations, the total
number of shares voted for and against the Plan respectively, is as follows:
<TABLE>
<CAPTION>
Name of
Corporation Class For Against Total Shares
----------- ----- --- ------- ------------
<S> <C> <C> <C> <C>
Bow-Flex Common 957,376 0 957,376
Total 957,376 0 957,376
Stratford Common 885,533 6,285 891,818
Total 885,533 6,285 891,818
</TABLE>
-xvii-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Subsidiary Common 1 0 1
Total 1 0 1
</TABLE>
4. The adoption of the Plan and the performance of its terms were
duly adopted, approved and authorized by the Board of Directors and Shareholders
of the Subsidiary pursuant to RCW 23B.11.010 and RCW 23B.11.030,
respectively, and by the Board of Directors and Shareholders of Stratford and
Bow-Flex pursuant to RCW 23B.11.070. All other necessary corporate action has
been taken to effectuate the merger outlined in such Plan.
5. The Articles of Merger may be executed in one or more
counterparts, all of which shall be considered one and the same document, and
shall become a binding document when one or more counterparts have been signed
by each of the undersigned corporations.
BOW-FLEX OF AMERICA, INC.
By /s/ Roland Wheeler
----------------------------------
Roland Wheeler
Its Secretary and Chief Financial
Officer
STRATFORD SOFTWARE CORPORATION
By /s/ Thompson Joseph McKie
----------------------------------
Thompson Joseph McKie
Its President
STRATFORD SOFTWARE CORPORATION, USA
By /s/ Thompson Joseph McKie
----------------------------------
Thompson Joseph McKie
Its President
<PAGE>
Val: 05/13/1998 - 109834
$50.00 on 05/13/1998
Check - 05/12/1998 - 1920
FOR OFFICE USE ONLY
[LOGO] STATE OF WASHINGTON ARTICLES OF AMENDMENT
SECRETARY OF STATE WASHINGTON
RALPH MUNRO, SECRETARY OF STATE PROFIT CORPORATION
(PER CHAPTER 23B.10 RCW)
- - Please PRINT or TYPE in black ink FEE: $30
- - Sign, date and return original AND ONE COPY to:
EXPEDITED (24-HOUR) SERVICE AVAILABLE - $20 PER ENTITY
INCLUDE FEE AND WRITE "EXPEDITE" IN BOLD LETTERS
ON OUTSIDE OF ENVELOPE
CORPORATIONS DIVISION
605 E. UNION - PO BOX 40234
OLYMPIA, WA 98504-0234
FOR OFFICE USE ONLY
- - BE SURE TO INCLUDE FILING FEE. Checks --------------------------
should be made payable to "Secretary of State" FILED: 5/13/98
--------------------------
- -------------------------------------------------------------------------------
IMPORTANT! Person to contact about this filing Daytime Phone Number
(with area code)
Roger J. Sharp (360) 699-1400
- -------------------------------------------------------------------------------
FILED
AMENDMENT TO ARTICLES OF INCORPORATION STATE OF WASHINGTON
MAY 13, 1998
- -------------------------------------------------------------------------------
NAME OF CORPORATION (AS CURRENTLY RECORDED WITH THE OFFICE OF THE
SECRETARY OF STATE)
Bow Flex, Inc.
- -------------------------------------------------------------------------------
UBI NUMBER CORPORATION NUMBER (IF KNOWN) AMENDMENTS TO ARTICLES OF
INCORPORATION WERE ADOPTED ON
601 414 569 Date: May 8, 1998
------------------------
- -------------------------------------------------------------------------------
EFFECTIVE DATE (SPECIFIED EFFECTIVE DATE MAY BE UP TO 30 DAYS AFTER RECEIPT
OF ARTICLES OF OF THE DOCUMENT BY THE SECRETARY OF STATE)
AMENDMENT / / Specific Date: /X / Upon filing by
------------------- the Secretary of
State
- -------------------------------------------------------------------------------
ARTICLES OF AMENDMENT WERE ADOPTED BY (PLEASE CHECK ONE OF THE FOLLOWING)
/ / Incorporators. Shareholders action was not required
/ / Board of Directors. Shareholders action was not required
/X/ Duly approved shareholder action in accordance with Chapter 23B.10 RCW
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AMENDMENTS TO THE ARTICLES OF INCORPORATION ARE AS FOLLOWS
IF AMENDMENT PROVIDES FOR AN EXCHANGE, RECLASSIFICATION, OR CANCELLATION OF
ISSUED SHARES, PROVISIONS FOR IMPLEMENTING THE AMENDMENT MUST BE
INCLUDED. IF NECESSARY, ATTACH ADDITIONAL AMENDMENTS OR INFORMATION.
The Articles of Incorporation are amended by deleting Article I in its
entirety and substituting the following therefor:
ARTICLE I
NAME
The name of this Corporation is Direct Focus, Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SIGNATURE OF OFFICER
THIS DOCUMENT IS HEREBY EXECUTED UNDER PENALTIES OF PERJURY, AND IS, TO THE
BEST OF MY KNOWLEDGE, TRUE AND CORRECT.
/s/ Brian R. Cook Brian R. Cook President 5/12/98
---------------------------------------------------------------------------
SIGNATURE OF OFFICER PRINTED NAME DATE
- -------------------------------------------------------------------------------
INFORMATION AND ASSISTANCE - 360/753-7115 (TDD - 360/753-1485) 006-002 (8/97)
1998 3339 7845 002
<PAGE>
BYLAWS OF
STRATFORD SOFTWARE CORPORATION, USA
Garvey, Schubert & Barer
1011 Western Avenue, 10th Floor
Seattle, WA 98104-1023
(206) 464-3939
<PAGE>
BYLAWS OF
STRATFORD SOFTWARE CORPORATION, USA
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 1
1.3 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . 1
1.3.1 Notice of Special Meeting. . . . . . . . . . . . . 2
1.3.2 Proposed Articles of Amendment or Dissolution. . . 2
1.3.3 Proposed Merger, Consolidation, Exchange, Sale,
Lease or Disposition . . . . . . . . . . . . . . . 2
1.3.4 Declaration of Mailing . . . . . . . . . . . . . . 3
1.3.5 Waiver of Notice . . . . . . . . . . . . . . . . . 3
1.4 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Voting of Shares. . . . . . . . . . . . . . . . . . . . . . 3
1.6 Adjourned Meetings. . . . . . . . . . . . . . . . . . . . . 3
1.7 Record Date . . . . . . . . . . . . . . . . . . . . . . . . 4
1.8 Record of Shareholders Entitled to Vote . . . . . . . . . . 4
1.9 Action by Shareholders Without a Meeting. . . . . . . . . . 4
1.10 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . 5
1.11 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE II - BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . 5
2.1 Management Responsibility . . . . . . . . . . . . . . . . . 5
2.2 Number of Directors, Qualification. . . . . . . . . . . . . 5
2.3 Election, Term of Office. . . . . . . . . . . . . . . . . . 5
2.4 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 Removal . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . 6
2.7 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 6
2.8 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 6
2.9 Notice of Meeting . . . . . . . . . . . . . . . . . . . . . 7
2.10 Quorum of Directors . . . . . . . . . . . . . . . . . . . . 7
2.11 Presumption of Assent . . . . . . . . . . . . . . . . . . . 8
2.12 Action by Directors Without a Meeting . . . . . . . . . . . 8
2.13 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . 8
2.14 Compensation. . . . . . . . . . . . . . . . . . . . . . . . 9
2.15 Committees. . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE III - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Qualification . . . . . . . . . . . . . . . . . . . . . . . 10
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TABLE OF CONTENTS
(continued)
3.3 Officers Designated . . . . . . . . . . . . . . . . . . . . 10
3.3.1 President. . . . . . . . . . . . . . . . . . . . . 10
3.3.2 Vice Presidents. . . . . . . . . . . . . . . . . . 10
3.3.3 Secretary. . . . . . . . . . . . . . . . . . . . . 11
3.3.4 Treasurer. . . . . . . . . . . . . . . . . . . . . 11
3.4 Delegation. . . . . . . . . . . . . . . . . . . . . . . . . 11
3.5 Resignation . . . . . . . . . . . . . . . . . . . . . . . . 12
3.6 Removal . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.7 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.8 Compensation. . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE IV - CONTRACTS, LOANS, CHECKS AND DEPOSITS . . . . . . . . . . 12
4.1 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Loans . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.3 Checks, Drafts, Etc.. . . . . . . . . . . . . . . . . . . . 12
4.4 Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE V - STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.1 Issuance of Shares. . . . . . . . . . . . . . . . . . . . . 13
5.2 Certificates of Stock . . . . . . . . . . . . . . . . . . . 13
5.3 Restrictions on Transfer. . . . . . . . . . . . . . . . . . 14
5.4 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VI - BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . 15
6.1 Books of Accounts, Minutes and Share Register . . . . . . . 15
6.2 Copies of Resolutions . . . . . . . . . . . . . . . . . . . 15
ARTICLE VII - FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII - DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IX - CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE X - INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . 16
10.1 Right to Indemnification. . . . . . . . . . . . . . . . . . 16
10.2 Right of Indemnitee to Bring Suit . . . . . . . . . . . . . 17
10.3 Nonexclusivity of Rights. . . . . . . . . . . . . . . . . . 18
10.4 Insurance, Contracts and Funding. . . . . . . . . . . . . . 18
10.5 Indemnification of Employees and Agents of the
Corporation . . . . . . . . . . . . . . . . . . . . . . . . 18
10.6 Persons Serving Other Entities. . . . . . . . . . . . . . . 18
ARTICLE XI - MISCELLANY. . . . . . . . . . . . . . . . . . . . . . . . 19
11.1 Inspector of Elections. . . . . . . . . . . . . . . . . . . 19
11.2 Rules of Order. . . . . . . . . . . . . . . . . . . . . . . 20
11.3 Registered Office and Registered Agent. . . . . . . . . . . 20
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TABLE OF CONTENTS
(continued)
ARTICLE XII - AMENDMENT OF BYLAWS. . . . . . . . . . . . . . . . . . . 20
12.1 By the Shareholders . . . . . . . . . . . . . . . . . . . . 20
12.2 By the Board of Directors . . . . . . . . . . . . . . . . . 21
ARTICLE XIII - AUTHENTICATION. . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
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BYLAWS OF
STRATFORD SOFTWARE CORPORATION, USA
ARTICLE I - SHAREHOLDERS
1.1 ANNUAL MEETING. The annual meeting of the shareholders of the
corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held each year on a
date and at a time and place to be set by the Board of Directors.
1.2 SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by a majority of the Board of
Directors or by the Chairperson of the Board (if one be elected) or by the
President or by one or more shareholders holding not less than one-tenth (1/10)
of all the votes entitled to be cast on any issue proposed to be considered at
the proposed special meeting. The Board of Directors may designate any place as
the place of any special meeting called by the Chairperson, the President or the
Board, and special meetings called at the request of shareholders shall be held
at such place as may be determined by the Board and placed in the notice of such
meetings.
If a special meeting is called by any person or persons other than the
Board of Directors or the President or the Chairperson of the Board (if one be
elected), then the request shall be in writing, specifying the time of such
meeting, to be held not less than twenty (20) nor more than seventy (70) days
after the giving of the request for such meeting, and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by telegraphic or other facsimile transmission to the
President or the Secretary of the corporation. Upon receipt of such a request,
the Secretary shall cause notice of such meeting to be promptly given to the
shareholders entitled to vote, in accordance with the provisions of Section 1.3
of these Bylaws. If the notice is not given by the Secretary within ten (10)
days after receipt of the request, then the person or persons requesting the
meeting may give notice.
1.3 NOTICE OF MEETINGS. Except as otherwise provided in Subsections
1.3.2 and 1.3.3 below, the Secretary, Assistant Secretary, or any transfer agent
of the corporation shall deliver, either personally or by mail, private carrier,
telegraph or teletype, or telephone, wire or wireless equipment which transmits
a facsimile of the notice, not less than ten (10) nor more than
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sixty (60) days before the date of any meeting of shareholders, written notice
stating the place, day, and time of the meeting to each shareholder of record
entitled to vote at such meeting. If mailed in the United States, such notice
shall be deemed to be delivered when deposited in the United States mail, with
first-class postage thereon prepaid, addressed to the shareholder at his address
as it appears on the corporation's record of shareholders. If mailed outside the
United States, such notice shall be deemed to be delivered five (5) days after
being deposited in the mail, with first-class airmail postage thereon, return
receipt requested, addressed to the shareholder at the shareholder's address as
it appears on the corporation's record of shareholders.
1.3.1 NOTICE OF SPECIAL MEETING. In the case of a special
meeting, the written notice shall also state with reasonable clarity the purpose
or purposes for which the meeting is called and the actions sought to be
approved at the meeting. No business other than that specified in the notice may
be transacted at a special meeting.
1.3.2 PROPOSED ARTICLES OF AMENDMENT OR DISSOLUTION. If the
business to be conducted at any meeting includes any proposed amendment to the
Articles of Incorporation or the proposed voluntary dissolution of the
corporation, then the written notice shall be given not less than twenty (20)
nor more than sixty (60) days before the meeting date and shall state that the
purpose or one of the purposes is to consider the advisability thereof, and, in
the case of a proposed amendment, shall be accompanied by a copy of the
amendment.
1.3.3 PROPOSED MERGER, CONSOLIDATION, EXCHANGE, SALE, LEASE,
OR DISPOSITION. If the business to be conducted at any meeting includes any
proposed plan of merger or share exchange, or any sale, lease, exchange, or
other disposition of all or substantially all of the corporation's property
otherwise than in the usual or regular course of its business, then the written
notice shall state that the purpose or one of the purposes is to consider the
proposed plan of merger or share exchange, sale, lease, or disposition, as the
case may be, shall describe the proposed action with reasonable clarity, and, if
required by law, shall be accompanied by a copy or a detailed summary thereof;
and written notice shall be given to each shareholder of record, whether or not
entitled to vote at such meeting, not less than twenty (20) nor more than sixty
(60) days before such meeting, in the manner provided in Section 1.3 above.
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1.3.4 DECLARATION OF MAILING. A declaration of the mailing or
other means of giving any notice of any shareholders' meeting, executed by the
Secretary, Assistant Secretary, or any transfer agent of the corporation giving
the notice, shall be prima facie evidence of the giving of such notice.
1.3.5 WAIVER OF NOTICE. Notice of any shareholders' meeting
may be waived in writing by any shareholder at any time, either before or after
the meeting. Except as provided below, the waiver must be signed by the
shareholder entitled to the notice, and be delivered to the corporation for
inclusion in the minutes or filing with the corporate records. A shareholder's
attendance at a meeting waives objection to lack of notice, or defective notice,
unless the shareholder at the beginning of the meeting objects to holding the
meeting or transacting business at the meeting.
1.4 QUORUM. A quorum shall exist at any meeting of shareholders if a
majority of the shares entitled to vote is represented in person or by proxy.
Shares entitled to vote as a separate voting group may take action on a matter
at a meeting only if a quorum of those shares exists with respect to that
matter. The shareholders present at a duly organized meeting may continue to
transact business at such meeting and at any adjournment of such meeting (unless
a new record date is or must be set for the adjourned meeting), notwithstanding
the withdrawal of enough shareholders from either meeting to leave less than a
quorum. Once a share is represented for any purpose at a meeting other than
solely to object to holding the meeting or transacting business at the meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or must be set
for the adjourned meeting.
1.5 VOTING OF SHARES. Except as otherwise provided in the Articles
of Incorporation or these Bylaws, every shareholder of record shall have the
right at every shareholders' meeting to one vote for every share standing in his
name on the books of the corporation. If a quorum exists, action on a matter,
other than the election of directors, is approved by a voting group if the votes
cast within the voting group favoring the action exceed the votes cast within
the voting group opposing the action, unless a greater number is required by
the Articles of Incorporation or the Washington Business Corporation Act.
1.6 ADJOURNED MEETINGS. A majority of the shares represented
at a meeting, even if less than a quorum, may adjourn the meeting from time to
time without further notice. However, if the adjournment is for more than one
hundred twenty (120) days from the date set for the original meeting, a new
record date for the
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adjourned meeting shall be fixed and a new notice of the adjourned meeting shall
be given to each shareholder of record entitled to vote at the adjourned
meeting, in accordance with the provisions of Section 1.3 of these Bylaws. At
any adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting.
1.7 RECORD DATE. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or any
adjournment thereof, or entitled to receive payment of any dividend, the Board
of Directors may fix in advance a record date for any such determination of
shareholders, such date to be not more than seventy (70) days prior to the
meeting or action requiring such determination of shareholders. If no record
date is fixed for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders, or shareholders entitled to receive payment
of a dividend, the day before the date on which notice of the meeting is mailed
or the date on which the resolution of the Board of Directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date, which it must do if the meeting is adjourned
more than one hundred twenty (120) days after the date is fixed for the original
meeting.
1.8 RECORD OF SHAREHOLDERS ENTITLED TO VOTE. After fixing a
record date for a shareholders' meeting, the corporation shall prepare an
alphabetical list of the names of all shareholders on the record date who are
entitled to notice of the shareholders' meeting. The list shall be arranged
by voting group, and within each voting group by class or series of shares,
and show the address of and number of shares held by each shareholder. A
shareholder, shareholder's agent, or a shareholder's attorney may inspect the
shareholders list, beginning ten days prior to the shareholders' meeting and
continuing through the meeting, at the corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held during regular business hours and at the shareholder's expense. The
shareholders list shall be kept open for inspection during such meeting or
any adjournment. Failure to comply with the requirements of this section
shall not affect the validity of any action taken at such meeting.
1.9 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which may
be or which is required by law to be taken at any annual or special meeting of
shareholders may be taken without a meeting, without prior notice having been
given and without a vote having
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been taken, if one or more written consents, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote on the action. Such
consent shall have the same force and effect as a unanimous vote of shareholders
and may be described as such in any articles or other document filed with the
Secretary of State of the State of Washington. Action taken by consent is
effective when all consents have been delivered to the corporation, unless the
consent specifies a later effective date.
1.10 TELEPHONIC MEETINGS. Shareholders may participate in a meeting
by means of a conference telephone or other communications equipment by which
all persons participating in the meeting can hear each other during the meeting,
and participation by such means shall constitute presence in person at a
meeting.
1.11 PROXIES. At all meetings of shareholders, a shareholder may vote
by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy.
ARTICLE II - BOARD OF DIRECTORS
2.1 MANAGEMENT RESPONSIBILITY. All corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of, the Board of Directors,
except as may be otherwise provided in the Articles of Incorporation or the
Washington Business Corporation Act.
2.2 NUMBER OF DIRECTORS, QUALIFICATION. The number of directors of
the corporation shall be not less than one (1) nor more than five (5), the
specific number to be set by resolution of the Board of Directors or the
shareholders. No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
No director need be a shareholder of the corporation or a resident of
the State of Washington.
2.3 ELECTION, TERM OF OFFICE. At the first annual meeting of
shareholders and at each annual meeting thereafter, the shareholders shall elect
directors to hold office until the next annual meeting, except in the case of
the classification of directors as permitted by RCW 23B.08.060. If, for any
reason, the directors shall not have been elected at an annual meeting, they may
be elected at a special meeting of shareholders called for that purpose in
accordance with these Bylaws. Despite the expiration of
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a director's term, the director continues to serve until the director's
successor shall have been elected and qualified or until there is a decrease in
the number of directors.
2.4 VACANCIES. Any vacancy occurring in the Board of Directors
(whether caused by resignation, death, an increase in the number of directors,
or otherwise) may be filled by the shareholders or the Board of Directors. If
the directors in office constitute fewer than a quorum of the Board, they may
fill the vacancy by the affirmative vote of a majority of all the directors in
office. A director elected to fill any vacancy shall hold office until the next
shareholders meeting at which directors are elected.
2.5 REMOVAL. One or more members of the Board of Directors
(including the entire Board) may be removed, with or without cause, at a meeting
of shareholders called expressly for that purpose. If the Articles of
Incorporation do not permit cumulative voting, a director may be removed only if
the number of votes cast to remove the director exceeds the number of votes cast
not to remove the director. If the Articles of Incorporation permit cumulative
voting in the election of directors, no one of the directors may be removed if
the votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire Board.
2.6 ANNUAL MEETING. The first meeting of each newly elected Board of
Directors shall be known as the annual meeting thereof and shall be held without
notice immediately after the annual shareholders' meeting or any special
shareholders' meeting at which a Board is elected. Said meeting shall be held at
the same place as such shareholders' meeting unless some other place shall be
specified by resolution of the shareholders.
2.7 REGULAR MEETINGS. Regular meetings of the Board of Directors or
of any committee designated by the Board may be held at such place and such day
and hour as shall from time to time be fixed by resolution of the Board or
committee, without other notice than the delivery of such resolution as provided
in Section 2.9 below.
2.8 SPECIAL MEETINGS. Special meetings of the Board of Directors or
any committee designated by the Board may be called by the President or the
Chairperson of the Board (if one be elected) or any director or committee
member, to be held at such place and such day and hour as specified by the
person or persons calling the meeting.
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2.9 NOTICE OF MEETING. Notice of the date, time, and place of all
special meetings of the Board of Directors or any committee designated by the
Board shall be given by the Secretary, or by the person calling the meeting, by
mail, private carrier, telegram, facsimile transmission, or personal
communication over the telephone or otherwise, provided such notice is received
at least two (2) days prior to the day upon which the meeting is to be held.
No notice of any regular meeting need be given if the time and place
thereof shall have been fixed by resolution of the Board of Directors or any
committee designated by the Board and a copy of such resolution has been
delivered by mail, private carrier, telegram or facsimile transmission to every
director or committee member and is received at least two (2) days before the
first meeting held in pursuance thereof.
Notice of any meeting of the Board of Directors or any committee
designated by the Board need not be given to any director or committee member if
it is waived in a writing signed by the director entitled to the notice, whether
before or after such meeting is held.
A director's attendance at or participation in a meeting waives any
required notice to the director of the meeting unless the director at the
beginning of the meeting, or promptly upon the director's arrival, objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors or any committee designated by the Board need be
specified in the notice or waiver of notice of such meeting unless required by
the Articles of Incorporation or these Bylaws.
Any meeting of the Board of Directors or any committee designated by the
Board shall be a legal meeting without any notice thereof having been given if
all of the directors or committee members have received valid notice thereof,
are present without objecting, or waive notice thereof in a writing signed by
the director and delivered to the corporation for inclusion in the minutes or
filing with the corporate records, or any combination thereof.
2.10 QUORUM OF DIRECTORS. Unless a greater number is required by the
Articles of Incorporation, a majority of the number of directors fixed by or in
the manner provided by these Bylaws shall constitute a quorum for the
transaction of business. If a quorum is present when a vote is taken, the
affirmative vote of a majority
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of directors present is the act of the Board of Directors unless the Articles of
Incorporation or these Bylaws require the vote of a greater number of directors.
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place. If the meeting is
adjourned for more than forty-eight (48) hours, then notice of the time and
place of the adjourned meeting shall be given before the adjourned meeting takes
place, in the manner specified in Section 2.9 of these Bylaws, to the directors
who were not present at the time of the adjournment.
2.11 PRESUMPTION OF ASSENT. Any director who is present at any
meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless (a) the
director objects at the beginning of the meeting, or promptly upon the
director's arrival, to holding the meeting or transacting business at the
meeting; (b) the director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or (c) the director delivers written
notice of dissent or abstention to the presiding officer of the meeting before
the adjournment thereof or to the corporation within a reasonable time after
adjournment of the meeting. Such right to dissent or abstain shall not be
available to any director who voted in favor of such action.
2.12 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required by
law to be taken or which may be taken at a meeting of the Board of Directors or
of a committee thereof may be taken without a meeting if one or more written
consents, setting forth the action so taken, shall be signed by all of the
directors or all of the members of the committee, as the case may be, either
before or after the action taken and delivered to the corporation for inclusion
in the minutes or filing with the corporate records. Such consent shall have the
same effect as a unanimous vote at a meeting duly held upon proper notice on the
date of the last signature thereto, unless the consent specifies a later
effective date.
2.13 TELEPHONIC MEETINGS. Members of the Board of Directors or any
committee designated by the Board may participate in a meeting of the Board or
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
during the meeting. Participation by such means shall constitute presence in
person at a meeting.
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2.14 COMPENSATION. By resolution of the Board of Directors, the
directors and committee members may be paid their expenses, if any, or a fixed
sum or a stated salary as a director or committee member for attendance at each
meeting of the Board or of such committee as the case may be. No such payment
shall preclude any director or committee member from serving the corporation in
any other capacity and receiving compensation therefor.
2.15 COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the full Board, may from time to time designate from among its
members one or more committees, each of which must have two or more members and,
to the extent provided in such resolution, shall have and may exercise all the
authority of the Board of Directors, except that no such committee shall have
the authority to:
(a) authorize or approve a distribution except according to
a general formula or method prescribed by the Board of Directors;
(b) approve or propose to shareholders action that the
Washington Business Corporation Act requires to be approved by shareholders;
(c) fill vacancies on the Board of Directors or on any of
its committees;
(d) adopt any amendment to the Articles of Incorporation;
(e) adopt, amend or repeal these Bylaws;
(f) approve a plan of merger; or
(g) authorize or approve the issuance or sale or contract
for sale of shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except that the
Board of Directors may authorize a committee, or a senior executive officer
of the corporation, to do so within limits specifically prescribed by the
Board of Directors.
Meetings of such committees shall be governed by the same procedures as
govern the meetings of the Board of Directors. All committees so appointed shall
keep regular minutes of their meetings and shall cause them to be recorded in
books kept for that purpose at the office of the corporation.
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ARTICLE III - OFFICERS
3.1 APPOINTMENT. The officers of the corporation shall be appointed
annually by the Board of Directors at its annual meeting held after the annual
meeting of the shareholders. If the appointment of officers is not held at such
meeting, such appointment shall be held as soon thereafter as a Board meeting
conveniently may be held. Except in the case of death, resignation or removal,
each officer shall hold office until the next annual meeting of the Board and
until his successor is appointed and qualified.
3.2 QUALIFICATION. None of the officers of the corporation need be a
director, except as specified below. Any two or more of the corporate offices
may be held by the same person.
3.3 OFFICERS DESIGNATED. The officers of the corporation shall be a
President, one or more Vice Presidents (the number thereof to be determined by
the Board of Directors), a Secretary, and a Treasurer, each of whom shall be
elected by the Board of Directors. Such other officers and assistant officers as
may be deemed necessary may be appointed by the [Board of Directors]
[President].
The Board of Directors may, in its discretion, appoint a Chairperson of
the Board of Directors; and, if a Chairperson has been appointed, the
Chairperson shall, when present, preside at all meetings of the Board of
Directors and the shareholders and shall have such other powers as the Board may
prescribe.
3.3.1 The President shall be the chief executive officer of
the corporation and, subject to the direction and control of the Board, shall
supervise and control all of the assets, business, and affairs of the
corporation. The President shall vote the shares owned by the corporation in
other corporations, domestic or foreign, unless otherwise prescribed by
resolution of the Board. In general, the President shall perform all duties
incident to the office of President and such other duties as may be prescribed
by the Board from time to time.
The President shall, unless a Chairperson of the Board of Directors has
been appointed and is present, preside at all meetings of the shareholders and
the Board of Directors.
3.3.2 VICE PRESIDENTS. In the absence of the President or
his inability to act, the Vice Presidents, if any, in order of their rank as
fixed by the Board of Directors or, if not ranked a Vice President designated
by the Board shall perform all the duties of the President and when so acting
shall have all the powers of, and be subject to all the restrictions upon,
the President;
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provided that no such Vice President shall assume the authority to preside as
Chairperson of meetings of the Board unless such Vice President is a member of
the Board. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be respectively prescribed for them by the
Board, these Bylaws or the President.
3.3.3 SECRETARY. The Secretary shall:
(a) keep the minutes of meetings of the shareholders and the
Board of Directors in one or more books provided for that purpose;
(b) see that all notices are duly given in accordance with
the provisions of these Bylaws or as required by law;
(c) be custodian of the corporate records and seal of the
corporation, if one be adopted;
(d) keep a register of the post office address of each
shareholder and director;
(e) sign with the President, or a Vice President,
certificates for shares of the corporation, the issuance of which shall have
been authorized by resolution of the Board of Directors;
(f) have general charge of the stock transfer books of the
corporation; and
(g) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned by the
President or the Board of Directors.
In the absence of the Secretary, an Assistant Secretary may perform the
duties of the Secretary.
3.3.4 TREASURER. Subject to the direction and control of the
Board of Directors, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation; and, at the
expiration of his term of office, he shall turn over to his successor all
property of the corporation in his possession.
In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer.
3.4 DELEGATION. In case of the absence or inability to act of any
officer of the corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time
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delegate the powers or duties of such officer to any other officer or director
or other person whom it may select.
3.5 RESIGNATION. Any officer may resign at any time by delivering
written notice to the Corporation. Any such resignation shall take effect when
the notice is delivered unless the notice specifies a later date. Unless
otherwise specified in the notice, acceptance of such resignation by the
corporation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
3.6 REMOVAL. Any officer or agent elected or appointed by the Board
of Directors may be removed by the Board at any time with or without cause.
Election or appointment of an officer or agent shall not of itself create
contract rights.
3.7 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, creation of a new office, or any other
cause may be filled by the Board of Directors for the unexpired portion of the
term or for a new term established by the Board.
3.8 COMPENSATION. Compensation, if any, for officers and other
agents and employees of the corporation shall be determined by the Board of
Directors, or by the President to the extent such authority may be delegated to
him by the Board. No officer shall be prevented from receiving compensation in
such capacity by reason of the fact that he is also a director of the
corporation.
ARTICLE IV - CONTRACTS, LOANS, CHECKS AND DEPOSITS
4.1 CONTRACTS. The Board of Directors may authorize any officer or
officers or agent or agents to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation. Such authority
may be general or confined to specific instances.
4.2 LOANS. The corporation shall not borrow money and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the Board of Directors. Such authority may be general or confined to specific
instances.
4.3 CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the
payment of money, notes, or other evidences of indebtedness issued in the name
of the corporation shall be signed by such
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officer or officers or agent or agents of the corporation and in such manner as
may be determined from time to time by resolution of the Board of Directors.
4.4 DEPOSITS. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies, or other depositories as the Board of Directors may
select.
ARTICLE V - STOCK
5.1 ISSUANCE OF SHARES. No shares of the corporation shall be issued
unless authorized by the Board of Directors, which authorization shall include
the maximum number of shares to be issued, the consideration to be received for
each share, and, if the consideration is in a form other than cash, the
determination of the value of the consideration and a statement that such
consideration is adequate.
5.2 CERTIFICATES OF STOCK. Certificates of stock shall be issued in
numerical order, and each shareholder shall be entitled to a certificate signed
by the President or a Vice President, attested to by the Secretary or Assistant
Secretary, and sealed with the corporate seal, if any. Every certificate of
stock shall be in such form as is consistent with the provisions of the
Washington Business Corporation Act and shall state:
(a) The name of the corporation and that the corporation is
organized under the laws of this state;
(b) The name of the registered holder of the shares represented
thereby; and
(c) The number and class of shares, and the designation of the
series, if any, which such certificate represents.
If the corporation is authorized to issue different classes of shares or
different series within a class, the designations, preferences, limitations,
and relative rights applicable to each class and the variations in rights,
preferences and limitations determined for each series, and the authority of
the Board of Directors to determine variations for future series, must be
summarized on the front or back of each certificate. Alternatively, each
certificate may state conspicuously on its front or back that the corporation
will furnish the shareholder this information without charge on request in
writing.
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If the shares are subject to transfer or other restrictions under applicable
securities laws or contracts with the corporation, either a complete description
of or a reference to the existence and general nature of such restrictions shall
be placed on the face or back of the certificate.
5.3 RESTRICTIONS ON TRANSFER. Except to the extent that the
corporation has obtained an opinion of counsel acceptable to the corporation
that transfer restrictions are not required under applicable securities laws,
all certificates representing shares of the corporation shall bear the following
legend (or a legend of substantially the same import) on the face of the
certificate or on the reverse of the certificate if a reference to the legend is
contained on the face:
NOTICE: RESTRICTIONS ON TRANSFER
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 or any applicable state law, and no
interest therein may be sold, distributed, assigned, offered, pledged or
otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering
any such transaction involving said securities, or (b) this corporation
receives an opinion of legal counsel for the holder of these securities
(concurred in by legal counsel for this corporation) stating that such
transaction is exempt from registration or this corporation otherwise
satisfies itself that such transaction is exempt from registration.
Neither the offering of the securities nor any offering materials have
been reviewed by any administrator under the Securities Act of 1933, or
any applicable state law."
5.4 TRANSFERS. Shares of stock may be transferred by delivery of the
certificates therefor, accompanied by:
(a) an assignment in writing on the back of the certificate, or an
assignment separate from certificate, or a written power of attorney to sell,
assign, and transfer the same, signed by the record holder of the
certificate, and
(b) such additional documents, instruments, or other items or
evidence as may be reasonably necessary to satisfy the requirements of any
transfer restrictions applicable to such shares, whether arising under
applicable securities or other laws, or by contract, or otherwise.
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Except as otherwise specifically provided in these Bylaws, no shares of
stock shall be transferred on the books of the corporation until the outstanding
certificate therefor has been surrendered to the corporation. All certificates
surrendered to the corporation for transfer shall be cancelled, and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and cancelled, except that in case of a lost,
destroyed, or mutilated certificate a new one may be issued therefor upon such
terms (including indemnity to the corporation) as the Board of Directors may
prescribe.
ARTICLE VI - BOOKS AND RECORDS
6.1 BOOKS OF ACCOUNTS, MINUTES AND SHARE REGISTER. The corporation
shall keep as permanent records minutes of all meetings of its shareholders and
Board of Directors, a record of all actions taken by the shareholders or Board
of Directors without a meeting, and a record of all actions taken by a committee
of the Board of Directors exercising the authority of the Board of Directors on
behalf of the corporation. The corporation shall maintain appropriate accounting
records. The corporation or its agent shall maintain a record of its
shareholders, in a form that permits preparation of a list of the names and
addresses of all shareholders, in alphabetical order by class of shares showing
the number and class of shares held by each. The corporation shall keep a copy
of the following records at its principal office: the Articles or Restated
Articles of Incorporation and all amendments to them currently in effect; the
Bylaws or Restated Bylaws and all amendments to them currently in effect; the
minutes of all shareholders' meetings, and records of all actions taken by
shareholders without a meeting, for the past three years; its financial
statements for the past three years, including balance sheets showing in
reasonable detail the financial condition of the corporation as of the close of
each fiscal year, and an income statement showing the results of its operations
during each fiscal year prepared on the basis of generally accepted accounting
principles or, if not, prepared on a basis explained therein; all written
communications to shareholders generally within the past three years; a list of
the names and business addresses of its current directors and officers; and its
most recent annual report delivered to the Secretary of State of Washington.
6.2 COPIES OF RESOLUTIONS. Any person dealing with the corporation
may rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the President
or Secretary.
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ARTICLE VII - FISCAL YEAR
The fiscal year of the corporation shall be set by resolution of the
Board of Directors.
ARTICLE VIII - DIVIDENDS
The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and to
the extent prescribed and permitted by law and the Articles of Incorporation.
ARTICLE IX - CORPORATE SEAL
The Board of Directors may adopt a corporate seal for the corporation
which shall have inscribed thereon the name of the corporation, the year and
state of incorporation and the words "corporate seal".
ARTICLE X - INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION. Each individual (hereinafter an
"indemnitee") who was or is made a party or is threatened to be made a party to
or is otherwise involved (including, without limitation, as a witness) in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or
officer of the corporation or that, while serving as a director or officer of
the corporation, he or she is or was also serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation or of a foreign or domestic partnership,
joint venture, trust, employee benefit plan or other enterprise, whether the
basis of the proceeding is alleged action in an official capacity as such a
director, officer, employee, partner, trustee, or agent or in any other capacity
while serving as such director, officer, employee, partner, trustee, or agent,
shall be indemnified and held harmless by the corporation to the full extent
permitted by applicable law as then in effect, against all expense, liability
and loss (including, without limitation, attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts to be paid in settlement) incurred
or suffered by such indemnitee in connection therewith, and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee, partner, trustee, or agent and shall inure to
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the benefit of the indemnitee's heirs, executors and administrators;
provided, however, that no indemnification shall be provided to any such
indemnitee if the corporation is prohibited by the Washington Business
Corporation Act or other applicable law as then in effect from paying such
indemnification; and provided, further, that except as provided in Section
10.2 of this Article with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized or ratified by the
Board of Directors. The right to indemnification conferred in this Section
10.1 shall be a contract right and shall include the right to be paid by the
corporation the expenses incurred in defending any proceeding in advance of
its final disposition (hereinafter an "advancement of expenses"). Any
advancement of expenses shall be made only upon delivery to the corporation
of a written undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such
expenses under this Section 10.1 and upon delivery to the corporation of a
written affirmation (hereinafter an "affirmation") by the indemnitee of his
or her good faith belief that such indemnitee has met the standard of conduct
necessary for indemnification by the corporation pursuant to this Article.
10.2 RIGHT OF INDEMNITEE TO BRING SUIT. If a written claim for
indemnification under Section 10.1 of this Article is not paid in full by the
corporation within sixty days after the corporation's receipt thereof, except
in the case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty days, the indemnitee may at any time
thereafter bring suit against the corporation to recover the unpaid amount of
the claim. If successful, in whole or in part, in any such suit or in a suit
brought by the corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expenses of prosecuting or defending such suit. The indemnitee shall be
presumed to be entitled to indemnification under this Article upon submission
of a written claim (and, in an action brought to enforce a claim for an
advancement of expenses, where the required undertaking and affirmation have
been tendered to the corporation) and thereafter the corporation shall have
the burden of proof to overcome the presumption that the indemnitee is so
entitled. Neither the failure of the corporation (including the Board of
Directors, independent legal counsel or the shareholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances
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nor an actual determination by the corporation (including the Board of
Directors, independent legal counsel or the shareholders) that the indemnitee is
not entitled to indemnification shall be a defense to the suit or create a
presumption that the indemnitee is not so entitled.
10.3 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
advancement of expenses conferred in this Article X shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation or Bylaws of the
corporation, general or specific action of the Board of Directors, contract or
otherwise.
10.4 INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain
insurance, at its expense, to protect itself and any individual who is or was a
director, officer, employee or agent of the corporation or who, while a
director, officer, employee or agent of the corporation, is or was serving at
the request of the corporation as a agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any expense, liability or loss asserted against or incurred
by the individual in that capacity or arising from the individual's status as a
director, officer, employee or agent, whether or not the corporation would have
the power to indemnify such person against such expense, liability or loss under
the Washington Business Corporation Act. The corporation may enter into
contracts with any director, officer, employee or agent of the corporation in
furtherance of the provisions of this Article and may create a trust fund, grant
a security interest or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article.
10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
corporation may, by action of the Board of Directors, grant rights to
indemnification and advancement of expenses to employees and agents of the
corporation with the same scope and effect as the provisions of this Article
with respect to the indemnification and advancement of expenses of directors and
officers of the corporation or pursuant to rights granted pursuant to, or
provided by, the Washington Business Corporation Act or otherwise.
10.6 PERSONS SERVING OTHER ENTITIES. Any individual who is or was a
director, officer or employee of the corporation who, while a director, officer
or employee of the corporation, is or was serving (a) as a director or officer
of another foreign or domestic corporation of which a majority of the shares
entitled to vote in the election of its directors is held by the corporation,
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(b) as a trustee of an employee benefit plan and the duties of the director or
officer to the corporation also impose duties on, or otherwise involve services
by, the director or officer to the plan or to participants in or beneficiaries
of the plan or (c) in an executive or management capacity in a foreign or
domestic partnership, joint venture, trust or other enterprise of which the
corporation or a wholly owned subsidiary of the corporation is a general partner
or has a majority ownership or interest shall be deemed to be so serving at the
request of the corporation and entitled to indemnification and advancement of
expenses under this Article.
ARTICLE XI - MISCELLANY
11.1 INSPECTOR OF ELECTIONS. Before any annual or special meeting of
Shareholders, the Board of Directors may appoint an inspector of elections to
act at the meeting and any adjournment thereof. If no inspector of elections is
so appointed by the Board, then the chairperson of the meeting may appoint an
inspector of elections to act at the meeting. If any person appointed as
inspector fails to appear or fails or refuses to act, then the chairperson of
the meeting may, and upon the request of any shareholder or a shareholder's
proxy shall, appoint a person to fill that vacancy.
Such inspector of elections shall:
(a) determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, and, with the advice of legal counsel to the corporation, the
authenticity, validity, and effect of proxies;
(b) receive votes, ballots, or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine the result; and
(f) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
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11.2 RULES OF ORDER. The rules contained in the most recent edition
of Robert's Rules of order, Newly Revised, shall govern all meetings of
shareholders and directors where those rules are not inconsistent with the
Articles of Incorporation or Bylaws, subject to the following:
(a) The chairperson of the meeting shall have absolute
authority over matters of procedure, and there shall be no appeal from the
ruling of the chairperson. If the chairperson deems it advisable to dispense
with the rules of parliamentary procedure for any meeting or any part thereof,
the chairperson shall so state and shall clearly state the rules under which the
meeting or appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents continuation of
the legitimate business of the meeting, the chairperson may quit the chair and
announce the adjournment of the meeting; upon his so doing, the meeting shall be
deemed immediately adjourned, subject to being reconvened in accordance with
Section 1.6 of these Bylaws.
(c) The chairperson may ask or require that anyone not a
bona fide shareholder or proxy leave the meeting of shareholders.
(d) A resolution or motion at a meeting of shareholders
shall be considered for vote only if proposed by a shareholder or duly
authorized proxy and seconded by an individual who is a shareholder or duly
authorized proxy other than the individual who proposed the resolution or
motion.
11.3 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of
e corporation shall be located in the State of Washington at such place as may
be fixed from time to time by the Board of Directors upon filing of such notices
as may be required by law, and the registered agent shall have a business office
identical with such registered office. Any change in the registered agent or
registered office shall be effective upon filing such change with the office of
the Secretary of State of the State of Washington.
ARTICLE XII - AMENDMENT OF BYLAWS
12.1 BY THE SHAREHOLDERS. These Bylaws may be amended, altered, or
repealed at any meeting of the shareholders, provided that in case of a special
meeting, notice of the proposed alteration or amendment was contained in the
notice of the meeting.
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12.2 BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered,
or repealed by the affirmative vote of the majority of the whole Board of
Directors at any regular or special meeting of the Board unless (a) the Articles
of Incorporation or the Washington Business Corporation Act reserve the power to
amend exclusively to the shareholders in whole or part; or (b) the shareholders,
in amending or repealing a particular bylaw, provide expressly that the Board of
Directors may not amend or repeal that bylaw. Any action of the Board with
respect to the amendment, alteration or repeal of these Bylaws is hereby made
expressly subject to change or repeal by the shareholders.
ARTICLE XIII - AUTHENTICATION
The foregoing Bylaws were read, approved, and duly adopted by the Board
of Directors, of Stratford Software Corporation, USA, on the 8th day of October
1992, and the President of the corporation was empowered to authenticate such
Bylaws by his signature below.
