<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1999
REGISTRATION NO. 333-73243
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
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 (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) 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
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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: / /
------------------------
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.
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<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 12, 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 April 7,
1999, the last reported price of our common stock on the Toronto Stock Exchange,
stated in U.S. dollars, was $18.875 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
identified in 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>
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. FIRST SECURITY VAN KASPER
The date of this Prospectus is , 1999
<PAGE>
------------------------
TABLE OF CONTENTS
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PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 10
Market Price of our Common Stock and Dividend
Policy....................................... 10
Capitalization................................. 11
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.
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 wheel chair 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 Nautilus Sleep Systems logo. Below the
logo is a picture of the Company's airbed mattress in a bedroom setting with the
Company's Instant Comfort logo and 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 premium quality, premium priced, 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 airbed mattress systems.
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.
In January 1999, we acquired substantially all of the assets of Nautilus
International, Inc., the manufacturer and marketer of Nautilus brand commercial
fitness equipment and consumer fitness accessories. Before the acquisition,
Nautilus International suffered from several years of declining revenues and
significant losses. We believe that we can effectively integrate the Nautilus
business into our operations and stabilize its financial performance. We also
believe that Nautilus is one of the most recognized brand names in the fitness
industry and possesses significant direct marketing potential.
We believe that we have been successful primarily because of the direct
marketing expertise, systems and procedures we have developed and refined while
directly marketing our Bowflex products. We have developed sophisticated
database management systems, a state-of-the-art customer service call center and
a system for accurately tracking our advertising success and customer buying
habits. We believe this expertise and experience enable us to:
- Develop proprietary, 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 premium quality, premium priced 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
airbeds;
- Develop and directly market additional premium quality, premium priced,
branded consumer products;
3
<PAGE>
- 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.
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
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<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........................................ 10,359,599 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 presently
intend to declare any dividends in the
near future.
Proposed Nasdaq National Market symbol............ DFXI
</TABLE>
- ------------------------
(1) Based on 9,534,599 shares outstanding as of March 31, 1999. Includes 86,076
shares of common stock issued after December 31, 1998, upon the exercise of
options. Excludes:
- 464,542 shares of common stock issuable upon the exercise of
outstanding options; and
- 696,961 shares available for future issuance under our Stock Option
Plan.
See "Management - Benefit Plans" for a description of our Stock Option Plan.
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 50,295
Operating income (loss)....................... (531) (59) 460 3,616 18,888 15,776
Net income (loss)............................. $ (510) $ 15 $ 693 $ 2,421 $ 12,485 $ 9,868
Basic earnings (loss) per share............... $ (0.06) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 1.06
Diluted earnings (loss) per share............. $ (0.06) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.01
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 PRO AS
--------- FORMA(2) ADJUSTED(2)
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 15,682 $ 2,772 $ 16,654
Total assets............................................ 24,373 27,431 41,313
Long-term liabilities................................... 67 166 166
Total stockholders' equity.............................. $ 17,651 $ $17,651 $ 31,533
</TABLE>
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(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" for a
discussion of pro forma adjustments.
(2) The unaudited pro forma and pro forma as adjusted balance sheet data assumes
that we consummated the Nautilus acquisition on December 31, 1998. The data
reflects the effects of purchase accounting adjustments. These adjustments
are set forth in our "Unaudited Pro Forma Combined Financial Statements -
Pro Forma Combined Balance Sheet," included elsewhere in this prospectus. We
also adjusted the pro forma as adjusted balance sheet 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.
A SIGNIFICANT DECLINE IN CONSUMER INTEREST IN BOWFLEX PRODUCTS WOULD SHARPLY
DIMINISH OUR SALES AND PROFITABILITY.
Our financial performance depends significantly on sales of our Bowflex line
of home fitness equipment. Any significant diminished consumer interest in our
Bowflex products would sharply reduce our sales and profitability. In 1998,
approximately 99.6% of our net sales were attributable to our Bowflex products.
We recently diversified our product line by introducing a line of premium
airbeds and acquiring the Nautilus product line. We also intend to develop and
introduce new products and product enhancements. If our diversification efforts
do not succeed, our sales will continue to depend significantly on our Bowflex
products. See "Business - New Product Development and Innovation" for a
discussion of our efforts to develop new products and product enhancements.