/s/ T. J. McKie
-----------------------------
Thompson J. McKie
President
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EXHIBIT 3.5
AMENDMENT TO BYLAWS OF REGISTRANT
RESOLVED, that the first sentence of Section 2.2 of the bylaws of Bow
Flex, Inc. is hereby amended, effective as of the expiration of the term of
the current directors of Bow Flex, Inc., to provide as follows:
The number of directors of the corporation shall be not less than one
(1) nor more than six (6), the specific number to be set by resolution
of the Board of Directors or the shareholders.
DATED February 27, 1998.
/s/ Roger J. Sharp
--------------------------------
Roger J. Sharp
<PAGE>
DIRECT FOCUS, INC.
(FORMERLY: BOW FLEX, INC.)
STOCK OPTION PLAN
June 20, 1995, as amended June 30, 1998, and February 20, 1999
1. STATEMENT OF PURPOSE
1.1 The principal purposes of this Stock Option Plan (the "Plan")
are to secure to Direct Focus, Inc. (the "Company") the advantages of the
incentive inherent in stock ownership on the part of employees, officers,
directors and consultants responsible for the continued success of the Company
and to create in such individuals a proprietary interest in, and a greater
concern for, the welfare of the Company through the grant of options to acquire
shares of the common stock of the Company (the "Common Stock"). Each incentive
stock option ("ISO") granted hereunder is intended to constitute an "incentive
stock option", as such term is defined in Section 422 of the United States
Internal Revenue Code of 1986, as the same may be amended from time to time (the
"Code"), and this Plan and each such ISO are intended to comply with all of the
requirements of said Section 422 and of all other provisions of the Code
applicable to incentive stock options and to plans issuing the same. Each
non-statutory stock option ("Non-ISO") granted hereunder is intended to
constitute a non-statutory stock option that does not comply with the
requirements of Section 422 of the Code. ISOs and Non-ISOs shall sometimes
hereinafter be referred to collectively as "Options". The Plan is expected to
benefit shareholders by enabling the Company to attract and retain personnel of
the highest calibre by offering to them an opportunity to share in any increase
in the value of the Common Stock to which such personnel have contributed.
2. ADMINISTRATION
2.1 The Plan shall be administered by the Board of Directors of the
Company (the "Board") or by a committee of the Board appointed in accordance
with Section 2.2 or 2.4.2 below (the Board, or such committee, if appointed,
will be referred to in this Plan as the "Committee").
2.2 The Board may at any time appoint a Committee, consisting of not
less than two (2) of its members, to administer the Plan on behalf of the Board
in accordance with such terms and conditions not inconsistent with this Plan as
the Board may prescribe. Once appointed, the Committee shall continue to serve
until otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members, remove members
(with or without cause) and appoint new members in their place, fill vacancies,
however caused, and/or remove all members of the Committee and thereafter
directly administer the Plan.
2.3 A majority of the members of the Committee shall constitute a
quorum and, subject to the limitations in this Section 2, all actions of the
Committee shall require the affirmative vote of members who constitute a
majority of such quorum. Members of the Committee who are not Disinterested
Persons (as defined in Section 2.5) may vote on any matters affecting the
administration of the Plan or the grant of Options pursuant to the Plan, except
that no such member shall act upon the granting of an Option to himself (but any
such member may be counted in determining the existence of a quorum at any
meeting of the Committee during which action is taken with respect to the
granting of Options to him).
2.4
<PAGE>
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2.5 The Committee shall have the authority to do the following:
2.5.1 To administer the Plan in accordance with its express terms;
2.5.2 To determine all questions arising in connection with the
administration, interpretation and application of the Plan,
including all questions relating to the value of the Common
Stock;
2.5.3 To correct any defect, supply any information or reconcile any
inconsistency in such manner and to such extent as shall be
deemed necessary or advisable to carry out the purposes of the
Plan;
2.5.4 To prescribe, amend and rescind rules and regulations relating
to the administration of the Plan;
2.5.5 To determine the duration and purposes of leaves of absence
which may be granted to participants without constituting a
termination of employment for purposes of the Plan;
2.5.6 To do the following with respect to the granting of Options:
(a) based on the eligibility criteria in Section 3 below, to
determine the employees, officers, directors or
consultants to whom Options shall be granted;
(b) to determine whether such Options shall be ISOs or
Non-ISOs;
(c) to determine the terms and provisions of the Option
Agreement, as defined in Section 5 below, to be entered
into with any Optionee (which need not be identical with
the terms of any other Option Agreement), and, with the
consent of such Optionee and with the prior consent of
The Toronto Stock Exchange, to modify and amend such
terms and provisions;
(d) to determine when such Options shall be granted;
(e) to determine the number of shares of Common Stock
subject to each Option; and
2.5.7 To make all other determinations necessary or advisable for
administration of the Plan.
<PAGE>
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2.6 The Committee's exercise of the authority set out in Section 2.6 shall
be consistent with the intent that the ISOs issued under the Plan be
qualified under the terms of Section 422 of the Code, and that the
Non-ISOs shall not be so qualified. All determinations made by the
Committee in good faith on matters referred to in Section 2.6 shall be
final, conclusive and binding upon all persons. The Committee shall have
all powers necessary or appropriate to accomplish its duties under this
Plan. In addition, the Committee's administration of the Plan shall in
all respects be consistent with the policies and rules of The Toronto
Stock Exchange (the "TSE") governing the granting of the stock options
for so long as the Common Stock is listed on the TSE.
3. ELIGIBILITY
3.1 ISOs may be granted to any employee of the Company or of an
Affiliate of the Company, as defined in Section 3.2 below. Non-ISOs may be
granted to any employee, officer or director (whether or not also an employee)
or consultant of the Company or of an Affiliate of the Company. Each employee,
officer, director or consultant selected by the Committee to receive an Option
shall sometimes hereinafter be referred to as an "Optionee".
3.2 As used in this Plan, an "Affiliate" of a corporation shall
refer to a "parent corporation" of such corporation as described in Section
424(e) of the Code or a "subsidiary corporation" of such corporation as
described in Section 424(f) of the Code.
3.3 An Optionee who is not an employee of the Company or of an
Affiliate of the Company shall not be eligible to receive an ISO under the Plan
and no ISOs shall be granted to any such non-employee Optionee.
3.4 No Option shall be granted hereunder to any Optionee unless the
Committee shall have determined, based on the advice of counsel, that the grant
of such Option (and the exercise thereof by the Optionee) will not violate the
securities law of the jurisdiction where the Optionee resides.
4. SHARES SUBJECT TO THE PLAN
4.1 The Committee, from time to time, may provide for the option and
sale in the aggregate of up to 1,857,961 shares of Common Stock, to be made
available from authorized, but unissued, or re-acquired shares of Common Stock.
The number of such shares shall be adjusted so as to take account of the events
referred to in Section 10 hereof. Notwithstanding the foregoing, for so long as
the Company's Common Stock is listed on the TSE, the maximum number of shares of
Common Stock which may be reserved for issuance under Options granted to any one
person under the Plan, shall not exceed five percent (5%) of the Common Stock
outstanding (on a non-diluted basis) less the aggregate number of shares of
Common Stock reserved for issuance to such person under any other option to
purchase Common Stock from treasury granted as a compensation or incentive
mechanism.
4.2 Upon exercise of an Option, the number of shares of Common Stock
thereafter available under the Plan and under the Option shall decrease by the
number of shares as to which the Option was exercised.
4.3 If any Option granted under the Plan shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject thereto shall again be available for the purposes of the Plan.
4.4 The Company will at all times during the term of this Plan
reserve and keep available such number of shares as shall be sufficient to
satisfy the requirements of the Plan.
4.5 Except with the further approval of the shareholders of the
Company given by the affirmative vote of a majority of the votes cast at a
meeting of the shareholders of the Company, excluding the votes of Insiders (as
defined in section 4.6), such approval not being sought at the time of adoption
of this Plan, the Company may not cause:
<PAGE>
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4.5.1 The number of shares of Common Stock reserved for issuance
pursuant to Options granted to Insiders (as defined in section
4.6 hereof) to exceed 15% of the Outstanding Issue (as defined
in section 4.7);
4.5.2 the issuance to Insiders, within a one-year period, of shares of
Common Stock under Share Compensation Arrangements (as defined
in section 4.8) to exceed 15% of the Outstanding Issue; and
4.5.3 subject always to section 4.1 of this Plan, the issuance to any
one Insider and such Insider's Associates (as defined in Section
1(1) of the SECURITIES ACT (Ontario), within a one-year period,
of shares of common stock under share compensation arrangements
to exceed 5% of the outstanding issue.
Any entitlement granted prior to a participant becoming an
insider of the Company shall be excluded in determining the number of common
shares issuable to insiders.
4.6 "Insider" means:
(i) an insider as defined under Section 1(1) of the
SECURITIES ACT (ONTARIO), other than a person who falls
within that definition solely by virtue of being a
director or senior officer of a subsidiary of the
Company; and
(ii) an associate as defined under Section 1(1) of the
SECURITIES ACT (ONTARIO) of any person who is an insider
by virtue of (i) above.
4.7 "Outstanding Issue" means number of shares of Common Stock that
are outstanding immediately prior to the share issuance or grant of option in
question, excluding shares issued pursuant to Share Compensation Arrangements
over the preceding one year period.
4.8 "Share Compensation Arrangements" means any stock option, stock
option plan, employee stock purchase plan or any other compensation or incentive
mechanism involving the issuance or potential issuance of shares of Common
Stock, including a share purchase from treasury which is financially assisted by
the Company by way of a loan, guarantee or otherwise.
5. OPTION TERMS
5.1 With respect to each Option to be granted to an Optionee, the
Committee shall specify the following terms in a written agreement (the "Option
Agreement") to be executed by the Company and the Optionee:
5.1.1 Whether such Option is an ISO or a Non-ISO;
5.1.2 The number of shares of Common Stock subject to purchase
pursuant to such Option;
5.1.3 The date on which the grant of such Option shall be effective
(the "Date of Grant");
5.1.4 The period of time during which such Option shall be
exercisable, which shall in no event be more than ten (10) years
following its Date of Grant; provided, however, that if an ISO
is granted to an Optionee who on the Date of Grant owns, either
directly or indirectly within the meaning of Section 424(d) of
the Code, more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or an
Affiliate of the Company, the period of time during which such
Option shall be exercisable shall in no event be more than five
(5) years following its Date of Grant;
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5.1.5 The price at which such Option shall be exercisable by the
Optionee (the "Option Price"); provided, however, that the Option Price
specified in ISOs shall in no event be less than the Fair Market Value (as
defined in Section 5.2 below) on the Date of Grant, of the shares of Common
Stock subject thereto; and provided further that, if such Option is granted
to an Optionee who on the Date of Grant owns, either directly or indirectly
within the meaning of Section 424(d) of the Code, more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or
an Affiliate of the Company, then the Option Price specified in such Option
shall be at least one hundred ten percent (110%) of the fair market value, on
the Date of Grant, of the Common Stock subject thereto;
5.1.6 Any vesting schedule upon which the exercise of an Option is
contingent; provided that the Committee shall have complete discretion with
respect to the terms of any vesting schedule upon which the exercise of an
Option is contingent, including, without limitation, discretion:
(a) to allow full and immediate vesting upon grant of such
Option;
(b) to permit partial vesting in stated percentage amounts
based on the length of the holding period of such
Option; or
(c) to permit full vesting after a stated holding period has
passed; and
5.1.7 Such other terms and conditions as the Committee deems advisable
and as are consistent with the purpose of this Plan.
5.2 "Fair Market Value" means, with respect to a share of Common
Stock subject to Option, the closing price of the Common Stock on the Toronto
Stock Exchange on the trading day immediately preceding the date of grant or if
there were no trades in the Common Stock on the day immediately preceding the
grant, the average of the bid and ask price for that day, or, if the Common
Stocks are not listed on such exchange, on such other exchange or exchanges on
which the Common Stock are listed. If no Common Shares have been traded on such
day, the Fair Market Value shall be established on the same basis on the last
previous day for which a trade was reporting by such exchange. If the Common
Stock are not listed and posted for trading on such exchange, on such day, the
Fair Market Value shall be such price per Common Stock as the Committee, acting
in good faith, may determine.
5.3 No Option granted under the Plan shall be exercisable more than
ten (10) years following said date. Except as expressly provided herein, nothing
contained in this Plan shall require that the terms and conditions of Options
granted under the Plan be uniform.
5.4 The Option Agreement for any Option granted to a person who, on
the Date of Grant, is subject to Section 16 of the Exchange Act shall provide
that at least six (6) months must elapse from the Date of Grant of the Option to
the date of disposition, as defined in Section 424(c) of the Code, of the Common
Stock issued upon exercise of such Option.
6. LIMITATION ON GRANTS OF OPTIONS
6.1 In the event that the aggregate fair market value of Common
Stock and other stock with respect to which ISOs granted to an Optionee under
this Plan or incentive stock options granted to such Optionee under any other
plan of the Company or any of its Affiliates are exercisable for the first time
during any calendar year, exceeds the maximum permitted under Section 422(d) of
the Code, then to the extent of such excess such Options shall be treated as
Non-ISOs.
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7. EXERCISE OF OPTION
7.1 Subject to any limitations or conditions imposed upon an Option
pursuant to Section 5 above, an Optionee may exercise an Option, or any part
thereof (unless partial exercise is specifically prohibited by the terms of the
Option), by giving written notice thereof to the Company at its principal place
of business.
7.2 The notice described in Section 7.1 shall be accompanied by full
payment of the Option Price to the extent the Option is so exercised, and full
payment of any amounts the Company determines must be withheld for tax purposes
from the Optionee pursuant to the Option Agreement. Such payment shall be:
7.2.1 In lawful money of the United States in cash or by cheque; or
7.2.2 At the discretion of the Committee, through delivery of shares
of Common Stock having a fair market value equal as of the date
of the exercise to the cash exercise price of the Option; or
7.2.3 At the discretion of the Committee, by any combination of
Sections 7.2.1 or 7.2.2, provided however that no financial
assistance will be provided to an Optionee by the Company to
exercise the Option.
7.3 As soon as practicable after exercise of an Option in accordance
with Sections 7.1 and 7.2 above, the Company shall issue a stock certificate
evidencing the Common Stock with respect to which the Option has been exercised.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of such stock
certificate, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to such Common Stock, notwithstanding the
exercise of the Option. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in Section 10 below.
8. TRANSFERABILITY OF OPTIONS
8.1 Except as provided otherwise in this Section 8, no option shall
be transferable or exercisable by any person other than the Optionee to whom
such Option was originally granted.
8.2 If an Optionee to whom an ISO has been granted (an "ISO
Optionee") ceases to be employed by the Company or by any Affiliate of the
Company by reason of such Optionee's death, any ISOs held by such Optionee shall
pass to the person or persons entitled thereto pursuant to the will of the
Optionee or the applicable laws of descent and distribution (such person or
persons are sometimes herein referred to collectively as the "Qualified
Successor" of the Optionee), and shall be exercisable by the Qualified Successor
on the earlier of six (6) months following such death and ten (10) years from
the Date of Grant.
8.3 If the employment of an ISO Optionee is terminated by the
Company or by any Affiliate of the Company by reason of such Optionee's
disability, as defined in Section 22(e)(3) of the Code, any ISO held by such
Optionee that could have been exercised immediately prior to such termination of
employment shall be exercisable by such Optionee, or, if a guardian (the
"Guardian") is appointed for such Optionee, by the Guardian of such Optionee on
the earlier of twelve (12) months following the termination of employment of
such Optionee and ten (10) years from the Date of Grant.
8.4 If an ISO Optionee who has ceased to be employed by the Company
or by any Affiliate of the Company by reason of such Optionee's disability, as
defined in Section 22(e)(3) of the Code, dies within six (6) months after the
termination of such employment, any ISO held by such Optionee that could have
been exercised immediately prior to his or her death shall pass to the Qualified
Successor of such Optionee, and shall be exercisable by the Qualified
<PAGE>
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Successor on the earlier of six (6) months following the termination of
employment of such Optionee and ten (10) years from the Date of Grant.
8.5 If an Optionee to whom a Non-ISO has been granted dies, any
Non-ISO held by such Optionee shall pass to the person or persons entitled
thereto pursuant to the will of the Optionee or the applicable laws of descent
and distribution, and shall be exercisable by such person or persons in
accordance with the terms of the applicable Option Agreement.
8.6 Options held by a Qualified Successor or exercisable by a
Guardian shall, during the period prior to their termination that such Options
are held by the Qualified Successor or exercisable by the Guardian, continue to
vest in accordance with any vesting schedule under Section 5.1.6 to which such
Options are subject.
8.7 In the event that two or more persons constitute the Qualified
Successor or the Guardian of an Optionee, all rights of such Qualified Successor
or such Guardian shall be exercisable, if at all, by the unanimous agreement of
such persons.
8.8 Employment shall be considered as continuing intact during any
military or sick leave or other bona fide leave of absence if the period of such
leave does not exceed ninety (90) days or, if longer, for so long as the
Optionee's right to re-employment with the Company or an Affiliate thereof is
guaranteed either by statute or by contract. If the period of such leave exceeds
ninety (90) days and his or her re-employment is not so guaranteed, then his or
her employment shall be deemed to have terminated on the ninety-first (91st)
day of such leave.
9. TERMINATION OF OPTIONS
To the extent not earlier exercised, an Option shall terminate
at the earliest of the following dates:
9.1 The termination date specified for such Option in the respective
Option Agreement;
9.2 With respect to ISOs, six (6) months after the date of
termination of the Optionee's employment with the Company or any Affiliate of
the Company by reason of such Optionee's disability (within the meaning of
Section 22(e)(3) of the Code) or such Optionee's death;
9.3 With respect to ISOs, thirty (30) days, or at the discretion of
the Committee up to three (3) months, after the date of termination of the
Optionee's employment with the Company or any Affiliate of the Company for any
reason other than disability (within the meaning of Section 22(e)(3) of the
Code) or death;
9.4 The date of any sale, transfer or hypothecation, or any
attempted sale, transfer or hypothecation, of such Option in violation of
Section 8.1 above; or
9.5 The date specified in Section 10.2 below for such termination in
the event of a Terminating Event.
10. ADJUSTMENTS TO OPTIONS
10.1. In the event of a material alteration in the capital structure
of the Company on account of a recapitalization, stock split, reverse stock
split, stock dividend or otherwise, then the Committee shall make such
adjustments to this Plan and to the Options then outstanding and thereafter
granted under this Plan as the Committee determines to be appropriate and
equitable under the circumstances, so that the proportionate interest of each
holder of any such Option shall, to the extent practicable, be maintained as
before the occurrence of such event. Such adjustments may include, without
limitation:
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(a) a change in the number or kind of shares of stock of the
Company covered by such Options; and
(b) a change in the Option Price payable per share;
provided, however, that the aggregate Option Price applicable to the unexercised
portion of the existing Options shall not be altered, it being intended that any
adjustments made with respect to such Options shall apply only to the price per
share and the number of shares subject thereto. For the purposes of this Section
10.1, neither:
(i) the issuance of additional shares of stock of the
Company in exchange for adequate consideration
(including services); nor
(ii) the conversion of outstanding preferred shares of the
Company into Common Stock shall be deemed material
alterations of the capital structure of the Company.
In the event the Committee shall determine that the nature of a material
alteration in the capital structure of the Company is such that it is not
practical or feasible to make appropriate adjustments to this Plan or to the
Options granted hereunder, such event shall be deemed a Terminating Event as
defined in Section 10.2 below.
10.2 Subject to Section 10.3, all Options granted under the Plan
shall terminate upon the occurrence of any of the following events (the
"Terminating Events"):
(a) the dissolution or liquidation of the Company; or
(b) a material change in the capital structure of the
Company that is subject to this Section 10.2 by virtue
of the last sentence of Section 10.1 above.
10.3 The Committee shall give notice to Optionees not less than
thirty (30) days prior to the consummation of:
(a) a Terminating Event as defined in Section 10.2 above;
(b) a merger or consolidation of the Company with one or
more corporations as a result of which, immediately
following such merger or consolidation, the shareholders
of the Company as a group will hold less than a majority
of the outstanding capital stock of the surviving
corporation; or
(c) the sale or other disposition of all or substantially
all of the assets of the Company.
Upon the giving of such notice, all Options granted under the Plan shall become
immediately exercisable, without regard to any contingent vesting provision to
which such Options may have otherwise been subject.
10.4 All Options granted under the Plan shall become immediately
exercisable, without regard to any contingent vesting provision to which such
Options may have otherwise been subject, upon the occurrence of any event
whereby any person or entity, including any "person" as such term is used in
Section 13(d)(3) of the Exchange Act, becomes the "beneficial owner", as
defined in the Exchange Act, of Common Stock representing fifty percent (50%)
or more of the combined voting power of the voting securities of the Company.
10.5 In the event of a reorganization as defined in this Section 10.5
in which the Company is not the surviving or acquiring company, or in which the
Company is or becomes a wholly-owned subsidiary of another company after the
effective date of the reorganization, then the plan or agreement respecting the
reorganization shall include
<PAGE>
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appropriate terms providing for the assumption of each Option granted under this
Plan, or the substitution of an option therefor, such that no "modification" of
any such Option occurs under Section 424 of the Code. For purposes of this
Section 10.5, reorganization shall mean any statutory merger, statutory
consolidation, sale of all or substantially all of the assets of the Company, or
sale, pursuant to an agreement with the Company, of securities of the Company
pursuant to which the Company is or becomes a wholly-owned subsidiary of another
corporation after the effective date of the reorganization.
10.6 The Committee shall have the right to accelerate the date of
exercise of any installment of any Option; provided that, without the consent of
the Optionee with respect to any Option, the Committee shall not accelerate the
date of any installment of any Option granted to an employee as an ISO (and not
previously converted into a Non-ISO pursuant to Section 12 below) if such
acceleration would violate the annual vesting limitation contained in Section
422(d) of the Code, as described in Section 6 above.
10.7 Adjustments and determinations under this Section 10 shall be
made by the Committee (upon the advice of counsel), whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding and conclusive.
11. TERMINATION AND AMENDMENT
11.1 Unless earlier terminated as provided in Section 10 above, the
Board may at any time terminate, suspend or amend the terms of the Plan in
accordance with applicable legislation, and subject to any required approval;
provided, however, that, except as provided in Section 10 above, the Board may
not do any of the following without obtaining, within twelve (12) months either
before or after the Board's adoption of a resolution authorizing such action,
approval by the affirmative votes of the holders of a majority of the securities
of the Company present, or represented, and entitled to vote at a meeting duly
held in accordance with the applicable corporate laws or by the written consent
of the holders of a majority of the securities of the Company entitled to vote:
11.1.1 Increase the aggregate number of shares which may be issued
under the Plan;
11.1.2 Materially modify the requirements as to eligibility for
participation in the Plan, or change the designation of the
employees or class of employees eligible to receive ISOs under
the Plan;
11.1.3 Materially increase the benefits accruing to participate under
the Plan; or
11.1.4 Make any change in the terms of the Plan that would cause the
ISOs granted hereunder to lose their qualification as incentive
stock options under Section 422 of the Code.
11.2 No Option may be granted during any suspension or after
termination of the Plan. Amendment, suspension or termination of the Plan shall
not, without the consent of the Optionee, alter or impair any rights or
obligations under any Option theretofore granted.
12. CONVERSION OF ISOs INTO NON-ISOs
At the written request of any ISO Optionee, the Committee may in
its discretion take such actions as may be necessary to convert such Optionee's
ISOs (or any installments or portions of installments thereof) that have not
been exercised on the date of conversion into Non-ISOs at any time prior to the
expiration of such ISOs, regardless of whether the Optionee is an employee of
the Company or of an Affiliate of the Company at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee, with the consent of the
Optionee,
<PAGE>
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may impose such conditions on the exercise of the resulting Non-ISOs as the
Committee in its discretion may determine, provided that such conditions shall
not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give
any Optionee the right to have such Optionee's ISOs converted into Non-ISOs and
no such conversion shall occur until and unless the Committee takes appropriate
action. The Committee, with the consent of the Optionee, may also terminate any
portion of any ISO that has not been exercised at the time of such conversion.
13. CONDITIONS UPON ISSUANCE OF SHARES
13.1 Shares shall not be issued pursuant to the exercise of any
Option unless the exercise of such Option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, as amended,
the Exchange Act, any applicable state securities law, the rules and
regulations promulgated thereunder, and the requirements of any stock
exchange upon which the shares may then be listed or otherwise traded, and
such compliance has been confirmed by counsel for the Company.
13.2 As a condition to the exercise of any Option, the Company may
require the participant exercising the Option to represent and warrant at the
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such representations
and warranties are required by any relevant provision of law.
13.3 The Company's inability to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
shares hereunder, shall relieve the Company of any liability with respect to
the failure to issue or sell such shares.
14. USE OF PROCEEDS
Proceeds from the sale of Common Stock pursuant to the
Options granted and exercised under the Plan shall constitute general funds
of the Company and shall be used for general corporate purposes.
15. NOTICES
All notices, requests, demands and other communications
required or permitted to be given under this Plan and the Options granted
under this Plan shall be in writing and shall be either served personally on
the party to whom notice is to be given (in which case notice shall be deemed
to have been duly given on the date of such service), or mailed to the party
to whom notice is to be given, by first class mail, registered or certified,
return receipt requested, postage prepaid, and addressed to the party at his
or its most recent known address, in which case such notice shall be deemed
to have been duly given on the third (3rd) postal delivery day following the
date of such mailing.
16. MISCELLANEOUS PROVISIONS
16.1 Optionees shall be under no obligation to exercise Options granted under
this Plan.
16.2 Nothing contained in this Plan shall obligate the Company to retain
an Optionee as an employee, officer, director or consultant for any period,
nor shall this Plan interfere in any way with the right of the Company to
reduce such Optionee's compensation.
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16.3 The provisions of this Plan, each Option issued to an Optionee under
the Plan and each Option Agreement shall be binding upon such Optionee, the
Qualified Successor or Guardian of such Optionee, and the heirs, successors
and assigns of such Optionee.
16.4 Where the context so requires, references herein to the singular
shall include the plural, and vice versa, and references to a particular gender
shall include either or both genders.
17. EFFECTIVE DATE OF PLAN AND AMENDMENTS
17.1 This Plan was adopted by the Board of Directors on February 27,
1998 and approved by the Shareholders of the Company on May 8, 1998.
<PAGE>
DIRECT FOCUS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
Direct Focus, Inc. (the "Company") has granted to ___________ (the
"Optionee"), an option to purchase a total of ________ shares of Common Stock,
at the price determined as provided herein, and in all respects subject to the
terms, definitions and provisions of the 1995 Stock Option Plan (the "Plan")
adopted by the Company which is incorporated herein by reference. The Terms
defined in the Plan shall have the same defined meanings herein.
1. NATURE OF THE OPTION. This Option is a nonstatutory stock option and
is not intended to qualify for a special tax benefit to the Optionee.
2. EXERCISE PRICE. The exercise price is _______U.S. for each share of
Common Stock, which price is not less than the fair market value per share of
the Common Stock on the date of grant.
3. EXERCISE OF OPTION. This Option shall be exercisable during its term
in accordance with the provisions of the Plan as follows:
(i) RIGHT TO EXERCISE.
(a) This Option shall be exercisable, only when the Option is
vested as defined in Term of Option, Section 8.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death or divorce, the
exercisability of the Option is governed by the provisions of the Plan.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares of Common Stock as may be required by the Company
pursuant to the provisions of the Plan. Such written notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary or Assistant Secretary of the Company. The written notice shall be
accompanied by payment of the exercise price as provided in Section 5 below.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
4. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of the Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company the Optionee's Investment Representation
1
<PAGE>
Statement in such form as may be required in the opinion of the Company's legal
counsel to comply with applicable state and federal securities laws.
5. METHOD OF PAYMENT. Payment of the exercise price shall be in cash.
Any Common Stock delivered in full or partial payment for the exercise price
shall be valued at the fair market value thereof the day of exercise. If the
value of the Common Stock delivered in payment of the exercise price exceeds the
exercise price, no fractional shares will be issued and Optionee will receive
cash in the amount of such excess.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
issuance of such Shares upon such exercise of the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, or the rules,
regulations or listing requirements of any stock exchange upon which the shares
are listed or included.
7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a qualified domestic relations order as defined by Section 414(p) of
the Internal Revenue Code or Title I of the Employee Retirement Income Security
Act or the rules thereunder, and may be exercised during the lifetime of
Optionee only by the Optionee. The terms of this Option shall be binding upon
the executors, administrators, heirs, successors and assigns of the Optionee.
8. TERM OF OPTION. The term of this Option shall be in accordance with
the provisions of the Plan as follows:
(i) VESTING PERIOD OF OPTION. This Option shall vest 1/3 each year
from grant date.
(ii) EXERCISABLE PERIOD. This Option may not be exercised more than
5 years from the date of grant of this Option, and may be exercised during such
term only in accordance with the Plan and the terms of this Option. This option
is only exercisable during their employment/term with the Company.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that pursuant
to certain provisions of the Internal Revenue Code of 1986, as amended, upon
exercise of this Option, Optionee may recognize income for tax purposes in an
amount equal to the excess of the then fair market value of the shares over the
exercise price. The Company will be required to withhold tax from Optionee's
current compensation with respect to such income; to the extent that Optionee's
current compensation is insufficient to satisfy the withholding tax liability,
the Company may require the Optionee to make a cash payment to cover such
liability as a condition of exercise of this Option.
DATE OF GRANT:
-----------
DIRECT FOCUS, INC.
2
<PAGE>
By
-----------------------
Its
-----------------------
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
annexed hereto, and represents that Optionee is familiar with the terms and
provisions thereof. Optionee further acknowledges that if the Plan has not been
approved by the Company's shareholders on the date of grant of the Option, this
Option is not exercisable until such approval has been obtained.
Dated:
-------------
------------------------
(Optionee)
3
<PAGE>
DIRECT FOCUS, INC.
INCENTIVE STOCK OPTION AGREEMENT
Direct Focus, Inc. (the "Company") has granted to ___________ (the
"Optionee"), an option to purchase a total of ________ shares of Common Stock,
at the price determined as provided herein, and in all respects subject to the
terms, definitions and provisions of the 1995 Stock Option Plan (the "Plan")
adopted by the Company which is incorporated herein by reference. The Terms
defined in the Plan shall have the same defined meanings herein.
1. NATURE OF THE OPTION. This Option is an incentive stock option and
is intended to qualify for a special tax benefit to the Optionee.
2. EXERCISE PRICE. The exercise price is _________ U.S. for each share
of Common Stock, which price is not less than the fair market value per share
of the Common Stock on the date of grant.
3. EXERCISE OF OPTION. This Option shall be exercisable during its term
in accordance with the provisions of the Plan as follows:
(i) RIGHT TO EXERCISE.
(a) This Option shall be exercisable, only when the Option is
vested as defined in Term of Option, Section 8.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death or divorce, the
exercisability of the Option is governed by the provisions of the Plan.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise the option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares of Common Stock as may be required by the Company
pursuant to the provisions of the Plan. Such written notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary or Assistant Secretary of the Company. The written notice shall be
accompanied by payment of the exercise price as provided in Section 5 below.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
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<PAGE>
4. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of the Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company the Optionee's Investment Representation
Statement in such form as may be required in the opinion of the Company's
legal counsel to comply with applicable state and federal securities laws.
5. METHOD OF PAYMENT. Payment of the exercise price shall be in cash.
Any Common Stock delivered in full or partial payment for the exercise price
shall be valued at the fair market value thereof the day of exercise. If the
value of the Common Stock delivered in payment of the exercise price exceeds the
exercise price, no fractional shares will be issued and Optionee will receive
cash in the amount of such excess.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
issuance of such Shares upon such exercise of the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, or the rules,
regulations or listing requirements of any stock exchange upon which the shares
are listed or included.
7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a qualified domestic relations order as defined by Section 414(p) of
the Internal Revenue Code or Title I of the Employee Retirement Income Security
Act or the rules thereunder, and may be exercised during the lifetime of
Optionee only by the Optionee. The terms of this Option shall be binding upon
the executors, administrators, heirs, successors and assigns of the Optionee.
8. TERM OF OPTION. The term of this Option shall be in accordance with
the provisions of the Plan as follows:
(i) VESTING PERIOD OF OPTION. This Option shall vest 1/3 each year
from grant date.
(ii) EXERCISABLE PERIOD. This Option may not be exercised more than
5 years from the date of grant of this Option, and may be exercised during such
term only in accordance with the Plan and the terms of this Option. This option
is only exercisable during their employment/term with the Company.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that pursuant
to certain provisions of the Internal Revenue Code of 1986, as amended, upon
exercise of this Option, Optionee may recognize income for tax purposes in an
amount equal to the excess of the then fair market value of the shares over the
exercise price. The Company will be required to withhold tax from Optionee's
current compensation with respect to such income; to the extent
2
<PAGE>
that Optionee's current compensation is insufficient to satisfy the withholding
tax liability, the Company may require the Optionee to make a cash payment to
cover such liability as a condition of exercise of this Option.
DATE OF GRANT:
---------------
DIRECT FOCUS, INC.
By
-----------------------
Its
-----------------------
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
annexed hereto, and represents that Optionee is familiar with the terms and
provisions thereof. Optionee further acknowledges that if the Plan has not been
approved by the Company's shareholders on the date of grant of the Option, this
Option is not exercisable until such approval has been obtained.
Dated:
-------------
-----------------------
(Optionee)
3
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LEASE AGREEMENT
PARTIES
The parties to this Lease (herein "Lease") are CHRISTENSEN GROUP, INC.
herein "Lessor," and BOW-FLEX OF AMERICA, INC., herein "Lessee."
RECITALS
The parties by this Agreement desire to provide for the Lease by
Lessee from Lessor of manufacturing space in the building described below on a
"triple net" basis.
AGREEMENT
Lessor and Lessee agree as follows:
ARTICLE I
PREMISES AND TERM
1.1 PREMISES: Lessor, in consideration of rents hereinafter reserved
and of the agreements of Lessee herein to be kept, performed and fulfilled,
leases to Lessee the following described premises located in the OGDEN BUSINESS
PARK, hereinafter known as "Park," City of Vancouver, Clark County, Washington
bounded and described as follows:
A portion of Building No. 1, known as 2200 Northeast 65th Avenue,
Vancouver, Washington 98661, consisting of approximately 17,325 square
feet as represented by the area outlined in Red on the attached
Exhibit A, attached hereto and made a part hereof, together with the
right of ingress and egress thereto across those portions of the Park
designated from time to time as streets and roadways.
The aforesaid property shall herein be referred to as the "Premises"
1.2 COMMON AREAS. It is understood that the Premises constitute a
portion of a multiple occupancy area of warehouse and office buildings (herein
the "Complex"). During the term hereof and subject to the covenants, terms and
conditions hereof, Lessee, and its agents, employees, customers, invitees, and
licensees, shall have the nonexclusive right to use, in common with Lessor and
the other lessees of space in the Complex, and their agents, employees,
customers, invitees, and licensees, all automobile and truck parking
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areas, driveways, entrances and exits thereto, pedestrian sidewalks and ramps,
landscaped areas and other facilities now or hereafter furnished by Lessor in or
near the Complex, for the general use, in common, of the Lessor and the lessees
of space in the Complex and their agents, employees, customers, invitees, and
licensees (herein "Common Areas").
1.3 LIGHT AND AIR. This Lease does not grant any rights of access to
light and air over property.
1.4 TERM. The term of this Lease shall commence on May 1, 1992 and
end on April 30, 1997 unless earlier terminated hereunder.
If this Lease is executed before the Premises becomes vacant or
otherwise available and ready for occupancy, Lessor shall not be deemed to be in
default hereunder, and Lessee agrees to accept possession of the Premises at
such time as Lessor is able to tender the same, which date shall thenceforth be
deemed the commencement date as to such space; and Lessor hereby waives payment
of rent for the Premises covering any period prior to the tendering of
possession to Lessee hereunder.
For purposes of this Lease, the word "term" shall mean and include the
original term of this Lease, as provided herein, and any extensions thereof,
unless the context otherwise requires.
ARTICLE II
RENT, TAXES AND CHARGES
2.1 RENT AND LATE CHARGES. During the term hereof, Lessee shall
pay to Lessor, without deduction or offset by Lessee, rent for the Premises
in the sum of FOUR THOUSAND FOUR HUNDRED FORTY-TWO AND 25/100 DOLLARS
($4,442.25) PLUS BASE YEAR ESTIMATED TRIPLE NET CHARGES IN THE SUM OF FIVE
HUNDRED TWENTY AND NO/100 DOLLARS ($520.00) FOR A TOTAL PAYMENT IN THE SUM OF
FOUR THOUSAND NINE HUNDRED SIXTY-TWO AND 25/100 DOLLARS ($4,962.25) per month
beginning May 1, 1992 through April 30, 1993. The rents shall be payable
monthly in advance on the first day of each and every calendar month during
the term hereof, commencing on the first day of the first calendar month
following the commencement of the lease term. Any rental payment for any
fractional month during the term hereof shall be prorated and payable on the
next rent payment date. All rent payments more than ten (10) days past due
shall bear a late charge of ten percent (10%) of the amount due plus Five
Dollars ($5.00) per day from the tenth day following the date such payment
became due until the entire amount and late charges are paid in full.
LEASE AGREEMENT 2
<PAGE>
In conjunction with monthly rent payments, Lessee shall each month pay
a sum representing Lessee's proportionate share of real property taxes,
insurance and common area expenses for the Premises. Such amount shall annually
be estimated by Lessor in good faith to reflect actual or anticipated costs.
Upon termination of this Lease or at periodic intervals during the term hereof,
Lessor shall compute its actual costs for such expenses during such period. Any
overpayment by Lessee shall be refunded or credited to Lessee at Lessee's
option, and any deficiency shall be paid by Lessee within 15 days after receipt
of Lessor's statement. Lessor's records of expenses for taxes, insurance and
common area expenses may be inspected by Lessee at reasonable times and
intervals. At any one year the charges for common area expenses excluding taxes
and insurance shall not exceed more than six percent of previous year charges
for common area excluding base year.
2.2 RENT ADJUSTMENT. The rent to be paid by Lessee to Lessor during
the term hereof, or any extended or renewed term, shall be adjusted on September
1, 1993, (the end of the base year) and automatically without notice on
September 1 of each year thereafter during the term hereof and during any
extended or renewed term hereof, which date is sometimes referred to herein as
the adjustment date. The intervals between adjustment dates are sometimes
referred to herein as adjustment intervals. On each adjustment date, the rent
shall be adjusted as provided below in this paragraph provided, however, that
the monthly rent as adjusted, shall not be less than the sum set forth in
Paragraph 2 hereof. The rental adjustment shall be limited to a six percent
maximum annual increase including common area charges after the base year.
During each adjustment interval, rent shall be paid at the adjusted rate from
the preceding adjustment date until the next adjustment date or until the sooner
expiration of the term hereof, or as the same may be extended.
Such adjustments shall be made so that the rent payable hereunder
each month during the next adjustment interval shall bear the same
relationship to the sum set forth in Paragraph 2 hereof as the Consumer Price
Index, U. S. City Average, of the Bureau of Labor Statistics of the U. S.
Department of Labor (U.S. Index of All Items for All Urban Consumers -
1982-84 equals 100), sometimes referred to herein as the Index. If
publication of said Index is discontinued or if said Index or the base
thereof is changed, then there shall be used in lieu thereof such Index as
may be adopted by agreement of the parties hereto.
2.3 SECURITY DEPOSIT. As partial consideration for the execution of
this Lease, the Lessee has this day paid the Lessor the sum of ONE THOUSAND NINE
HUNDRED TWENTY-THREE AND 50/100 DOLLARS ($1,923.50) (herein "Deposit"), the
receipt of which is hereby acknowledged. The Deposit shall be held by Lessor,
without obligation of Lessor for interest, as security for the performance of
Lessee's covenants and obligations hereunder; however, it is expressly
understood and agreed that such Deposit is not an advance rental deposit or a
measure of Lessor's damages in case of Lessee's default. Upon the occurrence of
any event of default by Lessee, Lessor may, at its option and without prejudice
to any other right
LEASE AGREEMENT 3
<PAGE>
or remedy hereunder or at law or equity, use such funds to the extent necessary
to make good any arrears of rent or other payment due Lessor hereunder, and any
other damage, injury, expense or liability caused by such event of default; and
Lessee shall pay to Lessor on demand the amount so applied in order to restore
the Deposit to its original amount. At the expiration or termination hereof,
Lessor shall account for the Deposit and, if Lessee is not in default hereunder,
return the entire remaining balance of such Deposit to Lessee.
2.4 PROPORTIONATE SHARE. Lessee's proportionate share of real
property taxes shall mean that percentage of the total assessment affecting the
Premises which is the same as the percentage which the rentable area of the
Premises bears to the total rentable area of all buildings covered by the tax
statement. Lessee's proportionate share of insurance and common area expenses
for the Building shall be computed by dividing the rentable area of the Premises
by the total rentable area of the Building. If in Lessor's reasonable judgment
either of these methods of allocation results in an inappropriate allocation to
Lessee, Lessor shall select some other reasonable method of determining Lessee's
proportionate share.
2.5 REAL PROPERTY TAXES. During the term hereof, Lessor shall pay and
discharge all real property taxes, assessments, and charges lawfully imposed by
any governmental unit on the Complex, or any taxes imposed in lieu thereof
(herein "Real Property Taxes"), before the same become delinquent. Lessor may
elect to let any such Real Property Taxes to go to bond in accordance with
applicable law. If at any time in the future (there being no such charges or
taxes at present) there shall be levied on Lessor a capital levy, tax, franchise
or excise tax, assessment, levy or charge measured by or based, in whole or in
part, upon the rentals to be paid hereunder, then all such taxes, assessments,
levies or charges or the part thereof so measured or based, shall be included in
the term Real Property Taxes.
As provided in paragraph 2.1 of this Lease, Lessee shall pay to Lessor
as additional rent, Lessee's Proportionate Share of the Real Property Taxes paid
by Lessor. Real Property Taxes shall be pro-rated during the first and last year
of the Lease based on the period for which the subject Real Property Taxes
are assessed.
Lessor shall, at the request of lessees of fifty percent (50%) of the
leasable space in the subject tax lot, in Lessor's and Lessee's name, contest or
review in legal proceedings or in such manner as it deems suitable any Real
Property Tax, the cost of which shall be shared by all directly affected
Lessees in proportion to the amount of space leased. Lessor may pay under
protest any such contested tax to the appropriate public authority. Lessee will
join and assist Lessor in any contest or protest of Real Property Taxes provided
for herein at the request of Lessor.
Lessor may, at its option and expense, endeavor to obtain a lowering
of the assessed valuation of the Complex, or any part thereof, and Lessee agrees
to cooperate and
LEASE AGREEMENT 4
<PAGE>
join in such endeavor.
2.6 LESSEE'S TAXES. During the term hereof, Lessee shall pay and
discharge all taxes, assessments, impositions, and charges imposed by any
governmental unit on Lessee's leasehold interest hereunder, on Lessee's
personalty, or on Lessee's use or occupancy of the Premises.
2.7 COMMON AREAS EXPENSES. During the term hereof, Lessor shall
repair, maintain and keep the Common Areas throughout the Complex in good order
and condition. Lessee shall pay to Lessor as additional rental as provided in
paragraph 2.1 of this Lease, Lessee's Proportionate Share of the expense of such
repair, maintenance, and upkeep during each calendar year, or portion thereof,
during the term of this Lease.
2.8 UTILITIES. During the term hereof, Lessor shall provide all
connections to the Premises for water, sewer, electricity and telephone service.
During the term hereof, Lessee shall procure and pay for garbage collection
services, janitorial services and all utilities except water used or consumed on
the Premises and all charges for maintenance associated therewith.
Water shall be furnished by the Lessor. Notwithstanding the foregoing,
if Lessee's use of the Leased Premises shall require water in excess of that
usually supplied for use of the Leased Premises as warehouse area, Lessee shall
first procure the consent of Lessor, which consent Lessor may withhold, for such
altered use. If Lessor consents to Lessee's proposed use, Lessee must either
(1) cause a separate water meter or meters to be installed for the Leased
Premises, so as to measure the amount of water consumed thereon, and the cost of
any such meter and of installation, maintenance and repair thereof shall be paid
for by Lessee and Lessee shall pay promptly all charges for water usage assessed
on account of such meter; or (2) Lessor may charge Lessee, as additional rent,
an amount calculated by estimating on a monthly basis Lessee's excess water
consumption over the average rate of water consumption for the Building
exclusive of the Leased Premises. In no event shall Lessor be liable for an
interruption or failure in the supply of any service or utilities to the
Premises, whether or not being furnished by Lessor.
ARTICLE III
GENERAL COVENANTS
3.1 USE. Lessee shall use the Premises solely for the purposes of
manufacturing, marketing and distribution. Lessee shall not use, or permit or
suffer the use of, the Premises for any other business or purpose without the
consent of Lessor.
LEASE AGREEMENT 5
<PAGE>
Lessee shall not store materials or equipment nor park vehicles (other
than vehicles used for daily transportation) outside of the leased premises
without the prior written consent of Lessor. If Lessee does so, Lessee shall be
considered to have abandoned such property and Lessor may, at its option and
without prejudice to any of Lessor's other rights or remedies hereunder or at
law or equity, remove or retain the property, whereupon all rights of the Lessee
with respect to it shall cease. If Lessor removes and/or stores the property in
public storage for the Lessee's account, the Lessee shall be liable to the
Lessor for, and shall pay to Lessor forthwith on demand, the cost of removal and
storage, with interest at ten percent (10%) per annum on all such expenses from
the date of expenditure by the Lessor.
Lessee shall not receive, store, or otherwise handle anything which is
explosive or highly inflammable in or from the Premises. No auction, fire or
bankruptcy sales may be conducted in or from the Premises without the previous
written consent of Lessor.
Lessee shall not use, or permit or suffer in the Premises anything
that will increase the rate of fire insurance thereon or prevent the procuring
of fire insurance, or prevent the taking advantage of any ruling of the State
Insurance Rating Bureau, or its successors, which would allow the Lessor to
obtain reduced rates for long term insurance policies; or maintain anything that
may be dangerous to life or limb; or overload the floors; or permit any
objectionable noise or odor to escape or to be emitted from the Premises; or
permit anything to be done upon the Premises in any way tending to create a
safety hazard or nuisance or to disturb any other lessees of Lessor in the
Complex; or to use or permit the use of the Premises for lodging or sleeping
purposes, or for any immoral or illegal purposes.
3.2 WASTE AND UNLAWFUL USE. Lessee shall not make, permit or suffer
any strip or waste, or damage or defacement, or unlawful, improper or offensive
use of the Premises or of the Complex.
3.3 COMPLIANCE WITH LAWS. Lessee, at Lessee's expense, shall at all
times comply with all laws, ordinances, rules and regulations whether now or
hereafter made by any governmental authority and pertaining to the use
of the Premises, including obtaining all business licenses and permits, and
shall indemnify and save harmless Lessor against all costs, attorney's fees,
expenses, actions, suits, claims and damages arising by reason of the
nonobservance or nonperformance of said laws, ordinances, rules and
regulations or of this covenant.
Lessee shall have the right to contest the validity of or seek
variance from or review of said legal requirements, or any of them, by
administrative or court proceedings or in such other manner as Lessee deems
suitable, and, if able, may have said legal requirements, or any of them,
cancelled, removed or revoked without actual compliance with the same. If such
actions or proceedings are instituted, they shall be conducted promptly at the
expense of Lessee and free of expense to Lessor.
LEASE AGREEMENT 6
<PAGE>
3.4 MAINTENANCE AND REPAIR. Lessee, at Lessee's expense, shall at all
times maintain the Premises in a strictly clean, safe, and insurable condition.
Lessor shall repair and maintain the roof, gutters, downspouts,
exterior walls, building structure, foundation, exterior paved areas, and curbs
of the Premises in good condition unless repairs are required due to damage
caused by Lessee's negligent acts, or omission to act. Except for such
obligations of Lessor, Lessee shall keep the Premises neatly maintained and in
good order and repair. Lessee's responsibility shall include maintenance and
repair of the electrical system, plumbing, drainpipes to sewers,
air-conditioning and heating systems, overhead and personnel doors, and the
replacement of all broken or cracked glass with glass of the same quality.
Lessee shall refrain from any discharge that will damage the septic tank or
sewers serving the Premises. If Lessor elects to make repairs necessitated by
Lessee's negligent acts or omission to act, Lessor may add the cost of such
repairs to the rent which shall become due upon billing by Lessor therefor.
Lessee shall keep the sidewalks abutting the Premises or the separate
entrance free and clear of snow, ice, debris, and obstructions of every kind.
Lessee shall keep the roof and drains leading from the roof free and clear of
snow, ice, debris, or other obstructions.
Notwithstanding the foregoing, the expense of the repair and
maintenance of any party wall shall be shared equally by Lessee and the lessee
in the adjacent premises; provided, however, that Lessee shall not damage any
party wall or disturb the integrity and support provided by any party wall and
shall, at its sole expense, promptly repair any damage or injury to any party
wall caused by Lessee or its agents, employees, customers, invitees, or
licensees.
3.5 Omitted.
3.6 ALTERATIONS BY LESSEE. Lessee shall not remodel, replace, alter,
or make any addition to the Premises within or without, unless Lessor shall
consent prior thereto in writing. Any such activities shall be strictly in
accordance with the plans, specifications, and elevations approved in writing by
Lessor in advance thereof and shall be completed with all reasonable dispatch.
Notwithstanding the foregoing, Lessee may install or erect such
LEASE AGREEMENT 7
<PAGE>
partitions, shelves, bins, machinery, and trade fixtures as may be necessary or
appropriate to any permitted uses; provided, however, that such installation or
erection shall not alter the basic character of the Premises or overload the
floor or otherwise damage the Premises.
Lessee warrants that any construction, remodeling, replacement,
alteration, addition, erection or installation in, on or to the Premises,
whether done with or without Lessor's consent, shall be done in a good and
workmanlike manner with new materials and shall be done in complete compliance
with all other applicable covenants, terms and conditions hereof, that all
workmanship and materials shall be free from defects, and that all fixtures
erected or installed by Lessee shall be new or completely reconditioned.
All construction, replacements, remodeling, alterations, additions,
erections and installations done by Lessee, or done by Lessor on Lessee's behalf
hereunder, and all fixtures of whatever type and kind, except moveable trade
fixtures, shall become and remain part of the Premises and the property of the
Lessor upon installation thereof and shall be treated as such for all purposes
hereof, excepting risk of loss and insurance as provided in Section 5.3, and
shall be surrendered to Lessor as part of the Premises in accordance with
Section 3.13.
3.7 SIGNS AND AWNINGS. Lessee shall neither place nor suffer to be
placed or maintained on the roof or on any exterior door, wall or window of the
Premises any sign, decoration, awning or canopy, or advertising matter or other
thing of any kind, nor place or maintain any decoration, lettering or
advertising matter on the glass of any window or door of the demised premises
without first obtaining Lessor's written approval and consent. Lessee shall
install and remove such sign, awning, canopy, decoration, lettering, advertising
matter or other things as may be approved in such a manner as to avoid injury to
or defacement of the Premises and shall maintain the same in good condition and
repair at all times.
3.8 OVERLOADING OF FLOORS. The Lessee will not overload the floors of
the Leased Premises in such a way as to cause any undue or serious stress or
strain upon the Building or any part thereof, and Lessor shall have the right,
at any time, to call upon any competent engineer or architect whom the Lessor
may choose, to decide whether or not the floors of the Leased Premises, or any
part thereof, are being overloaded so as to cause any undue or serious stress or
strain on the Building, or any part thereof. The decision of said engineer or
architect shall be final and binding upon the Lessee and in the event that the
engineer or architect shall decide that in his opinion the stress or strain is
such as to endanger or injure the Building or any part thereof, the Lessee
agrees immediately to relieve the stress or strain either by reinforcing the
Building or by lightening the load which causes such stress or strain in a
manner satisfactory to the Lessor.
LEASE AGREEMENT 8
<PAGE>
3.9 RULES AND REGULATIONS. Lessor, for the proper maintenance of the
Premises, Common Areas, and Complex, the rendering of good service thereon, and
the providing of safety, order and cleanliness thereof, may make and enforce
such rules and regulations as Lessor may reasonably deem necessary or
appropriate for such purposes but not in enlargement of or inconsistent with the
covenants, terms and conditions hereof. Lessee's failure to keep and observe
said rules and regulations shall constitute a breach hereof in the manner as if
the same were contained herein as covenants. Lessor reserves the right from time
to time to revoke, alter, amend, supplement and add to said rules and
regulations. Notice of such revocations, alterations, amendments, supplements
and additions, if any, shall be given to Lessee, and Lessee shall upon receipt
thereof immediately comply therewith.
3.10 ADMITTANCE BY PASS-KEY. Lessor shall not be liable for the
consequences of admitting to the Premises by pass-key the Lessee or any of
Lessee's agents, or refusing to admit to the Premises any persons claiming
the right of admittance, including the Lessee or any of Lessee's agents.
3.11 LESSOR'S CONTROL OF COMMON AREAS. The Common Areas shall at all
times be subject to the exclusive control and management of Lessor. Lessor shall
have the right to change the area, level, location and arrangement of such
facilities and areas; to enforce parking regulations; to close temporarily all
or any portion of such areas or facilities; and to do and perform such other
acts in and to said areas and facilities as, in the use of good business
judgment, the Lessor shall determine to be advisable with a view to the
improvement of the convenience and use thereof by the lessees of the Complex,
and their agents, employees, customers, invitees, and licensee.
3.12 ALTERATIONS BY LESSOR. Lessor hereby reserves the right, from
time to time, to make alterations to, to make additions to, to build additional
stories on, the building in which the Premises are contained, provided that such
construction shall not materially interfere with the physical use to be made of
the Premises by Lessee. Lessor also reserves the right to construct other
buildings or improvements in the Complex from time to time and to make
alterations to, to make additions to, to build additional stories on, and to
build adjoining, any existing or future building in the Complex, and to enlarge
the area of the Complex itself.
3.13 INSPECTION AND RIGHT OF ENTRY. At all reasonable times, Lessor
and its agents shall have the right to enter the Premises and any part thereof
and to examine the same and its contents for the following purposes: (1) to
determine Lessee's compliance with the covenants, terms and conditions hereof;
(2) to fulfill Lessor's obligations hereunder; (3) to exhibit the Premises to
others for purposes of leasing during the last six months of the term hereof;
(4) to gain entry to adjoining premises and roof areas for repairs and
otherwise;
LEASE AGREEMENT 9
<PAGE>
and (5) to exercise any right of Lessor hereunder reasonably requiring such
entry or examination.
If Lessee shall not be personally present to open and permit an entry
into said Premises, at any time, when for any reason an entry therein shall be
necessary or permissible, Lessor or its agents may enter the same by a master
key, or may forcibly enter the same, without rendering Lessor or such agents
liable therefor, and without in any manner affecting the obligations and
covenants of this Lease.
During the six months prior to the expiration of the term of this
Lease or any renewal term, Lessor may place upon the Premises the usual "for
rent" notices advertising the availability of the Premises for lease which
notices Lessee shall permit to remain thereon without molestation.
3.14 QUIET ENJOYMENT. Lessor covenants and agrees with Lessee that,
conditioned upon Lessee's paying the rent herein reserved and faithfully
performing and fulfilling all the covenants, agreements, conditions and
provisions herein to be kept, observed or performed by Lessee, Lessee shall and
may at all times during the term hereby granted peaceably, quietly and
exclusively have, hold and enjoy the Premises, without hindrance or molestation
for Lessor or anyone claiming by, through or under Lessor.
3.15 NO WARRANTY OF FITNESS FOR USE. Lessee and not Lessor is
responsible for determining the fitness of the Leased Premises for the use to
which Lessee intends to put them. In particular, Lessee hereby acknowledges that
there is no noise control in the Building containing the Leased Premises and
that the internal security is minimal, since persons other than Lessee will have
access to the Building and the division of the Leased Premises from other
portions of the Building is by means of materials not resistant to fire, water
or other such elements and not secure from entry by persons other than Lessee.
3.16 ACCEPTANCE AND SURRENDER. By entry hereunder, Lessee acknowledges
that it has examined the Leased Premises and accepts the same as being in good,
sanitary order, condition and repair.
Immediately upon expiration or termination of this Lease, Lessee shall
peaceably deliver up to Lessor possession of the Premises hereby demised,
together with any and all improvements and fixtures, other than moveable trade
fixtures, thereon, in good repair, order and condition, and broom clean, subject
to reasonable wear and tear and damage by fire or casualty as provided in
Section 5.3, and shall surrender all keys for the Premises to Lessor at the
place then fixed for the payment of rent and shall inform Lessor of all
combinations on locks, safes and vaults, if any, in the Premises.
LEASE AGREEMENT 10
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Lessor may, at its option exercised within ten (10) days after
termination or expiration of this Lease, require Lessee expeditiously to remove
any or all improvements and fixtures placed on the Premises by Lessee and which
would otherwise remain the property of the Lessor and to repair any physical
damage resulting from such removal, or Lessor may elect to do so itself and
charge the cost to the Lessee with interest at ten percent (10%) per annum from
the date of expenditure, which shall be payable by Lessee forthwith on demand.
Prior to the termination of expiration of this Lease, Lessee shall
remove from the Premises all moveable trade fixtures of Lessee and all personal
property thereon. If Lessee fails to do so, Lessee shall be considered to have
abandoned such property and Lessor may, at its option and without prejudice to
any of Lessor's other rights or remedies hereunder or at law or equity, remove
or retain the property, whereupon all rights of the Lessee with respect to it
shall cease. If Lessor removes and/or stores the property in public storage for
the Lessee's account, the Lessee shall be liable to the Lessor for, and shall
pay to Lessor forthwith on demand, the cost of removal and storage, with
interest at ten percent (10%) per annum on all such expenses from the date of
expenditure by the Lessor.
3.17 RIGHT TO RELOCATE. Lessor reserves the right to relocate Lessee
to an equal or better location within the Business Park at Lessor's expense,
such expenses to include reimbursements to Lessee for Lessee's cost for changing
address.
3.18 HOLDING OVER. If Lessee shall, with the written consent of
Lessor, remain in possession of the demised Premises after the expiration of
said term and without executing any extension or renewal of this Lease, Lessee
shall be deemed to occupy said Premises as a tenant from month to month at the
monthly rental herein reserved, upon and subject to all other covenants,
conditions and provisions herein, as amended pursuant hereto. No such holding
over shall be deemed to vest any rights in Lessee to a renewal of this Lease
unless specifically agreed to in writing by Lessor.
ARTICLE IV
ENCUMBRANCES AND ASSIGNMENTS
4.1 ENCUMBRANCES BY LESSEE. Lessee shall keep the Premises and
Lessee's leasehold interest therein free and clear of, and shall indemnify and
hold harmless Lessor against, all liens, charges, mortgages, and encumbrances
which may result from any act or neglect of Lessee, including but not limited to
liens for utility charges and mechanics and materialman liens, and all
expenses in connection therewith, including attorneys' fees; it being
expressly agreed that the Lessee or any transferee, assignee, delegate or
sublessee shall have no power or authority to create any such lien, charge,
mortgage or encumbrance except with the prior written approval of Lessor.
LEASE AGREEMENT 11
<PAGE>
4.2 SUBORDINATION. Lessor shall have the absolute right to sell,
transfer, assign and encumber its interest in this Lease and its estate in the
Premises, or any part thereof, and to delegate all or any portion of its
obligations hereunder, from time to time as it sees fit, without obtaining any
approval from Lessee.
This Lease shall be subject and subordinate to any encumbrance and to
any extensions or renewals thereof which are now, or may hereafter be placed by
Lessor, upon the whole or any part of the Complex and which includes the
Premises. From time to time the Lessee shall execute and deliver any instrument
which may be reasonably required by the Lessor in confirmation of such
subordination promptly upon the Lessor's request, and without expense to the
Lessor; and if the Lessee shall fail at any time to execute and deliver any such
subordination, the Lessor, in addition to any other remedy available to it in
consequence thereof, may execute and deliver such instrument as the
attorney-in-fact of the Lessee, and the Lessee hereby appoints the Lessor as
attorney-in-fact for such purpose; provided, however, that so long as the Lessee
is not in default in the payment of rent or in the performance of any of the
covenants, terms and conditions of the Lease, Lessee's possession of the leased
premises and the Lessee's rights and privileges under the Lease or any renewal
thereof shall not be diminished or interfered with by the secured party under
such encumbrance.
In the event that Lessor sells or assigns its interest or estate
absolutely, Lessee shall be bound to the purchaser or assignee under all of the
covenants, terms and conditions of this Lease for the balance of the term hereof
remaining with the same force and effect as if such purchaser or assignee was
the Lessor under the Lease and Lessee hereby attorns to such purchaser or
assignee as its landlord, such attornment to be effective and self-operative
without the execution of any further instrument on the part of either of the
parties hereto immediately upon such purchaser or assignee succeeding to the
interest or estate of Lessor.
In the event that Lessor assigns or encumbers its interest or
estate for security purposes and such assignment or encumbrance is
"foreclosed" for any reason and Lessor's interest or estate is sold as upon
execution in the manner provided by law or Lessor's interest or estate is
sold at public or private sale by the secured party, Lessee shall be bound to
the purchaser at such sale under all of the covenants, terms and conditions
of this Lease for the balance of such term hereof remaining with the same
force and effect as if such purchaser was the Lessor under the Lease and
Lessee hereby attorns to such purchaser as its landlord, such attornment to
be effective and self-operative without the execution of any further
instrument on the part of either of the parties hereto immediately upon such
purchaser succeeding to the interest or estate of Lessor. If during the
pendency of foreclosure proceedings or otherwise, there is appointed by the
court a receiver for the property of which the lease Premises are a part,
Lessee hereby attorns to the receiver as its landlord during the pendency of
such foreclosure proceeding, such attornment to be effective and
self-operative
LEASE AGREEMENT 12
<PAGE>
without the execution of any further instrument on the part of either of the
parties hereto immediately upon the appointment of the receiver and his
qualification as such.
4.3 ASSIGNMENTS AND SUBLEASES. Lessee may not transfer or assign all
or any portion of its estate or interest under this Lease, or delegate all or
any portion of its obligations under this Lease, or sublet all or any portion of
the Premises, without the prior written approval of Lessor, which approval shall
not be unreasonably withheld. No transferee, assignee, delegate, or sublessee of
this Lease may transfer, assign, delegate, or sublease except to an affiliated
company and on the same terms and conditions as the Lessee hereunder may
transfer, assign, delegate, or sublease. This prohibition against transferring,
assigning, delegating, and subleasing shall be construed to include a
prohibition against any transfer, assignment, delegation, or sublease by
operation of law.
ARTICLE V
RISK OF LOSS, INDEMNITY, AND INSURANCE
5.1 LIMITATION OF LIABILITY. Lessor shall not be liable for any
damage to property of Lessee or of others located on the Premises, nor for the
loss of or damage to any property of Lessee or of others by theft or otherwise
regardless of whether such loss or damage was caused or contributed to by the
negligence of the Lessor. Lessor shall not be liable for any injury or damage to
persons or property resulting from fire, explosion, or other casualty, falling
plaster, steam, gas, electricity, water, rain or snow or leaks from any part of
the Premises or Complex or from the pipes, appliances or plumbing works or from
the roof, street or sub-surface or from any other place or by dampness or by any
other cause of whatsoever nature. Lessor shall not be liable for any such damage
caused by other lessees or persons in the Complex, caused by occupants of
adjacent property, caused by members of the public, or caused by operations in
construction of any private, public or quasi-public work. Lessor shall not be
liable for any latent defect in the Premises or in the building of which they
form a part. All property of Lessee or others kept or stored on the Premises
shall be so kept or stored at the risk of Lessee and the others only and Lessee
shall indemnify and hold Lessor harmless from any claims arising out of any loss
or damage to the same.
5.2 INDEMNIFICATION AND LIABILITY INSURANCE. Lessee shall indemnify
and save Lessor harmless from all claims and demands of any and every character
that may be made, presented, or allowed against Lessor by reason or on account
of any injuries or damage received or sustained from the date hereof by any
person or property arising out of or related to any activity of Lessee on the
Premises, or any condition of the Premises in the possession of or under the
control of Lessee including but not limited to water leakage from the roof,
walls, basement or other portion of the Leased Premises or the Building, or
caused by gas, fire, oil, electricity or any cause whatsoever in, on or about
the Leased Premises or the
LEASE AGREEMENT 13
<PAGE>
Building or any part thereof, except for any such claim, loss or liability which
may be caused or contributed to in whole or in part by Lessor's own negligence;
and in the event that any suit or action for damages resulting therefrom shall
be brought against Lessor by any person whomsoever, Lessee agrees at Lessee's
own cost and expense to defend Lessor against any such suit or action and all
appeals therefrom, to satisfy and discharge any judgment or decree that may be
awarded against Lessor in any such proceeding, and to pay all costs, expenses
and reasonable attorney's fees incurred or paid by Lessor in connection with
such litigation including such costs, expenses and reasonable attorney's fees
incurred on any appeal in such litigation.
Lessee shall, at its expense, procure and maintain public liability
and property damage insurance against liability for injuries to persons and
property with respect to the Premises, and the business operated by Lessee and
by any licensees, concessionaires and sublessees of Lessee, with limits, as to
injuries to the person (including death) of $500,000 as to one or more than one
person in any one occurrence, and $250,000 for property damage for any one
occurrence. Lessor may require Lessee to increase the aforesaid maximum limits
of coverage to keep pace with the trend in insurance coverage during the term of
this Lease and any extension thereof. The policy or policies shall name Lessor
and any persons, firms or corporations designated by Lessor as additional
insureds. Failure to obtain or maintain the above-described insurance shall
constitute an event of default.
5.3 FIRE AND OTHER CASUALTY.
(a) DEFINITIONS. For purposes of this Section, the term
"Alterations" shall mean and include all construction, replacements, remodeling,
alterations, additions, erections, and installations done in, on or to the
Premises by Lessee or on Lessee's behalf, as described in Section 3.5, including
fixtures and trade fixtures, whether or not done with Lessor's consent as
required by Section 3.5, unless the context otherwise requires.
For purposes of this Section, the term "Building" shall mean the
building of which the "Premises" are a part exclusive of all Alterations, but
including all repairs and replacements described in Section 3.4, unless the
context otherwise requires.
(b) BUILDING.
(1) INSURANCE. Lessor shall procure and maintain insurance
covering the subject Building in an amount not less than 90% (or such greater
percentage as may be necessary to comply with the provisions of any clauses of
the policy negating co-insurance) of the full replacement cost thereof as such
term is defined in the Replacement Cost Endorsement to be attached thereto,
insuring against the perils of Fire, Lightning, Vandalism and Malicious
Mischief, extended by Special Extended Coverage Endorsement to insure against
all other Risks of Direct Physical Loss. Such insurance shall be for the sole
LEASE AGREEMENT 14
<PAGE>
benefit of Lessor and under its sole control. Lessee shall reimburse Lessor for
Lessor's cost of maintaining such insurance as additional rental as provided in
paragraph 2.1 of this Lease. Any payment to be made pursuant to this subsection
with respect to the year in which this Lease commences or terminates shall bear
the same ratio to the payment which would be required to be made for the full
year as that part of such year covered by the term of this Lease bears to a full
year.
(2) DAMAGE OF LESS THAN 50%. If the subject Building is
less than 50% destroyed, as determined by Lessor, by fire or other casualty, the
parties shall proceed as follows:
(A) If the damage is caused by a risk which would be covered by
the required insurance policy, repairs shall be performed by and
at the expense of the Lessor whether or not the damage occurred
as the result of fault on the part of Lessee or the agents,
invitees, licensees, concessionaires or lessees of Lessee, except
that Lessee shall pay Lessor upon demand all applicable
deductible amounts specified in any required insurance then in
effect.
(B) If the damage occurred from a risk which would not be
covered by Lessor's insurance, repairs shall be performed by and
at the expense of the Lessor unless the damage was the result of
the fault of Lessee or the agents, employees, customers,
invitees, licensees, or sublessees of Lessee, in which case
repairs shall be performed by and at the expense of Lessee.
(3) DAMAGE OF 50% OR MORE. If the subject Building is 50%
or more destroyed, as determined by Lessor, by fire or other casualty, the
parties shall proceed as follows:
(A) Lessor may elect to terminate the Lease as of the date of
the damage or destruction by notice given to Lessee in writing
not more than 60 days following the date of damage. In such
event, Lessee shall be entitled to the reimbursement of any
prepaid rent.
(B) If Lessor does not elect to terminate the Lease, the parties
shall proceed as in the case of less than 50% destruction of the
subject Building.
LEASE AGREEMENT 15
<PAGE>
(4) ABATEMENT OF RENT. The rent herein reserved shall be
abated in proportion to the extent of the Premises rendered untenantable,
from the date damage occurs until repairs are substantially completed, except
when damage occurs because of the fault of Lessee or the agents, employees,
customers, invitees, licensees, or sublessees of Lessee, in which case there
shall be no abatement of rent.
(5) MORTGAGE RESTRICTIONS. Notwithstanding anything
herein to the contrary, in the event the holder of any indebtedness secured
by a mortgage or deed of trust covering the Premises restricts or prohibits
the use as contemplated hereunder of the proceeds of any insurance covering
the subject Building, then the Lessor shall have the right to terminate this
Lease by delivering written notice of termination to Tenant within fifteen
(15) days after such restriction or prohibition is enforced by any such
holder, whereupon all rights and obligations hereunder shall cease and
terminate.
(c) ALTERATIONS. Lessee shall procure and maintain insurance
covering all Alterations in an amount not less than 90% (or such greater
percentage as may be necessary to comply with the provisions of any clause of
the policy negating co-insurance) of the full replacement cost thereof as such
term is defined in the Replacement Cost Endorsement to be attached thereto. Such
insurance shall insure against the perils and be in the form, including
endorsements, specified in subsection 5.3(b)(1). Such insurance shall be for the
sole benefit of Lessee and under its sole control. All repairs to Alterations
damaged by fire or other casualty shall be by and at the expense of Lessee.
(d) MANNER OF REPAIR. Repairs required by either party under
this Section shall be accomplished with all reasonable dispatch and both parties
shall cooperate with each other to effectuate repair and restoration. Neither
party shall be liable or responsible for any delays in rebuilding or repairs due
to strikes, riots, Acts of God, national emergency, acts of public enemy,
governmental laws or regulations, inability to procure materials or labor or
both, or any causes beyond its control.
5.4 WORKER'S COMPENSATION INSURANCE. Lessee, at its expense, shall
procure, maintain and timely pay the premiums for such worker's compensation
insurance as is or may be required by any applicable law in connection with the
use or occupancy of the Premises by Lessee.
5.5 GENERAL INSURANCE PROVISIONS. As to all policies of insurance
required hereunder to be procured and maintained by Lessee.
(a) Each policy shall be issued by a licensed and reputable
insurance company satisfactory to and approved by Lessor, such approval not to
be unreasonably withheld.
LEASE AGREEMENT 16
<PAGE>
(b) Lessee, without prior demand, shall cause to be furnished to
Lessor promptly upon issuance thereof, original or certified copies of each
policy of insurance and all renewals thereof and copies of every receipt for
premium paid therefor;
(c) Each insurance policy shall contain a promise by the insurer
that it will not cancel the policy except upon thirty (30) days prior written
notice to Lessor and any permitted mortgagee of the leased premises; and
5.6 WAIVER OF SUBROGATION. Each of the parties hereto hereby releases
the other from any and all liability or responsibility to the releasing party or
anyone claiming through or under such party by way of subrogation or otherwise
for any injury or damage to person or property which is insured against by, or
on behalf of, the releasing party, even if such injury or damage shall have been
caused by the fault or negligence of the other party, or anyone for whom such
party may be responsible.
ARTICLE VI
CONDEMNATION
6.1 TOTAL TAKING OF PREMISES. In the event that the entire Premises,
or a substantial part thereof rendering the balance reasonably unusable for
Lessee's purposes, shall be taken or condemned by any authority having the power
of eminent domain or be sold in lieu thereof, then the entire estate and
interest of Lessee in the Premises shall upon such taking or sale cease and
determine and Lessee shall have no further rights or obligations hereunder.
6.2 PARTIAL TAKING OF PREMISES. In the event that an insubstantial
part of the Premises shall be taken or condemned by any authority having the
power of eminent domain or be sold in lieu thereof, then the estate and
interest of Lessee in the part so taken or sold shall upon such taking or
sale cease and determine; and the rent herein reserved for the Premises shall
be reduced for and during the unexpired balance of Lessee's term hereunder,
effective as of the date when, by reason of such taking or sale, Lessee shall
lose the right to possession of the part so taken or sold, to a sum which
shall bear the same ratio to the rent payable immediately before the taking
or sale as the value of the Premises immediately after the taking or sale
bears to the value of the Premises immediately before the taking or sale.
Lessor shall restore the Premises with all reasonable dispatch to a condition
comparable to their condition on the date of such taking or sale less the
portion lost in such taking or sale. Such work shall be accomplished with new
materials and shall be done in a good and workmanlike manner. Lessor shall
not be liable or responsible for any delays in rebuilding or repairing due to
strikes, riots, Acts of God, national emergency, acts of public enemy,
governmental laws or regulations, inability to procure materials or labor or
both, or any
LEASE AGREEMENT 17
<PAGE>
causes beyond its control. Rent shall be abated in proportion to Lessee's
dispossession during the period of repair.
6.3 COMPENSATION AND DAMAGES. In every case of taking or sale of the
Premises, or any part thereof, the entire compensation, damages, or sales
proceeds therefrom shall belong to the Lessor except that Lessee shall be
entitled to receive any award for moving expenses.
ARTICLE VII
DEFEASANCE
7.1 EVENTS OF DEFAULT. Events of default include, but are not limited
to, the following:
(a) Failure of Lessee to pay the rent herein (including payments
specified as rent) reserved, or any part thereof, within ten (10) days after the
same becomes due;
(b) Failure of Lessee to observe or perform any other covenant,
term, or condition hereof to be observed or performed by Lessee within twenty
(20) days of the receipt of written notice of such failure and diligently to
prosecute performance to completion if the failure cannot reasonably be cured
within the twenty (20) day period;
(c) Insolvency of Lessee or any guarantor of Lessee's
obligations hereunder (herein "Guarantor"); an assignment by Lessee or Guarantor
for the benefit of creditors; the filing by Lessee or Guarantor of a voluntary
petition in bankruptcy; an adjudication that Lessee or Guarantor is bankrupt or
the appointment of a receiver of the properties of Lessee or Guarantor; the
filing of an involuntary petition of bankruptcy against Lessee or Guarantor and
failure of Lessee or Guarantor to secure a dismissal of the petition within
sixty (60) days after filing; attachment of or the levying of execution on the
leasehold interest and failure to the Lessee or Guarantor to secure discharge of
the attachment of release of the levy of execution within thirty (30) days; or
(d) Lessee's abandonment of the Premises or any part thereof; or
(e) Falsification by Lessee of any document required or
permitted to be furnished to Lessor by Lessee hereunder.
LEASE AGREEMENT 18
<PAGE>
7.2 REMEDIES UPON DEFAULT:
(a) INJUNCTION. In the event of any default by Lessee or any
person claiming under, by, or through Lessee, or any threatened or attempted
default by such person, Lessor shall be entitled to an injunction against such
person enjoining such default. Nothing herein contained precludes Lessor from
pursuing any other remedies available hereunder or at law or equity to Lessor
for such breach, including eviction and the recovery of damages.
(b) TERMINATION. In the event of a default by Lessee, Lessor
may, during the continuance of such default and at its option, terminate this
Lease by notice in writing to Lessee. No act of Lessor or its agents shall be
deemed a termination of this Lease and no agreement of Lessor to terminate this
Lease shall be valid, effective, or enforceable unless in writing and signed by
Lessor.
(c) RE-ENTRY AFTER TERMINATION. Upon termination of this Lease,
Lessor shall have the right to re-enter the Premises.
(d) DAMAGES. Lessor shall be entitled to recover damages from
Lessee for any default by Lessee, without prejudice to any of Lessor's other
rights or remedies hereunder or at law or equity, including Lessor's right to
terminate this Lease. If this Lease is terminated for any reason, Lessee's
liability to Lessor for damages shall survive such termination. In the event of
termination on default, Lessor shall be entitled to recover immediately without
waiting until the due date of any future rent or until the date fixed for
expiration of the lease term, the following amounts as damages:
(1) Any excess of the value of all of Lessee's obligations
under this Lease, including the obligation to pay rent, from the date of default
until the end of the term, over the reasonable rental value of the Premises for
the same period figured as of the date of default, the net result to be
discounted to the date of default at the rate of five percent (5%) per annum.
(2) The loss of reasonable rental value from the date of
default until a new Lessee has been, or with the exercise of reasonable efforts
could have been, secured; and
(3) The reasonable costs of re-entry and re-letting
including without limitation the cost of any clean-up, refurbishing, removal of
Lessee's property and fixtures, and any other expense occasioned by Lessee's
failure to quit the Premises upon termination or to leave them in the required
condition, and any remodeling costs, broker commissions and advertising costs.
LEASE AGREEMENT 19
<PAGE>
(e) RE-LETTING FOLLOWING TERMINATION. Following termination on
default and re-entry, Lessor shall use reasonable diligence in re-letting the
Premises to a new tenant. Lessor shall in no event be required, however, to
alter substantially any of the covenants, terms, and conditions of this Lease,
or to re-let to any tenant whom it reasonably considers unqualified, or at a
rental which is less than the fair rental value of the Premises.
(f) RE-LETTING WITHOUT TERMINATION. In the event of any default
during the term hereof, and during the continuance of such default, and upon ten
(10) days prior written notice to Lessee, Lessor may, from time to time, at its
option and without prejudice to any of Lessor's other rights or remedies
hereunder, including its right to terminate, and without thereby terminating
this Lease, relet for the account of the Lessee the demised premises or any part
thereof to any person, firm or corporation for all or any portion of the
remainder of said term, or any extension thereof, with the right in Lessor to
put the Premises in reasonably good order and condition and to make alterations
and repairs reasonably required for said reletting at Lessee's expense, together
with ten percent (10%) interest thereon from the date of expenditure by Lessor.
The Lessor shall receive such rentals for the Premises applying them, first, to
the payment of the expense of recovering possession of the demised premises and
the rerenting thereof, together with such expense as the Lessor may have
incurred in putting the Premises in good condition or in making alterations and
repairs, and then to the payment of the rent due by these presents and to the
fulfillment of the covenants of the Lessee; the balance, if any, to be paid over
to the Lessee. If such rentals received from reletting during any month be less
than that to be paid during that month by Lessee hereunder, Lessee shall pay any
such deficiency to Lessor forthwith upon demand, together with ten percent (10%)
interest thereon from the date of demand until paid. Such deficiency shall be
calculated and paid monthly. No such reentry or taking possession of the
Premises by Lessor shall be construed as an election on its part to terminate
this Lease unless a written notice of such intention be given to Lessee.
Notwithstanding any such reletting without termination, Lessor may at any time
thereafter elect to terminate this Lease for such previous breach.
(g) REMEDIES CUMULATIVE AND NONEXCLUSIVE. The foregoing rights
and remedies shall be in addition to and not exclude any other rights or
remedies available to Lessor hereunder or at law or equity. Lessor's election to
pursue any right or remedy hereunder or at law or equity for any breach, or any
attempted or threatened breach, of this Lease, shall not preclude it from
pursuing at the same time or any other time any other right or remedy
hereunder or at law or equity for the same breach or any right or remedy
hereunder or at law or equity for any other breach.
7.3 LESSOR'S DEFAULT PROVISION. Before Lessee may declare a default
by Lessor, Lessee must give Lessor written notice thereof and twenty (20) days
in which to cure the alleged default.
LEASE AGREEMENT 20
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee shall
default in the observance or performance of any covenant, term, or condition
contained herein to be observed or performed by Lessee, then Lessor may, at its
option and without prejudice to any of Lessor's rights or remedies hereunder or
at law or equity for such default, perform the same for the account of Lessee
and Lessee shall reimburse Lessor for all costs and expenses incurred by Lessor
in such performance forthwith upon demand, together with interest at ten percent
(10%) per annum from date of incurrence of expense by Lessor until the entire
amount, principal and interest, is paid.
8.2 NEGATION OF WAIVER. Any waiver by either party of any breach by
the other party of any provision of this Lease shall not operate or be construed
as waiver by the waiving party of any breach of any other provision or of a
subsequent breach of the same provision by the breaching party.
8.3 NEGATION OF LESSOR'S REPRESENTATIONS. Lessor makes no warranty or
representation with respect to the condition of the Premises, the same being
leased "as is" and "where is," except as expressly set forth herein.
8.4 SUCCESSOR INTERESTS. This Lease is binding upon and shall inure
to the benefit of the heirs, executors, administrators, successors and assigns
of Lessor and Lessee; provided, however, that Lessee may not assign its rights
nor delegate its obligations hereunder except as expressly provided herein.
8.5 JOINT AND SEVERAL LIABILITY. If more than one person constitutes
the Lessee, all such persons shall be jointly and severally liable for the
observance and performance of all of the covenants, terms, and conditions hereof
to be observed and performed by Lessee, including the covenant to pay rent.
8.6 NOTICES AND PAYMENTS. Any notice required or permitted by the
terms of this Lease shall be sufficient if in writing and delivered personally
or deposited in the U. S. Certified Mail with postage fully prepaid, return
receipt requested, and if addressed to Lessor, then if addressed at QUANTUM
COMMERCIAL MANAGEMENT, INC. 1104 Main Street, Suite 100, Vancouver, Washington
98660, (206) 699-2333, and if addressed to Lessee, then if addressed at 2200
Northeast 65th Avenue, Vancouver, Washington 98661. Any such notice shall be
deemed conclusively received by the addressee on the third business day after
posting. Any payment required or permitted by the terms of this Lease shall be
deemed sufficiently given if delivered or mailed in the manner provided in this
Section for the giving
LEASE AGREEMENT 21
<PAGE>
of notices. Any party may change the address to which notices and payments may
be sent by giving written notice to the other party in the manner provided in
this Section.
8.7 ENTIRE AGREEMENT. This Lease constitutes the entire, final, and
complete agreement between the parties relevant to the subject matter hereof,
and it supersedes and replaces all written and oral agreements relevant to the
subject matter hereof heretofore made or existing by and between the parties or
their representatives, and there shall be no modification hereto unless it is in
written form and signed by the parties.
8.8 NUMBER, GENDER AND CAPTIONS. Unless the context otherwise
requires, as used herein, the singular shall include the plural, the plural
shall include the singular, the masculine and neuter shall each include the
masculine, feminine, and neuter, and generally all grammatical changes shall be
made, assumed, and implied to make the provisions hereof apply equally to one or
more individuals and/or Firms. All captions used herein are intended solely for
convenience of reference and shall in no way have the effect of defining,
diminishing, or enlarging the rights or obligations of the parties or affecting
the construction or interpretation of any part of this contract.
8.9 COUNTERPARTS. This Lease may be executed in one or more
counterparts all of which shall be considered one and the same Lease and shall
be effective when one or more counterparts have been signed and delivered by
each of the parties.
8.10 SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall in no way affect the validity or enforceability of any
other provision hereof.
8.11 GOVERNING LAW. Validity, interpretation, performance, remedies,
and all other issues arising under or out of this Agreement shall be governed by
the internal law of the state in which the Premises are situated.
8.12 RECORDING. Lessee shall not record this Lease without the prior
written consent of Lessor; upon the request of either party hereto, the other
party shall join in the execution of a memorandum or so-called "short form" of
this Lease, and the requesting party may then record such memorandum. Said
memorandum or short form of this Lease shall describe the parties, the Premises
and the duration of this Lease and shall incorporate this Lease by reference.
8.13 LEGAL COSTS. If any legal proceeding is brought for the
enforcement of this Lease, or for recovery of possession of the Premises, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any of the covenants, conditions, and provisions of this Lease,
the successful or prevailing party shall be entitled to recover from the losing
party reasonable attorneys' fees and other costs incurred in that action or
LEASE AGREEMENT 22
<PAGE>
proceeding and in any appellate proceedings relating thereto, in addition to any
other relief to which such party may be entitled.
8.15 TIME OF ESSENCE. Time is of the essence hereof.
Executed this 16th day of Sept., 1992.
LESSOR: LESSEE:
CHRISTENSEN GROUP, INC. BOW-FLEX OF AMERICA, INC.
By /s/ D. H. Christensen By /s/ Brian R. Cook, President
---------------------------- --------------------------------
STATE OF WASHINGTON
ss.
COUNTY OF CLARK
THIS IS TO CERTIFY that on this 16th day of September, 1992, before
me, the undersigned, a notary public in and for the State of Washington, duly
commissioned and sworn personally appeared D. H. Christensen, to me known to be
the President of CHRISTENSEN GROUP, INC., the corporation that executed the
within and foregoing instrument, and acknowledged the said instrument to be the
free and voluntary act and deed of said corporation for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument, and that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
/s/ Marian Gross
-------------------------------------
Notary public in and for the State of
Washington, residing at Portland, Oregon
Commission expires November 19, 1995
LEASE AGREEMENT 23
<PAGE>
CHRISTENSEN GROUP, Inc.
4400 E. Columbia Way
Vancouver, Washington 98661
(206) 696-0381
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
September 16, 1992
Mr. Brian Cook
BOW-FLEX OF AMERICA, INC.
Bldg. #1
2200 N.E. 65th Ave
Vancouver, WA 98661
RE: Lease September 16, 1992
Ogden Business Park
This document shall serve as a binding agreement between the landlord
"Christensen Group, Inc." and the tenant, "Bow-Flex of America, Inc." The
tenant has the option to terminate the attached lease each year on its
anniversary date upon 90 days written notice prior to each anniversary
date, in the event the leased space becomes inadequate or tenant needs
change so that the leased space is no longer suitable.
/s/ D.H. Christensen
---------------------------------------
D.H. Christensen
President, Christensen Group, Inc.
/s/ Brian R. Cook
---------------------------------------
Brian Cook - President
Bow-Flex of America, Inc.
<PAGE>
AMENDMENT TO BOWFLEX, INC.