WE ARE A RAPIDLY GROWING COMPANY, AND OUR FAILURE TO PROPERLY MANAGE GROWTH MAY
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We have grown significantly since 1996, with increases in net sales from
$8.5 million in 1996 to $19.9 million in 1997 and $57.3 million in 1998. We also
recently added substantial operations through our Nautilus acquisition and
intend to continue to pursue an aggressive growth strategy. Our growth and the
Nautilus acquisition have strained our management team, production facilities,
information systems and other resources. We cannot assure you that we will
succeed in effectively managing our existing operations or our anticipated
growth, which could adversely affect our financial performance. See "Business -
Growth Strategy" for a discussion of our growth strategies.
IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE THE NAUTILUS BUSINESS INTO OUR
OPERATIONS, WE MAY NOT ACHIEVE ANTICIPATED REVENUE, EARNINGS AND BUSINESS
SYNERGIES.
We face significant challenges integrating our recently acquired Nautilus
business into our operations, any of which could adversely affect the revenue,
earnings and business synergies we expect from the acquisition. The distance
between our Vancouver, Washington and Independence, Virginia facilities
amplifies these challenges. Specifically, we must successfully integrate the
following aspects of the Nautilus business into our operations:
- Manufacturing and other production facilities, including a new
manufacturing management team;
- Employees, including those working in production, product development
and administration;
- Marketing and product distribution systems, including a new marketing
management team; and
- Administrative and financial policies and procedures.
OUR PROFITABILITY WILL DECLINE IF WE ARE UNABLE TO REVERSE NAUTILUS
INTERNATIONAL'S RECENT LOSSES.
Prior to our Nautilus acquisition, Nautilus International had incurred
several years of declining sales and accelerating losses. Unless our new
Nautilus management team is able to revitalize commercial sales and reduce
costs, our profitability will decline. For example, for the fiscal year ended
June 27, 1998, Nautilus International had an operating loss of approximately
$14.8 million, of which $8.8 million constituted a one-time impairment charge,
on net sales of $20.9 million.
OUR KEY EMPLOYEES ARE CRITICAL TO OUR SUCCESS, AND THEIR DEPARTURE MAY ADVERSELY
AFFECT OUR BUSINESS.
As a direct marketing company, our success depends on our key marketing,
sales, technical and managerial personnel, including our recently hired Nautilus
management team. The loss of any of our
6
<PAGE>
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 key man life insurance policy in the
amount of $500,000 on Brian R. Cook, our President and Chief Executive Officer.
A DECLINE IN CONSUMER SPENDING DUE TO UNFAVORABLE ECONOMIC CONDITIONS COULD
HINDER SALES OF OUR CONSUMER PRODUCTS.
The success of each of our products depends substantially on how consumers
decide to spend their money. Unfavorable economic conditions may depress
consumer spending, especially for premium priced products like ours.
GOVERNMENT REGULATORY ACTIONS COULD DISRUPT OUR DIRECT MARKETING EFFORTS AND
PRODUCT SALES.
Various federal, state and local government authorities, including the
Federal Trade Commission and the Consumer Products Safety Commission, regulate
our direct marketing efforts and products. If any of these authorities commence
a regulatory enforcement action that interrupts our direct marketing efforts or
results in a product recall, our sales and profitability could be significantly
harmed.
A SIGNIFICANT AMOUNT OF OUR COMMON STOCK WILL BE PUBLICLY HELD AFTER THIS
OFFERING, AND SALES OF A SUBSTANTIAL NUMBER OF THESE SHARES MAY DEPRESS OUR
STOCK PRICE.
Our common stock has been publicly traded on the Toronto Stock Exchange
since 1993, and we believe that as many as 8.3 million shares of our common
stock will be freely tradable in the public market following this offering.
Public sales of a substantial number of these shares could depress the market
price for our common stock. See "Shares Eligible for Future Sale" for a more
detailed discussion of our currently outstanding common stock and applicable
resale restrictions.
AN ADVERSE OUTCOME FROM PENDING LITIGATION WITH SOLOFLEX, INC. COULD
SIGNIFICANTLY HARM OUR FINANCIAL POSITION.