LEASE EXTENSION
AUGUST 27,1996
The certain Lease between Ogden Business Park, a Washington General Partnership,
Lessor, and Bowflex, Inc., Lessee, dated May 1, 1992, for the Premises located
at 2200 NE 65th Avenue, Building 1, Vancouver, WA 98661 (approximately 17,325
square feet, of which 4,100 square feet is office), is hereby extended and
amended as follows:
1 a. Current lease expires April 30, 1997.
b. Expiration of said Lease is extended to April 30, 2002.
2. Monthly rental is increased as follows:
a. May 1, 1997 to April 30, 1998: $4,851.00 + Triple Net
b. Rent Adjustment. The rent to be paid by Lessee to Lessor during the
term hereof, or any extended or renewed term, shall be adjusted on
April 30, 1998 (the end of the base year) and automatically without
notice on April 30th of each year thereafter during the term hereof
and during any extended or renewed term hereof, which date is sometime
referred to herein as the adjustment date. The intervals between
adjustment dates are sometimes referred to herein as adjustment
intervals. On each adjustment date, the rent shall be adjusted as
provided below in this paragraph provided, however, that the monthly
rent as adjusted, shall not be less than $4,851.00. The rental
adjustment shall be limited to a six percent maximum annual increase
after the base year. During each adjustment interval, rent shall be
paid at the adjusted rate from the preceding adjustment date until the
next adjustment date or until the sooner expiration of the term
hereof, or as the same may be extended.
Such adjustments shall be made so that the rent payable hereunder each
month during the next adjustment interval shall bear the same
relationship to the sum set forth in Section 2.a. of the lease as the
Consumer Price Index, U. S. City Average, of the Bureau of Labor
Statistics of the U. S. Department of Labor (U. S. Index of All Items
for All Urban Consumers - 1982-84 equals 100), sometimes referred to
herein as the Index. If publication of said Index is discontinued or
if said Index or the base thereof is changed, then there shall be used
in lieu thereof such Index as may be adopted by agreement of the
parties hereto.
3. The current lease dated May 1, 1992, states that common area expenses for
the Premises shall not exceed more than six percent of previous year
charges for common area excluding base year. The six percent cap shall be
terminated and Lessee shall pay Lessor for their pro-rata share of actual
common area expenses incurred as of May 1, 1997.
4. Lessee, at Lessee's expense, shall be allowed, with Lessor's prior
approval, to remodel and/or expand office area of Premises. Lessor shall
not charge office rental surcharge for said office expansion. Lessor
reserves the right, at Lessor's sole discretion, to have Lessee remove, at
Lessee's expense, additional office buildout constructed during lease
extension.
5. OPTION TO EXTEND TERM: If Lessee has not been in material default of lease
terms, then Lessee shall have an option to extend the terms hereof for an
additional period of five (5) years which said option shall be exercised by
giving written notice to Landlord not less than 120 days prior to the
termination of the term hereof. Upon the exercise of said option by
Lessee, the term of this Lease shall be extended for the additional period
of five (5) years upon all of the terms, covenants and conditions herein
contained, provided, however, that the monthly rental due and payable
hereunder shall increase at the Consumer Price Index as stated in paragraph
2.b., not to exceed six (6%) percent per year.
<PAGE>
Amendment to Lease Extension
Ogden Business Park, Lessor
Bowflex, Inc., Lessee
August 27, 1996
Page 2
All other provisions, terms, and conditions of the Lease remain the same.
BC/sj
bowflxle.doc
AGREED AND ACCEPTED AGREED AND ACCEPTED
LESSEE: Bowflex, Inc. LESSOR: Ogden Business Park Partnership
By: /s/ Brian R. Cook By:
------------------------------- ----------------------------------
Brian Cook D. H. Christensen
Date: 8/28/96 Date:
----------------------------- --------------------------------
By:
-----------------------------------
Dean Henry
Date:
---------------------------------
<PAGE>
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("Amendment") is made as of the 10th day
of December, 1996 between Ogden Business Park, a Washington Joint Venture
("Lessor"), and Bow-Flex of America, Inc. ("Lessee").
RECITALS
A. Lessor (successor-in-interest to Christensen Group, Inc.) and Lessee
executed that certain Lease Agreement September 16, 1992, with the term
beginning May 1, 1992 (the "Lease"), with respect to certain premises located in
the OGDEN BUSINESS PARK, in the City of Vancouver, Clark County, Washington
which are more particularly described in the Lease (the "Premises").
B. Lessee has asked Lessor to extend the term of the Lease, provide for an
additional lease extension option, and consent to Lessee making certain
alterations to the Premises at Lessee's sole cost and expense. Lessor is willing
to grant such requests, provided that the parties make certain other amendments
to the Lease.
NOW, THEREFORE, for and in consideration of the covenants contained herein,
the parties agree as follows:
AGREEMENT
1. DEFINITIONS. Terms used herein shall have the same meanings as
provided therefor in the Lease unless otherwise expressly provided herein or
unless the context otherwise requires.
2. AMENDMENTS TO LEASE. The Lease is hereby amended in the following
respects only:
2.1 LEASE TERM. The first sentence of Section 1.4 of the Lease is
hereby deleted and the following is substituted therefor:
The term of this Lease shall commence on May 1, 1992 and end on
April 30, 2002 unless earlier terminated hereunder.
2.2 OPTION TO EXTEND. Sections 1.5 and 1.6 are hereby added to the Lease
following Section 1.4 as follows:
<PAGE>
SECTION 1.5. OPTION TO EXTEND. Lessee shall have the option to
extend the Lease term for five (5) additional years, beginning May 1,
2002 and ending on April 30, 2007 (the "Option Period"), provided
Lessee (a) notifies Lessor in writing of its intention to exercise its
option to extend no later than October 31, 2001 and (b) Lessee is not
then in default, has not been in material default during the Lease
term, nor is in default at the commencement of the Option Period, under
the terms of the Lease.
SECTION 1.6. OPTION PERIOD TERMS. The same terms and conditions of
this Lease applicable to the initial Lease term shall be applicable in
the Option Period, except that at the commencement of the Option
Period, the monthly rent will be the greater of (i) the adjusted
monthly rental rate in effect as of September 1, 2001 or (ii) the
monthly "fair market" rental rate for the Premises as determined in
Lessor's sole discretion ("May 2002 Rent") and thereafter such rent
will be adjusted on September 1 of each year as set forth in Section
2.2 of the Lease. In no event shall the rent, as subsequently adjusted,
be less than the May 2002 Rent, and for purposes of such adjustments,
the reference in the second paragraph of Section 2.2 to "the sum set
forth in Paragraph 2 hereof" is hereby amended to reference "the May
2002 Rent." At Tenant's written request at any time after August 31,
2001, Lessor will notify Lessee of the monthly "fair market" rental
rate that it has determined will apply to the Premises as of May 1,
2002.
2.3 RENT ADJUSTMENT. The parties hereby clarify the intended
meaning of the first sentence of the second paragraph of Section 2.2 by
amending it to read as follows:
Such adjustments shall be made so that the rent payable hereunder
each month during the next adjustment interval shall bear the same
relationship to the sum set forth in Paragraph 2 hereof as the Consumer
Price Index, U.S. City Average, of the Bureau of Labor Statistics of the
U.S. Department of Labor (U.S. Index Of All Items for All Urban Consumers -
1982-84 equals 100) (sometimes referred to herein as the "Index") as of
the date of the adjustment bears to the Index as of
<PAGE>
the base date. For all adjustments prior to September 1, 1997, the base
year or base date shall be May 1, 1992, for adjustments on September 1,
1997 through September 1, 2001, the base year or base date shall be May
1, 1997, and for adjustments during the Option Period, the base year or
base date shall be May 1, 2002.
2.4 RENT BEGINNING MAY 1, 1997. Effective May 1, 1997, the first
sentence of Section 2.1 is hereby amended to read as follows:
During the term hereof, Lessee shall pay to Lessor, without
deduction or offset by Lessee, rent for the Premises in the sum of
Four Thousand Nine Hundred Ninety-One Dollars ($4,991.00) per month.
2.5 COMMON AREA EXPENSES. Effective May 1, 1997, the last sentence in
Section 2.1 and the phrase "including common area charges" in the
fourth sentence of Section 2.2 are hereby deleted.
2.6 ALTERATIONS BY LESSEE. Subject to the requirements of Section
3.6 of the Lease, Lessee, at Lessee's sole cost and expense, may remodel
and/or expand the office area of the Premises ("Office Expansion
Improvements"). Prior to commencement of any work relating to the Office
Expansion Improvements, Lessee must obtain Lessor's written approval of
plans, specifications, and elevations, as applicable. Lessor agrees not to
charge an office rental surcharge for such Office Expansion Improvements.
Notwithstanding language to the contrary in Section 3.6 of the Lease, at the
end of the Lease term, in Lessor's sole discretion, Lessor may require Lessee
to remove any or all of the Office Expansion Improvements and restore the
Premises to their condition prior to installation of the Office Expansion
Improvements, all at Lessee's sole cost and expense.
3. NO OTHER CHANGES. All other provisions, terms and conditions of
the Lease, except as expressly set forth in this Amendment, shall remain
unmodified and shall otherwise continue in full force and effect as written.
4. EFFECTIVE DATE. Except as expressly otherwise set forth herein,
the provisions of this Amendment are effective on the date set forth above.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
LANDLORD: OGDEN BUSINESS PARK,
a Washington joint venture
By: WINMAR COMPANY, INC.,
its Venturer
By /s/ Eddie L. Hendrikson
------------------------------
Its President
-------------------------------
By /s/ Dean F. Henry
--------------------------------
Its Sr. Vice President
-----------------------------
By: CHRISTENSEN GROUP, INC.
its Venturer
By /s/ D.H. Christensen
--------------------------------
Its President
-------------------------------
TENANT: BOW-FLEX OF AMERICA, INC.
/s/ Rod W. Rice
-----------------------------------
Its: CFO
------------------------------
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Eddie L.
Hendrikson and Dean F. Henry are the persons who appeared before me, and said
persons acknowledged that they signed this instrument, on oath stated that
they were authorized to execute the instrument and acknowledged it as the
President and Senior Vice Pres., respectively, of WINMAR COMPANY, INC., the
corporation acting as venturer of OGDEN BUSINESS PARK, the joint venture that
executed the within and foregoing instrument, to be the free and voluntary
act of such party for the uses and purposes mentioned in the instrument; and
on oath stated that they were duly elected, qualified and acting as said
officers of the corporation and that they were authorized to execute said
instrument on behalf of the corporation and that the seal affixed, if any, is
the corporate seal of the corporation, and that the corporation was
authorized to execute said instrument on behalf of the joint venture.
Dated: [illegible], 1996
/s/ Diane Bogue
---------------------------------------
[SEAL] Print Name: DIANE BOGUE
NOTARY PUBLIC in and for the State of
Washington, residing at Bellevue
My commission expires: 4/20/98
STATE OF WASHINGTON )
) ss.
COUNTY OF CLARK )
I certify that I know or have satisfactory evidence that D.H. Christensen
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the President of CHRISTENSEN GROUP, INC., the
corporation acting as venturer of OGDEN BUSINESS PARK, the joint venture that
executed the within and foregoing instrument, to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument; and on oath
stated that he was duly elected, qualified and acting as said officers of the
corporation and that he was authorized to execute said instrument on behalf of
the corporation and that the seal affixed, if any, is the corporate seal of the
corporation, and that the corporation was authorized to execute said instrument
on behalf of the joint venture.
Dated: 1-16-97
/s/ Marian Gross
--------------------------------
[SEAL] Print Name: MARIAN GROSS
NOTARY PUBLIC in and for the State
of Washington, residing at Vancouver, WA
My commission expires: 11-19-99
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF CLARK )
I certify that I know or have satisfactory evidence that Rod W. Rice is the
person who appeared before me, and said person acknowledged that [he/she] signed
this instrument, on oath stated that [he/she] was authorized to execute the
instrument and acknowledged it as the CFO of BOW-FLEX OF AMERICA, INC. to be the
free and voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated: 1-27-97
/s/ Randi R. Christopherson
---------------------------------------
Print Name: Randi R. Christopherson
[SEAL] NOTARY PUBLIC in and for the State of
Washington, residing at Clark Co.
My commission expires: 1-1-2000
<PAGE>
STANDARD INDUSTRIAL LEASE -- GROSS
-- AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Lease, dated for reference purposes only, June 4, 1998, is
made by and between LeRoy Hart Rentals (herein called "Lessor") and Direct
Focus, Inc. (herein called "Lessee").
2. PREMISES. Lessor hereby Leases to Lessee and Lessee Leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
that certain real property situated in the County of Clark State of
Washington, commonly know as a portion of 2650 NE Andresen Road, Vancouver,
WA 98661 and described as approximately 28,500 SF warehouse (see attached
Exhibit C). Said real property including the land and all improvements
therein, is herein called "the Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for twenty four (24) months
commencing on July 1, 1998 and ending on June 30, 2000 unless sooner
terminated pursuant to any provision hereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date, Lessor shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent until possession of the Premises is tendered to Lessee;
provided, however, that if Lessor shall not have delivered possession of the
Premises within (60) days from said commencement date, Lessee may, at
Lessee's option, by notice in writing to Lessor within ten (10) days thereafter
within sixty (60) days from said commencement be discharged from all
obligations hereunder; provided further, however, that is
such written notice of Lessee is not received by Lessor within said ten (10)
day period, Lessee's right to cancel this Lease hereunder shall terminate and
be of no further force or effect.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay
rent for such period at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of (SEE PARAGRAPH 52, RENT SCHEDULE), in advance, on the first day
of each month of the term hereof. Lessee shall pay Lessor upon the execution
hereof (SEE PARAGRAPH 52, RENT SCHEDULE) as rent for (SEE PARAGRAPH 52, RENT
SCHEDULE) Rent for any period during the term hereof which is for less than
one month shall be a pro rata portion of the monthly installment. Rent shall
be payable in lawful money of the United States to Lessor at the address
stated herein or to such other persons or at such other places as Lessor may
designate in writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof $7,590.00 + $3,240.00 (previously paid) for a total of $10,830.00 as
security for Lessee's faithful performance of Lessee's obligations hereunder.
If Lessee fails to pay rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this Lease, Lessor may use, apply
or retain all or any portion of said deposit for the payment of any rent or
other charge in default or for the payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor
for any loss or damage which Lessor may suffer thereby. If Lessor so uses or
applies all or any portion of said deposit, Lessee shall within ten (10) days
after written demand therefor deposit cash with Lessor in an amount
sufficient to restore said deposit to the full amount therein above stated
and Lessee's failure to do so shall be a material breach of the Lease. If the
monthly rent shall, from time to time, increase during the term of this
Lease, Lessee shall thereupon deposit with Lessor additional security deposit
so that the amount of security deposit held by Lessor shall at all times bear
the same proportion to current rent as the original security deposit so that
the amount of security deposit held by Lessor shall at all times bear the same
proportion to current rent as the original security deposit bears to the
original monthly rent set forth in Paragraph 4 hereof. Lessor shall not be
required to keep said deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much
thereof as has not theretofore been applied by Lessor shall be returned,
without payment of interest or other increment for its use to Lessee (or, at
Lessor's option, to the last assignee, if any, of Lessee's interest
hereunder) at the expiration of the term thereof, and after Lessee has
vacated the Premises. No trust relationship is created herein between Lessor
and Lessee with respect to said Security Deposit.
Standard Industrial Lease -- Gross Page 1 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
6. USE.
6.1 USE. The Premises shall be used and occupied only for assembly,
testing, warehousing and distribution of Tenant's products or any other use
which is reasonably comparable and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term commencement date. In the event it is
determined that this warranty has been violated, then it shall be the
obligation of the Lessor, after written notice from Lessee, to promptly, at
Lessor's sole cost and expense, rectify and such violation. In the event
Lessee does not give to Lessor written notice of the violation of this
warranty within six months from the date that the Lease term commences, the
correction of same shall be the obligation of the Lessee at Lessee's sole
cost. The warranty contained in this Paragraph 6.2 (a) shall be of no force
or effect if, prior to the date of this Lease, Lessee was the owner or
occupant of the Premises, and, in such event, Lessee shall correct any such
violation at Lessee's sole cost.
(b) Except as provided in Paragraph 6.2(a), Lessee shall, at
Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements in effect during the term or any part of the term hereof,
regulating the use by Lessee of the Premises, Lessee shall not use nor permit
the use of the Premises in any manner that will tend to create waste or a
nuisance or, if there shall be more than one tenant in the building
containing the Premises, shall tend to disturb such other tenants.
(c)
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession)
and Lessor further warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation. Lessee's failure to give such written
notice to Lessor within thirty (30) days after the Lease commencement date
shall cause the conclusive presumption that Lessor has complied with all of
Lessor's obligations hereunder. The warranty contained in this Paragraph
6.3(a) shall be of no force or effect if prior to the date of this Lease,
Lessee was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their condition existing as of the Lease commencement
date or the date that Lessee takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use of the Premises,
and any covenants or restrictions of record, and accepts this Lease subject
thereto and to all matters disclosed thereby and by any exhibits attached
hereto. Lessee acknowledges that either Lessor nor Lessor's agent has made
any representation or warranty as to the present or future suitability of the
Premises for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1. LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 6,
7.2 and 9 and except for damage caused by any negligent or intentional act or
omission of Lessee, Lessee's agents, employees, or invitees in which event
Lessee shall repair the damage. Lessor, at Lessor's expense, shall keep in
good order, condition and repair the foundations, exterior walls and the
exterior roof of the Premises. Lessor shall not, however, be obligated to
paint such exterior, nor shall Lessor be required to maintain the interior
surface of exterior walls, windows, doors or plate glass. Lessor shall have
no obligation to make repairs under this Paragraph 7.1 until a reasonable
time after receipt of written notice of the need for such repairs. Lessee
expressly waives the benefits of any statute now or hereafter in effect which
would otherwise afford Lessee the right to make repairs at Lessor's expense
or to terminate this Lease because of Lessor's failure to keep the Premises
in good order, condition and repair.
7.2 (a) Subject to the provisions of Paragraphs 6, 78.1 and 9.
Lessor, at Lessor's expense shall keep in good order, condition and repair
the Premises and every part thereof (whether or not the damaged portion of the
Premises or the means of repairing the same are reasonably or readily
accessible to Lessee) including, without limiting the generality of the
foregoing, all plumbing, heating, air conditioning, (Lessee shall procure and
maintain, at Lessor's expense, an air conditioning system maintenance
contract) ventilating, electrical and lighting facilities and equipment within
the Premises, fixtures, interior walls and interior surface of exterior
walls, ceilings, windows, doors, plate glass, and
Standard Industrial Lease -- Gross Page 2 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
skylights, located within the Premises, and all landscaping, driveways,
parking lots, fences and signs located in the Premises and all sidewalks and
parkways adjacent to the Premises.
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of its trade fixtures, furnishings and equipment.
Notwithstanding anything to the contrary otherwise stated in this Lease.
Lessee shall leave the air lines, power panels, electrical distribution
systems, lighting fixtures, space heater, air conditioning, plumbing and
fencing on the Premises in good operating conditions.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, or Utility Installations in, on or
about the Premises, except for nonstructural alterations not exceeding
$2,500.00 in cumulative costs during the term of this Lease. In any event,
whether or not in excess of $2,500.00 in cumulative cost, Lessee shall make
no change or alteration to the exterior of the Premise nor the exterior of
the building(s) on the Premises without Lessor's prior written consent. As
used in this Paragraph 7.3 the term "Utility Installation" shall mean
carpeting, window coverings, air lines, power panels, electrical distribution
systems, lighting fixtures, space heaters, air conditioning, plumbing and
fencing. Lessor may require that Lessee remove any or all of said
alterations, improvements, additions or Utility Installations at the
expiration of the term, and restore the Premises to their prior condition.
Lessor may require Lessee to provide Lessor, at Lessee's sole cost and
expense, a lien and completion bond in a amount equal to one and one-half
times the estimated cost of such improvements, to insure Lessor against any
liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or
Utility Installations without the prior approval of Lessor, Lessor may
require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in
written form, with proposed detailed plans. If Lessor shall give its consent,
the consent shall be deemed conditioned upon Lessee acquiring a permit to do
so from appropriate governmental agencies, the furnishing of a copy thereof to
Lessor prior to the commencement of the work and the compliance by Lessee of
all conditions of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of
any work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall,
in good faith, contest the validity of any such lien, claim or demand, then
Lessee shall, at its sole expense defend itself and Lessor against the same
and shall pay and satisfy any such adverse judgement that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises,
upon the condition that if Lessor shall require, Lessee shall furnish to
Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs
in participating in such action if Lessor shall decide it is to its best
interest to do so.
(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.3(a), all alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may; be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at
the expiration of the term. Notwithstanding the provisions of this Paragraph
7.3(d), Lessee's machinery and equipment, other than that which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 7.2(c).
Standard Industrial Lease -- Gross Page 3 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE -- LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Combined
Single Limit Bodily Injury and Property Damage Insurance insuring Lessee and
Lessor against any liability arising out of the use, occupancy or maintenance
of the Premises and all other areas appurtenant thereto. Such insurance shall
be in an amount not less than $500,000.00 per occurrence. The policy shall
insure performance by Lessee of the indemnity provisions of the Paragraph 8.
The limits of said insurance shall not, however, limit the liability of
Lessee hereunder.
8.2 LIABILITY INSURANCE -- LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Property Damage Insurance, insuring Lessor, but not Lessee, against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto in an amount not less than
$500,000.00 per occurrence.
8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or
damage to the Premises, but not Lessee's fixtures, equipment or tenant
improvements in an amount not to exceed the full replacement value thereof,
as the same may exist from time to time, providing protection against all
perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, flood (in the event same is required by a
lender having a lien on the Premises) special extended perils ("all risk", as
such term is used in the insurance industry) but not plate glass insurance.
In addition, the Lessor shall obtain and keep in force, during the term of
this Lease, a policy of rental value insurance covering a period of one year,
with loss payable to Lessor, which insurance shall also cover all real estate
taxes and insurance costs for said period.
8.4 PAYMENT OF PREMIUM INCREASE.
(c) If the Premises are part of a larger building, then Lessee
shall not be responsible for paying any increase in the property insurance
premium caused by the acts or omissions of any other tenant of the building
of which the Premises are a part.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus or
such other rating as may be required by a lender having a lien of the
Premises, as set forth in the most current issue of "Best's Insurance Guide".
Lessee shall deliver to Lessor copies of policies of liability insurance
required under Paragraph 8.1 or certificates evidencing the existence and
amounts of such insurance. No such policy shall be cancelable or subject to
reduction of coverage or other modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall, at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with renewals or
"binders" thereof, or Lessor may order such insurance and charge the cost
thereof to Lessee, which amount shall be payable by Lessee upon demand.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in Paragraph 8.3.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under Paragraph 8.3, which perils
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occur in, on or about the Premises, whether due to the negligence of Lessor
or Lessee or their agents, employees contractors and/or invitees. Lessee and
Lessor shall, upon obtaining the policies of insurance required hereunder,
give notice to the insurance carrier or carriers that the foregoing mutual
waiver of subrogation is contained in this Lease.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from
and against any and all claims arising from Lessee's use of the Premises, or
from the conduct of Lessee's business or from any activity, work or things
done, permitted or suffered by Lessee in or about the Premises or elsewhere
and shall further indemnify and hold harmless Lessor from and against any and
all claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any negligence of the Lessee, or any of Lessee's agents,
contractors, or employees, and from and against all costs, attorney's fees,
expenses and liabilities incurred in the defense of any such claim or any
action or proceeding brought thereon; and in case any action or proceeding be
brought against Lessor by reason of any such claim, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons, in, upon or about
the Premises arising from any cause and Lessee hereby waives all claims in
respect thereof against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's Business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part or from other sources or places and
regardless or whether the cause of such damage or Injury of the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant, if any, of
the building in which the Premises are located.
9. DAMAGE OF DESTRUCTION.
9.1 DEFINITIONS:
(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less
than 50% of the fair market value of the Premises immediately prior to such
damage or destruction. "Premises Building Partial Damage" shall herein mean
damage or destruction to the building of which the Premises are a part to the
extent that the cost of repair, is less than 50% of the fair market value of
such building as a whole immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50%
or more of the fair market value of the Premises immediately prior to such
damage or destruction. "Premises Building Total Destruction" shall herein
mean damage or destruction to the building of which the Premises are a part
to the extent that the cost of repair is 50% or more of the fair market value
of such building as a whole immediately prior to such damage or destruction.
(c) "Insured Loss" shall herein mean damage or destruction which
was caused by an event required to be covered by the insurance described in
Paragraph 8.
9.2 PARTIAL DAMAGE - INSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of the Lease
there is damage which is not an insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial
Damage, then Lessor shall, at Lessor's sole cost, repair such damage, but not
Lessee's fixtures, equipment or tenant improvements, as soon as reasonably
possible and this Lease shall continue in full force and effect.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is not an insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial
Damage, unless caused by a negligent or willful act of Lessee (in which event
Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's
option either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of the occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, as of the date of the occurrence of such damage. In the
event Lessor elects to give such notice of Lessor's intention to
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cancel and terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's intention to repair such damage at Lessee's expense, without
reimbursement from Lessor, in which event this Lease shall continue in full
force and effect, and Lessee shall proceed to make such repairs as soon as
reasonably possible. If Lessee does not give such notice within such 10-day
period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease
there is damage, whether or not an Insured Loss, (including destruction
required by any authorized public authority), which falls into the
classification of Premises Total Destruction or Premises Building Total
Destruction, this Lease shall automatically terminate as of the date of such
total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to Lessee of Lessor's election to do so within 30 days
after the date of occurrence of such damage.
(b) Notwithstanding Paragraph 9.5(a), in the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than 20 days after the
occurrence of an Insured Loss falling within the classification of Premises
Partial Damage during the last six months of the term of this Lease. If
Lessee duly exercises such option during said 20 day period, Lessor shall, at
Lessor's expense, repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise
such option during said 20 day period, then Lessor may at Lessor's option
terminate and cancel this Lease as of the expiration of said 20 day period
by giving written notice to Lessee of Lessor's election to do so within 10
days after the expiration of said 20 day period, notwithstanding any term or
provision in the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraphs 9.2 or 9.3,
and Lessor or Lessee repairs or restores the Premises pursuant to the
provisions of this Paragraph 9, the rent payable hereunder for the period
during which such damage, repair or restoration continues shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of rent, if any, Lessee shall have no claim against
Lessor for any damage suffered by reason of any such damage, destruction,
repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accrue,
Lessee may at Lessee's option cancel and terminate this Lease by giving
Lessor written notice of Lessee's election to do so at any time prior to the
commencement of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's security
deposit as has not theretofore been applied by Lessor.
9.8 WAIVER. Lessor and Lessee waive the provisions of any statutes
which relate to termination of Leases when Leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAX INCREASE. Lessor shall pay the real property tax,
as defined in Paragraph 10.3, applicable to the Premises.
10.2 ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1 hereof,
Lessee shall pay to Lessor upon demand therefor the entirety of any increase
in real property tax if assessed solely by reason of additional improvements
placed upon the Premises by Lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or
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extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed on the Premises by any authority having the direct or indirect power
to tax, including any city, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Premises
or in the real property of which the Premises are a part, as against Lessor's
right to rent or other income therefrom, and as against Lessor's business of
leasing the Premises. The term "real property tax" shall also include any
tax, fee, levy, assessment or charge (i) in substitution of, partially or
totally, any tax, fee, levy, assessment or charge hereinabove included within
the definition of "real property tax" or (ii) the nature of which was
hereinbefore included within the definition of "real property tax," or (iii)
which is imposed as a service or right not charged prior to June 1, 1978, or
if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such
transfer, or (v) which is imposed by reason of the transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the
real property of Lessor.
(b) I any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable
to Lessee within 10 days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES. Lessor shall pay for all water, gas, heat, light, power, and
other utilities and services supplied to the Premises, together with any
taxes thereon. Lessee shall pay for trash removal and telephone, and
separately metered electrical service.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance
or subletting without such consent shall be void, and shall constitute a
breach of this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of Paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion
thereof, without Lessor's consent, to any corporation which controls, is
controlled by or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee, or to any person or
entity which acquires all the assets of Lessee as a going concern of the
business that is being conducted on the Premises, provided that said assignee
assumes, in full, the obligations of Lessee under this Lease. Any such
assignment shall not, in any way, affect or limit the liability of Lessee
under the terms of this Lease even if after such assignment or subletting the
terms of this Lease are materially changed or altered without the consent of
Lessee, the consent of whom shall not be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of
any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by any assignee of Lessee or any successor of Lessee, in the
performance of any of the terms hereof, Lessor may proceed directly against
Lessee without the necessity of exhausting remedies against said assignee.
Lessor may consent to subsequent assignments or subletting of this Lease or
amendments or modifications to this Lease with assignees of
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Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining is or their consent thereto and such action shall not relieve
Lessee of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable attorneys fees incurred in
connection therewith, such attorneys fees not to exceed $350.00 for each such
request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee, other than described in Paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice thereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's default
is such that more than 30 days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commenced such cure
within said 30-day period and thereafter diligently prosecutes such cure to
completion.
(d) (i) The making by Lessee of any general arrangement or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is dismissed within 60
days); (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 30
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets to located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
30 days. Provided, however, in the event that any provision of the Paragraph
13.1(d) is contrary to any applicable law, such provision shall be of no
force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee or Lessee, any subtenant of Lessee, and
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises by any lawful means, in
which case this Lease shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor. In such event Lessor shall be entitled
to recover from Lessee all damages incurred by Lessor by reason of Lessee's
default including, but not limited to, the cost of recovering possession of
the Premises; expenses of reletting, including necessary renovation and
alteration of the Premises, reasonable attorney's fees, and any real estate
commission actually paid; the worth at the time of award by the court having
jurisdiction thereof of the amount by which the unpaid rent for the balance
of the term after the time of such award exceeds the amount of such rental
loss for the same period that Lessee proves could be reasonably avoided; that
portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which chase this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent
as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid
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installments of rent and other unpaid monetary obligation of Lessee under the
terms of this Lease shall bear interest from the date due at the maximum rate
then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time but
in no event later than thirty 930) days after written notice by Lessee to
Lessor and to the Holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to
Lessee in writing, specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessor's obligation is
such that more than thirty 930) days are required for performance then Lessor
shall not be in default if Lessor commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur cost s not contemplated by this Lease, the exact amount of which will
be extremely difficult to ascertain. Such costs include but are not limited
to, processing and accounting charges, and late charges which may be imposed
on Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount,
nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of rent,
then rent shall automatically become due and payable quarterly in advance,
rather than monthly, notwithstanding Paragraph 4 or any other provision of
this Lease to the contrary.
13.5 IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease. Lessee shall pay
to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment, payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the
terms of this Lease. Such fund shall be established to insure payment when
due, before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Lessor by Lessee under the provisions of this
Paragraph are insufficient to discharge the obligations of Lessee to pay such
real property taxes and insurance premiums as the same become due, Lessee
shall pay to Lessor, upon Lessor's demand, such additional sums necessary to
pay such obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a default in the obligations of Lessee to perform under this Lease,
then any balance remaining from funds paid to Lessor under the provisions of
this Paragraph may, at the option of Lessor, be applied to the payment of any
monetary default of Lessee in lieu of being applied to the payment of real
property tax and insurance premiums.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation", this Lease shall
terminate as to the part so taken as of the date the condemning authority
take title or possession, whichever first occurs. If more than 10% of the
floor area of the building on the Premises, or more than 25% of the land area
of the Premises which is not occupied by any building, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing only
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the rent shall be reduced in the proportion that the floor area
of the building taken bears to the total floor area of the building situated
on the Premises. No reduction of rent shall occur if the only area taken is
that which does not have a building located thereon. Any award for the taking
of all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power shall be the property
of Lessor, whether such award shall be made as compensation for diminution in
value of the Leasehold or for the taking of the fee, or as severance damages;
provided, however, that Lessee shall be entitled to any award for loss of or
damage to Lessee's trade fixtures and removable personal property. In the
event that this Lease is not terminated by reason of such condemnation,
Lessor shall to the extent of severance damages received by Lessor in
connection with such condemnation, repair any damage to the Premises caused
by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall pay any amount in excess
of such severance damages required to complete such repair.
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15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
William Connolly of Eric Fuller & Associates, Inc. Licensed real estate
broker(s), a fee as set forth in a separate agreement between Lessor and said
broker(s), or in the event there is no separate agreement between Lessor and
said broker(s), the sum of per separate agreement, for brokerage services
rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in Paragraph 39.1 of this Lease, which is granted to Lessee under
this Lease, or any subsequently granted option which is substantially similar
to an Option granted to Lessee under this Lease, or if Lessee acquires any
rights to the Premises or other Premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or if Lessee remains in possession of the
Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or if said broker(s) are the procuring cause of any
other Lease or sale entered into between the parties pertaining to the
Premises and/or any adjacent property in which Lessor has an interest, then
as to any of said transactions, Lessor shall pay said broker(s) a fee in
accordance with the schedule of said broker(s) in effect at the time of
execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity
having an ownership interest in said real property or any part thereof, when
such fee is due hereunder. Any transferee of Lessor's interest in this Lease
whether such transfer is by agreement or by operation of law, shall be deemed
to have assumed Lessor's obligation under this Paragraph 15. Said broker
shall be a third party beneficiary of the provisions of this Paragraph 15.
16. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification
and certifying that this Lease, as so modified, is in full force and effect)
and the date to which the rent and other charges are paid in advance, if any
and (ii) acknowledging that there are not, to Lessee's knowledge any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premise.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be represented by Lessor (ii) that there
are no uncured defaults in Lessor's performance, and (iii) that not more than
one month's rent has been paid in advance or such failure may be considered
by Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any tender or purchaser
designated by Lessor such financial statement of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three year's financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and
shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only
the owner or owners at the time in question of the fee title or a Lessee's
interest in a ground Lease of the Premises, and except as expressly provided
in Paragraph 15, in the event of any transfer of such title or interest,
Lessor herein named and in case of any subsequent transfers then the grantor)
shall be relieved from and after the date of such transfer of all liability
as respects Lessor's obligations thereafter to be performed, provided that
any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall,
subject as aforesaid, be binding on Lessor's successors and assigns, only
during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee nor on
any amounts upon which late charges are paid by Lessee.
Standard Industrial Lease -- Gross Page 10 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No
prior agreements of understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification. Except as otherwise stated in
this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in Paragraph 15 hereof nor any cooperating broker on this transaction
nor the Lessor or any employees or agents of any of said persons has made any
oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of said Premises and Lessee acknowledges that
Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease except as otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given if
addressed to Lessee or the Lessor at the address noted below the signature of
the respective parties, as the case may be. Either party may by notice to the
other specify a different address for notice purposes except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice purposes. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of any act,
shall not be deemed to render unnecessary the obtaining of Lessor's consent
to or approval of any subsequent act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee
of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of
this Lease for recording purposes.
26. HOLDING OVER. <#>If Lessee, with Lessor's consent, remains in
possession of the Premises or any part thereof after the expiration of the
term hereof, such occupancy shall be a tenancy from month to month upon all
the provisions of this Lease pertaining to the obligations of Lessee, but all
options and rights of first refusal, if any, granted under the terms of this
Lease shall be deemed terminated and be of no further effect during said
month to month tenancy.</#> See Paragraph 51. [DELETION INITIALED]
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, whenever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions
of Paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
Lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and
to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quite possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or ground Lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground Lease, and shall
give written notice thereof to Lessee, this Lease shall be deemed prior to
such mortgage, deed of trust, or ground Lease, whether this Lease is dated
prior or subsequent to the date of said mortgage, deed of trust or ground
Lease or the date of recording thereof.
Standard Industrial Lease -- Gross Page 11 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
(b) Lessee agrees to execute any documents required to effectuate
an atternment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground Lease, as the case may be. Lessee's failure
to execute such documents within 10 days after written demand shall
constitute a material default by Lessee hereunder, or at Lessor's option
Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this Paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action, on trial or appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this Paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to
enter the Premises at reasonable times for the purpose of inspecting the
same, showing the same to prospective purchasers, lenders, or Lessees, and
making such alterations, repairs, improvements or additions to the Premises
or to the building of which they are a part as Lessor may deem necessary or
desirable. Lessor may at any time place on or about the Premises any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the
term hereof place on or about the Premises any ordinary "For Lease" signs,
all without rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without
Lessor's prior written consent except that Lessee shall have the right,
without the prior permission of Lessor to place ordinary and usual for rent
or sublet signs thereon.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. CONSENTS. Except for Paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party, such consent
shall not be unreasonably withheld.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph the word "options" has the
following meaning: (1) the right or option to extend the term of this Lease
or to renew this Lease or to extend or renew any Lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to Lease
the Premises or the right of first offer to Lease the Premises or the right
of first refusal to Lease other property of Lessor or the right of first
offer to Lease other property of Lessor; (3) the right or option to purchase
the Premises, or the right of first refusal to purchase the Premises, or the
right of first offer to purchase the Premises or the right or option to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other
property of Lessor.
39.2 OPTIONS PERSONAL. Each option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate
as defined in Paragraph 12.2 of this Lease. The Options herein granted to
Lessee are not assignable separate and apart from this Lease.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised
unless the prior option to extend or renew this Lease has been so exercised.
Standard Industrial Lease -- Gross Page 12 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to Paragraph 13.1(b) or 13.1(c) and continuing until the
default alleged in said notice of default is cured, or (ii) during the period
of time commencing on the day after a monetary obligation to Lessor is due
from Lessee and unpaid (without any necessity for notice thereof to Lessee)
continuing until the obligation is paid, or (iii) at any time after an event
of default described in Paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any
necessity of Lessor to give notice of such default to Lessee), or (iv) in the
event that Lessor has given to Lessee three or more notices of default under
Paragraph 13.1(b), where a late charge becomes payable under Paragraph 13.4
for each of such defaults, or Paragraph 13.1(c), whether or not the defaults
are cured, during the 12 month period prior to the time that Lessee intends
to exercise the subject Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of 30 days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails
to commence to cure a default specified in Paragraph 13.10 within 30 days
after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessee commits a default described in Paragraph 13.1(a), 13.1(d) or
13.1(e) (without any necessity of Lessor to give notice of such default to
Lessee), or (iv) Lessor gives to Lessee three or more notices of default
under Paragraph 13.1(b), where a late charge becomes payable under
Paragraph 13.4 for each such default, or paragraph 13.1(c) whether or not the
defaults are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may
make from time to time for the management, safety, care and cleanliness of
the building and grounds, the parking of vehicles and the preservation of
good order therein as well as for the convenience of other occupants and
tenants of the building. The violations of any such rules and regulation
shall be deemed a material breach of this Lease by Lessee.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of Lessee,
its agents and invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of parcel maps and restrictions, so
long as such easements, rights, dedications, maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material breach of the Lease.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall survive
the right on the part of said party to institute suite for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said party to pay such sum or any part thereof, said party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution
of this Lease, deliver to Lessor evidence of such authority satisfactory to
Lessor.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
Standard Industrial Lease -- Gross Page 13 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
46. ADDENDUM. Attached hereto is an addendum or addenda containing
Paragraph 47 through 52 which constitute a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL
ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR
THE TRANSACTION RELATING THERETO. THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE.
ADDRESSES FOR NOTICES AND RENT
LESSOR LESSEE
- ------ ------
Hart Enterprises Direct Focus, Inc.
211 E. McLoughlin Blvd. 2200 NE Andresen Road
Vancouver, WA 98663 Vancouver, WA 98661
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So.
Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777.
Standard Industrial Lease -- Gross Page 14 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
THIS LEASE IS SUBJECT TO ACCEPTANCE BY LANDLORD:
IN WITNESS WHEREOF, the parties hereto have executed this Lease the date and
year above written.
Address: 211 E. McLoughlin Blvd Owner: LeRoy Hart Rentals
Vancouver, WA 98663
By: /s/ Joseph Hart
------------------------------
Joseph Hart
Address: 2200 NE Andresen Road Tenant: Direct Focus, Inc.
Vancouver, WA 98661
By: /s/ Brian Cook
------------------------------
Brian Cook, President
LESSOR:
STATE OF Washington )
---------------------
County of Clark ) ss.
--------------------
On June 18, 1998 before me, a Notary Public in and for said County and State,
residing therein, personally appeared Joseph L. Hart, who, being duly sworn,
and he acknowledged said instrument to be its voluntary act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal
the day and year last above written.
/s/ Judith A. Bray
- ------------------------------
Notary Public for Washington
My Commission Expires 2/1/99
LESSEE:
STATE OF Washington )
---------------------
County of Clark ) ss.
--------------------
On June 17, 1998 before me, a Notary Public in and for said County and State,
residing therein, personally appeared Brian R. Cook, who, being duly sworn,
and he acknowledged said instrument to be its voluntary act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal
the day and year last above written.
/s/ Nora L. Rowe
- ------------------------------
Notary Public for Washington
My Commission Expires 11-12-01
Standard Industrial Lease -- Gross Page 15 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
ADDENDUM "A"
47. COMMISSION. Owner shall pay a commission or fee to ERIC FULLER &
ASSOCIATES, INC. in accordance with the provisions of a separate commission
contract. Each party represents that it has not had dealings with any other
real estate broker or salesman with respect to this Lease, and each party
shall defend, indemnify and hold harmless the other party from all costs and
liabilities including reasonable attorney's fees resulting from any claims to
the contrary.
48. AGENCY DISCLOSURE. At the signing of this Agreement the listing agent,
William M. Connelly of ERIC FULLER & ASSOCIATES represented the Landlord.
Each party signing this document confirms that prior oral and/or written
disclosure of agency was provided to him/her in this transaction.
49. HAZARDOUS MATERIALS. The Lessee, at its sole cost and expense, shall
comply with all laws, ordinances, regulations, and standards regulating or
controlling hazardous wastes or hazardous substances, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, 42 U.S.C. 9601, ET SEQ.; the Hazardous
Material Transportation Act, 49 U.S.C. 1901, ET SEQ.; the Resource
Conservation and Recovery Act, 42 U.S.C. 6901, ET SEQ.; the
Carpenter-Presley-Tanner Hazardous Substance Account Act, Health and Safety
Code section 25300, ET SEQ.; the Underground Storage of Hazardous Substance
Act, Health and Safety section 25280, ET SEQ., the Safe Drinking Water and
Toxic Enforcement Act of 1986 (Health and Safety Code section 25249.5, ET
SEQ.); and the Hazardous Waste Control Law, Health and Safety Code section
25100, ET SEQ. (the "Environmental Laws"). The Lessee hereby indemnifies and,
at all times, shall indemnify and hold harmless the Lessor, the Lessor's
trustees, directors, officers, employees, investment manager(s), attorneys,
agents and any successors to the Lessor's interest in the chain of title to
the Property, their trustees, directors, officers, employees, and agents from
and against any and all claims, suits, demands, response costs, contribution
costs, liabilities, losses, or damages, directly or indirectly arising out of
the existence, use, generation, migration, storage, transportation, release,
threatened release, or disposal of Hazardous Materials (defined below) in,
on, or under the Property or in the groundwater under the Property and the
migration or transportation of hazardous materials to or from the Property or
the groundwater underlying the Property. This indemnity extends to the costs
incurred by the Lessor or its successors to reasonably repair, clean up,
dispose of, or remove such Hazardous Materials in order to comply with the
Environmental Laws, provided the Lessor gives the Lessee not less than thirty
(30) days advance written notice of its intention to incur such costs. The
Lessee's obligations pursuant to the foregoing indemnification and hold
harmless agreement shall survive the termination of this Lease. The
subtenants, contractors, agents, or invitees of the Lessee shall not use,
generate, manufacture, store, transport, release, threaten release, or
dispose of Hazardous Materials in, on, or about the Property unless the
Lessee shall have received the Lessor's prior written consent therefore,
which the Lessor may withhold or revoke at any time in its reasonable
discretion, and shall not cause or permit the release or disposal of Hazardous
Materials from the property except in compliance with applicable
Environmental Laws. The Lessee shall not permit any person, including its
subtenants, contractors, agents, or invitees to use, generate, manufacture,
store, transport, release, threaten release, or dispose of Hazardous
Materials in, on, or about the Property or transport Hazardous Materials from
the Property unless the Lessee shall have received the Lessor's prior written
consent therefore, which the Lessor may withhold or revoke at any time in its
reasonable discretion and shall not cause or permit the release or disposal
of Hazardous Materials. The Lessee shall promptly deliver written notice to
the Lessor if it obtains knowledge sufficient to infer that Hazardous
Materials are located on the Property that are not in compliance with
applicable Environmental Laws or if any third party, including, without
limitation, any governmental agency, claims a significant disposal of
Hazardous Materials occurred on the Property or is being or has been released
from the Property, or any such party gives notice of its intention to declare
the Property to be Border Zone Property (as defined in section 25117.4 of the
California Health and Safety Code). Upon reasonable written request of the
Lessor, the Lessee, through its professional engineers and at its cost, shall
thoroughly investigate suspected Hazardous Materials contamination of the
Property. The Lessee, using duly licensed and insured contractors, shall
promptly commence and diligently complete the removal, repair, clean-up, and
detoxification of any Hazardous Materials from the Property as may be
required by applicable Environmental Laws.
Notwithstanding anything to the contrary in this Lease, nothing herein
shall prevent the Lessee from using materials other than Hazardous Materials
on the Premises as would be used in the ordinary course of the Lessee's
business as contemplated by this Lease. The Lessee does not in the course of
the Lessee's current business use Hazardous Materials. If during the term
of this Lease, the Lessee contemplates utilizing such materials (or
subleases/assigns this Lease to a subtenant or assignee who utilizes
Hazardous Materials), the Lessee shall obtain prior written approval from the
Lessor which approval shall not be unreasonably withheld. The Lessor, at its
option, and at the Lessee's expense, may cause an engineer selected by the
Lessor, to review (a) the Lessee's operations including materials used,
generated, stored, disposed, and manufactured in the Lessee's business and
(b) the Lessee's compliance with terms of this Paragraph. The Lessee
Standard Industrial Lease -- Gross Page 16 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
shall provide the engineer with such information reasonably requested by the
engineer to complete the review. The first such review may occur prior to or
shortly following commencement of the term of this Lease. Thereafter, such
review shall not occur more frequently than once each year unless cause
exists for some other review schedule. One-half (1/2) of the fees and costs
of the engineer shall be paid promptly by the Lessee to the Lessor upon
receipt of written notice of such fees and costs.
"Hazardous Materials" means any hazardous waste or hazardous substance
as defined in any federal, state, county, municipal, or local statute,
ordinance, rule, or regulation applicable to the Property, including, without
limitation, the Environmental Laws. "Hazardous Materials" shall also include
asbestos or asbestos-containing materials, radon gas, petroleum or petroleum
fractions, urea formaldehyde foam insulation, transformers containing levels
of polychlorinated biphenyls greater than 50 parts per million, and chemicals
known to cause cancer or reproductive toxicity, whether or not defined as a
hazardous waste or hazardous substance in any such statute, ordinance, rule,
or regulation,
50. ZONING DISCLAIMER. This agreement will not allow use of the Property
described in this agreement in violation of applicable land use laws and
regulations. Before signing or accepting this agreement, the person acquiring
Lease-hold to the Property should check with the appropriate city or county
planning department to verify approved uses.
51. HOLDING OVER. Tenant will, at the termination of this Lease by lapse of
time or otherwise, yield up immediate possession to Landlord. If Landlord
agrees in writing that Tenant may hold over after the expiration or
termination of this Lease, unless the parties hereto otherwise agree in
writing on the terms of such holding over, the hold over tenancy shall be
subject to termination by Landlord at any time upon not less than five
(5) days, advance written notice, or by Tenant at any time upon not less than
thirty days advance written notice, and all of the other terms and provisions
of this Lease shall be applicable during that period, except that Tenant
shall pay Landlord from time to time upon demand, as rental for the period of
any hold over, an amount equal to one and one-half (1-1/2) the Base Rent in
effect on the termination date, plus all additional rental as defined herein,
computed on a daily basis for each day of the hold over period. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease except as otherwise expressly provided. The preceding
provisions of this Paragraph 51 shall not be construed as Landlord's consent
for Tenant to hold over.
52. RENT SCHEDULE.
<TABLE>
<CAPTION>
Months Monthly Rent
------ ------------
<S> <C>
July 1, 1998 to November 30, 1998 $10,260.00/month/gross
December 1, 1998 to June 30, 1999 $10,830.00/month/gross
July 1, 1999 to June 30, 2000 $10,830.00/month/gross
</TABLE>
Standard Industrial Lease -- Gross Page 17 Lessee ??
Direct Focus, Inc. 6/98 Lessor ??
<PAGE>
EXHIBIT A
To the Lease dated June 4, 1998, between LeRoy Hart Rentals, Lessor, and
Direct Focus, Inc., Lessee.
The leased premises consists of a portion of Building B in the Hart Business
Park, which is legally described as a portion of 890 Jamison DLC.
The Premises is commonly known as:
2650 NE Andresen Road, Building B
Vancouver, WA 98661
For purposes of identification only, the Premises general location is
delineated below.
[SITE PLAN]
Standard Industrial Lease -- Gross Page 18 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
EXHIBIT B
CONDITION OF PREMISES. Lessee shall accept the Premises in their present
condition.
1. Lessee improvements at Lessee's expense:
(a) Add chain link fence to demise leased premises from balance of
building.
2. Additional Provisions:
(a) Lessee shall have exclusive use of eastern most dock high door and
access to restrooms.
Standard Industrial Lease -- Gross Page 19 Lessee [ILLEGIBLE]
Direct Focus, Inc. 6/98 Lessor [ILLEGIBLE]
<PAGE>
EXHIBIT "C"
[FLOOR PLAN]
<PAGE>
AMENDMENT TO LEASE DATED JUNE 4, 1998
BY AND BETWEEN
DIRECT FOCUS, INC., TENANT AND
LEROY HART RENTALS, LANDLORD
October 20, 1998
Additional provisions regarding expansion at the NE Andresen Road Complex
(approximately 8,000 square feet):
1. LEASE TERM. Lease term for the expansion space at the Hart Industrial
Park, 2650 and NE Andresen Road, shall commence November 1, 1998, and
expire on June 30, 2000.
2. RENT ADJUSTMENT. The rent for expansion space shall be as follows:
November 1, 1998 to June 30, 2000 = $3,040.00 per month, gross.
3. EXPANSION SQUARE FOOTAGE. Tenant will additionally occupy an approximate
8,000 SF located at 2650 NE Andresen Road, as indicated on the attached
drawing.
4. TERMS AND CONDITIONS. All other terms and conditions shall remain in
effect.
5. TENANT IMPROVEMENTS. Tenant accepts space in an "AS-IS" condition.
6. TOTAL LEASED SPACE.
<TABLE>
<CAPTION>
Shell Office
-------- ------
<S> <C> <C> <C>
Space A 9,000 SF 0 SF )
Space B 9,000 SF 0 SF ) $10,830.00/month
Space C 7,500 SF 0 SF )
Space D 3,000 SF 0 SF )
Space E 8,000 SF 0 SF ) $ 3,040.00/month
--------- ----------------
TOTAL 36,500 SF 0 SF $13,870.00/MONTH
</TABLE>
7. USE. The Premises shall be used and occupied only for warehousing,
assembly and testing of Tenant's products.
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
TENANT: Direct Focus, Inc. LANDLORD: Leroy Hart Rentals
By: /s/ Brian R. Cook By: /s/ Joseph Hart
------------------------ ------------------------
Brian R. Cook, President Joseph Hart
Date: 11/23/98 Date: 12-1-98
------------------------ ------------------------
<PAGE>
EXHIBIT "C"
[FLOOR PLAN]
<PAGE>
[LOGO]-Registered Trademark- SEAFIRST BANK
MEMBER FDIC
BORROWING AGREEMENT
- -------------------------------------------------------------------------------
LOAN. By accepting this agreement from DIRECT FOCUS CORPORATION, a
WASHINGTON corporation ("Borrower"), the chief executive office of which is
located at 2200 NE 65TH AVENUE, VANCOUVER, WA 98661, Bank of America National
Trust and Savings Association, doing business as Seafirst Bank (including its
successors and/or assigns "Bank") promises to lend to Borrower the principal
amount of $5,000,000.00 (the "Loan") on a revolving basis until MARCH 31, 1999,
with no more than $5,000,000.00 to be outstanding at any one time. Any one or
more of the following persons are authorized to request and direct disbursement
of loan proceeds under this agreement: Brian Cook
--------------------------------
Rod Rice
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------.
PAYMENT. In return, Borrower promises to pay to the order of Bank the
principal amount of $5,000,000.00, or such lesser amount as is advanced under
the Loan, plus interest determined in accordance with Exhibit B attached to
this agreement, calculated on the basis of actual number of days elapsed over
a year of 360 days (together the "Obligations"), to be paid as follows: all
outstanding principal to be paid in full on MARCH 31, 1999, with all accrued
interest to be paid on the last day of each month, beginning the last day of
DECEMBER, 1998, and upon maturity or acceleration of the Obligations. Bank is
authorized to automatically debit each required installment of principal
and/or interest from Borrower's checking account number 68578210 at Bank, or
such other deposit account at Bank as Borrower may authorize in the future.
If a payment is 10 days or more late, Borrower, at Bank's option, will be
charged 5.000% of the regularly scheduled payment or $20.00, whichever is
greater.
FEE ON UNUTILIZED PORTION OF LINE: Borrower shall pay a fee of 0.25% per annum
upon the average unused portion of the line of credit, collected quarterly.
COLLATERAL. To secure the Obligations, Borrower grants to Bank a security
interest in Borrower's accounts, general intangibles, documents, instruments,
chattel paper, deposit accounts, inventory, equipment, all whether now owned or
hereafter acquired, and all proceeds and products thereof, and any such other
collateral as may be granted to Bank in a document referring to this agreement
(the "Collateral").
CONDITIONS. Bank shall have no obligation to advance funds to Borrower until:
- - Borrower and every other party whose signature is required on this
agreement has signed this agreement.
- - Borrower has delivered to Bank all signed documents necessary to perfect
Bank's security interests granted in this agreement.
- - Bank has received proof satisfactory to Bank that all insurance required
under this agreement is in effect.
COVENANTS. Borrower shall deliver to Bank:
- - within 30 days of quarter's end, Borrower's quarterly balance sheet and
income statement, which may be internally prepared, certified by an officer of
Borrower as true and correct.
- - within 120 days of each fiscal year end, Borrower's year-end balance sheet,
income statement, and statement of cash flows, which shall be audited by an
independent certified public accountant.
- - such other financial information as Bank may reasonably request from time
to time.
Borrower shall also:
- - maintain replacement value insurance on all tangible Collateral against all
risks, casualties, and losses through extended coverage or otherwise, with such
policy or policies naming Bank as loss payee, as its interests may appear.
- - give Bank prompt written notice of any material adverse change in
Borrower's financial condition. On the basis of a comprehensive review and
assessment of Borrower's systems and equipment and inquiry made of Borrower's
material suppliers, vendors, and customers, Borrower reasonably believes that
the "Year 2000 problem" (that is, the inability of computers, as well as
embedded microchips in noncomputing devices, to perform properly date-sensitive
functions with respect to certain dates prior to and after December 31, 1999),
including costs of remediation, will not result in a material adverse change in
the operations, business, properties, condition (financial or otherwise) or
prospects of Borrower. Borrower has developed feasible contingency plans
adequately to ensure uninterrupted and unimpaired business operation in the
event of failure of its own or a third party's systems or equipment due to the
Year 2000 problem, including those of vendors, customers, and suppliers, as well
as a general failure of or interruption in its communications and delivery
infrastructure.
- - keep accurate and complete books, accounts, and records, and during normal
business hours, as often as Bank may reasonably request, permit Bank's
authorized agents or employees to have access to Borrower's premises and
financial records, and to make copies or abstracts of such records.
- - defend and hold Bank harmless from and against any and all claims, demands,
penalties, fees, liens, damages, losses, expenses, and liabilities arising out
of or in any way connected with any alleged or actual past or future presence on
or under any of Borrower's real property of any hazardous or toxic waste or
substances from any cause whatsoever; and prepare and deliver to Bank any
environmental questionnaire Bank may reasonably require with respect to
Borrower's real property. This covenant shall be independent of any similar
covenant secured by the real property and shall survive any foreclosure of a
deed of trust covering the property. "Hazardous or toxic waste or substances"
means any substance or material defined or designated as hazardous or toxic
wastes, hazardous or toxic material, a hazardous, toxic or radioactive substance
or other similar term by any applicable federal, state, or local statute,
regulation, or ordinance now or hereafter in effect.
- - maintain at all times a ratio of total indebtedness to Tangible Net Worth
of not more than 1.25 to 1, measured quarterly.
- - maintain at all times a ratio of current assets to current liabilities of
not less than 2.00 to 1, measured quarterly.
- - maintain at all times a minimum debt coverage ratio of 1.50 to 1, measured
on a rolling four-quarter average. Debt coverage ratio defined as (Net Income +
Depreciation + Amortization + Interest) divided by (CPLTD + Interest).
- - maintain an out of debt period on the obligation for 45 consecutive days
annually.
Page 1
<PAGE>
- - not incur aggregate Capital Expenditures in excess of $2,000,000.00 during
any fiscal year.
- - use the proceeds of the Loan only for the following purpose: short-term
operating expenses.
REMEDIES. If Borrower violates any promise of this agreement; or Borrower
defaults under any other agreement with Bank; or if any guarantor of the
Obligations violates any of its promises to Bank; or if anything should happen
or is reasonably likely to happen which significantly impairs Borrower's
financial condition, the value of the Collateral, or Bank's prospects for
repayment of the Obligations, Bank may refuse to make any further advances of
funds to Borrower, may immediately demand payment in full of all Obligations
(which, at Bank's option, shall bear interest from the date of such demand at a
rate 4% in excess of the rate otherwise applicable under this agreement), and
may use any one or more of its remedies given under this agreement or by the
laws of the State of Washington. Borrower shall, if demanded by Bank, pay all of
Bank's costs, expenses, and attorneys' fees (including the cost of in-house
counsel) incurred in collecting the Obligations, or arising out of the
transaction reflected by this agreement, which is governed by the laws of
Washington. If neither party elects or has the right to elect arbitration under
the following paragraph, any lawsuit relating to this agreement may be brought
in a court located in King County, Washington, or at Bank's option where
necessary to obtain jurisdiction over any Borrower, guarantor, or Collateral.
ARBITRATION. Any dispute relating to this agreement (in contract or tort) shall
be settled by arbitration if requested by Bank, Borrower, or any other party to
the dispute (such as a guarantor); PROVIDED, however, that both Bank and
Borrower must consent to a request for arbitration relating to an obligation
secured by real property or a marine vessel. The arbitration proceedings shall
be held in Seattle, Washington by the American Arbitration Association under its
commercial rules of arbitration, by a single arbitrator. The United States
Arbitration Act will apply. Judgment upon the arbitration award may be entered
in any court having jurisdiction. Commencement of a lawsuit shall not
constitute a waiver of the right of any party to request arbitration if the
lawsuit is contested. Likewise, any party may exercise self-help remedies such
as setoff, foreclosure, repossession, or sale of any collateral before, after,
or during arbitration without waiving the right to request arbitration. At
Bank's option, foreclosure under a deed of trust may be made judicially (as a
mortgage) or nonjudicially (by power of sale).
DEFINITIONS. For purposes of this agreement, terms defined in the Washington
version of the Uniform Commercial Code, R.C.W. Section 62A.9-101, ET SEQ.
("UCC"), and not otherwise defined in this agreement, shall have the meaning
given in the UCC; and an accounting term not otherwise defined in this
agreement shall have the meaning assigned to it under generally accepted
accounting principles. "Reference rate" shall mean the rate of interest
publicly announced from time to time by Bank in San Francisco, California, as
its "Reference Rate." The Reference Rate is set based on various factors,
including Bank's costs and desired return, general economic conditions, and
other factors, and is used as a reference point for pricing some loans. Bank
may price loans to its customers at, above, or below the Reference Rate. Any
change in the Reference Rate shall take effect at the opening of business on
the day specified in the public announcement of a change in the Reference
Rate. "Tangible Net Worth" shall mean the excess of total assets over total
liabilities, excluding, however, from the determination of total assets (a)
all assets which should be classified as intangible assets (such as goodwill,
patents, trademarks, copyrights, franchises, and deferred charges, including
unamortized debt discount and research and development costs), (b) treasury
stock, (c) cash held in a sinking or other similar fund established for the
purpose of redemption or other retirement of capital stock, (d) to the extent
not already deducted from total assets, reserves for depreciation, depletion,
obsolescence, or amortization of properties and other reserves or
appropriations of retained earnings which have been or should be established
in connection with Borrower's business, and (e) any revaluation or other
write-up in book value of assets subsequent to the fiscal year of Borrower
last ended at the date Tangible Net Worth is being measured.
AMENDMENTS. This agreement can only be amended in writing, signed by the party
to be bound by such amendment. If Borrower shall enter into, or has entered
into, other borrowing agreements with Bank, each such agreement shall supplement
the other, and Borrower must comply with each such agreement independently,
unless otherwise agreed in writing by Bank. ORAL AGREEMENTS OR ORAL COMMITMENTS
TO LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A
DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
This agreement is dated December 16, 1998.
Bank:
SEAFIRST BANK
By [Illegible]
---------------------------------------
Title Vice President
-----------------------------------
Borrower:
DIRECT FOCUS CORPORATION
By: [Illegible]
---------------------------------------
Title: CFO
-------------------------------------
Page 2
<PAGE>
Exhibit B to Borrowing Agreement dated December 16, 1998
EXHIBIT B-1 -- INTEREST PROVISIONS
All terms used in Exhibit B-1 or B-2 shall have the meaning given in the
Agreement or as defined in B-2 below:
1.1 INTEREST RATES. The advances under the Agreement shall bear interest
from their respective date of advance on the unpaid principal balance
outstanding from time to time at the Floating Rate or a Fixed Rate as selected
by Borrower.
1.2 PROCEDURE. Borrower may give Bank an irrevocable notice (written or
oral) specifying the election of the Adjusted LIBOR Rate option, the amount to
be borrowed at or fixed at the Adjusted LIBOR Rate, the requested Interest
Period, and the requested Commencement Date, three Business Days before the
requested Commencement Date. The interest rate on the amount specified shall
then be fixed at the Adjusted LIBOR Rate determined two London Banking Days
before the requested Commencement Date.
1.3 RESTRICTIONS. Each Interest Period shall be one, two, three, or six
months, or one year, but in no event shall the Interest Period extend beyond the
maturity date of the advances under the Agreement. Each Fixed Rate Loan shall be
in a minimum principal amount of $500,000.
1.4 PREPAYMENTS. If Borrower prepays all or any portion of a Fixed Rate
Loan prior to the end of an Interest Period, there shall be due at the time of
any such prepayment a prepayment fee equal to the amount (if any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the Interest
Period exceeds
(ii) the interest which would have been recoverable by Bank by
placing the amount prepaid on deposit in the offshore dollar market for a
period starting on the date on which it was prepaid and ending on the last
day of the Interest Period.
1.5 REVERSION TO FLOATING. Advances under the Agreement shall bear
interest at the Floating Rate unless a Fixed Rate is specifically selected. At
the termination of any Interest Period, the interest rate on such principal
shall revert to the Floating Rate unless Borrower directs otherwise pursuant to
Section 1.2 above.
1.6 INABILITY TO PARTICIPATE IN MARKET. If Bank in good faith cannot
participate in the Eurodollar market for legal or practical reasons, there shall
be no Fixed Rate option. Bank shall notify Borrower of and when it again
becomes legal or practical to participate in the offshore dollar market, at
which time there shall again be a Fixed Rate option.
1.7 MODIFICATION TO FIXED RATE CALCULATIONS. If, after the date of the
setting of a Fixed Rate, there is a change in any law, rule, or regulation, or
in the interpretation or administration thereof, by any governmental authority,
central bank, or comparable agency, or compliance by Bank with any request or
direction (whether or not having the force of law) of any such authority,
central bank, or comparable agency that subjects Bank to additional costs or
relieves Bank of costs, or in Bank's reasonable opinion reduces or increases the
amount of any payment received or receivable by Bank under the Obligations by
reason of obtaining funds in the offshore U.S. dollar deposit market, through
imposition or reduction of taxes (except for changes in the rate of tax on the
overall net income of Bank imposed by the jurisdictions in which Bank's
principal office is located), reserves, or any other conditions, then for any
Interest Period commencing thereafter for Fixed Rate Loans, the formulas for
calculating the Fixed Rate shall be modified to reflect and include the impact
of such change whether or not Bank purchases funds in the applicable offshore
U.S. dollar deposit market.
1.8 BASIS OF QUOTES. Borrower acknowledges that Bank may or may not in
any particular case actually match-fund the fixing of a Fixed Rate. FDIC
assessments, and Federal Reserve Board reserve requirements, if any are
assessed, will be based on Bank's best estimates of its marginal cost for
each of these items. Whether such estimates in fact represent the actual cost
to Bank for any particular offshore deposit or maintaining interest at a
Fixed Rate will depend upon how Bank actually chooses to fund the Fixed Rate
Loan. By electing a Fixed Rate, Borrower waives any right to object to Bank's
means of calculating the Fixed Rate quote accepted by Borrower.
EXHIBIT B-2 -- DEFINITIONS
2.1 ADJUSTED LIBOR RATE shall mean for any day that per annum rate
equal to the sum of (a) a margin of 2.00%, (b) the Assessment Rate, and (c)
the quotient of (i) the LIBOR Rate as determined for such day, divided by
(ii) the Reserve Adjustment. The Adjusted LIBOR Rate shall change with any
change in the LIBOR Rate on the first day of each Interest Period and on the
effective date of any change in the Assessment Rate or Reserve Adjustment.
2.2 AGREEMENT shall mean the attached Borrowing Agreement dated December
16, 1998.
2.3 ASSESSMENT RATE shall mean as of any day the minimum annual percentage
rate established by the Federal Deposit Insurance Corporation (or any successor)
for the assessment due from members of the Bank Insurance Fund (or any
successor) in effect for the assessment period during which said day occurs
based on deposits maintained at such members' offices located outside of the
United States, in determination of an Adjusted LIBOR Rate.
2.4 BUSINESS DAY shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks in Seattle, Washington, or London, England,
are authorized or required by law to close.
2.5 COMMENCEMENT DATE shall mean the first day of any Interest Period as
requested by Borrower.
2.6 FIXED RATE shall mean the Adjusted LIBOR Rate.
2.7 FIXED RATE LOAN shall mean principal of the Obligations accruing
interest at the Adjusted LIBOR Rate.
2.8 FLOATING RATE shall mean the reference rate plus 0.00% per annum.
2.9 INTEREST PERIOD shall mean the period commencing on the date of any
advance at, or conversion to, a Fixed Rate and ending on any date thereafter as
selected by Borrower, subject to the restrictions of Section 1.3 of Exhibit B-1.
If any Interest Period would end on a day which is not a Business Day, the
Interest Period shall be extended to the next succeeding Business Day.
2.10 LIBOR RATE shall mean for any Interest Period the per annum rate,
calculated on the basis of actual number of days elapsed over a year of 360
days, for U.S. Dollar deposits for a period equal to the Interest Period
appearing on the display designated as "Page 3750" on the Telerate Service
(or such other page on that service or such other service designated by the
British Banker's Association for the display of that Association's Interest
Settlement Rates for U.S. Dollar deposits) as of 11:00 a.m., London time, on
the day which is two Business Days prior to the first day of the Interest
Period. If there is no period equal to the Interest Period on the display,
the LIBOR Rate shall be determined by straight-line interpolation to the
nearest month (or week or day if expressed in weeks or days) corresponding to
the Interest Period between the two nearest neighboring periods on the
display.
<PAGE>
2.11 LONDON BANKING DAY shall mean any day upon which banks in London,
England, are open for business and dealing in offshore dollars.
2.12 RESERVE ADJUSTMENT shall mean as of any day the remainder of one
minus that percentage (expressed as a decimal) which is the highest of any such
percentages established by the Board of Governors of the Federal Reserve System
(or any successor) for required reserves (including any emergency, marginal, or
supplemental reserve requirement) regardless of the aggregate amount of deposits
with said member bank and without benefit of any possible credit, proration,
exemptions, or offsets for time deposits established at offices of member banks
located outside of the United States or for eurocurrency liabilities, if any.
<PAGE>
[LOGO]-Registered Trademark- SEAFIRST BANK
MEMBER FDIC
BORROWING AGREEMENT
- --------------------------------------------------------------------------------
LOAN. By accepting this agreement from DIRECT FOCUS CORPORATION, a
WASHINGTON corporation ("Borrower"), the chief executive office of which is
located at 2200 NE 65TH AVENUE, VANCOUVER, WA 98661, Bank of America National
Trust and Savings Association, doing business as Seafirst Bank (including its
successors and/or assigns "Bank") promises to lend to Borrower the principal
amount of $5,000,000.00 (the "Loan") in the aggregate, in multiple advances on a
nonrevolving basis until MARCH 31, 1999. Any one or more of the following
persons are authorized to request and direct disbursement of loan proceeds under
this agreement: Brian Cook
---------------------------------------------------------
Rod Rice
- ------------------------------------------------------------------------
PAYMENT. In return, Borrower promises to pay to the order of Bank the principal
amount of $5,000,000.00, or such lesser amount as is advanced under the Loan,
plus interest determined in accordance with Exhibit B attached to this
agreement, calculated on the basis of actual number of days elapsed over a year
of 360 days (together the "Obligations"), to be paid as follows: all outstanding
principal to be paid in full on MARCH 31, 1999, with all accrued interest to be
paid on the last day of each month, beginning the last day of JANUARY 1999, and
upon maturity or acceleration of the Obligations. Bank is authorized to
automatically debit each required installment of principal and/or interest from
Borrower's checking account number 68578210 at Bank, or such other deposit
account at Bank as Borrower may authorize in the future. If a payment is 10 days
or more late, Borrower, at Bank's option, will be charged 5.000% of the
regularly scheduled payment or $20.00, whichever is greater.
COLLATERAL. To secure the Obligations, Borrower grants to Bank a security
interest in Borrower's accounts, general intangibles, documents, instruments,
chattel paper, deposit accounts, inventory, equipment, all whether now owned or
hereafter acquired, and all proceeds and products thereof, and any such other
collateral as may be granted to Bank in a document referring to this agreement
(the "Collateral").
CONDITIONS. Bank shall have no obligation to advance funds to Borrower until:
- - Borrower and every other party whose signature is required on this
agreement has signed this agreement.
- - Borrower has delivered to Bank all signed documents necessary to protect
Bank's security interests granted in this agreement.
- - Bank has received proof satisfactory to Bank that all insurance required
under this agreement is in effect.
COVENANTS. Borrower shall deliver to Bank:
- - within 30 days of quarter's end, Borrower's quarterly balance sheet and
income statement, which may be internally prepared, certified by an officer of
Borrower as true and correct.
- - within 120 days of each fiscal year end, Borrower's year-end balance sheet,
income statement, and statement of cash flows, which shall be audited by an
independent certified public accountant.
- - such other financial information as Bank may reasonably request from time
to time.
Borrower shall also:
- - maintain replacement value insurance on all tangible Collateral against all
risks, casualties, and losses through extended coverage or otherwise, with such
policy or policies naming Bank as loss payee, as its interests may appear.
- - give Bank prompt written notice of any material adverse change in
Borrower's financial condition. On the basis of a comprehensive review and
assessment of Borrower's systems and equipment and inquiry made of Borrower's
material suppliers, vendors, and customers, Borrower reasonably believes that
the "Year 2000 problem" (that is, the inability of computers, as well as
embedded microchips in non-devices, to perform properly date-sensitive
functions with respect to certain dates prior to and after December 31, 1999),
including costs of remediation, will not result in a material adverse change in
the operations, business, properties, condition (financial or otherwise) or
prospects of Borrower. Borrower has developed feasible contingency plans
adequately to ensure uninterrupted and unimpaired business operation in the
event of failure of its own or a third party's systems or equipment due to the
Year 2000 problem, including those of vendors, customers, and suppliers, as well
as a general failure of or interruption in its communications and delivery
infrastructure.
- - keep accurate and complete books, accounts, and records, and during normal
business hours, as often as Bank may reasonably request, permit Bank's
authorized agents or employees to have access to Borrower's premises and
financial records, and to make copies or abstracts of such records.
- - defend and hold Bank harmless from and against any and all claims, demands,
penalties, fees, liens, damages, losses, expenses, and liabilities arising out
of or in any way connected with any alleged or actual past or future presence on
or under any of Borrower's real property of any hazardous or toxic waste or
substances from any cause whatsoever; and prepare and deliver to Bank any
environmental questionnaire Bank may reasonably require with respect to
Borrower's real property. This covenant shall be independent of any similar
covenant secured by the real property and shall survive any foreclosure of a
deed of trust covering the property. "Hazardous or toxic waste or substances"
means any substance or material defined or designated as hazardous or toxic
wastes, hazardous or toxic material, a hazardous, toxic or radioactive substance
or other similar term by any applicable federal, state, or local statute,
regulation, or ordinance now or hereafter in effect.
- - maintain at all times a ratio of total indebtedness to Tangible Net Worth
of not more than 1.25 to 1, measured quarterly.
- - maintain at all times a ratio of current assets to current liabilities of
not less than 2.00 to 1, measured quarterly.
- - maintain at all times a minimum debt coverage ratio of 1.50 to 1, measured
on a rolling four-quarter average. Debt coverage ratio defined as (Net Income +
Depreciation + Amortization + Interest) divided by (CPLTD + Interest).
- - not incur aggregate Capital Expenditures in excess of $2,000,000.00 during
any fiscal year.
- - use the proceeds of the Loan only for the following purpose: bridge
financing for purchase of fixed assets.
REMEDIES. If Borrower violates any promise of this agreement; or Borrower
defaults under any other agreement with Bank; or if any
Page 1
<PAGE>
guarantor of the Obligations violates any of its promises to Bank; or if
anything should happen or is reasonably likely to happen which significantly
impairs Borrower's financial condition, the value of the Collateral, or Bank's
prospects for repayment of the Obligations, Bank may refuse to make any further
advances of funds to Borrower, may immediately demand payment in full of all
Obligations (which, at Bank's option, shall bear interest from the date of such
demand at a rate 4% in excess of the rate otherwise applicable under this
agreement), and may use any one or more of its remedies given under this
agreement or by the laws of the State of Washington. Borrower shall, if demanded
by Bank, pay all of Bank's costs, expenses, and attorneys' fees (including the
cost of in-house counsel) incurred in collecting the Obligations, or arising out
of the transaction reflected by this agreement, which is governed by the laws of
Washington. If neither party elects or has the right to elect arbitration under
the following paragraph, any lawsuit relating to this agreement may be brought
in a court located in King County, Washington, or at Bank's option where
necessary to obtain jurisdiction over any Borrower, guarantor, or Collateral.
ARBITRATION. Any dispute relating to this agreement (in contract or tort)
shall be settled by arbitration if requested by Bank, Borrower, or any other
party to the dispute (such as a guarantor); PROVIDED, however, that both Bank
and Borrower must consent to a request for arbitration relating to an
obligation secured by real property or a marine vessel. The arbitration
proceedings shall be held in Seattle, Washington by the American Arbitration
Association under its commercial rules of arbitration by a single arbitrator.
The United States Arbitration Act will apply. Judgment upon the arbitration
award may be entered in any court having jurisdiction. Commencement of a
lawsuit shall not constitute a waiver of the right of any party to request
arbitration if the lawsuit is contested. Likewise, any party may exercise
self-help remedies such as setoff, foreclosure, repossession, or sale of any
collateral before, after, or during arbitration without waiving the right to
request arbitration. At Bank's option, foreclosure under a deed of trust may
be made judicially (as a mortgage) or nonjudicially (by power of sale).
DEFINITIONS. For purposes of this agreement, terms defined in the Washington
version of the Uniform Commercial Code, R.C.W. Section 62A.9-101, ET SEQ.
("UCC"), and not otherwise defined in this agreement, shall have the meaning
given in the UCC; and an accounting term not otherwise defined in this
agreement shall have the meaning assigned to it under generally accepted
accounting principles. "Reference rate" shall mean the rate of interest
publicly announced from time to time by Bank in San Francisco, California, as
its "Reference Rate." The Reference Rate is set based on various factors,
including Bank's costs and desired return, general economic conditions, and
other factors, and is used as a reference point for pricing some loans. Bank
may price loans to its customers at, above, or below the Reference Rate. Any
change in the Reference Rate shall take effect at the opening of business on
the day specified in the public announcement of a change in the Reference
Rate. "Tangible Net Worth" shall mean the excess of total assets over total
liabilities, excluding, however, from the determination of total assets (a)
all assets which should be classified as intangible assets (such as goodwill,
patents, trademarks, copyrights, franchises, and deferred charges, including
unamortized debt discount and research and development costs), (b) treasury
stock, (c) cash held in a sinking or other similar fund established for the
purpose of redemption or other retirement of capital stock, (d) to the extent
not already deducted from total assets, reserves for depreciation,
depletion, obsolescence, or amortization of properties and other reserves or
appropriations of retained earnings which have been or should be established
in connection with Borrower's business, and (e) any revaluation or other
write-up in book value of assets subsequent to the fiscal year of Borrower
last ended at the date Tangible Net Worth is being measured.
AMENDMENTS. This agreement can only be amended in writing, signed by the party
to be bound by such amendment. If Borrower shall enter into, or has entered
into, other borrowing agreements with Bank, each such agreement shall supplement
the other, and Borrower must comply with each such agreement independently,
unless otherwise agreed in writing by Bank. ORAL AGREEMENTS OR ORAL COMMITMENTS
TO LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A
DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
This agreement is dated December 16, 1998.
Bank:
SEAFIRST BANK
By [Illegible]
---------------------------------------
The Vice President
-------------------------------------
Borrower:
DIRECT FOCUS CORPORATION
By: [Illegible]
---------------------------------------
Title: CFO
-------------------------------------
Page 2
<PAGE>
EXHIBIT B TO BORROWING AGREEMENT DATED DECEMBER 16, 1998
EXHIBIT B-1 -- INTEREST PROVISIONS
All terms used in Exhibit B-1 or B-2 shall have the meaning given in the
Agreement or as defined in B-2 below:
1.1 INTEREST RATES. The advances under the Agreement shall bear interest
from their respective date of advance on the unpaid principal balance
outstanding from time to time at the Floating Rate or a Fixed Rate as selected
by Borrower.
1.2 PROCEDURE. Borrower may give Bank an irrevocable notice (written or
oral) specifying the election of the Adjusted LIBOR Rate option, the amount to
be borrowed at or fixed at the Adjusted LIBOR Rate, the requested Interest
Period, and the requested Commencement Date, three Business Days before the
requested Commencement Date. The interest rate on the amount specified shall
then be fixed at the Adjusted LIBOR Rate determined two London Banking Days
before the requested Commencement Date.
1.3 RESTRICTIONS. Each Interest Period shall be one, two, or three months,
but in no event shall the Interest Period extend beyond the maturity date of the
advances under the Agreement. Each Fixed Rate Loan shall be in a minimum
principal amount of $250,000.
1.4 PREPAYMENTS. If Borrower prepays all or any portion of a Fixed Rate
Loan prior to the end of an Interest Period, there shall be due at the time of
any such prepayment a prepayment fee equal to the amount (if any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the Interest
Period exceeds
(ii) the interest which would have been recoverable by Bank by placing
the amount prepaid on deposit in the offshore dollar market for a period
starting on the date on which it was prepaid and ending on the last day of
the Interest Period.
1.5 REVERSION TO FLOATING. Advances under the Agreement shall bear
interest at the Floating Rate unless a Fixed Rate is specifically selected. At
the termination of any Interest Period, the interest rate on such principal
shall revert to the Floating Rate unless Borrower directs otherwise pursuant to
Section 1.2 above.
1.6 INABILITY TO PARTICIPATE IN MARKET. If Bank in good faith cannot
participate in the Eurodollar market for legal or practical reasons, there shall
be no Fixed Rate option. Bank shall notify Borrower of and when it again becomes
legal or practical to participate in the offshore dollar market, at which time
there shall again be a Fixed Rate option.
1.7 MODIFICATION TO FIXED RATE CALCULATIONS. If, after the date of the
setting of a Fixed Rate, there is a change in any law, rule, or regulation, or
in the interpretation or administration thereof, by any governmental authority,
central bank, or comparable agency, or compliance by Bank with any request or
direction (whether or not having the force of law) of any such authority,
central bank, or comparable agency that subjects Bank to additional costs or
relieves Bank of costs, or in Bank's reasonable opinion reduces or increases the
amount of any payment received or receivable by Bank under the Obligations by
reason of obtaining funds in the offshore U.S. dollar deposit market, through
imposition or reduction of taxes (except for changes in the rate of tax on the
overall net income of Bank imposed by the jurisdictions in which Bank's
principal office is located), reserves, or any other conditions, then for any
Interest Period commencing thereafter for Fixed Rate Loans, the formulas for
calculating the Fixed Rate shall be modified to reflect and include the impact
of such change whether or not Bank purchases funds in the applicable offshore
U.S. dollar deposit market.
1.8 BASIS OF QUOTES. Borrower acknowledges that Bank may or may not in any
particular case actually match-fund the fixing of a Fixed Rate. FDIC
assessments, and Federal Reserve Board reserve requirements, if any are
assessed, will be based on Bank's best estimates of its marginal cost for each
of these items. Whether such estimates in fact represent the actual cost to Bank
for any particular offshore deposit or maintaining interest at a Fixed Rate will
depend upon how Bank actually chooses to fund the Fixed Rate Loan. By electing a
Fixed Rate, Borrower waives any right to object to Bank's means of calculating
the Fixed Rate quote accepted by Borrower.
EXHIBIT B-2 -- DEFINITIONS
2.1 ADJUSTED LIBOR RATE shall mean for any day that per annum rate
equal to the sum of (a) a margin of 2.00%, (b) the Assessment Rate, and (c)
the quotient of (i) the LIBOR Rate as determined for such day, divided by
(ii) the Reserve Adjustment. The Adjusted LIBOR Rate shall change with any
change in the LIBOR Rate on the first day of each Interest Period and on the
effective date of any change in the Assessment Rate or Reserve Adjustment.
2.2 AGREEMENT shall mean the attached Borrowing Agreement dated December
16, 1998.
2.3 ASSESSMENT RATE shall mean as of any day the minimum annual
percentage rate established by the Federal Deposit Insurance Corporation (or
any successor) for the assessment due from members of the Bank Insurance Fund
(or any successor) in effect for the assessment period during which said day
occurs based on deposits maintained at such members' offices located outside
of the United States, in determination of an Adjusted LIBOR Rate.
2.4 BUSINESS DAY shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks in Seattle, Washington, or London, England,
are authorized or required by law to close.
2.5 COMMENCEMENT DATE shall mean the first day of any Interest Period as
requested by Borrower.
2.6 FIXED RATE shall mean the Adjusted LIBOR Rate.
2.7 FIXED RATE LOAN shall mean principal of the Obligations accruing
interest at the Adjusted LIBOR Rate.
2.8 FLOATING RATE shall mean the reference rate plus 0.00% per annum.
2.9 INTEREST PERIOD shall mean the period commencing on the date of any
advance at or conversion to, a Fixed Rate and ending on any date thereafter
as selected by Borrower, subject to the restrictions of Section 1.3 of
Exhibit B-1. If any Interest Period would end on a day which is not a
Business Day, the Interest Period shall be extended to the next succeeding
Business Day.
2.10 LIBOR RATE shall mean for any Interest Period the per annum rate,
calculated on the basis of actual number of days elapsed over a year of 360
days, for U.S. Dollar deposits for a period equal to the Interest Period
appearing on the display designated as "Page 3750" on the Telerate Service
(or such other page on that service or such other service designated by the
British Banker's Association for the display of that Association's Interest
Settlement Rates for U.S. Dollar deposits) as of 11:00 a.m., London time, on
the day which is two Business Days prior to the first day of the Interest
Period. If there is no period equal to the Interest Period on the display,
the LIBOR Rate shall be determined by straight-line interpolation to the
nearest month (or week or day if expressed in weeks or days) corresponding to
the Interest Period between the two nearest neighboring periods on the
display.
<PAGE>
2.11 LONDON BANKING DAY shall mean any day upon which banks in London,
England, are open for business and dealing in offshore dollars.
2.12 RESERVE ADJUSTMENT shall mean as of any day the remainder of one minus
that percentage (expressed as a decimal) which is the highest of any such
percentages established by the Board of Governors of the Federal Reserve System
(or any successor) for required reserves (including any emergency, marginal, or
supplemental reserve requirement) regardless of the aggregate amount of deposits
with said member bank and without benefit of any possible credit, proration,
exemptions, or offsets for time deposits established at offices of member banks
located outside of the United States or for eurocurrency liabilities, if any.
<PAGE>
ROYALTY AGREEMENT
This Royalty Agreement is made and entered into as of 4/9, 1988 by and
between BOW-FLEX OF AMERICA, INC., a California corporation (hereinafter
called "Company"), and Tessema D. Shifferaw (hereinafter called "Inventor").
WITNESSETH:
WHEREAS, Inventor has developed certain proprietary products and has been
granted a patent thereon;
WHEREAS, Inventor has assigned all his rights to such proprietary products
and patent to the Company;
WHEREAS, Company is willing to pay Inventor royalties as provided herein;
WHEREAS, Inventor and the Company have previously executed a License
Agreement dated March 25, 1986, as amended (the "Prior Agreement"); and
WHEREAS, Inventor and the Company desire that this Agreement and the
Assignment attached hereto shall replace the Prior Agreement, which Prior
Agreement shall be terminated.
<PAGE>
NOW, THEREFORE, in consideration of these premises and of the mutual
premises and of the mutual covenants herein contained, the Company and Inventor
hereby agree as follows:
ARTICLE I - DEFINITIONS
As used herein:
"Products" means - all products in the existing product line of the Company
based on the Patent Rights and any new products developed by the Company based
on the Patent Rights during the term of this Agreement.
"Patent Rights" shall mean the patent rights which have been assigned by
Inventor to the Company pursuant to the Assignment attached hereto as Exhibit A.
"Improvements" shall mean any and all improvements, modifications,
enhancements or adaptations made to the Products or the Patent Rights by
Inventor.