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. Although we intend to vigorously defend
against Soloflex's claims, we cannot assure you that we will prevail in this
dispute. If Soloflex successfully prosecutes any of its claims against us, our
financial position could be significantly harmed. Soloflex claims 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. Soloflex has
requested both monetary damages and injunctive relief. The requested injunctive
relief would prohibit us from airing advertisements that allegedly would
infringe upon Soloflex's intellectual property rights. See "Business - Legal
Proceedings" for a more detailed description of the Soloflex litigation.
IF A UNITED STATES MARKET FOR OUR COMMON STOCK DOES NOT DEVELOP, SHAREHOLDER
LIQUIDITY AND OUR STOCK PRICE COULD BE ADVERSELY AFFECTED.
We have applied to have our common stock listed for trading on Nasdaq, and
we intend to delist our common stock from the Toronto Stock Exchange upon the
completion of this offering. If an active United States market for our common
stock fails to develop and our common stock is no longer publicly traded in
Canada, our shareholders may have difficulty selling their shares and our stock
price may decline.
WE MAY FAIL TO EFFECTIVELY IDENTIFY AND RESOLVE SIGNIFICANT YEAR 2000 PROBLEMS
WITHIN OUR BUSINESS, OR IMPORTANT SUPPLIERS MAY BE UNABLE TO SUPPLY GOODS AND
SERVICES TO US DUE TO YEAR 2000 PROBLEMS.
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 could interrupt our ability to process orders and
ship our products. The resulting costs could be significant and we could suffer
a significant decrease in sales. Similar problems and consequences could result
if any of our key suppliers, such as telephone companies, carriers,
manufacturers, suppliers and our
7
<PAGE>
consumer credit facilitator, experience Year 2000 problems. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Compliance" for a more detailed discussion of Year 2000 issues as they
affect our business.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH YOU CAN BASE YOUR ANALYSIS OF OUR
BUSINESS.
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 that these trends will
continue or that we will remain profitable.
INCREASES IN PRODUCT RETURNS COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
Any material increase in the quantity of products returned by our customers
for purchase-price refunds could adversely affect our financial performance. We
have limited operating experience with our airbeds, which we began test
marketing in August 1998, and therefore limited experience with the return rates
for these products. See "Business - Products" for a discussion of our return
policies.
OUR WARRANTY RESERVES MAY BE INSUFFICIENT TO COVER FUTURE WARRANTY CLAIMS, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We offer warranties on all of our principal products. If our warranty
reserves are inadequate to cover future warranty claims on our products, our
financial performance could be adversely affected. We have limited operating
experience with our airbeds, which we began test marketing in August 1998, and
therefore limited experience with warranty claims for these products. See
"Business - Products" for a discussion of our warranty policies.
PRODUCT LIABILITY CLAIMS EXCEEDING OUR PRODUCT LIABILITY INSURANCE COVERAGE AND
RESERVES COULD ADVERSELY AFFECT OUR BUSINESS.
We are subject to potential product liability claims if our products injure
or allegedly injure our customers or other users. If our product liability
insurance coverage and reserves fail to cover future product liability claims,
we could become liable for significant monetary damages.
FUTURE ACQUISITIONS MAY DISRUPT OR OTHERWISE ADVERSELY AFFECT OUR BUSINESS.
As part of our growth strategy, we intend to explore strategic acquisitions
that would enhance our direct marketing capabilities or our product lines.
Future acquisitions are subject to the following risks that may negatively
impact our financial performance and cause fluctuations in our operating
results:
- Acquisitions may disrupt our ongoing operations and distract our
management team;
- We may not be able to successfully integrate the products, services or
personnel of the acquired businesses into our operations;
- We may acquire companies in markets in which we have little experience;
- Any acquisition may not produce the revenue, earnings or business
synergies we anticipate; and
- An acquired product or technology may not perform as we expect.
To pay for an acquisition, we may use common stock or cash, including the
proceeds of this offering. 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.
CERTAIN RISKS IN OUR INTERNATIONAL OPERATIONS COULD INTERRUPT THE SUPPLY OF OUR
PRODUCT COMPONENTS OR THE INTERNATIONAL DISTRIBUTION OF OUR NAUTILUS PRODUCTS.