ARTICLE II - ASSIGNMENT
A. Inventor has executed the Assignment attached hereto as Exhibit A
assigning the Patent Rights and all other rights of Inventor in the Products to
the Company. Inventor further agrees to assign all Improvements to the Company,
and to reasonably cooperate with the Company in prosecuting patent applications,
both
-2-
<PAGE>
U.S. and foreign, covering the Improvements and/or any improvements,
modifications, enhancements or adaptations made to the Products by the Company,
provided that the Company shall pay all expenses (including legal fees and
expenses) of Inventor in connection therewith in advance and shall include a
reasonable per diem in the event Inventor is not then employed by the Company.
ARTICLE III - PAYMENT OF ROYALTIES
A. The Company shall use its best reasonable efforts to market and sell
(or to have a third party market and sell) the Products.
B. The Company shall pay to Inventor royalties (i) on sales of the
Products at the rate of three percent (3%) of the Net Sales Revenue, as
defined below, of all Products sold by the Company, and (ii) on revenue
received by the company from licensing third parties to manufacture and sell
the Products or otherwise utilize the Patent Rights to manufacture and sell
products at the rate of twelve percent (12%) of Net License Revenue, as
defined below, after the date hereof until the date the Patent Rights expire.
C. The Company shall pay Inventor royalties with respect to cash
received by the company (i) from sales of the Products in each quarter no
later than thirty (30) days following the end of such quarter and (ii) from
licensing the Products or Patent Rights in each quarter no later than forty
seven (47) days following the end of
-3-
<PAGE>
such quarter and shall at the same time deliver to Inventor a royalty
statement for such quarter; each such quarter royalty statement shall show,
for the period covered thereby, Net Sales Revenue and Net License Revenue,
with any adjustments made in such figures for preceding periods and whatever
other items or information may be necessary for Inventor in calculating the
royalties due under this Agreement. The Company's total sales revenue (net of
charges for insurance, freight, packaging or handling), less the sum of (i)
total credits for returns, (ii) any commissions paid to dealers or sales
representatives, (iii) uncollectible accounts receivable, (iv) cash or
credit-card discounts, (v) any fees paid to prosecute patent applications to
extend the Patent Rights or otherwise obtain patents coveting the Products in
foreign countries ("Patent Fees"), and (vi) all legal costs and fees incurred
by the Company in litigation with regard to upholding the Patent Rights or
prosecuting third parties for infringement of the Patent Rights ("Legal
Fees") is referred to herein as "Net Sales Revenue."
The Company's total revenues received from third parties for licensing
third parties to manufacture and sell the Products or otherwise utilize the
Patent Rights, less the sum of Patent Fees and Legal Fees not deducted from Net
Sales Revenue, is referred to herein as "Net License Revenue."
In the event that the Company shall (i) undertake a public offering of its
securities pursuant to the Securities Act of 1933, as amended, or (ii) merge
with another corporation, or sell all or
-4-
<PAGE>
substantially all of its assets or capital stock and the shareholders of the
Company shall receive cash or publicly traded securities in such transaction
having a value of not less than $10.00 per share of Common Stock of the
Company, appropriately adjusted for any stock splits, combinations, or
recapitalizations of the Company (with (i) or (ii) being referred to as a
"Transaction"), then the Company shall have the option (the "Option") to
reduce the royalty payable to Inventor to one percent (1%) of Net Sales
Revenue, effective upon the closing of the Transaction, and to provide that
the royalty shall be payable only for a period of five (5) years after the
date of closing of the Transaction. If the Company shall elect to exercise
the Option, the Company shall pay to Inventor the sum of $1,700,000.00, to be
paid in cash upon the closing of the Transaction.
D. Once during each calendar year falling in whole or in part in the
term of this Agreement and the following twelve months, any certified public
accountants or lawyers and/or other persons of Inventor's choice may, upon
reasonable notice to the Company in each case and during regular business
hours, examine and make copies of the Company's books of account, records,
vouchers, invoices and all other documents relating to the subject matter in
whole or in part of this Agreement in order to determine the correctness and
completeness of all payments made and statements delivered hereunder to
Inventor. If any such examination reveals an error of 5% or more in royalties
paid or payable to Inventor,
-5-
<PAGE>
then the Company shall at Inventor's request promptly pay Inventor all costs
of such examination together with the amount of such deficiency of royalties
payable to Inventor plus interest at the maximum rate permitted by law since
the date such amount should have been paid to Inventor. The Company shall
keep in accordance with generally accepted accounting principles consistently
applied, and preserve for a reasonable period of time, proper, accurate,
complete and easily auditable records and books of account reflecting all
dealings with the Product or related materials and shall make all such
entries therein as may be necessary to enable all calculations referred to
herein to be readily verified.
ARTICLE IV - TERMINATION
A. This Agreement, unless sooner terminated in a manner herein
provided, shall continue until the expiration of the last to expire of any
and all U.S. patents comprising the Patent Rights and thereafter the Company
shall be free to utilize the Patent Rights and manufacture and sell Products
without payment of royalties to Inventor.
B. In the event that either party defaults in its performance under this
Agreement and fails to correct such default within thirty (30) days after
receipt from the other party of a notice specifying such default, the
nondefaulting party shall have the right, in its sole option and discretion, to
terminate this
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<PAGE>
Agreement. The rights under this Article shall be in addition to, and not in
lieu of, other rights afforded by operation of law or otherwise.
C. If this Agreement is terminated for any reason other than upon
expiration of the term hereof, the Company shall execute any instrument
necessary to formally revest Inventor of his interests in the Patent Rights as
fully and entirely as Inventor would have held and enjoyed if this Agreement and
the Assignment had not been made.
ARTICLE V - PATENTS, COPYRIGHTS AND TRADE SECRETS
A. Inventor shall hold and save the Company, its subsidiaries, agents,
customers and users, harmless of and from any and all loss, damage or liability
(including legal expense) for or on account of or resulting from any claim of
infringement of any existing or future Letters Patent or Copyright in the United
States and/or foreign countries or misappropriation of any trade secret or other
intellectual property right with respect to the Products and Patent Rights
provided that the Company shall give Inventor prompt written notice of any suit
against the Company based on any such claim and the option to defend or settle
the same through Inventor's counsel. However, nothing stated herein shall be
deemed to include within the indemnity hereby given any infringement caused by
modification of the Products or development of new
-7-
<PAGE>
products by the Company when said modification or development causes said
infringement.
B. If the Products or Patent Rights are held to be an infringement of any
patent or copyright or a misappropriation of any trade secret or other
intellectual property right and its use, sale or manufacture is enjoined,
Inventor shall, at Inventor's option and expense, either:
1. Procure for the Company the right to continue to manufacture,
have manufactured, use, sell, lease or otherwise dispose of such Product; or
2. Replace or modify the infringing part or portion of the Product
in such a way that it will not continue to constitute such infringement or
misappropriation without substantially changing the Company's manufacturing cost
of the Product.
ARTICLE VI - WARRANTY
Inventor warrants that he knows of no U.S. or foreign patents or patent
applications or copyrights which would be infringed or trade secrets or other
intellectual property rights which would be misappropriated by the Company's
manufacture, use or sale of the Products and that there is no present or
threatened trade secret, patent or copyright infringement suit with respect to
the Products or the Patent Rights.
-8-
<PAGE>
ARTICLE VII - SEVERABILITY
The invalidity or unenforceability of one or more provisions of this
Agreement shall not affect the other provisions and this Agreement shall be
constructed in all respects as if such invalid or unenforceable provisions were
omitted.
ARTICLE VIII - GENERAL
A. CONSTRUCTION: This Agreement shall be deemed to have been entered into
and shall be construed and interpreted in accordance with the laws of the State
of California.
B. NOTICE OF DELAY: Whenever any occurrence is delaying or threatens to
delay the timely performance of this Agreement, Inventor will immediately give
notice thereof, including all relevant information with respect thereto, to the
Company.
C. WAIVERS: The failure of either party to insist, in any one or more
instances, upon the performance of any of the terms, covenants or conditions of
this Agreement or to exercise any right hereunder, shall not be construed as a
waiver or relinquishment of the future performance of any such term, covenant or
conditions or the future performance of any such term, but the obligation of the
other party with respect to such future performance shall continue in full force
and effect.
-9-
<PAGE>
D. NO ASSIGNMENT: This Agreement is personal to the parties hereto and
shall be binding upon and inure solely to their benefit. Any assignment of the
rights or delegation of duties hereunder by either of the parties whether in
whole or in part shall only be made with the prior written consent of the other
party; provided, however, that the Company may assign this Agreement, without
the consent of Inventor, to any successor corporation in a merger or sale of
substantially all of the Company's assets transaction. Any attempted assignment
not made in accordance with the provisions of this Article shall be void and of
no effect.
E. ENTIRE AGREEMENT: This Agreement, together with the Assignment
attached hereto, sets forth and shall constitute the entire agreement between
the Company and Inventor with respect to the subject matter thereof, and shall
supersede any and all prior agreements, understandings, promises and
representations made by one party to the other concerning the subject matter
hereof and the terms applicable thereto. This Agreement may not be released,
discharged, supplemented, interpreted, amended or modified in any manner except
by an instrument in writing signed by a duly authorized officer or
representative of each of the parties hereto except as specifically provided
otherwise in this Agreement.
F. INDEPENDENT CONTRACTORS: In making and performing this Agreement, the
parties act and shall act at all times as independent contractors and nothing
contained in this Agreement shall be construed or implied to create any agency,
partnership or employer
-10-
<PAGE>
and employee relationship between the parties. At no time shall either party
make commitments or incur any charges or expenses for or in the name of the
other party.
G. PRIOR AGREEMENT: The Prior Agreement is hereby terminated.
IN WITNESS WHEREOF, the parties hereby execute this Agreement on April 9,
1988.
BOW-FLEX OF AMERICA, INC.
a California corporation
BY: /s/ Brian R. Cook
-------------------------------------
Title: President
----------------------------------
/s/ Tessema D. Shifferaw
----------------------------------------
Tessema D. Shifferaw
-11-
<PAGE>
ADDENDUM
ROYALTY AGREEMENT
That certain ROYALTY AGREEMENT dated April 9, 1988, by and between Tessema D.
Shifferaw and Bowflex of America, Inc. is hereby amended as follows:
Article VIII - General
H. Notwithstanding any provision herein to the contrary, in the event of the
death of Inventor, the royalties and/or other benefits payable hereunder shall
inure to the administrators, representatives, heirs, beneficiaries and/or
successors of Inventor.
August 25, 1988 /s/ Tessema D. Shifferaw
-----------------------------------------
Tessema D. Shifferaw, Inventor
August 9, 1988 Bowflex of America, Inc.
by /s/ Brian R. Cook
------------------------------------
Brian R.Cook, President
<PAGE>
ROYALTY PAYMENT AGREEMENT
THIS Agreement is made and entered into as of June 18, 1992 by and between
TESSEMA D. SHIFFERAW (hereinafter called "Inventor"), and BRIAN R. COOK and
R.E. "SANDY" WHEELER (hereinafter called "COOK AND WHEELER").
Inventor receives royalties under a Royalty Agreement dated April 9, 1988
by and between BOW-FLEX OF AMERICA, INC. ("Company") and TESSEMA D. SHIFFERAW
("Inventor"), attached hereto for reference as Exhibit "A". Further, Inventor
agrees that copy of this Agreement shall serve as notification and instruction
to Company to effect the changes in royalty payments agreed herein.
For and in valuable consideration of past and present services by Cook and
Wheeler, Inventor agrees to split royalties received under that Agreement and
instruct BOW-FLEX OF AMERICA, INC. to make payment as follows:
Beginning with the calendar year 1993 and continuing until modified in
writing by the parties to this Agreement, or exercise of the Company's
Option to purchase the Royalty under the terms of Article III, Paragraph C
of the Royalty Agreement, the Company shall pay solely to Inventor the
first seventy thousand dollars ($70,000) of royalties on sales each year in
accordance with Article III, Paragraph B and C of the Royalty Agreement.
Inventor agrees and hereby instructs the Company to pay Royalties due and
payable to Inventor in accordance with Paragraph B and C of the Royalty
Agreement in excess of seventy thousand dollars ($70,000) each year as follows:
An amount equal to sixty percent (60%) of the excess shall be paid to
Inventor and, at the same time, an amount equal to forty percent (40%),
divided equally, shall be paid directly to Cook and Wheeler.
THIS AGREEMENT sets forth and shall constitute the entire agreement between
the parties with respect to the subject matter thereof, and shall supersede any
and all other prior agreements, understandings, promises and representations
made by one party to the other concerning the subject matter hereof and the
terms applicable thereto. This Agreement may not be released, discharged,
supplemented, interpreted, amended, or
<PAGE>
modified in any manner except by an instrument in writing signed by each of the
parties hereto.
It is the express intention of the parties hereto that this Agreement shall
be enforceable and binding upon all parties. The parties acknowledge that this
Agreement has not been prepared by legal counsel and, in the event
interpretation of legal counsel, or jurisdiction, should proclaim any portion of
this Agreement unenforceable or not binding upon the parties as intended, then
the parties agree to execute any modification or document necessary to enforce
the intent of this Agreement.
The parties hereto have set forth their signatures, witnessed by unrelated
parties on the dates as indicated.
PARTIES TO THE AGREEMENT: WITNESSES:
Executed this 22 day of June, 1992.
/s/ Tessema D. Shifferaw [ILLEGIBLE]
- ------------------------------------- -------------------------------
Tessema D. Shifferaw
Executed this 18 day of June, 1992.
/s/ Brian R. Cook /s/ E. Beth Wake
- ------------------------------------- -------------------------------
Brian R. Cook
Executed this 18 day of June, 1992.
/s/ R.E. "Sandy" Wheeler /s/ E. Beth Wake
- ------------------------------------- -------------------------------
R.E. "Sandy" Wheeler
- 2 -
<PAGE>
[We have omitted portions of this Exhibit pursuant to a request for
confidential treatment that we have filed pursuant to Rule 406 of the
Securities Act. We have separately filed a copy of this Exhibit with the
omitted portions intact with the Securities and Exchange Commission.]
FIRST AMENDED AND RESTATED MERCHANT AGREEMENT
<TABLE>
<CAPTION>
<S> <C>
BANK: Household Bank (SB), N.A. MERCHANT: Direct Focus, Inc. f/k/a Bowflex, Inc.
1111 Town Center Drive 2200 NE 65th Avenue
Las Vegas, Nevada 89134 Vancouver, WA 98661
Phone: 360-418-6178
Facsimile No.: 360-694-7755
</TABLE>
This First Amended and Restated Merchant Agreement ("AGREEMENT") is made and
entered into as of the 27th day of January, 1999 ("EFFECTIVE DATE"), by and
between Household Bank (SB), N.A. for itself and as assignee of Household Bank
(Nevada), N.A. (herein "HOUSEHOLD") and Direct Focus, Inc., formerly known as
Bowflex, Inc., a Washington corporation (herein "MERCHANT") and shall be
effective as of February 1, 1999. In consideration of the mutual promises,
covenants, and agreements set forth below and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Merchant and Household agree as follows:
SECTION 1. DEFINITIONS. In addition to the words and phrases defined above and
elsewhere in this Agreement, the following words and phrases shall have the
following meanings:
a. "ACCOUNT" means an account resulting from the issuance of a Card. An
Account may have more than one Card issued for it. Each Account shall be
owned by, and deemed to be the property of, Household.
b. "AFFILIATE" means any entity that is owned by, owns or is under common
control with Household or its ultimate parent or Merchant or its ultimate
parent.
c. "APPLICABLE LAW" means collectively or individually any applicable law,
rule, regulation or judicial, governmental or administrative order, decree,
ruling, opinion or interpretation.
d. "APPLICATION" means an application for an Account under the Program.
e. "AUTHORIZATION" means permission from Household to make a Card Sale.
f. "AUTHORIZATION CENTER" means the facility designated by Household as the
facility at which Card Sales are authorized.
g. "BUSINESS DAY" means any day except Saturday or Sunday or a day on which
banks are closed in the State of Illinois.
h. "CARD" means the private label credit card bearing Merchant's name and/or
logo issued by Household for the Program.
i. "CARDHOLDER" means (i) the person in whose name an Account is opened, and
(ii) any other authorized users of the Account and Card.
j. "CARDHOLDER AGREEMENT AND DISCLOSURE STATEMENT" (hereafter "Cardholder
Agreement") means the credit card agreement between Household and each
Cardholder providing for the extension of credit by Household under the
Program pursuant to which the Cardholder is issued a Card, as the same may
be revised from time to time by Household with notification to Merchant.
k. "CARD SALE" means any sale of Goods that Merchant makes to a Cardholder
pursuant to this Agreement that is charged to an Account.
l. "CHARGEBACK" means the return to Merchant and reimbursement to Household of
a Sales Slip for which Merchant was previously paid pursuant to SECTION 8
herein.
m. "CREDIT SLIP" means evidence of credit in electronic or paper form for
Goods purchased from Merchant.
n. "DISCOUNT" means the fee payable by Merchant to Household as described in
Section 3.b.(ii) hereof.
o. "GOODS" means the products described in SECTION 2 below, certain warranties
expressly authorized by Household, and related services sold by Merchant in
the ordinary course of Merchant's business to consumers for individual,
family, personal or household use.
p. "MAILED-IN APPLICATION" means any Application for a Card which is received
by Merchant or Household through the mail.
q. "OPERATING INSTRUCTIONS" means the regulatory guidelines and operating
instructions and/or procedures or written instructions designated by
Household and agreed to by Merchant, which agreement shall not be
unreasonably withheld, from time to time concerning the Program.
r. "PROGRAM" means the private label revolving credit card program promoted by
Merchant whereby Accounts will be established and maintained by Household,
Cards issued by Household to qualified consumers purchasing Merchant's
Goods, and Card Sales funded all pursuant to the terms of this Agreement.
s. "SALES SLIP" means evidence of a Card Sale in electronic or paper form for
Goods purchased from Merchant.
t. "TELEPHONE APPLICATION" means any Application for a Card which is received
from a consumer or solicited by Merchant via telephone and for which the
applicant's credit or other information required to apply for a Card is
obtained by Merchant from the applicant over the telephone.
u. "TERMINAL" means an electronic terminal or computer capable of
communicating by means of an on-line or dial-up electronic link with an
Authorization Center.
1
<PAGE>
SECTION 2. SCOPE AND PURPOSE. Merchant engages in the sale of fitness equipment
and other products. Pursuant to that certain Merchant Agreement dated February
4, 1997 ("Existing Merchant Agreement"), Household and Merchant had agreed that
Household would make financing available to customers of Merchant purchasing
Goods from Merchant. Merchant has requested Household to continue to make
financing available to consumers purchasing Goods from Merchant and Merchant has
agreed to execute this Agreement in order to continue the Program and secure its
benefit for Merchant. Household and Merchant agree that this Agreement shall
supersede and replace the Existing Merchant Agreement. Household, a credit card
bank in the business of providing revolving credit financing pursuant to a
credit card, has agreed to continue to provide financing under the Program to
individual qualified consumers purchasing Merchant's Goods pursuant to the terms
and conditions set forth in this Agreement.
a. FORMS AND CARDS. Household will provide to Merchant standard Sales Slips,
Credit Slips and other forms from time to time for use by Merchant in the
Program, which documents may be changed from time to time by Household.
Merchant agrees to pay for the combined Application and Cardholder
Agreement and Disclosure Statement and will be charged a fee for
non-standard forms and for forms in excess of normal usage. The design and
content of Cards and billing statements and the terms and conditions of
Accounts and combined Applications and Cardholder Agreement and Disclosure
Statement shall be determined by Household and are subject to change by
Household from time to time.
b. CREDIT REVIEW, OWNERSHIP OF ACCOUNTS. All completed Applications for
Accounts submitted by Merchant to Household whether mailed, telephoned or
otherwise electronically transmitted will be processed and approved or
declined in accordance with Household's credit criteria and procedures from
time to time established by Household, with Household having and retaining
all rights to reject or accept such Applications. Household will only
accept Applications for revolving credit pursuant to the credit card it
issues for individual, personal, family or household use. Household or its
Affiliates shall own the Accounts and shall bear the credit risk for such
Accounts, except as otherwise provided in this Agreement. Merchant
acknowledges and agrees that it shall have no interest whatsoever in the
Accounts. Household shall not be obligated to take any action under an
Account, including making future advances or credit available to
Cardholders. Household shall not be obligated to accept Applications for a
Card or to approve any Card Sale for consumers that do not have their
principal residence and billing address in the fifty United States and the
District of Columbia.
c. CARD PROMOTIONS, SERVICES AND ENHANCEMENTS. Household and Merchant may from
time to time mutually agree to offer to existing or potential Cardholders
special credit promotions, additional services and/or enhancements. The
terms of such promotions, services and enhancements shall be mutually
agreed upon by Household and Merchant and are subject to change or
discontinuance by Household and Merchant. In consideration of Household's
providing special credit promotions and to compensate Household for such
promotions, Merchant agrees to pay to Household for the period agreed upon
by Household and Merchant such rates, amounts and/or discounts set forth
herein. Household may deduct amounts owed to it hereunder from amounts owed
to Merchant under this Agreement.
d. MERCHANT CUSTOMER LISTS. Household acknowledges that the names and
addresses of Merchant customers provided by Merchant to Household
constitute a merchant list and customer list respectively, of Merchant in
which Merchant has proprietary rights and which Merchant regards as (and
which is acknowledged by Household to constitute) a trade secret of
Merchant. Accordingly, Household shall not use such list except with the
prior written consent of Merchant, or to carry out its obligations under
this Agreement. Merchant grants to Household the right to use such merchant
and customer lists solely for such purposes. Household shall exercise such
care with respect to such merchant and customer lists as it does with its
own trade secrets. Notwithstanding the confidentiality provisions of this
Agreement, Merchant as owner of such merchant and customer list may use
such names and addresses for any purpose.
e. CARDHOLDER LIST. Merchant agrees that Household is the owner of the
Cardholder list and that Household and its Affiliates may use such list to
solicit Cardholders for credit card products offered by Household and/or
any of its Affiliates or other types of accounts or financial products or
insurance services offered by Household and/or any of its Affiliates.
Household agrees that Merchant may solicit, at its expense the Cardholder
list for products or services offered by Merchant; provided that such
products or services, as determined by Household do not compete with the
Program, Household or its Affiliates and such solicitation does not
reference the Program. The Cardholder list shall be subject to the
confidentiality provisions of this Agreement.
SECTION 3. FEES, DISCOUNTS, CHARGES, RATES AND FUNDING. Except as otherwise
provided herein, the following consumer rate, fees, Discount and charges shall
be effective for the Initial Term of this Agreement.
a. CONSUMER RATE. The consumer rate to be charged on purchases with the Card
shall be 21.8%, subject to change from time to time by Household.
b. DETERMINATION OF FEES AND DISCOUNTS. The rate, fees, discounts and charges
described in this SECTION 3 are subject to change from time to time by
Household.
c. MERCHANT. Merchant agrees to pay Household the following fees and discounts
(some of which are more fully described in this Agreement):
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(i) "CREDIT PROMOTION DISCOUNT FEE": Household shall make certain deferred
payment and/or deferred interest credit promotion ("Credit
Promotions") available to Merchant. Each Sales Slip generated pursuant
to each credit promotion shall be subject to a Credit Promotion
discount fee as set forth herein which is a designated percentage of
the amount of each Sales slip accepted and funded by Household. Each
Sales Slip generated pursuant to non-promotional Card Sale shall be
subject to a non-promotional discount fee also as set forth herein
which is a designated percentage of the amount of each Sales Slip
accepted and funded by Household. The Credit Promotion and
non-promotional discount fees shall be collectively referred to as the
"Discount Fees".
The Credit Promotions and Discount Fees available as of the date of
this Agreement are listed below:
<TABLE>
<CAPTION>
Promotional Period Promotional Type Discount Fee
---------------------------------------------------------------------
<S> <C> <C>
Regular Sale Non-Promotional Card Sale *
3 Months Same As Cash W/O Payment *
6 Months Same As Cash W/Payment *
7 Months Same As Cash W/Payment *
8 Months Same As Cash W/Payment *
9 Months Same As Cash W/Payment *
10 Months Same As Cash W/Payment *
11 Months Same As Cash W/Payment *
12 Months Same As Cash W/Payment *
</TABLE>
(ii) "START-UP FEE": *
(iii) "FORMS FEE": *
c. ACCEPTANCE, OFFSET & FUNDING. Subject to the terms, conditions, warranties
and representations in this Agreement and provided that Merchant has
satisfied all of the conditions set forth in this Agreement, including,
without limitation, SECTIONS 4, 5, 6 AND 7, Household agrees to pay to
Merchant the amount of each valid and authorized Sales Slip presented
to Household during the term of this Agreement, less the amount of the
fees, charges, and Discounts described above in this Section, outstanding
Account balances for Sales Slips subject to Chargeback, reimbursements,
refunds, customer credits and any other amounts owed to Household under
this Agreement by Merchant. Household may also offset or recoup said
amounts from future amounts owed to Merchant under this Agreement. Any
amounts owed by Merchant to Household which cannot be paid by the aforesaid
means shall be due and payable by Merchant on demand. Any payment made by
Household to Merchant shall not be final but shall be subject to subsequent
review and verification by Household. Household's liability to Merchant
with respect to the funding of any Card Sale, Sales Slip or Credit Slip
shall not exceed the amount on the Sales Slip or Credit Slip in connection
with such transaction. In no event shall Household be liable for incidental
or consequential damages.
d. FUNDING. Funding of Sales Slips by Household to Merchant shall be made to
Merchant's account at a bank designated by Merchant. Household will use its
best efforts to make such payments on the first Business Day after receipt,
verification and processing by Household of the transmission of the
transaction data, if such transmission is received by 7:30 am Central
Standard Time; if received later than 7:30 am Central Standard Time, then
on the second Business Day after said transmission, however, in no event
shall such payments be made later than the third Business Day after receipt
of said transmission by Household.
SECTION 4. MERCHANT RESPONSIBILITIES CONCERNING CONSUMER TRANSACTIONS. Merchant
covenants and agrees that Merchant shall:
a. Honor all valid Cards without discrimination, when properly presented by
Cardholders for payment of Goods.
b. Not require, through an increase in price or otherwise, any Cardholder to
pay any surcharge at the time of sale or pay any part of any charge imposed
by Household on Merchant.
c. Not establish minimum or maximum charge amounts without Household's prior
written approval.
d. Prominently display at each of its locations, advertising and promotional
materials relating to the Card, including, without limitation, take-one
Applications for the Card and use and display such materials in accordance
with any specifications provided by Household. Such materials shall be used
only for the purpose of soliciting accounts for the Program. Any
solicitation, written material, advertising or the like relating to the
Program or the products offered pursuant to the Program shall be prepared
or furnished by Household or shall receive Household's prior written
approval. Household will charge Merchant and Merchant agrees to pay for any
such advertising and promotional materials. Any such materials shall not be
used by Merchant following termination of this Agreement.
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e. Use only the form of, or modes of transmission for, Application/Cardholder
Agreements, Sales Slips and Credit Slips as are provided by Household, and
not use any Application/Cardholder Agreements, Sales Slips, and Credit
Slips provided by Household other than in connection with a Card
transaction.
f. With respect to Telephone Applications, Merchant shall:
(i) Make sure all information requested on the Telephone Application is
complete;
(ii) Give the applicant the applicable initial disclosures at the time the
Telephone Application information is requested or such other
disclosures as may be required by Household from time to time;
(iii) Provide all information required by Household from time to time for
approval of Applications by telephone or other electronic
transmission;
(iv) Designate on the Application and/or enter into the Terminal that it
was a Telephone Application and Card Sale;
(v) Not submit to Household for funding any Sales Slip resulting from a
telephone or mail order Card Sale until not less than five (5)
Business Days after receipt by Merchant and approval by Household of
the Telephone or Mail Order Application; and
(vi) Merchant represents and warrants that in connection with telephone
solicitations, it has adopted such policies and procedures to ensure
compliance with all applicable federal and state laws, regulations or
rules relating to telemarketing and/or telephone solicitations
including but not limited to the Telephone Consumer Protection Act of
1991 ("TCPA") 42 USC 227 and 152(b); Chapter I, Title 47 of the Code
of Federal Regulations, parts 64 and 68, the Telemarketing and
Consumer Fraud and Abuse Prevention Act (TCFAPA) 15 U.S.C. Sections
6101-6108; 16 CFR Part 310 and any applicable telemarketing or
telephone solicitation laws of the state from which Merchant shall be
initiating telephone solicitations for the Card.
g. With respect to Mailed-In Applications, Merchant shall:
(i) Make sure all information requested on the Application is complete;
(ii) Provide all information required by Household from time to time for
approval of Applications by mail and legibly insert the Account number
on the Application in the designated area;
(iii) Designate on the Application and Sales Slip that it is a Mailed In
Application and Card Sale;
(iv) Merchant represents and warrants that in connection with mail-order
sales, it has adopted such policies and procedures to ensure
compliance with all applicable federal and state laws, regulations or
rules relating to mail order sales including but not limited to all
applicable requirements of Title 16 Code of Federal Regulations,
Chapter I, Subchapter D, part 435.1 ("Mail Order Rule");
(v) Not ship or deliver or cause to be shipped or delivered any Goods to a
Cardholder until not less than five (5) Business Days after receipt by
Merchant and approval by Household of the Telephone or Mailed-In
Application;
(vi) Not submit to Household for funding any Sales Slip resulting from a
telephone or mail order Card Sale until not less than five (5)
Business Days after receipt by Merchant and approval by Household of
the Telephone or Mailed-In Application; and
(vii) Send a copy of the approved Telephone or Mailed-In Application to
Household within five (5) Business Days after the date the Goods are
shipped to the Cardholder or the Sales Slip funded by Household.
h. With respect to Sales Slips Merchant shall:
(i) Enter legibly on a single Sales Slip prior to obtaining the
Cardholder's signature (1) a description of all Goods purchased in the
same transaction in detail sufficient to identify the transaction; (2)
the date of the transaction; (3) the Authorization number; and (4) the
entire amount due for the transaction (including any applicable
taxes);
(ii) REQUEST AUTHORIZATION FROM HOUSEHOLD'S AUTHORIZATION CENTER UNDER ALL
CIRCUMSTANCES. (Household may refuse to accept or fund any Sales Slip
that is presented to Household for payment more than sixty (60) days
after the date of Authorization of the Card Sale). Merchant agrees not
to divide a single transaction between two or more Sales Slips or
between a Household Sales Slip and a sales slip for another credit
provider. If Authorization is granted, legibly enter the Authorization
number in the designated area on the Sales Slip. If Authorization is
denied, not complete the transaction and follow any instructions from
the Authorization Center. Merchant shall use its best efforts, by
reasonable and peaceful means, to retain or recover a Card:
(1) if Merchant is advised to retain the Card in response to an
Authorization request; or
(2) if Merchant has reasonable grounds to believe that the Card is
counterfeit, fraudulent, or stolen. The obligation to retain or
recover a Card imposed by this Section does not authorize a
breach of the peace or any injury to persons or property, and
Merchant will hold Household harmless from any claim arising from
any injury to person or property or other breach of the peace.
(iii) Imprint legibly on the Sales Slip the embossed legends from the Card
or if the transaction is to be completed electronically or otherwise
without a Card imprint, then enter legibly on the Sales Slip
sufficient information to identify the Cardholder and Merchant,
including at least, Merchant's name, Cardholder's name, Account
number,
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expiration date and any effective date on the Card. Merchant shall be
deemed to warrant the Cardholder's true identity as an authorized user
of the Card;
(iv) Check the effective date, if any, and the expiration date on the Card;
(v) Obtain the signature of the Cardholder on the Sales Slip, and compare
the signature on the Sales Slip with the signature panel of the Card
and if identification is uncertain or if Merchant otherwise questions
the validity of the Card, contact Household's Authorization Center for
instructions. For telephone orders (TO) or mail orders (MO) only, the
Sales Slip may be completed without the Cardholder's signature and a
Card imprint, but Merchant shall, in addition to all other
requirements under this SECTION 4, enter legibly on the signature line
of the Sales Slip the letters "TO" or "MO", as appropriate, and not
deliver Goods or perform services after being advised that the "TO" or
"MO" has been canceled or that the Card is not to be honored;
(vi) IDENTIFICATION OF THE CARDHOLDER IS THE RESPONSIBILITY OF MERCHANT;
(vii) Not present the Sales Slip to Household for funding until all Goods
are delivered and all the services are performed to the Cardholder's
satisfaction. If the Card Sale is canceled or the Goods or services
canceled or returned, the Sales Slip is subject to Chargeback;
(viii) Enter the Card Sale into the Terminal and, if applicable, Household's
approval code; and
(ix) Deliver a true and completed copy of the Sales Slip to the Cardholder
at the time of delivery of the Goods.
i. CREDIT SLIPS. If Goods are returned, any Card Sale or services are
terminated or canceled, or Merchant allows any price adjustment, then
Merchant shall not make any cash refund, but shall complete and deliver
promptly to Household a Credit Slip evidencing the refund or adjustment and
deliver to the Cardholder a true and complete copy of the Credit Slip at
the time the refund or adjustment is made. Merchant shall sign and date
each Credit Slip and include thereon a brief description of the Goods
returned, services terminated or canceled, refund or adjustment made, the
date of the original Card Sale, Authorization number, Cardholder's name,
address and Account number, and the date and amount of the credit, all in
sufficient detail to identify the transaction. Merchant shall imprint or
legibly reproduce on each Credit Slip the embossed legends from the Card
and from Merchant's imprinter plate. The amount of the Credit Slip cannot
exceed the amount of the original transaction as reflected on the Sales
Slip. Merchant shall issue Credit Slips only in connection with previous
bona fide Card Sales and only as permitted hereunder.
j. Not receive any payments from a Cardholder for charges included on any
Sales Slip resulting from the use of any Card, nor receive any payments
from a Cardholder to prepare and present a Credit Slip for the purpose of
effecting a deposit to the Cardholder's Account.
k. CARDHOLDER COMPLAINTS. Merchant shall within five (5) days of receipt
provide Household with a copy of any written complaint from any Cardholder
concerning an Account.
l. RIGHT OF FIRST REFUSAL. Merchant shall actively promote the Program.
Merchant agrees to give Household right of first refusal in presenting
consumer credit Applications and/or Sales Slips. During the term of this
Agreement, Merchant shall not issue, arrange to issue, or accept, in the
fifty United States and the District of Columbia, any private label credit
card or account other than the Card, under any of Merchant's names or
logos, except with respect to Applications declined by Household. To the
extent Merchant displays other third party credit or charge card materials,
it shall display the advertising and promotional materials relating to the
Card in a manner and with a frequency equal to or greater than that
accorded any other third party credit or charge card.
m. Satisfy all other requirements designated in any Operating Instructions or
as may be required from time to time by Household. In the event there is
any inconsistency between any Operating Instructions and this Agreement,
this Agreement shall govern unless otherwise expressly indicated by
Household in any Operating Instructions.
n. Present each Sales Slip and deliver each Credit Slip to Household or such
other person designated by Household, within ten (10) Business Days after
the date of the respective sale or credit transaction.
SECTION 5. MERCHANT REPRESENTATIONS AND WARRANTIES. Merchant represents and
warrants to Household as of the Effective Date and throughout the term of this
Agreement the following:
a. That each Card Sale will arise out of a bona fide sale of Goods by Merchant
and will not involve the use of the Card for any other purpose.
b. That each Card Sale will be to a consumer for personal, family, or
household purposes.
C. That Cardholder Applications will be available to the public (i) without
regard to race, color, religion, national origin, sex, marital status, or
age (provided the applicant has the capacity to enter into a binding
contract) and (ii) not in any manner which would discriminate against an
applicant or discourage an applicant from applying for the Card.
d. That it has full corporate power and authority to enter into this
Agreement; that all corporate action required under any organization
documents to make this Agreement binding and valid upon Merchant according
to its terms has been taken; and that this Agreement is and will be
binding, valid and enforceable upon Merchant according to its terms.
e. That it is not in violation of any covenants in any debt instruments to
which it is a party as of the Effective Date of this Agreement.
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f. Neither (i) the execution, delivery and performance of this Agreement, nor
(ii) the consummation of the transactions contemplated hereby will
constitute a violation of law or a violation or default by Merchant under
its articles of incorporation, by laws or any organization documents, or
any material agreement or contract and no authorization of any governmental
authority is required in connection with the performance by Merchant of its
obligations hereunder.
g. There are no proceedings or investigations pending, or, to the knowledge of
Merchant, threatened, before any court, regulatory body, administrative
agency, or other tribunal or governmental instrumentality having
jurisdiction over Merchant or its properties: (i) asserting the invalidity
of this Agreement or seeking to prevent the consummation of any of the
transactions contemplated hereunder, or (ii) which, individually or in the
aggregate, could reasonably be expected to have a material adverse effect
on the ability of Merchant to perform its obligations hereunder.
h. Merchant has and will retain throughout the term of this Agreement all
required licenses to perform it's obligations under this Agreement.
i. Any Card Sale subject to rescission has not been rescinded.
SECTION 6. CHARGEBACKS TO MERCHANT. Merchant agrees as follows:
a. CHARGEBACKS. Any Sales Slip or Card Sale is subject to Chargeback under any
one or more of the following circumstances, and thereupon the provisions of
SECTION 6.b. below shall apply:
(i) The Application or any information on the Application or the Sales
Slip or any required information on the Sales Slip (such as the
account number, expiration date of the Card, description of Dealer or
Goods purchased, transaction amount or date) is illegible or
incomplete, or except as provided in Section 4.f., the Sales Slip or
Application is not executed by the Cardholder; or Authorization is not
obtained from Household's Authorization Center, or a valid
Authorization number is not correctly and legibly entered on the Sales
Slip; or the Sales Slip is a duplicate of an item previously paid, or
the price of the Goods or services shown on the Sales Slip differs
from the amount shown on the Cardholder's copy of the Sales Slip;
(ii) Household determines that (1) Merchant has breached or failed to
satisfy, any term, condition, covenant, warranty, or other provision
of this Agreement, including, without limitation, SECTIONS 4 AND 5
above, or of the Operating Instructions, in connection with a Sales
Slip or the transaction to which it relates, or an Application for a
Card or the opening of an Account; or (2) the Sales Slip,
Application/Cardholder Agreement or Card Sale is fraudulent or is
subject to any claim of illegality, cancellation, rescission,
avoidance or offset for any reason whatsoever, including, without
limitation, negligence, fraud, misrepresentation, or dishonesty on the
part of the customer or Merchant or its agents, employees, licensees,
or franchisees, or that the related transaction is not a bona fide
transaction in Merchant's ordinary course of business;
(iii) the Cardholder disputes or denies the Card Sale or other Card
transaction, the execution of the Sales Slip or Application/Cardholder
Agreement, or the delivery, quality, or performance of the goods,
services or warranties purchased, or the Cardholder has not authorized
the Card Sale, or alleges that a credit adjustment was requested and
refused or that a credit adjustment was issued by Merchant but not
posted to the Account; or
(iv) Merchant fails to deliver to Household the Sales Slip, Credit Slip,
Application or other records of the Card transaction within the times
required in this Agreement.
b. RESOLUTION AND PAYMENT. Merchant is required to resolve any dispute or
other of the circumstances described above in (a) of this SECTION 6 to
Household's satisfaction within fifteen (15) days of notice of Chargeback
or Merchant shall pay to Household the full amount of each Sales Slip
subject to Chargeback or the portion thereof designated by Household, as
the case may be, plus the finance charges thereon, any attorney fees
incurred by Household, and other fees and charges provided for in the
Cardholder Agreement. Upon Chargeback to Merchant of a Sales Slip, Merchant
shall bear all liability and risk of loss associated with such Sales Slip
or Account, or the applicable portion thereof, without warranty by, or
recourse or liability to, Household. Household may deduct amounts owed to
Household under this Section from any amounts owed to Merchant under this
Agreement.
c. EXCESSIVE CHARGEBACKS. If (i) the aggregate number of Sales Slips subject
to Chargeback exceeds 3.0% of the total number of Card Sales submitted by
Merchant with respect to an individual Merchant location in any calendar
quarter or (ii) the aggregate dollar amount of all Sales Slips subject to
Chargeback in any monthly billing cycle exceeds 5% of the total net
balances of all Accounts at the end of such monthly billing cycle ((i) and
(ii) are herein individually and collectively called "EXCESSIVE
CHARGEBACKS"). Excessive Chargebacks shall be deemed a material breach of
this Agreement and Household has the right, in its sole discretion, to
terminate this Agreement pursuant to SECTION 15.
d. The terms and provisions of this Section 6 shall survive the termination of
this Agreement.
SECTION 7. TAPE OR ELECTRONIC TRANSMISSION & RECORDS. Data, records and
information shall be transmitted and maintained as described below.
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a. TRANSMISSION OF DATA. In lieu of depositing paper Sales Slips and Credit
Slips with Household, Merchant shall transmit to Household, by electronic
transmission or other form of transmission designated by Household all data
required by this Agreement to appear on Sales Slips and Credit Slips. All
data transmitted shall be in a medium, form and format designated by
Household and shall be presorted according to Household's instructions. Any
errors in such data or in its transmission shall be the sole responsibility
of Merchant. The means of transmission indicated above in this Section or
other means approved by Household, shall be the exclusive means utilized by
Merchant for the transmission of Sales Slip or Credit Slip transaction data
to Household. Merchant shall use a leased line, supplied by Household, for
communicating with Household pursuant to the guidelines set forth in
SECTION 4. Household's voice Authorization Center will be available for use
for times when the leased line authorization system is not in operation.
b. RECEIPT OF TRANSMISSION. Upon successful receipt of any transmission,
Household shall accept such transmission and pay Merchant in accordance
with this Agreement, subject to subsequent review and verification by
Household and to all other rights of Household and obligations of Merchant
as set forth in this Agreement. If data transmission is by tape, Merchant
agrees to deliver upon demand by Household a duplicate tape of any prior
tape transmission, at the expense of Household, if such demand is made
within forty-five (45) calendar days of the original transmission.
C. RECORDS. Merchant shall maintain the actual paper Sales Slips, Credit
Slips, and other records pertaining to any transaction covered by this
Agreement for such time and in such manner as Household or any law or
regulation may require, but in no event less than two (2) years after the
date Merchant presents each transaction data to Household, and Merchant
shall make and retain for at least seven (7) years legible copies of such
actual paper Sales Slips, Credit Slips or other transaction records. Within
fifteen (15) days, or such earlier time as may be required by Household,
of receipt of Household's request, Merchant shall provide to Household the
actual paper Sales Slips, Credit Slips or other transaction records, and
any other documentary evidence available to Merchant and reasonably
requested by Household to meet its obligations under law (including its
obligations under the Fair Credit Billing Act) or otherwise to respond to
questions, complaints, lawsuits, counterclaims or claims concerning
Accounts or requests from Cardholders, or to enforce any rights Household
may have against a Cardholder, including, without limitation, litigation by
or against Household, collection efforts and bankruptcy proceedings, or for
any other reason. In the event Merchant fails to comply in any respect with
the provisions of this SECTION 7, Household may process a Chargeback for
each Card Sale involved pursuant to SECTION 6 above.
d. PRODUCTION. Promptly upon termination of this Agreement or upon the request
of Household, Merchant will provide Household with all original and
microfilm copies of documents required to be retained under this Agreement.
SECTION 8. PAYMENTS BY CARDHOLDER AND ENDORSEMENT. Merchant agrees that
Household has the sole right to receive payments on any Sales Slip funded by
Household. Unless specifically authorized in writing by Household, Merchant
agrees not to make any collections on any such Sales Slip. Merchant agrees to
hold in trust for Household any payment received by Merchant of all or part of
the amount of any such Sales Slip and to deliver promptly the same in kind to
Household as soon as received together with the Cardholder's name, Account
number, and any correspondence accompanying the payment and deliver same
promptly within five (5) days of receipt by Merchant. Merchant agrees that
Merchant shall be deemed to have endorsed any Sales Slip, Credit Slip, or
Cardholder payments by check, money order, or other instrument made payable to
Merchant that a Cardholder presents to Household in Household's favor, and
Merchant hereby authorizes Household to supply such necessary endorsements on
behalf of Merchant.
SECTION 9. MERCHANT CREDIT INFORMATION. Household may annually review Merchant's
financial stability. To assist Household in doing this, Merchant shall deliver
to Household no later than ninety (90) days after the end of each fiscal year,
an audited financial statement, including, without limitation, all footnotes,
and supporting materials with sufficient detail to accurately portray the
financial condition of Merchant. Merchant warrants and represents that its
credit Application and financial statements submitted to Household by or on
behalf of Merchant are true and accurate and Merchant agrees to supply such
additional credit information as Household may reasonably request from time to
time. Merchant understands that Household may verify the information on any
financial statement or other information provided by Merchant and, from time to
time, may seek credit and other information concerning Merchant from others and
may provide information regarding this Program including financial and other
information to its Affiliates or others for purposes of its asset
securitizations and sales.
SECTION 10. MERCHANT BUSINESS PRACTICES. Merchant agrees to provide adequate
services in connection with each Card Sale pursuant to standard customs and
trade practices and any applicable manufacturer's warranties, and to provide
such repairs, service and replacements and take such other corrective action as
may be required by law.
SECTION 11. CARDHOLDER ACCOUNT INFORMATION. Merchant shall not sell, purchase,
provide, or exchange Account information in the form of imprinted Sales Slips,
carbon copies of imprinted Sales Slips, mailing lists, tapes or other media
obtained by reason of a Card transaction to any third party other than to
Merchant's agents for the purpose of assisting Merchant in its business with
Household or pursuant to a government request.
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SECTION 12. CHANGE IN OWNERSHIP. Each party agrees to send the other party at
least thirty (30) days prior written notice of any change in such party's name
or location, any material change in ownership of Merchant's business or any
change in Sales Slip or Credit Slip information concerning Merchant.
SECTION 13. INDEMNIFICATION.
a. INDEMNIFICATION BY MERCHANT. Merchant shall be liable to and shall
indemnify and hold harmless Household and its Affiliates associated with
the Program and their respective officers, employees, agents and directors
from any losses, damages, claims or complaints incurred by Household or any
Affiliate of Household or their respective officers, employees, agents and
directors arising out of: (i) Merchant's failure to comply with this
Agreement or any of the Operating Instructions; (ii) any claim, dispute,
complaint or setoff made by a Cardholder with respect to anything done or
not done by Merchant in connection with Card Sales or Credit Slips; (iii)
anything done or not done by Merchant in connection with the furnishing of
any Goods, warranties or services purchased by Cardholders; (iv) the death
or injury to any person or the loss, destruction or damage to any property
arising out of the design, manufacture or furnishing by Merchant of any
Goods, warranties or services purchased by Cardholders; (v) any claim or
complaint of a third party in connection with Merchant's advertisements and
promotions relating to the Card which have not been reviewed or approved by
Household; (vi) any illegal or improper conduct of Merchant or its
employees or agents; and (vii) any claim or complaint by a consumer that
Merchant has violated the Equal Credit Opportunity Act, Truth in Lending
Act, or any other act and related Applicable Laws. Household may deduct any
amounts incurred by Household under this Section from amounts owed Merchant
under this Agreement.
b. INDEMNIFICATION BY HOUSEHOLD. Household shall be liable to and shall
indemnify and hold harmless Merchant and its subsidiaries or Affiliates and
their respective officers, employees, agents and directors from any losses,
damages, claims or complaints incurred by Merchant or any subsidiary or
affiliate of Merchant or their respective officers, employees, agents and
directors arising out of (i) Household's failure to comply with this
Agreement or any of the Operating Instructions; (ii) any claim, dispute or
complaint by a Cardholder made in good faith resulting from anything done
or not done by Household in connection with such Cardholder's Account;
(iii) any illegal or improper conduct of Household, or its employees or
agents with respect to the Card, a Card Sale, an Account or any other
matters relating to the Program; (iv) any claim, dispute, complaint or
setoff by a consumer made in good faith resulting from a violation by
Household, with respect to the Application/Agreement, of the Equal Credit
Opportunity Act, Truth in Lending Act or any other act and related
Applicable Laws and regulations; and (v) any claim, dispute or complaint of
any thirty party made in good faith in connection with advertisements and
promotions prepared by Household relating to the Card. Notwithstanding the
foregoing, the indemnification by Household shall not apply to any claim or
complaint relating to the failure of Merchant to resolve a billing inquiry
or dispute with a Cardholder where such failure was not caused by
Household.
c. NOTICE OF CLAIM & SURVIVAL. In the event that Household or Merchant shall
receive any claim or demand or be subject to any suit or proceeding of
which a claim may be made against the other under this Section, the
indemnified party shall give prompt written notice thereof to the
indemnifying party and the indemnifying party will be entitled to
participate in the settlement or defense thereof with counsel satisfactory
to indemnified party at the indemnifying party's expense. In any case, the
indemnifying party and the indemnified party shall cooperate (at no cost to
the indemnified party) in the settlement or defense of any such claim,
demand, suit, or proceeding. The terms of this SECTION 13 shall survive the
termination of this Agreement.
SECTION 14. NONWAIVER. Merchant's liability under this Agreement, including,
without limitation, its liability under SECTION 6 above, shall not be affected
by any settlement, extension, forbearance, or variation in terms that Household
may grant in connection with any Sales Slip or Account or by the discharge or
release of the obligations of the Cardholder(s) or any other person by operation
of law or otherwise. Merchant hereby waives any failure or delay on Household's
part in asserting or enforcing any right that Household may have at any time
under this Agreement or under any Account.
SECTION 15. TERM AND TERMINATION.
a. TERM. This Agreement shall be effective as of the Effective Date and shall
remain in effect for three (3) years ("INITIAL TERM"), subject to earlier
termination as set forth below. Thereafter, this Agreement shall be
automatically renewed for successive one year terms (the "RENEWAL TERM(S)")
unless and until terminated as provided herein. The termination of this
Agreement shall not affect the rights and obligations of the parties with
respect to transactions and occurrences which take place prior to the
effective date of termination, except as otherwise provided herein.
b. TERMINATION. This Agreement may be terminated:
(i) By Household or Merchant at the end of the Initial Term or the end of
any Renewal Term upon not less than ninety (90) days prior written
notice to the other;
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(ii) By either party upon notice to the other in the event the other party
shall elect to wind up or dissolve its operation or is wound up and
dissolved; becomes insolvent or repeatedly fails to pay its debts as
they become due; makes an assignment for the benefit of creditors:
files a voluntary petition in bankruptcy, or for reorganization or is
adjudicated as bankrupt or insolvent; or has a liquidator or trustee
appointed over its affairs; and
(iii) by Household upon notice (a) if there occurs any material change in
ownership of Merchant or if a change occurs in Merchant's financial
condition as determined by Household in Household's sole discretion,
or if Merchant suspends or goes out of business or substantially
reduces its business operations or sends a notice of a proposed bulk
sale of all or part of its business; or (b) in the event Merchant
materially breaches its obligations or any warranty or representation
under this Agreement or in any Operating Instructions; or (c) if
Household has reasonable cause to believe that Merchant will not be
able to perform its obligations under this Agreement, or if Household
receives a disproportionate number of Cardholder inquiries, disputes,
or complaints; or (d) if in Household's judgment, any Applicable Law
requires that this Agreement or either party's rights or obligations
hereunder be amended, modified, waived or suspended in any respect,
including, without limitation, the amount of finance charges or fees
that may be charged or collected or the consumer rate that may be
charged on purchases with the Card.
c. TERMINATION OF CARD ACCEPTANCE. Household upon notice to Merchant may elect
to terminate the acceptance of the Card at a particular Merchant location
if at such location there are Excessive Chargebacks, high fraudulent
activity or other course of business conduct that is injurious to the
business relationship between Household and Merchant. In addition,
Household may terminate this Agreement upon thirty (30) days prior notice
to Merchant if the termination of a particular Merchant location materially
affect(s) the volume of Card Sales generated by Merchant.
d. DUTIES AND RIGHTS UPON TERMINATION. Upon termination of this Agreement,
Merchant will promptly submit to Household all Card Sales, Sales Slips,
credits and other data made through the date of termination. Household is
not liable to Merchant for any direct damages that Merchant may suffer as a
result of Household's termination of this Agreement as provided in this
Agreement. In the event this Agreement is terminated for any reason or
notice of termination is given by either party, Household may take such
other reasonable actions including but not limited to establishing and
maintaining a reserve from payments otherwise payable to Merchant to
protect Household's rights under this Agreement and to cover Chargeback
amounts and other amounts owing to Household.
e. PURCHASE REQUIREMENTS. Upon termination of this Agreement due to material
breach or termination without notice by Merchant, Merchant, its successors
and assigns shall, at Household's option and upon Household's request,
purchase or arrange to purchase by a third party, the Accounts, without
recourse to Household and without representations or warranty, express or
implied, at a price determined by Household, in Household's sole
discretion, but not less than the full amount of all of the outstanding
Account balances; the purchase to occur not later than ninety (90) days
after the effective date of termination of this Agreement and to be under
such terms and conditions as are reasonably acceptable to Household. In any
event, commencing on the effective date of termination of this Agreement,
Merchant shall pay to Household, monthly, within ten (10) days of
Household's request, a liquidation fee in the amount of $5.00 per active
Account per month until such time as the outstanding Account
balances/receivables are liquidated and paid in full or, if a purchase is
required as stated above, such purchase of all of the outstanding Account
balances is consummated and Household receives the purchase price.
SECTION 16. STATUS OF THE PARTIES. In performing their responsibilities pursuant
to this Agreement, Household and Merchant are in the position of independent
contractors, and in no circumstances shall either party be deemed to be the
agent or employee of the other. This Agreement is not intended to create, nor
does it create and shall not be construed to create, a relationship of partner
or joint venturer or an association for profit between Household and Merchant.
Any amounts ever owing by Merchant pursuant to this Agreement represent
contractual obligations only and are not a loan or debt.
SECTION 17. FORCE MAJEURE. Neither party to this Agreement shall be liable to
the other by reason of any failure in performance of this Agreement in
accordance with its terms if such failure arises out of a cause beyond the
control and without the fault or negligence of such party. Such causes may
include but are not limited to acts of God, of the public enemy or of civil or
military authority, unavailability of energy resources, system or communication
failure, delay in transportation, fires, strikes, riots or war. In the event of
any force majeure occurrence, the disabled party shall use its best efforts to
meet its obligations as set forth in this Agreement.
SECTION 18. LIMITED LICENSE. Merchant hereby authorizes Household for
purposes of this Agreement to use Merchant's name, logo, registered
trademarks and servicemarks (if any) and any other proprietary designations
("Proprietary Materials") on the Cards, Applications, periodic statements,
billing statements, collection letters or documents, promotional or
advertising materials and otherwise in connection with the Program, subject
to Merchant's periodic reasonable review of such use and to such reasonable
specifications of Merchant. Merchant represents and warrants that it has
obtained appropriate federal and state trademark registrations to protect its
interest in the use and ownership of the Proprietary Materials. Merchant
shall, indemnify, defend and
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hold Household harmless from any loss, damage, expense or liability arising from
any claims of alleged infringement of the Proprietary Materials (including
attorneys' fees and costs). Merchant may not use any name or service mark of
Household or any of its Affiliates in any manner without the prior written
consent of Household.
SECTION 19. CONFIDENTIALITY. Merchant will keep confidential and not disclose to
any person or entity (except to employees, officers, partners or directors of
Merchant who are engaged in the implementation and execution of the Program) all
information, software, systems and data, that Merchant receives from Household
or from any other source, relating to the Program and matters which are subject
to the terms of this Agreement, including, but not limited to, Cardholder names
and addresses or other Account information, and shall use, or cause to be used,
such information solely for the purposes of the performance of Merchant's
obligations under the terms of this Agreement. Household will keep confidential
and not disclose to any person or entity (except employees, officers, agents or
directors of Household, its subsidiaries or affiliates who are engaged in the
implementation and execution of the Program) any information that Household
receives from Merchant which is designated confidential by Merchant. In the
event Household sells or assigns the Accounts or any portion of the Accounts
under the Program, Household may disclose any information under this provision
reasonably necessary or required to effectuate such sale or assignment. The
provisions of this SECTION 19 shall survive the termination of this Agreement.
SECTION 20. ADDITIONAL PRODUCTS & SERVICES. Household and/or any of its
Affiliates may at any time, whether during or after the term of this Agreement
and whether the Accounts are owned by Household, solicit Cardholders for any
other credit cards or other types of accounts or financial products or insurance
services offered by Household and/or any of its Affiliates.
SECTION 21. NOTICES. All notices required or permitted by this Agreement shall
be in writing and shall be sent to the respective parties; if to Household, to
the Attention of President (with a copy to the Attention of General Counsel, HRS
Law Department 2700 Sanders Road, Prospect Heights, IL 60070); if to Merchant,
to the Attention of General Counsel, Direct Focus, Inc. 2200 NE 65th Avenue,
Vancouver, WA 98661, or such other addresses as each party may designate to the
other by notice hereunder. Said notices shall be deemed to be received when sent
to the above addresses (i) upon three (3) Business Days after deposit in the
U.S. first class mail with postage prepaid, (ii) upon personal delivery, or
(iii) upon receipt by telex, facsimile, or overnight/express courier service or
mail.
SECTION 22. AMENDMENTS AND SUPPLEMENTARY DOCUMENTS. Household may amend this
Agreement upon ten (10) days prior notice to Merchant if such modification is
reasonably determined by Household to be required by any state or federal law,
rule, regulation, governmental or judicial order, opinion, interpretation or
decision. Reference herein to "this Agreement" shall include any schedules,
appendices, exhibits, and amendments hereto. Any amendment or modification to
this Agreement must be in writing and signed by a duly authorized officer of
Household to be effective and binding upon Household; no oral amendments or
modifications shall be binding upon the parties.
SECTION 23. ASSIGNMENT. This Agreement is binding upon the parties and their
successors and assigns. Notwithstanding Merchant may not assign this Agreement
without the prior written consent of Household; any purported assignment without
such consent shall be void. Household may without Merchant's consent assign this
Agreement or any of its rights or obligations hereunder to any Affiliate of
Household at any time. In the event of such assignment, the assignee shall have
the same rights and remedies as Household under this Agreement.
SECTION 24. NONWAIVER AND EXTENSIONS. Household shall not by any act, delay,
omission, or otherwise be deemed to have waived any rights or remedies
hereunder. Merchant agrees that Household's failure to enforce any of its rights
under this Agreement shall not affect any other right of Household or the same
right in any other instance.
SECTION 25. RIGHTS OF PERSONS NOT A PARTY. This Agreement shall not create any
rights on the part of any person or entity not a party hereto, whether as a
third party beneficiary or otherwise.
SECTION 26. SECTION HEADINGS. The headings of the sections of this Agreement are
for reference only, are not a substantive part of this Agreement and are not to
be used to affect the validity, construction or interpretation of this Agreement
or any of its provisions.
SECTION 27. INTEGRATIONS. This Agreement contains the entire agreement between
the parties. There are merged herein all prior oral or written agreements,
amendments, representations, promises and conditions in connection with the
subject matter hereof. Any representations, warranties, promises or conditions
not expressly incorporated herein shall not be binding on Household or Merchant.
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SECTION 28. GOVERNING LAW/SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois. If any provision
of this Agreement is contrary to Applicable Law, such provision shall be deemed
ineffective without invalidating the remaining provisions hereof.
SECTION 29. JURISDICTION. ANY SUIT, COUNTERCLAIM, ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT MUST BE BROUGHT BY EITHER PARTY IN THE
COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS; AND MERCHANT HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF SUCH COURTS AND ANY APPELLATE COURTS THEREOF FOR THE
PURPOSE OF ANY SUCH SUIT, COUNTERCLAIM, ACTION, PROCEEDING OR JUDGMENT (IT BEING
UNDERSTOOD THAT SUCH CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS WAIVES
ANY RIGHT TO SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS OTHER THAN THOSE
ABOVE). NOTHING HEREIN SHALL PRECLUDE HOUSEHOLD FROM BRINGING AN ACTION OR
PROCEEDING RELATED TO THIS AGREEMENT IN ANY OTHER STATE OR PLACE HAVING
JURISDICTION OVER SUCH ACTION.
SECTION 30. WAIVER OF JURY TRIAL. HOUSEHOLD AND MERCHANT HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY
RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM
ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY
SUCH ACTION, SUIT, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND
NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT FOR HOUSEHOLD AND
MERCHANT ENTERING INTO THIS AGREEMENT.
IN WITNESS WHEREOF, Household and Merchant have caused their duly
authorized representatives to execute this Agreement as of the date set forth
above.
BANK: MERCHANT:
HOUSEHOLD BANK (SB), N.A. DIRECT FOCUS, INC.
By: /s/ J.W. Hoff By: /s/ Rod Rice
------------------------------- ----------------------------------
Print Name: J.W. Hoff Print Name: Rod Rice
------------------------ --------------------------
Title: Vice President Title: CFO
----------------------------- --------------------------------
ATTESTED OR WITNESSED ATTESTED OR WITNESSED
By: /s/ Phil Layher By: /s/ Randal Potter
------------------------------- ----------------------------------
Print Name: Phil Layher Print Name: Randal Potter
------------------------ --------------------------
Title: Vice President Title: VP Marketing
---------------------------- -----------------------------
Merchant's Federal Tax ID #'s:
94-3002667
--------------------------------
--------------------------------
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[We have omitted portions of this Exhibit pursuant to a request for
confidential treatment that we have filed pursuant to Rule 406 of the
Securities Act. We have separately filed a copy of this Exhibit with the
omitted portions intact with the Securities and Exchange Commission.]
EXCLUSIVE SALES AGREEMENT(1)
This Exclusive Sales Agreement (the "Agreement") is made as of the 1st day
of January, 1996 by and between Delta Consolidated Corporation, a New York
corporation doing business as Nautilus Marketing ("Nautilus Marketing"), and
NovaCare, Inc., a Delaware corporation, The Polaris Group division
("NovaCare").
WHEREAS, Nautilus Marketing is engaged in the business of marketing
products of Nautilus International, Inc., a Virginia corporation ("Nautilus"),
and
WHEREAS, Nautilus Marketing desires to engage NovaCare to solicit orders
for certain of the products of Nautilus for sale to customers in certain markets
and territory as described herein;
NOW THEREFORE, in consideration of the promises and the mutual covenants
herein, the parties hereto agree as follows:
1. RIGHTS GRANTED
1.1 Except as limited hereby, Nautilus Marketing hereby grants to
NovaCare, subject to the terms and conditions set forth herein, the exclusive
right to solicit and submit orders for the Products from Senior Living
Industry purchaser locations within the Territory (as so defined, the
"Exclusive Market"), and the non-exclusive right to solicit and submit orders
for the Products from hospitals and outpatient medical clinics in the
Territory for Medical Purposes (such market, together with the Exclusive
Market, being sometimes referred to herein as the "NovaCare Market"). It is
expressly understood and agreed that the NovaCare Market shall not include
individuals purchasing for in-home or personal use of the Products, any
person or entity purchasing for resale, any health club or fitness center
outside the Senior Living Industry (whether a stand-alone facility or part of
another business or institution), any agency or department of the federal
government, or any entity purchasing through or under a contract with the
General Services Administration.
1.2 It is understood and agreed that the "Senior Living Industry" refers
only to nursing facilities, subacute care units, other long-term care units,
assisted living facilities and other non-hospital health care facilities that in
each case provide residential and day care to senior citizens and other patients
on premises. "Medical purposes," as used herein, refers to use of the Products
in a hospital or outpatient clinic for preventive, rehabilitative and
therapeutic medical purposes under the supervision of a physician, nurse,
clinician, or other health care provider. An "affiliate" of NovaCare, as used
herein, refers to any entity that controls, is
- ------------------------
(1) EXCEPT TO THE EXTENT THAT THE UNITED STATES ARBITRATION ACT APPLIES, THIS
AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO CHAPTER 48 OF TITLE 15 OF
THE CODE OF LAWS OF SOUTH CAROLINA
<PAGE>
controlled by, or is under common control with NovaCare. "Territory" refers to
the United States of America.
1.3 Except as expressly limited by Section 1.4 hereof, nothing herein
contained shall be construed to limit the right of Nautilus or Nautilus
Marketing to sell the Products outside the Exclusive Market, or to sell other
Nautilus products in any market or manner whatsoever. Without limiting the
foregoing, Nautilus and Nautilus Marketing shall not be restricted from selling
any product under any existing or future Government Services Administration
contract or other contract with any agency or department of the federal
government, whether or not for use within the Senior Living Industry.
1.4 NovaCare shall not knowingly submit any order for Products from any
person or entity intending to resell or use the Products outside the NovaCare
Market, without the prior written consent of Nautilus Marketing. Except as
provided in Section 4.4 hereof, Nautilus Marketing shall not knowingly ship or
install any Product or any equipment product which is designed for the consumer
market or is part of the "Challenger" treadmill line to or within the Exclusive
Market, and shall not knowingly sell any Product or any such consumer or
Challenger equipment product to any party which intends to resell the same
within the Exclusive Market, unless pursuant to orders submitted by NovaCare.
2. PRODUCTS; DISCOUNT; COMMISSION AND MARKETING ALLOWANCE
2.1 PRODUCTS. As used herein, "Products" means the complete line of
Nautilus equipment, as such line is described on the retail price list published
by Nautilus and in effect on the date hereof, provided that "Products"
specifically does not include the line of Nautilus equipment designed for the
consumer market, the "Challenger" treadmill line, or any nonequipment product
of Nautilus which is not normally sold together with a Product.
2.2 DISCOUNT ON NOVACARE PURCHASES. Subject to the terms and conditions
of this Agreement, Nautilus Marketing hereby grants a discount of *
* off the List Price (defined below) of products SOLD pursuant to orders
submitted by NovaCare for its own account, or the account of any Affiliate
identified as such in the order, and accepted by both Nautilus and Nautilus
Marketing. Such discount shall be shown on the invoice for the Products sold,
and shall not apply with respect to taxes or to charges for shipping (including
insurance), special handling, crating, special paint and/or pad covers, and any
other special charges or allowances that may be applicable from time to time
(Special Charges), which shall be billed at the full amount thereof. NovaCare
represents and agrees that Products purchased by NovaCare or any Affiliate shall
be for use within the Territory by NovaCare or such Affiliate, and shall not be
purchased for resale or resold in any market.
2.3 SALES COMMISSION. Subject to the terms and conditions of this
Agreement, Nautilus Marketing agrees to pay NovaCare a sales commission on sales
of Products to Customers (as defined in Section 3.1 hereof), other than sales at
a discount pursuant to Section
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2.2 hereof, in response to orders submitted by NovaCare and accepted by both
Nautilus and Nautilus Marketing and shipped to the Customer as further described
in this Section 2.3 (the "Sales Commission").
2.3.1 AMOUNT OF COMMISSION. For each sale of Products with
respect to which the Sales Commission is payable, the Sales Commission shall
be an amount equal to:
(1) the aggregate amount collected by Nautilus on the invoice(s)
rendered for that sale at the prices quoted for such Products
pursuant to Section 3.2.4 after deduction of the following:
applicable federal, state or local sales, excise, use or similar
taxes, if any; credits for returned or defective products, any
additional discounts and/or cancellations; and Special Charges
(collectively "Deductions"),
less
(2) * of the List Price of the Products shipped
pursuant to such order.
2.3.2 LIMITATIONS. There shall be no commissions due on orders that
are not accepted by Nautilus Marketing and Nautilus or that are received by
Nautilus Marketing on or after the effective date of any termination of this
Agreement. There shall be no commissions due for any product that is not a
Product at the time the order is received by Nautilus Marketing or that is
ordered by any person who is not a Customer at the time the order is received by
Nautilus Marketing.
2.3.3 TIME OF PAYMENT. The Sales Commission, if any, accrued to
NovaCare in respect of a sale shall be due and payable to NovaCare, subject to
adjustment as set forth in this Agreement, within thirty (30) days after the end
of the fiscal month during which the full payment for that sale is received by
Nautilus. In the case of orders financed by Nautilus in whole or in part
pursuant to Section 3.4.2 hereof, unless otherwise specified at the time of such
order, for purposes of determining the amount and the time of payment of the
Sales Commission payable with respect to such order, the amount so financed
shall be deemed collected in the month such financing is effected.
2.4 MARKETING ALLOWANCE. In addition to the Sales Commission, for each
year during which NovaCare meets the sales quota for such year described in
Section 4 hereof, Nautilus Marketing agrees to pay NovaCare a non-accountable
marketing allowance equal to * of the List Price of the Products
sold pursuant to orders submitted by NovaCare pursuant to this Agreement for
which the Sales Commission is payable or the discount described in Section 2.2
hereof is applicable, and for which payment in full is received by Nautilus
during such year (the "Marketing Allowance"). After NovaCare has met its sales
quota for any sales year defined in Section 4 hereof, Nautilus Marketing shall
pay the then-accrued Marketing Allowance for such year within thirty (30) days
after the end of the quarter during which such sales quota was met, and shall
pay any subsequently-accrued Marketing Allowance for such year
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<PAGE>
within thirty (30) days after the end of each quarter (if any) remaining in
such year. If, due to adjustments calculated pursuant to Section 2.7 hereof,
NovaCare has not met its sales goal for any such sales year at the end of
that year, to the extent any Marketing Allowance previously paid with respect
to such year has not been recovered pursuant to Section 2.7.2 hereof,
NovaCare shall refund to Nautilus Marketing any such unrecovered Marketing
Allowance within 30 days after the end of such year.
2.5 LIST PRICE. As used herein, "List Price" of a Product shall mean
the price of such Product as listed on the standard retail price lists
published by Nautilus Marketing or Nautilus from time to time for general
use. Such standard retail price lists may be changed, expanded, reduced or
modified, or the sale or distribution of any Product discontinued
unilaterally, from time to time and at any time during the term hereof, in
the sole and absolute discretion of Nautilus, without incurring any liability
whatsoever to NovaCare or others. Nautilus Marketing will use its best
efforts to give NovaCare sixty (60) days' notice in advance of any such
change in List Price or Products, which notice may be in the form of one or
more new price lists delivered in advance of their effective dates. It is
understood and agreed, for purposes of calculating the Sales Commission and
the Marketing Allowance, that List Price does not include Deductions, but
that the foregoing provisions regarding unilateral modification and notice by
Nautilus Marketing Nautilus shall apply to Deductions.
2.6 EXPLANATION OF PAYMENTS. On or before the end of each fiscal
quarter, Nautilus Marketing shall provide NovaCare with a schedule (an
"Explanation of Payments") summarizing the basis for the computation of the
Sales Commission and Marketing Allowance paid or accrued during the previous
fiscal quarter including without limitation in respect to the pertinent
period, the value of each shipment, the value of any credits, the commission
amount for each shipment and the amount of any Deductions, plus any other
information pertinent to the status of the orders submitted by NovaCare that
Nautilus Marketing may elect to include. NovaCare also agrees that, in the
event NovaCare has any question or objection regarding any information, or
the lack thereof, regarding any aspect of any Explanation of Payments or any
question regarding any order with an expiration date occurring during the
period to which any Explanation of Payments pertains, NovaCare will give
Nautilus Marketing in writing a detailed statement of such question or
objection and the basis for it within sixty (60) days of the date on which
NovaCare receives the Explanation of Payments (the "Receipt Date"). NovaCare
agrees that all payments in respect to an Explanation of Payments shall be
deemed to have been received by NovaCare, the information contained in such
Explanation of Payments shall be deemed complete and correct, and all
questions of NovaCare shall be deemed answered to the satisfaction of
NovaCare, for all invoices sent, all orders received, and all payments
received prior to the end of the period to which such Explanation of Payments
pertains (plus, in the event of a post termination Explanation of Payments,
all orders received, invoices sent and payments received prior to
termination) except to the extent specified by NovaCare to Nautilus Marketing
in a written objection or question within sixty days of the Receipt Date of
that Explanation of Payments.
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2.7 ADJUSTMENTS AND REPAYMENTS.
2.7.1 OUTSTANDING ADVANCES. An advance on the payment due
NovaCare by Nautilus Marketing hereunder (an "Advance") shall be deemed to
have been made under any of the circumstances described in this subparagraph:
(1) In the event that a Deduction applicable to the calculation of any Sales
Commission or Marketing Allowance was not deducted in the calculation of such
amount at the time of payment by Nautilus Marketing (whether through error or
because the Deduction arose from events occurring after the initial
calculation of the amount), the reduction in such amount that would have
occurred if that Deduction had been deducted by Nautilus Marketing shall be
an Advance. (2) In the event that the Marketing Allowance paid with respect
to any sales year set forth in Section 4 hereof is determined not to have
been payable due to failure of NovaCare to achieve the sales quota for such
year, after adjusting for Deductions and making any other adjustments
required hereunder, such payment shall be an Advance. (3) In the event any
Customer fails to pay any amount due pursuant to an order financed by
Nautilus pursuant to Section 3.4.2 hereof, the payment of which is guaranteed
by NovaCare pursuant to Section 3.4.3 hereof, the amount of Sales Commission
and Marketing Allowance previously paid with respect to such sale shall be an
Advance, provided that such Sales Commission and Marketing Allowance shall be
deemed to have been earned to the extent the amount paid by the Customer or
by NovaCare pursuant to its guaranty obligation with respect to such sale,
less the amount of any Deductions related thereto, exceeds *
* of the aggregate List Price of all Products included in such sale. (4)
Whenever, for any reason, the amount of Sales Commission, Marketing
Allowance, or any other payment made in respect to a fiscal quarter exceeds
the amount of such payments due in respect of that fiscal quarter after the
adjustments set forth in this Agreement (whether as a result of an error in
calculation or events occurring after the initial calculation), the amount of
the overpayment shall be an Advance. (5) In the event NovaCare fails to pay
any amount due Nautilus or Nautilus Marketing under the guaranty provisions
set forth in Section 3.4.3 hereof, such unpaid amount may be treated as an
Advance at the election of Nautilus Marketing. That portion of the total of
all Advances made under this Agreement that, from time to time, has not been
recovered by Nautilus Marketing through an adjustment to amounts paid in
respect to any fiscal quarter shall be Outstanding Advances.
2.7.2 OFFSET AND REPAYMENT. To the maximum extent possible, any
Outstanding Advances shall be deducted at the earliest possible time from
future Sales Commission, Marketing Allowance, or other sums owed by Nautilus
or Nautilus Marketing to NovaCare, and shall continue to be deducted from any
such sums that may become due after termination of this Agreement. If on the
date any Sales Commission or Marketing Allowance becomes payable to NovaCare
under this Agreement, NovaCare is indebted to Nautilus or Nautilus Marketing
for any reason whatsoever, Nautilus or Nautilus Marketing, as the case may
be, shall have the right to deduct from the payment of such amount the amount
of such indebtedness. Further, in the event that NovaCare fails to earn or
repay, prior to the termination of this Agreement, sufficient Sales
Commission or Marketing Allowance to offset the amount of any portion of the
Outstanding Advances as of the termination of this Agreement, NovaCare shall
repay to Nautilus Marketing the amount of any Outstanding Advances remaining
on the termination date of this
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Agreement within thirty (30) days of such date.
3. ORDERS AND TERMS
3.1 ORDERS. All sales to NovaCare or to other purchasers within the
NovaCare Market, (such purchasers, together with NovaCare, being referred to
herein as "Customers") shall be in accordance with the terms and conditions of
this Agreement, and in accordance with such other reasonable terms, conditions
and procedures (not inconsistent herewith) as are established by Nautilus
Marketing from time to time. Such other reasonable terms, conditions and
procedures may be set forth by Nautilus Marketing or Nautilus in written
communications, such as price lists, manuals, bulletins, letters, or the like.
NovaCare shall comply with all requirements of Nautilus Marketing which are in
effect from time to time regarding the submission of orders.
3.2 TERMS OF ACCEPTANCE. Without limiting the generality of the
foregoing, the following terms will be deemed incorporated in all orders
accepted by Nautilus Marketing and Nautilus, and such acceptance is expressly
made conditioned on the following:
3.2.1 No sale shall be effective until a purchase order is
delivered by NovaCare to Nautilus Marketing and accepted by Nautilus Marketing
and Nautilus. Nautilus Marketing and Nautilus each reserves the right to reject
any order in its sole discretion. Neither Nautilus Marketing nor Nautilus shall
be liable to NovaCare for any loss or damage resulting from any such action so
taken.
3.2.2 Except as provided in Section 3.2.3 hereof, upon acceptance
of a purchase order, after the number of days following such acceptance
indicated by the then-current delivery lead time schedule published by Nautilus
from time to time in its sole discretion (plus or minus ten business days),
Nautilus, to the extent possible using its best efforts, shall drop ship the
Products to the "ship to" address or addresses shown on the purchase order.
NovaCare shall furnish Nautilus, on a timely basis, full and adequate shipping
directions for each order.
3.2.3 Delivery dates given by Nautilus or Nautilus Marketing for
Product orders shall be considered estimates only. In the event of late
delivery (defined as a delivery not shipped within 45 days from date Nautilus
receives the order for said product), the ordering Customer may cancel the
order provided that such Customer shall give written notice thereof to
Nautilus Marketing and Nautilus, and further provided that the Products in
question may be delivered within (10) business days after such notice is
actually received by Nautilus Marketing and Nautilus, in which case the
cancellation notice shall be void. Cancellation by a Customer in accordance
with this subparagraph shall be without cost or penalty to NovaCare, and
shall terminate any obligation on the part of Nautilus or Nautilus Marketing
with respect to such canceled order, including without limitation any
obligation for payment of Sales Commission or Marketing Allowance with
respect to such canceled order.
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3.2.4 Upon shipment, Nautilus will invoice the Customer for the
price of the Products ordered, (1) in the case of purchases made pursuant to
Section 2.2 hereof, at the discounted List Price described in that Section, or
(2) in the case of orders submitted by NovaCare pursuant to Section 3.1 hereof,
at the sales prices quoted by NovaCare for the Products ordered (which in no
event shall be lower than * of the List Price of such
Products), plus, in each case, applicable charges for shipping, special
handling, crating, special paint and/or pad covers, and applicable federal,
state or local sales, excise, use or similar taxes, and any other charges in
addition to the sales price for the Products ordered, the payment of which shall
be the responsibility of the Customer.
3.2.5 All Products Will be shipped F.O.B. Nautilus' manufacturing
facility, and the Customer shall bear all costs of freight, insurance and
associated costs.
3.2.6 In the event orders of Products by Customers and other
purchasers exceed Nautilus' ability to manufacture and deliver Products in a
timely manner, Nautilus Marketing reserves the right to apportion Products among
the Customers and its other customers in its reasonable discretion.
3.3 MODIFICATION OF ORDERS, SHIPPING, ETC. Nautilus Marketing and
Nautilus each has the right, in its sole discretion, to modify any of the
Products, to cancel or delay shipment of any order for any reason, to
discontinue the sale of all or some of the Products, or to allocate any of its
products during a period of shortage, without incurring any liability to
NovaCare, including without limitation any liability for the payment of the
Sales Commission or Marketing Allowance. In the event any Product is
discontinued by Nautilus or Nautilus Marketing (unless a substantially similar
product is available or made available to NovaCare hereunder), the quota
requirement set forth in Section 4 hereof for the year during which such
discontinuation takes place shall be reduced by the amount produced by
multiplying (1) the sales quota for the year of discontinuation, (2) the
percentage of the aggregate List Price of Products purchased and paid for by
Customers pursuant to orders submitted by NovaCare during the year preceding the
year of such discontinuation represented by sales of the discontinued Product in
such year, and (3) the percentage of days remaining in the year of
discontinuation following the date of such discontinuation. The sales quota for
each subsequent year will be reduced (if at all) by the amount produced by
multiplying (1) the sales quota for such subsequent year, (2) the percentage
described in clause (2) of the preceding sentence, and (3) the percentage of
days (if any) of such subsequent year during which no substantially similar
product to the discontinued Product is available or made available to NovaCare
hereunder. In the event an order for Products submitted by NovaCare is accepted
by Nautilus and Nautilus Marketing hereunder and is later canceled by Nautilus
or Nautilus Marketing, or is canceled by the customer in accordance with Section
3.2.3 hereof, the aggregate List Price of the Products ordered pursuant to such
order shall be deducted from the sales quota for the year during which such
cancellation takes place.
3.4 PAYMENT.
3.4.1 TERMS. Nautilus Marketing and Nautilus shall have sole and
absolute
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discretion, at the time of and with respect to each order from a particular
Customer, to accept or reject any order made upon the condition of terms or
financing, or for any other reason, and no order shall be effective until
accepted by Nautilus and Nautilus Marketing. Without limiting the discretion
of Nautilus and Nautilus Marketing under the foregoing sentence, a Customer
may elect to submit an order specifying payment terms of either net thirty
(30) days or net ninety (90) days from the shipment date, provided that
Nautilus shall charge and the Customer will pay interest on any unpaid
balance, at four percent (4%) over the highest prime rate published by any
bank at which Nautilus maintains an account, beginning after thirty (30) days
from the shipment date until paid.
3.4.2 FINANCING. A Customer shall be permitted, but not obligated,
to apply for Nautilus in-house financing of any purchase of Products, which
financing shall be upon such terms and conditions as Nautilus shall establish in
its sole discretion for such Customer at the time of each such purchase. No sale
involving Nautilus in-house financing shall be effective until the Customer
makes application to Nautilus and is approved for such financing. Nautilus
reserves the right to refuse to finance any Customer or purchase of Products for
any reason whatsoever in its sole and absolute discretion exercised with respect
to each order for which financing is sought.
3.4.3 NOVACARE GUARANTY. In the event an order from a Customer
is rejected for terms or financing by Nautilus or Nautilus Marketing,
NovaCare may offer to guarantee to Nautilus Marketing and to Nautilus the
timely payment of all amounts due Nautilus or Nautilus Marketing from time to
time under any invoice or Nautilus in-house financing with respect to such
order, and if such order and guaranty is accepted by Nautilus and Nautilus
Marketing in its sole discretion, NovaCare shall be liable for the full and
timely payment thereunder. NovaCare shall promptly pay all amounts required
to be paid pursuant to any such guaranty, and if NovaCare fails promptly to
pay any such amount, Nautilus Marketing may, in addition to its other
remedies, elect to treat such amount (and the associated Sales Commission and
Marketing Allowance, to the extent paid) as an Advance deductible pursuant to
Section 2.7.2 hereof from amounts due NovaCare.
4. SALES QUOTAS
4.1 In consideration of the exclusive and non-exclusive rights to sell
the Products within the NovaCare Market granted hereby, NovaCare agrees to use
its best efforts to effect sales and purchases aggregating at least the
following minimum dollar volumes of Products within the NovaCare Market during
the time periods shown:
JANUARY 1, 1996 TO DECEMBER 31, 1996
------------------------------------
*
JANUARY 1, 1997 TO DECEMBER 31, 1997
------------------------------------
*
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JANUARY 1, 1998 to DECEMBER 31, 1998
------------------------------------
*
JANUARY 1, 1999 TO DECEMBER 31, 2000
------------------------------------
*
JANUARY 1, 2001 TO DECEMBER 31, 2001 AND EACH YEAR THEREAFTER
-------------------------------------------------------------
the greater of:
(i) * of the prior year's quota
or
(ii) the prior year's quota plus one-half (1/2) the difference
between the prior year's quota and the prior year's actual sales
Notwithstanding the foregoing, the sales quota for any year hereunder
shall not exceed * , unless otherwise agreed in writing by the
parties hereto, during the ten (10) year period beginning on the date hereof
and ending on November 30, 2005.
4.2 Sales volumes for purposes of determining compliance with the
above quotas will be calculated at the end of each of the above periods by
adding together (1) the total List Price of Products, excluding Deductions,
purchased and paid for by Customers pursuant to orders submitted by NovaCare
for which the Sales Commission is payable with respect to such period, and
(2) the total List Price of Products, excluding Deductions, purchased and
paid for by NovaCare or any Affiliate prior to the end of such period, as to
which the discount set forth in Section 2.2 hereof is applicable.
4.3 In the event NovaCare exceeds its quota in any of the above periods,
NovaCare shall be entitled to carry over such excess and apply it toward the
quota for the next successive period up to and including ten percent (10%) of
the quota for such next successive period, provided that such excess shall be
excluded from the calculation of the Marketing Allowance for such next
successive period.
4.4 It is expressly understood and agreed that the failure of NovaCare
to meet the above sales quotas, as determined at the end of each of the above
periods during the term hereof, will give Nautilus Marketing the right, upon
written notice to NovaCare, to terminate the exclusivity of NovaCare's right to
sell under this Agreement.
5. REPRESENTATIONS AND COVENANTS
5.1 REPRESENTATIONS OF NOVACARE
5.1.1 CORPORATE STATUS. NovaCare is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, with all
requisite corporate power and
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authority to conduct its business as presently conducted, to own, operate and
lease its properties and to enter into and perform this Agreement. NovaCare
is duly qualified to do business and is in good standing in all states in
which the nature of its business and properties makes such qualification
necessary.
5.1.2 AGREEMENT DULY AUTHORIZED, EXECUTED AND BINDING. NovaCare
has the full legal right and power and all authority required to enter into,
execute and deliver this Agreement and all instruments and documents to be
executed by it pursuant to this Agreement and to perform fully its or his
obligations hereunder and thereunder. This Agreement and all instruments and
documents to be executed pursuant to this Agreement have been duly authorized
by all corporate action required to be taken by NovaCare, have been duly
executed and delivered and are the legal, valid and binding obligation of
NovaCare, enforceable against it in accordance with their respective terms.
5.1.3 AGREEMENT CAUSES NO DEFAULT. Neither the execution and
the delivery of this Agreement nor the consummation of the transactions
contemplated herein will conflict with or result in any violation of or
constitute a default under any provision of the Articles of Incorporation,
by-laws or similar document of NovaCare, or any agreement, mortgage, note,
indenture, franchise, license, permit, authorization, lease or other
instrument, judgment, decree, order, law or regulation by which NovaCare is
or may be bound or which may affect any of its respective assets or
properties.
5.1.4 REQUIRED CONSENTS. No consent, approval or authorization of,
filing with or notice to any governmental authority or any person or entity is
required in connection with the execution, delivery or performance of this
Agreement or the consummation of the transactions contemplated herein.