We currently acquire many of our product components from foreign
manufacturers and distribute our Nautilus products internationally. Our
international operations are subject to the inherent risks of doing business
abroad. The loss of certain foreign suppliers, customers or distributors could
harm our
8
<PAGE>
ability to deliver our products on time and cause our sales to decline. Our
financial performance could be materially adversely affected by many events and
circumstances relating to our international operations, including:
- Shipping delays and cancellations;
- Increases in import duties and tariffs;
- Foreign exchange rate fluctuations;
- Changes in foreign laws and regulations; and
- Political and economic instability.
INCREASES IN ADVERTISING RATES MAY REDUCE OUR PROFITABILITY.
We depend primarily on 60-second or "spot" television commercials and
television infomercials to market our products. 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 increase
our selling and marketing expenses and decrease our profitability. See "Business
- -Direct Marketing" for a more detailed discussion of our advertising efforts.
OUR SALES MAY MATERIALLY DECLINE IF OUR CUSTOMER SERVICE CALL CENTER STOPS
OPERATING.
We receive and process almost all orders for our directly marketed products
through our customer service call center. Our sales could materially decline if
our call center stops operating for a significant time period. 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. See "Business - Direct Marketing"
for a more detailed description of our call center operations.
OUR FAILURE OR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD
SIGNIFICANTLY HARM OUR COMPETITIVE POSITION, AND WE COULD ALSO INCUR SUBSTANTIAL
COSTS TO DEFEND CLAIMS THAT WE HAVE VIOLATED THE PROPRIETARY RIGHTS OF OTHERS.
Protecting our intellectual property is an important factor in maintaining
our competitive position in the fitness and mattress industries. If we do not or
are unable to adequately protect our intellectual property, our sales and
profitability could be adversely affected. We currently hold a number of patents
and trademarks and have several patent and trademark applications pending.
However, our efforts to protect our proprietary rights may be inadequate and
applicable laws provide only limited protection. For example, the patent on our
Bowflex Power Rods, a key component of our Bowflex products, expires on April
27, 2004. In addition, we may not be able to successfully prevent others from
claiming that we have violated their proprietary rights. We could incur
substantial costs in defending against such claims, even if they are invalid,
and we could become subject to judgments requiring us to pay substantial
damages. For a more detailed discussion of our efforts to protect our
intellectual property rights, see "Business - Intellectual Property."
CERTAIN ANTITAKEOVER PROVISIONS OF WASHINGTON LAW MAY REDUCE OUR STOCK PRICE.
As a Washington corporation, we are subject to the Washington Business
Corporation Act. Certain antitakeover provisions of this Act may make it more
difficult for a third party to acquire us, even if an acquisition would benefit
our shareholders. See "Description of Capital Stock - Antitakeover Effects of
Certain Provisions of Washington Law" for a more detailed discussion of the
antitakeover provisions.
9
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $13,881,985 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
$2,618,906 in net proceeds. In calculating estimated net proceeds, we assume an
offering price of $18.875 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 for the following
purposes and in the following order of priority:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
------------- ---------------
<S> <C> <C>
Working capital..................................................... $ 7,381,985 53.2%
Capital equipment................................................... 1,500,000 10.8
General corporate................................................... 5,000,000 36.0
------------- -----
Total............................................................... $ 13,881,985 100.0%
------------- -----
------------- -----
</TABLE>
We intend to direct the working capital proceeds toward such needs as
increased direct marketing expenditures for our existing products, the growth of
our Nautilus consumer product business, including the introduction of new
Nautilus consumer products, and other working capital needs associated with our
growth. We intend to direct our capital equipment proceeds toward such needs as
the addition of a second product assembly and distribution center in the western
United States and computer and related technology upgrades. We may use a portion
of the general corporate 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 any of these 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 OUR COMMON STOCK AND DIVIDEND POLICY
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 current year and the
preceding two years. The prices listed below are in Canadian dollars, the
currency in which they were quoted, and in United States dollars,
10
<PAGE>
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
1999
1(st) Quarter........................................ $ 28.00 $ 18.55 $ 18.39 $ 12.09
</TABLE>
As of March 31, 1999, 9,534,599 shares of our common stock were issued and
outstanding and held of record by 81 shareholders. See "Shares Eligible for
Future Sale" for a discussion of our outstanding common stock.