5.2 COVENANTS OF NOVACARE.
5.2.1 NovaCare shall not have the authority to accept orders on
behalf of Nautilus Marketing or Nautilus. Nautilus Marketing and Nautilus
shall not be under any obligation to accept any order. The determination
whether to accept an order shall be made by Nautilus Marketing and Nautilus
in their sole discretion.
5.2.2 NovaCare shall have no authority to make quotations with
respect to purchase terms, other than prices (subject to the limitation set
forth in Section 3.2.4 hereof), except to the extent authorized by Nautilus
Marketing.
5.2.3 NovaCare shall not extend any warranty or guarantee, make
any other representation, or assume any liability on behalf of Nautilus
Marketing or Nautilus, provided, however, that NovaCare may distribute
literature supplied by Nautilus Marketing containing representations as to
Products.
5.2.4 NovaCare shall not have any authority to make, and shall
not make, any
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commitment and/or obligation on behalf of Nautilus Marketing or Nautilus to
anyone for any purposes under any circumstances.
6. RESPONSIBILITIES OF NAUTILUS MARKETING AND NAUTILUS
In addition to and subject to the other provisions of this Agreement,
Nautilus Marketing or Nautilus shall:
6.1 Provide Products to Customers in response to orders submitted by
NovaCare and accepted by Nautilus Marketing and Nautilus, as set forth in this
agreement.
6.2 Use its best efforts to forward to NovaCare all leads received by it
from advertising, trade shows, and other sources, to the extent such leads
relate to potential sales into the Exclusive Market.
6.3 Provide NovaCare with such marketing literature, technical advice
and assistance and warranty literature as Nautilus Marketing and Nautilus
deem appropriate for the Products. Such literature shall be provided to
NovaCare with the cost of same to be borne by NovaCare, provided that
NovaCare has approved such charges in advance or accepts a shipment of such
literature. NovaCare shall not supply its employees or agents with any
literature or information regarding the Products which is not either provided
by Nautilus Marketing or Nautilus or approved by Nautilus Marketing or
Nautilus in advance of its use. Nautilus Marketing and Nautilus will use
their best efforts promptly to notify NovaCare of any literature errors.
6.4 Provide NovaCare with access to employees of Nautilus Marketing
and Nautilus for graphic design, marketing assistance and other support, if
such employees have sufficient time available for such support as determined
by Nautilus Marketing or Nautilus in their sole discretion. NovaCare shall
pay for such employee services at the cost of such employees to Nautilus
Marketing or Nautilus, as the case may be, as described in writing to
NovaCare before such support is provided. Such payment shall be made by
deduction from amounts payable pursuant to Section 2.3 hereof.
6.5 Provide sales and technical training to NovaCare employees,
trainers and/or representatives, upon reasonable request by NovaCare. In
addition, NovaCare may utilize existing training classes that may be provided
by Nautilus, based on availability and at Nautilus' reasonable discretion.
All such training shall be provided at such prices as Nautilus shall announce
from time to time.
7. RESPONSIBILITIES OF NOVACARE
In view of NovaCare's understanding that pre-sale and post-sale support
of the Products by NovaCare are critical to the reputation and success of the
Products in the marketplace, NovaCare acknowledges that its ability to
provide such support and to aggressively market the Products is a critical
element in Nautilus Marketing' decision to enter into this Agreement.
Accordingly, in addition to the sales quotas set forth in Section 4 hereof
and the other provisions of this Agreement, and in further consideration of
the Sales Commission and the Marketing
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Allowance, and the exclusive rights granted hereunder, NovaCare agrees to
implement the sales and support program described below:
7.1 BEST EFFORTS. NovaCare shall exercise its best efforts to achieve,
in a manner consistent with other terms of this Agreement, maximum market
penetration for the Products in the NovaCare Market. NovaCare will forward all
leads for potential sales in the NovaCare Market received from Nautilus
Marketing or other sources to the appropriate Representative promptly after
receipt and will implement an appropriate follow-up system.
7.2 NOVACARE SYSTEM. NovaCare shall develop and market a complete
customized system (the "NovaCare System") respecting the sales of Products and
the provision of support to purchasers of Products. The NovaCare System will
include, but not be limited to:
i. Sale of appropriate Products.
ii. Training in use of the Products through on-site instruction,
using instructional manuals and other appropriate methods.
iii. Provision of brochures and literature to Customers to assist
in marketing through promotion of the strength training
concept.
iv. Follow-up support and assistance, including provision of
toll-free telephone support, and on-site consultation as
reasonably necessary.
7.3 REPRESENTATIVES. NovaCare will use its existing force of sales
representatives and any additional representatives as may be retained by
NovaCare (collectively, the "Representatives") to sell the Products and
implement the NovaCare System. NovaCare shall be solely responsible for the
hiring, compensation, termination and all other matters relating to the
Representatives and any other persons or entities employed or engaged by
NovaCare for any reason whatsoever, and shall indemnify Nautilus Marketing
and Nautilus against all injuries, actions, losses, damages, expenses or
proceedings arising from the employment or engagement of or the actions or
inactions of, any such persons or entities, except to the extent caused by
any defect of a Product manufactured by Nautilus.
7.4 LEADS. NovaCare agrees to promptly forward to Nautilus Marketing a
complete written description of any lead or other information generated by
NovaCare's advertising, trade shows, and other activities, or otherwise received
by Novacare, relating to potential sales outside the NovaCare Market.
7.5 TRADE SHOWS. NovaCare agrees to promote the Products by
independently participating in at least five (5) appropriate shows in the
Territory during each year of this Agreement. All travel and other expenses of
NovaCare or its employees or Representatives related to these shows will be paid
by NovaCare and/or the Representatives.
7.6 SALES TRAINING. NovaCare shall cause the Representatives to become
trained and knowledgeable with respect to functional capabilities and operation
of the Products.
7.7 LIMITATION ON EXTRA-TERRITORIAL AND UNSUPPORTED SALES. NovaCare
shall not ship,
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sell, market or support any of the Products outside the Territory unless
specifically authorized by the prior written consent of Nautilus Marketing.
7.8 PROBLEM RESOLUTION. NovaCare will comply with all reasonable
requests by Nautilus Marketing for assistance in the collection of accounts
receivable, investigation of complaints and settlement of disputes regarding
sale of Products to any Customer. NovaCare shall attempt to resolve all
complaints of customers of NovaCare prior to involving Nautilus Marketing or
Nautilus personnel.
7.9 PRODUCT INFORMATION. NovaCare will immediately notify Nautilus
and Nautilus Marketing if at any time it obtains notice or knowledge of any
defect, dangerous condition, complaint, or other problem with respect to any
Product, will provide with such notification such information as it has in
its possession or can obtain without unreasonable effort or expense regarding
such defect, dangerous condition, complaint or other problem, and will
cooperate fully with Nautilus and Nautilus Marketing in their investigative
and remedial efforts in response thereto. NovaCare agrees that any such
information it obtains shall be deemed confidential information subject to
the non-disclosure requirements of Section 8.3 hereof.
7.10 CUSTOMER STATUS. NovaCare will provide Nautilus Marketing promptly
with all information that Nautilus Marketing reasonably requests in connection
with any order placed by a Customer, and will keep Nautilus Marketing apprised
of any changes that may affect a Customer's status from time to time. Changes
that may affect a Customer's status include, but are not limited to, a change in
address or the identity of the person or persons responsible for purchasing the
Products. NovaCare shall, on the request of Nautilus Marketing, assist Nautilus
Marketing in obtaining credit information relating to Customers or prospective
Customers.
7.11 REPORTS. NovaCare shall monitor its activities and those of the
Representatives with respect to the Products, and shall provide Nautilus
Marketing with such reports as Nautilus Marketing may reasonably request from
time to time.
7.12 TRAINING FEE. NovaCare agrees to pay a training fee (only upon
request to train from NovaCare) to Nautilus for any Nautilus employee who
trains any person who purchases Products pursuant to orders submitted by
NovaCare. Such training fee will be calculated as * of the
gross invoice amount, less Deductions, collected by Nautilus from the
purchaser of the Products sold. Payment will be made only after such
purchaser signs a Nautilus installation satisfaction sheet provided by
NovaCare.
7.13. EXPENSES. Except for such expenses as may be approved by Nautilus
Marketing from time to time for reimbursement by it, all expenses for travel,
entertainment, office, clerical, office and equipment maintenance expense,
general selling expense, and other expenses incurred by NovaCare, and all
disbursements made by it in the performance of duties hereunder, shall be borne
solely by NovaCare. In no case shall Nautilus Marketing be responsible or liable
for any such expenses not approved by it for reimbursement.
7.14. COMPLIANCE WITH COMMISSION AGREEMENTS, ETC. NovaCare agrees to
comply, and to cause all of its Representatives, employees and other agents
who are involved in NovaCare's performance under this Agreement to comply, in
all material respects (except to the extent any such agreement or arrangement
is inconsistent with this Agreement) with all agreements or
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arrangements, written or oral, entered into by NovaCare with any party other
than or in addition to Nautilus or Nautilus Marketing, which in any way
relate to or affect the Products or NovaCare's fulfillment of its obligations
hereunder (a "Third Party Agreement"). Without limiting the generality of the
foregoing, NovaCare agrees to pay in a timely manner all commissions and
other amounts owed by NovaCare from time to time to any distributor or dealer
under any Third Party Agreement entered into with any such distributor or
dealer. NovaCare agrees that any such distributor or dealer shall look
solely to NovaCare for payment of such commissions or other amounts, and
agrees to indemnify Nautilus and Nautilus Marketing in accordance with
Section 12.1 hereof with respect to claims, liabilities and defense costs
arising out of any Third Party Agreement.
7.15. COMPLIANCE WITH LAWS. NovaCare agrees to comply, and to cause
all of its Representatives, employees and other agents to comply, in all
material respects with all applicable laws and regulations, including
applicable workers' compensation laws, and to pay the premiums and other
costs and expenses incident to the required workers' compensation coverage.
7.16. PROPERTY OF NAUTILUS. Any property of Nautilus received by NovaCare
under this Agreement shall be held by it for the account of Nautilus, and upon
request by Nautilus or upon termination or expiration of this Agreement such
property shall be returned to Nautilus in as good condition as when received by
NovaCare, ordinary wear and tear excepted. All records or papers of any kind
received from Nautilus Marketing or Nautilus related to their business shall
remain the property of Nautilus Marketing and Nautilus and, together with any
and all copies thereof, shall be surrendered to Nautilus Marketing or Nautilus,
as the case may be, upon their request and upon the termination or expiration of
this Agreement.
8. NON-COMPETITION AND NON-DISCLOSURE
8.1 Except as specifically authorized by Nautilus Marketing in writing
in advance, NovaCare and its representatives shall not during the term of this
Agreement represent or offer for sale any item of a similar nature to the
Products other than the Products, nor shall NovaCare or any Affiliate, except to
the extent authorized in writing by Nautilus Marketing, while this Agreement is
in effect, have a financial interest in the manufacture, production,
importation, sale or distribution of any item of a similar nature to any product
sold by Nautilus Marketing or manufactured by Nautilus. Notwithstanding the
foregoing, NovaCare may itself purchase any equipment, whether sold by Nautilus
or otherwise, for use in facilities it owns, operates, or manages.
8.2 Nautilus Marketing agrees not to solicit any Representative of
NovaCare for employment with or as contractors of Nautilus Marketing.
8.3 To the extent requested from time to time by Nautilus Marketing,
NovaCare agrees to keep confidential such information as Nautilus or Nautilus
Marketing may from time to time impart to NovaCare regarding Nautilus'
business affairs, operations, products and customers, and NovaCare will not,
in whole or in part, now or at any time, use such information except in
performing its obligations under this Agreement, or disclose said information
to any person without the prior approval of Nautilus or Nautilus Marketing,
except as required by law
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(in which case Nautilus Marketing shall be given as much prior notice of the
terms of such disclosure as is reasonably practicable, along with a description
of the information proposed to be disclosed).
9. INTELLECTUAL PROPERTY: GOOD WILL
9.1 NovaCare hereby acknowledges that one or more affiliates of
Nautilus Marketing are the sole owners of the Products and the NAUTILUS,
NAUTILUS SHELL DESIGN, STRONG MEDICINE and other trademarks, trade names and
service marks now or hereafter affixed or related to the Products, and of all
the goodwill associated therewith, (the "Trademarks"). NovaCare hereby
acknowledges the validity of the Trademarks, that the same shall at all times
be and remain the sole and exclusive property of those affiliates, and that
NovaCare, by reason of this Agreement or otherwise, has not acquired any
right, title, interest, or claim of ownership therein. The use by NovaCare of
the Trademarks permitted hereunder and any and all goodwill arising from such
use shall inure solely to the benefit of those affiliates and shall be deemed
to be the sole property of those affiliates in the event of the termination
of this Agreement for any reason; and upon termination of this Agreement, any
and all rights in and to the Trademarks granted to NovaCare hereunder shall
automatically terminate. If, during the term of this Agreement, any such
right should become vested in NovaCare by operation of law or otherwise,
NovaCare agrees that it will promptly, on the request of Nautilus Marketing
or any affiliate and, in any event, upon termination or expiration of this
Agreement, forthwith irrevocably assign, without consideration, any and all
such rights, together with any good will appurtenant thereto, to Nautilus
Marketing or its designated affiliate. NovaCare will at no time contest
ownership of the rights or the goodwill associated with the Trademarks.
Nothing contained in this Agreement shall be construed to prevent those
affiliates from authorizing any other person, firm, or corporation to sell
the Products outside the Exclusive Market or use associated Trademarks in any
way.
9.2 NovaCare shall not, and shall use its reasonable efforts to cause
the Representatives not to, permit any Trademark, servicemark, or trade name
of any affiliate of Nautilus Marketing to be used in a manner that is
contrary to the instructions of Nautilus Marketing or that affiliate or that
may adversely affect Nautilus Marketing or that affiliate or be detrimental
to its good name and reputation, or which might adversely affect any other
businesses licensed by Nautilus Marketing or any of its affiliates; nor do
anything in any way, directly or indirectly, at any time during the term of
this Agreement or thereafter to infringe upon, impair, harm, or contest the
rights, title, and interests in or to the Products or Trademarks of Nautilus
Marketing or any of its affiliates. NovaCare will not use any trademarks or
other trade name in connection with the Products except those used by
Nautilus Marketing. NovaCare will use those trademarks only in their standard
form and style or as instructed by Nautilus Marketing. No other letter, word,
design or symbol, or other matter of any kind shall be superimposed upon,
associated with or shown in such proximity to the trademarks of affiliates of
Nautilus Marketing as to tend to alter or dilute them. NovaCare will not
combine or associate any trademark of Nautilus Marketing's affiliates with
any other trademark or trade name. The generic or common name of any Product
must always follow the trademark. Every use of any trademark of Nautilus
Marketing's affiliates must be accompanied by the appropriate indication that
the trademark is a trademark of the appropriate affiliate. Neither NovaCare
nor any Representative will use any trademark or trade name of any affiliate
of Nautilus Marketing or
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any simulation of such marks or names as a part of NovaCare's or any
Representative's corporate or other trading name or designation of any kind.
Nautilus Marketing reserves the right to withdraw the right to the use of the
Trademarks if NovaCare or any Representative materially violates the provisions
of this paragraph.
9.3 If and to the extent each proposed use is submitted to and approved
in writing in advance by Nautilus Marketing in its sole discretion, NovaCare
will have the right to use of the Trademarks in marketing the Products in the
NovaCare Market. Without limiting the discretion of Nautilus Marketing described
in the foregoing sentence, such use may include, without limitation, business
cards, brochures, letterhead, advertising, and trade shows and promotions.
9.4 NovaCare shall give notice in writing to Nautilus Marketing of any
infringement of any Trademarks of any of Nautilus Marketing's affiliates or
misappropriation of any rights of any such affiliate which shall come to
NovaCare's knowledge at any time and, when requested, shall cooperate with the
appropriate affiliate in stopping such infringements. The appropriate affiliate
of Nautilus Marketing shall decide the need for instituting legal action with
respect to any infringement which may occur, and the cost of any such litigation
or the policing of rights granted by such affiliate hereunder shall be paid by
the affiliate.
9.5 NovaCare agrees to cooperate in the defense or prosecution of any
action involving infringement or misappropriation of any intellectual property
or proprietary or confidential information.
9.6 NovaCare hereby acknowledges the validity of all copyrights
registered by or in favor of Nautilus, its parent company, or any affiliate of
either of them in respect of literature, software and any other similar works
which may be copyrighted. NovaCare agrees that it will comply with any
licensing, sub-licensing or other program which Nautilus may from time to time
implement with respect to software used in connection with Products. NovaCare
shall not enhance or in any way alter any such software, and shall cause the
Representatives not to do so. Any alteration of the software voids any Nautilus
warranty with respect thereto.
10. SERVICE AND WARRANTY
10.1 NovaCare acknowledges that the Products require installation,
warranty and nonwarranty service, and maintenance by skilled, trained and fully
qualified Nautilus technicians (other than maintenance to be performed by the
end user in accordance with Nautilus' recommended maintenance instructions).
NovaCare will not, and will cause the Representatives to not, engage in any
installation, service, or maintenance of the Products.
10.2 NovaCare agrees to indemnify, defend and hold harmless Nautilus for
and against any claim or cause of action, including without limitation any claim
for loss or damages resulting from a voided warranty, arising solely out of any
violation of this subparagraph by NovaCare or any Representative.
10.3 The Nautilus new product Limited Warranty is as may be provided with
the Products by Nautilus from time to time (the "Limited Warranty"). Nautilus
agrees to double the normal term of the Limited Warranty applicable to each
Product sold hereunder, provided
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that such doubling of the normal term shall apply to a particular Product only
so long as it remains installed in the location in which it is first installed
following sale hereunder. Nautilus reserves the right at any time to amend or
modify its warranty policy, including any limitations or exclusions applicable
thereto. All used or refurbished Products are sold "as is" and no Nautilus
warranty shall apply thereto.
THERE ARE NO OTHER WARRANTIES WHICH EXTEND BEYOND THE FACE OF THE LIMITED
WARRANTY. ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING WITHOUT
LIMITATION THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
AND FITNESS FOR USE, ARE EXCLUDED.
10.4 Nautilus' sole responsibility shall be to repair or replace
Products under warranty, in accordance with the procedures set forth in the
Limited Warranty. Charges for out-of-warranty repairs by Nautilus will be at
the rates then in effect as charged to other Nautilus customers as Nautilus
may establish from time to time. NovaCare shall not make any representation
regarding cost, timing, availability or parts, or applicability of any
warranty, or assume any liability on behalf of Nautilus Marketing or
Nautilus, with respect to service or repair of the Products by Nautilus,
whether in or out of warranty.
10.5 NovaCare may not extend the Limited Warranty or modify it in any
respect. No modification or extension of the Limited Warranty is effective
unless it is contained in a writing signed by an authorized officer of
Nautilus. NovaCare shall not, and shall use its best efforts to cause the
Representatives to not, make any representation about the Products unless such
representation is contained in literature provided or approved by Nautilus with
respect to the Product in question.
10.6 NovaCare shall indemnify and hold harmless Nautilus, including
the payment of Nautilus' reasonable attorney fees and costs, in the event
NovaCare or any representative of NovaCare makes any unauthorized commitment
on behalf of Nautilus or Nautilus Marketing with respect to service and
repair of any Product or any other matter, or makes any express or implied
warranty or representation with respect to any Product which is inconsistent
with, different from, or in addition to the Limited Warranty or literature
provided or approved by Nautilus.
11. TERM AND TERMINATION
11.1 TERM. This Agreement shall continue for a term of five (5) years
from the date hereof, and shall be automatically renewed for three successive
five year periods thereafter, unless (1) NovaCare fails to meet or exceed its
sales quota set forth in Section 4 hereof for any two years hereunder,
whether or not such years are consecutive, in which case Nautilus Marketing
shall thereafter have the right to terminate this Agreement without notice,
or (2) this Agreement is otherwise earlier terminated pursuant to this
Section 11 or any other applicable provision of this Agreement.
11.2 TERMINATION FOR BREACH. Either party shall have the right to
terminate this Agreement with immediate effect if the other party hereto shall
default on or breach any of the
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terms, conditions, or covenants undertaken by or binding on it under this
Agreement, and such default or breach shall continue for a period of sixty (60)
days after receipt of written notice of the default or breach, or if any
representation or warranty made by the other party in this Agreement shall
become untrue in any material respect.
11.3 BANKRUPTCY, ETC. This Agreement may also be terminated by Nautilus
Marketing if NovaCare makes an assignment for the benefit of creditors, files a
voluntary petition under the federal bankruptcy laws, or any state law of
similar import, is the subject of any involuntary petition under the federal
bankruptcy laws or any state law of similar import without having the same
dismissed within sixty (60) days of its filing, or makes any bulk transfer of
its assets.
11.4 PENDING SALES. Upon termination of this Agreement, other than as
a result of NovaCare's breach hereof, NovaCare shall be entitled to receive
the Sales Commission and the Marketing Allowance, in accordance with and
limited by the provisions of Sections 2.3 and 4 hereof, with respect to
orders ultimately accepted by Nautilus Marketing and Nautilus that were
submitted by NovaCare to Nautilus Marketing prior to the effective date of
such termination in compliance with all requirements regarding the submission
of orders then in effect. No other or further amounts, for any reason, shall
be payable by Nautilus Marketing to NovaCare after termination. NovaCare
agrees that after termination of this Agreement Nautilus Marketing may, in
its sole discretion, in order to assure payment of any amounts due Nautilus
Marketing in connection with Outstanding Advances, withhold up to one-third
of any amount due in respect to any fiscal quarter for an additional thirty
days from the date on which such amounts would otherwise be due and payable.
In the event that any order is accepted by Nautilus Marketing and Nautilus
but canceled after termination because of expiration of the order or the
creditworthiness of the Customer, or at the request of the Customer, or for
any similar reason, no Sales Commission or Marketing Allowance shall be due
in respect to that order even if it is later rebooked.
11.5 NO LIABILITY. Nautilus Marketing shall not, by reason of the
termination or expiration of this Agreement, be liable to NovaCare for
compensation, reimbursement, or damages either on account of present or
prospective profits on sales or anticipated sales, or on account of
expenditures, investments, or commitments made in connection therewith, or in
connection with the establishment, development, or maintenance of the
business or goodwill of NovaCare, provided that termination shall not affect
the rights or liabilities of the parties with respect to sales of Products
hereunder prior to such termination, or with respect to any Sales Commission,
Marketing Allowance, Outstanding Advances, or other amount or indebtedness
then owing by either party to the other at the time of termination.
11.6 RETURN OF MATERIAL. Upon termination or expiration of this
Agreement, any samples for which NovaCare has not paid in full, any equipment
(including without limitation computers), any price books, other pricing
data, catalogues, booklets, pamphlets, technical information, literature, and
any sales or advertising aids and materials provided to NovaCare by Nautilus
or Nautilus Marketing (including all copies or extracts) shall remain or
become the property of Nautilus or Nautilus Marketing, as the case may be,
and shall be promptly returned to Nautilus or Nautilus Marketing, as the case
may be, along with any documents containing any information regarding the
business of Nautilus or Nautilus Marketing.
11.7 DISCONTINUANCE OF USE OF NAMES. Upon termination or expiration of
this
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Agreement, NovaCare will immediately discontinue every use of any Trademark and
the use of any language stating or suggesting that NovaCare is a sales
representative of Nautilus Marketing or affiliated in any way with Nautilus.
12. INDEMNIFICATION AND INSURANCE
12.1 NOVACARE.
12.1.1 NovaCare agrees to indemnify Nautilus and Nautilus
Marketing, their present and former agents, servants, officers, directors,
employees, attorneys, representatives, predecessors, successors, assigns,
shareholders, parent, subsidiaries and affiliates, and any and all other persons
or entities related thereto, against any and all claims, damages, losses and
expenses, including reasonable attorney's fees, arising in whole or in part out
of any action or inaction of NovaCare, any Representative of NovaCare or any of
NovaCare's employees or agents arising under or in connection with NovaCare's
performance under this Agreement, any deficiency in the performance under this
Agreement by NovaCare or any person or entity employed or engaged by NovaCare in
connection with this Agreement or any violation or breach by NovaCare of any
provision of this Agreement.
12.1.2 NovaCare shall carry general liability insurance
coverage in an amount of not less than $1,000,000 (combined single limit per
occurrence) with an insurance company satisfactory to Nautilus. NovaCare shall
provide Nautilus with a certificate of insurance evidencing such coverage within
thirty (30) days of the execution of this Agreement showing Nautilus
International, Inc. as an additional insured and certificate holder and
providing that such insurance shall not lapse or be canceled or modified unless
Nautilus has been given thirty (30) days' prior written notice of the intended
cancellation or modification.
12.2 NAUTILUS MARKETING.
12.2.1 Nautilus Marketing agrees to indemnify NovaCare, its
present and former agents, servants, officers, directors, employees, attorneys,
representatives, predecessors, successors, assigns, shareholders, parents,
subsidiaries and affiliates, and any and all other persons or entitles related
thereto, against any and all claims, damages, losses and expenses, including
reasonable attorney's fees, arising in whole or in part out of (i) claims by
previous sales agents, distributors or other resellers of the Products, (ii) any
action or inaction of Nautilus Marketing or any of its employees or agents
arising under or in connection with Nautilus Marketing' performance under this
Agreement, (iii) any deficiency in the performance under this Agreement by
Nautilus Marketing or any person or entity employed or engaged by Nautilus
Marketing in connection with this Agreement or (iv) any violation or breach by
Nautilus Marketing of any provision of this Agreement.
12.2.2 Nautilus shall carry general liability insurance
coverage in an amount of not less than $1,000,000 (combined single limit per
occurrence) with an insurance company reasonably satisfactory to NovaCare.
Nautilus shall provide NovaCare with a certificate of insurance evidencing such
coverage within thirty (30) days of the execution of this Agreement showing
NovaCare, Inc. as an additional insured and certificate holder and providing
that such insurance shall not lapse or be canceled or modified unless NovaCare
has been given
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thirty (30) days' prior written notice of the intended cancellation or
modification.
13. RELATIONSHIP OF THE PARTIES
13.1 NovaCare specifically acknowledges and agrees that it is an
independent contractor hereunder. Nautilus Marketing is interested only in the
results to be achieved, and subject to the terms and conditions of this
Agreement, the conduct and control of the work will lie solely with NovaCare. It
is understood that Nautilus Marketing does not agree to use NovaCare exclusively
except as stated herein. It is further understood that NovaCare is free to
contract for similar services to be performed for other parties while under
contract with Nautilus Marketing, subject to the non-competition provisions
hereof. It is the express intention of Nautilus Marketing and NovaCare that
anything in this Agreement which may be construed as inconsistent with the
independent contractor relationship shall be disregarded.
13.2 Neither NovaCare, the Representatives, nor its or any of their
employees or agents are employees of Nautilus or Nautilus Marketing under the
meaning or application of any law. Neither NovaCare, the Representatives, nor
any of its or their employees, representatives, agents and independent
contractors shall be covered as employees of Nautilus or Nautilus Marketing
under the workers' compensation laws of any state, or any other laws pertaining
to employees of an employer or the employment relationship. NovaCare shall be
solely responsible for the reporting, for purposes of federal tax, state tax,
FICA and any other applicable law, of any payments made to it or its employees
or the Representatives or other agents or independent contractors by Nautilus
Marketing or NovaCare, and is solely responsible for any payments required by
the United States Internal Revenue Service or other governmental agencies with
respect to such payments.
13.3 NovaCare shall not hold itself out as an agent of Nautilus or
Nautilus Marketing. NovaCare shall not have, or represent itself as having,
any authority to make contracts in the name of Nautilus or Nautilus Marketing
or to bind Nautilus or Nautilus Marketing in any manner. NovaCare shall not
make any warranties or statements ostensibly on behalf of or approved by
Nautilus or Nautilus Marketing with respect to the Products other than those
set forth in the Limited Warranty or literature provided or approved by
Nautilus or Nautilus Marketing.
13.4 It is understood and agreed that no franchisor/franchisee
relationship is created by this Agreement or otherwise exists between the
parties. NovaCare expressly acknowledges that it has negotiated with Nautilus
Marketing as an independent contractor, and that is shall not be deemed a
franchisee of Nautilus or Nautilus Marketing under any circumstance whatsoever.
13.5 Any breach of the terms of this Section 13 shall be deemed a
material breach of this Agreement.
14. MISCELLANEOUS
14.1 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties hereto with respect to the matters set forth herein, and
there are no other Agreements
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between the parties pertaining to the subject matter hereof, either oral or
written. Except as provided in Section 3.1 hereof, no contrary, different or
additional terms will apply to the transactions contemplated by this Agreement,
even if such terms are contained on purchase orders, order confirmations, or
other forms or documents sent by a Customer.
14.2 ASSIGNMENT. Either party hereto may assign its rights and
obligations under this Agreement to a successor corporation, to an affiliate
corporation controlling, controlled by, or under common control with such party,
or to a corporation to which it transfers substantially all of its assets,
upon written notice to the other party. In addition, NovaCare may assign its
rights and obligations to an entity designated by Gary Reinl upon obtaining the
prior written consent of Nautilus Marketing, which consent may be withheld for
any reason in the sole discretion of Nautilus Marketing. Any other assignment
hereof shall require the written consent of the other party. This Agreement
shall inure to the benefit of Nautilus Marketing and NovaCare and be binding
upon the parties hereto, and their respective successors and permitted assigns.
In each case of any assignment hereunder, the assigning party shall remain
liable for the performance of all of its obligations hereunder, provided that
Nautilus Marketing shall be released from such performance upon the sale of
substantially all of the assets of Nautilus or Nautilus Marketing in one or more
transactions, and NovaCare shall be released from such performance after an
assignment by it, with the consent of Nautilus Marketing, to an entity
designated by Gary Reinl.
14.3 MODIFICATION AND WAIVER. This Agreement may not be modified or
amended except by Nautilus Marketing as provided herein or in a writing signed
by NovaCare and by Nautilus Marketing. Either party may waive, in writing, a
provision in this Agreement which is for its benefit, but such provision shall
not otherwise be deemed waived. A waiver of any provision in any one instance
shall not be deemed a waiver of any provision in any other instance. No
provision contained in this Agreement shall be deemed to have been waived by
reason of any failure or delay to enforce the same, regardless of the number of
breaches or violations which may occur.
14.4 ENFORCEABILITY. In the event any provision of this Agreement shall
be invalid, illegal or unenforceable in any circumstance, the validity, legality
and enforceability of that provision in any other circumstance or of the
remaining provisions shall not in any way be affected or impaired thereby.
14.5 EXCUSE OF PERFORMANCE. Nautilus shall not be liable for failure
to deliver, delays in delivery or failure to perform under this Agreement
occasioned, in whole or in part, by strikes, lockouts, embargoes, war, or
other outbreak or hostilities, inability to obtain materials or shipping
space, machinery breakdown, delays of carriers or suppliers, governmental
acts and regulations, acts of God, receipt of orders in excess of Nautilus'
inventory or then scheduled delivery capacity, or any unforeseen
circumstances or cause beyond Nautilus' reasonable control. However, if
Products are not available on a commercially reasonable basis due to one or
more of the above circumstances, NovaCare will not be held to its quota
requirements during the period of such inability to deliver, but shall
reasonably and in good faith negotiate with Nautilus Marketing to establish
new objectives.
14.6 ARBITRATION. Any controversy or claim arising under or in relation
to this Agreement, or the breach thereof, or the relations between NovaCare and
either Nautilus Marketing or Nautilus shall be settled by arbitration by a panel
of three arbitrators (unless the
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amount in dispute is less than $25,000 in which case there shall be only one
arbitrator) in the City of Greenville, South Carolina, administered by the
American Arbitration Association, except as specified otherwise in this
Agreement, under its Commercial Arbitration Rules. Judgment on the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof.
14.7 LIMITATION ON ARBITRATION REMEDIES. The arbitrators shall have
no power to extend this Agreement beyond its termination date, nor to order
reinstatement or other continuation of the parties' relationship after
termination, nor to award punitive, consequential, multiple, incidental or
any other damages in excess of the economic damages actually sustained by the
claimant.
14.8 CHOICE OF LAW AND FORUM; JURY TRIAL WAIVER. This Agreement shall be
governed, construed, and interpreted in accordance with the laws of the state of
South Carolina and the United States Arbitration Act without giving effect to
any choice or conflict of law provision or rule (whether of the state of South
Carolina or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the state of South Carolina. Any actions or
proceedings with respect to any matters, arising under or growing out of this
Agreement or the performance of this Agreement, shall be instituted and
prosecuted only in state or federal courts located in the City of Greenville,
South Carolina. Each party specifically consents to service of process by and
the jurisdiction of and venue in those courts. Each party further consents that
any process, notice of motion or other application to the court or any judge
thereof may be served in the manner provided for giving of notice under this
Agreement provided a reasonable time for appearance is allowed. NovaCare, to the
fullest extent permitted by law, hereby waives a jury trial with respect to any
litigation in regard to any matters arising under or growing out of this
Agreement, the performance of this Agreement, or NovaCare's relations with
Nautilus Marketing or Nautilus. The parties represent and warrant that they
understand the implications of this subparagraph, that they have comparable
bargaining power and access to counsel and have consulted such counsel in the
drafting of this subparagraph, together with any and all other terms and
conditions set forth in this Agreement, and that they intend to be fully bound
hereby.
14.9 HEADINGS. The headings in this Agreement are inserted for the
convenience of the parties hereto and shall not define, affect, limit, or
describe the scope or intent of this Agreement or any portion thereof in any
way.
14.10 SURVIVAL. After termination, this Agreement shall continue to
govern the rights and duties of the parties as to transactions made hereunder
and continuing covenants. Without limiting the generality of the foregoing,
all confidentiality and nondisclosure obligations under this Agreement shall
survive its termination.
14.11 AUTHORITY. The person executing this Agreement on behalf of
each party represents and warrants that he or she is duly authorized to bind
such party and that such party has authorized him or her to execute this
Agreement on behalf of such party.
14.12 CONFIDENTIALITY. Except as may be required by law, the terms of
this Agreement shall be kept in strict confidence by both parties. Neither
party may disclose the contents of this Agreement to any person except for
its employees, affiliates or agents who have a need to know
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such information, without the prior written consent of the other (which consent
shall not be unreasonably withheld) except as may be required by law.
Notwithstanding anything herein to the contrary, upon execution of this
Agreement by both parties, NovaCare may issue a one-time Press Release regarding
the general terms of this Agreement, provided that the Press Release is reviewed
and approved by Nautilus Marketing in advance of release or other publication
and may advertise itself as a Nautilus distributor so long as the specific
details of this Agreement are kept confidential.
14.13 NOTICE. All notice given hereunder shall be in writing and shall
be validly given if delivered in person, by telex, by verbally confirmed
facsimile, by telegram, or by the United States mail, as follows:
If to Nautilus Marketing: ATTN: President
Delta Consolidated Corporation
Hammond Square, Suite 200
233 North Main Street
Greenville, SC 29601
With a copy to: ATTN: President
Nautilus International, Inc.
9800 West Kincey Avenue
Calhoun Building, Suite 150
Huntersville, NC 28078
and: Wyche Law Firm
Attn: Henry L. Parr, Jr.
P. 0. Box 728
44 East Camperdown Way
Greenville, South Carolina 29602
Facsimile No. (803) 235-8900
Verify No. 803-242-8200
If to NovaCare: NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, PA 19406
ATTN: C. Arnold Renschler, M.D.
IN WITNESS WHEREOF, the parties hereto have hereunder executed this
Agreement as of the date indicated on the first page of this Agreement.
DELTA CONSOLIDATED CORPORATION NOVACARE, INC.
By: /s/ Danny L. Stanton By: /s/ C. Arnold Renschler
--------------------------------- ------------------------------------
Name and title: Danny L. Stanton Name and title: Sr. VP, Nova Care Inc.
--------------------- -------------------------
Pres-Nautilus International President, The Polaris Group
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EXHIBIT 21.1
SUBSIDIARIES OF DIRECT FOCUS, INC.
Nautilus Fitness Products, Inc, a Washington corporation.
Nautilus Human Performance Systems, Inc., a Virginia corporation.
Nautilus, Inc., a Washington corporation.
Direct Focus Sales Corporation, a Washington corporation.
Direct Focus FSC, Ltd., a Barbados corporation.
DFI Properties, LLC, a Virginia limited liability company.
BFI Advertising, Inc., a Washington corporation.
Instant Comfort Corporation, a Washington corporation.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Direct Focus, Inc. on
Form S-1 of our report dated February 26, 1999 appearing in the prospectus,
which is part of this Registration Statement. We also consent to the reference
to us under the headings "Experts" in such prospectus.
/s/_DELOITTE & TOUCHE LLP__
Deloitte & Touche LLP
Portland, Oregon
March 2, 1999
II-6
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Delta Woodside, Inc.:
We consent to the inclusion of our report date October 2, 1998 with respect to
the combined balance sheets of the Nautilus Business as of June 27, 1998 and
June 28, 1997, and the related combined statements of operations and accumulated
deficit and cash flows for each of the years in the three-year period ended June
27, 1998, which report appears in the Form S-1 of Direct Focus, Inc. and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/_KPMG PEAT MARWICK LLP__
KPMG Peat Marwick LLP
Greenville, South Carolina
March 1, 1999
II-7
<PAGE>
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints Brian Cook and Rod Rice, or either of them, the undersigned's true and
lawful attorney-in-fact to:
(1) Execute for and on behalf of the undersigned, in the
undersigned's capacity as a director of Direct Focus, Inc. (the
"Company"), a registration statement on Form S-1, registering the
sale of up to 1,150,000 shares of the Company's common stock.
(2) Do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute any such registration statement on Form S-1 and timely
file such registration statement with the United States
Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) Take any other action of any type whatsoever in connection with
the foregoing which, in the opinion of such attorney-in-fact, may
be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents
executed by such attorney-in-fact on behalf of the undersigned
pursuant to this Power of Attorney shall be in such form and
shall contain such terms and conditions as such attorney-in-fact
may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this Power of Attorney and the rights and powers herein
granted.
This Power of Attorney shall remain in full force and effect until
revoked by the undersigned in a signed writing delivered to the foregoing
attorney-in-fact.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 20th day of February, 1999
/s/ Kirkland C. Aly
------------------------------
Kirkland C. Aly
<PAGE>
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints Brian Cook and Rod Rice, or either of them, the undersigned's true and
lawful attorney-in-fact to:
(1) Execute for and on behalf of the undersigned, in the
undersigned's capacity as a director of Direct Focus, Inc. (the
"Company"), a registration statement on Form S-1, registering the
sale of up to 1,150,000 shares of the Company's common stock.
(2) Do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute any such registration statement on Form S-1 and timely
file such registration statement with the United States
Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) Take any other action of any type whatsoever in connection with
the foregoing which, in the opinion of such attorney-in-fact, may
be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents
executed by such attorney-in-fact on behalf of the undersigned
pursuant to this Power of Attorney shall be in such form and
shall contain such terms and conditions as such attorney-in-fact
may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this Power of Attorney and the rights and powers herein
granted.
This Power of Attorney shall remain in full force and effect until
revoked by the undersigned in a signed writing delivered to the foregoing
attorney-in-fact.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 20th day of February, 1999
/s/ C. Reed Brown
---------------------------------
C. Reed Brown
<PAGE>
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints Brian Cook and Rod Rice, or either of them, the undersigned's true and
lawful attorney-in-fact to:
(1) Execute for and on behalf of the undersigned, in the
undersigned's capacity as a director of Direct Focus, Inc. (the
"Company"), a registration statement on Form S-1, registering the
sale of up to 1,150,000 shares of the Company's common stock.
(2) Do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute any such registration statement on Form S-1 and timely
file such registration statement with the United States
Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) Take any other action of any type whatsoever in connection with
the foregoing which, in the opinion of such attorney-in-fact, may
be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents
executed by such attorney-in-fact on behalf of the undersigned
pursuant to this Power of Attorney shall be in such form and
shall contain such terms and conditions as such attorney-in-fact
may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this Power of Attorney and the rights and powers herein
granted.
This Power of Attorney shall remain in full force and effect until
revoked by the undersigned in a signed writing delivered to the foregoing
attorney-in-fact.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 20th day of February, 1999
/s/ Gary L. Hopkins
--------------------------------
Gary L. Hopkins
<PAGE>
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints Brian Cook and Rod Rice, or either of them, the undersigned's true and
lawful attorney-in-fact to:
(1) Execute for and on behalf of the undersigned, in the
undersigned's capacity as a director of Direct Focus, Inc. (the
"Company"), a registration statement on Form S-1, registering the
sale of up to 1,150,000 shares of the Company's common stock.
(2) Do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute any such registration statement on Form S-1 and timely
file such registration statement with the United States
Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) Take any other action of any type whatsoever in connection with
the foregoing which, in the opinion of such attorney-in-fact, may
be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents
executed by such attorney-in-fact on behalf of the undersigned
pursuant to this Power of Attorney shall be in such form and
shall contain such terms and conditions as such attorney-in-fact
may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this Power of Attorney and the rights and powers herein
granted.
This Power of Attorney shall remain in full force and effect until
revoked by the undersigned in a signed writing delivered to the foregoing
attorney-in-fact.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 20th day of February, 1999
/s/ Roger J. Sharp
-----------------------------------
Roger J. Sharp
<PAGE>
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints Brian Cook and Rod Rice, or either of them, the undersigned's true and
lawful attorney-in-fact to:
(1) Execute for and on behalf of the undersigned, in the
undersigned's capacity as a director of Direct Focus, Inc. (the
"Company"), a registration statement on Form S-1, registering the
sale of up to 1,150,000 shares of the Company's common stock.
(2) Do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute any such registration statement on Form S-1 and timely
file such registration statement with the United States
Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) Take any other action of any type whatsoever in connection with
the foregoing which, in the opinion of such attorney-in-fact, may
be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents
executed by such attorney-in-fact on behalf of the undersigned
pursuant to this Power of Attorney shall be in such form and
shall contain such terms and conditions as such attorney-in-fact
may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this Power of Attorney and the rights and powers herein
granted.
This Power of Attorney shall remain in full force and effect until
revoked by the undersigned in a signed writing delivered to the foregoing
attorney-in-fact.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 20th day of February, 1999
/s/ Roland E. Wheeler
--------------------------------
Roland E. Wheeler
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,910,675
<SECURITIES> 0
<RECEIVABLES> 258,207
<ALLOWANCES> (40,000)
<INVENTORY> 2,614,673
<CURRENT-ASSETS> 22,337,701
<PP&E> 2,281,502
<DEPRECIATION> (438,790)
<TOTAL-ASSETS> 24,373,272
<CURRENT-LIABILITIES> 6,655,250
<BONDS> 0
0
0
<COMMON> (3,565,628)
<OTHER-SE> 14,085,514
<TOTAL-LIABILITY-AND-EQUITY> 24,373,272
<SALES> (57,296,880)
<TOTAL-REVENUES> (57,296,880)
<CGS> 12,442,307
<TOTAL-COSTS> 25,966,567
<OTHER-EXPENSES> 221,434
<LOSS-PROVISION> 61,875
<INTEREST-EXPENSE> 455
<INCOME-PRETAX> (19,193,078)
<INCOME-TAX> 6,707,584
<INCOME-CONTINUING> (12,485,494)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,485,494)
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.28
</TABLE>