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 presently
intend to declare any cash dividends in the near 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:
- On an actual basis;
- On a pro forma basis to reflect the effects of the Nautilus
acquisition, assuming the acquisition was consummated on December 31,
1998; and
- 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
$18.875 per share, after deducting estimated underwriting discounts and
offering expenses.
11
<PAGE>
You should read this information in conjunction with our financial
statements and notes thereto and with the unaudited pro forma combined financial
statements, which appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (IN THOUSANDS)
-----------------------------------
ACTUAL
---------
PRO FORMA PRO FORMA
----------- AS ADJUSTED
-----------
(UNAUDITED)
(UNAUDITED)
<S> <C> <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 $ 3,566 $ 17,448
Retained earnings....................................... 14,085 14,085 14,085
--------- ----------- -----------
Total stockholders' equity............................ 17,651 17,651 31,533
--------- ----------- -----------
Total capitalization.................................. $ 17,651 $ 17,651 $ 31,533
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Excludes:
- 86,076 shares of common stock issued after December 31, 1998, upon the
exercise of options;
- 464,542 shares of common stock issuable upon the exercise of
outstanding options under our Stock Option Plan at a weighted average
exercise price of $2.39 per share; and
- 696,961 shares available for future issuance under the Stock Option
Plan.
See "Management - Benefit Plans" for a description of our Stock Option Plan.
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 26,306
--------- --------- --------- --------- --------- -----------
Gross profit................................... 2,841 3,156 5,914 14,772 44,855 50,295
Operating expenses
Selling and marketing........................ 2,834 2,644 4,712 9,600 22,643 28,373
General and administrative................... 393 370 473 975 1,701 4,523
Royalties.................................... 145 201 269 581 1,623 1,623
--------- --------- --------- --------- --------- -----------
Total operating expenses................... 3,372 3,215 5,454 11,156 25,967 34,519
--------- --------- --------- --------- --------- -----------
Operating income (loss)........................ (531) (59) 460 3,616 18,888 15,776
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 15,166
Income tax expense (benefit)................... (31) (68) (249) 1,226 6,708 5,298
--------- --------- --------- --------- --------- -----------
Net income (loss).............................. $ (510) $ 15 $ 693 $ 2,421 $ 12,485 $ 9,868
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Basic earnings (loss) per share(2)............. $ (0.06) $ 0.00 $ 0.08 $ 0.27 $ 1.34 $ 1.06
Diluted earnings (loss) per share(2)........... $ (0.06) $ 0.00 $ 0.08 $ 0.25 $ 1.28 $ 1.01
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 $ 2,711
Working capital................................ 1,015 1,063 1,973 4,100 15,682 2,772
Total assets................................... 1,940 2,150 3,515 7,922 24,373 27,431
Current liabilities............................ 654 858 1,281 3,330 6,655 9,614
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 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 products. 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," and more recently under the trade name
"Nautilus Sleep Systems." 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 $16.2 million in cash and
assumed approximately $2.6 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.
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
14
<PAGE>
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:
- A direct marketing business that historically has generated a high
percentage gross margin; and
- 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:
- Inventory component costs;
- Manufacturing and distribution salaries and bonuses;
- Distribution expense and shipping costs; and
- Facility costs.
Selling and marketing expenses primarily consist of:
- Television advertising expenses;
- The cost of printed and video marketing materials;
- Television commercial production and marketing material expenses;
- Commissions, salaries and bonuses earned by sales and marketing
personnel; and
- 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.
15
<PAGE>
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.
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.
16
<PAGE>
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 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 selling 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
selling and marketing expenses. We expect that our selling and marketing
expenses will continue to increase in real dollar terms, but not as a percentage
of net sales, 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, in both real dollar terms and as a
percentage of net sales, as we integrate the Nautilus business into our
operations and expand our administrative staff and other resources to manage
growth.
17
<PAGE>
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.
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
18
<PAGE>
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.
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 $16.2 million in cash for the Nautilus
assets and assumed approximately $2.6 million in liabilities. The unaudited pro
forma combined statements of operations reflect:
- Certain adjustments for the effects of purchase accounting;
- Certain assumptions described below regarding financing and cash
management; and
- 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 $340,000 decrease in total operating expenses relating to the reduced
amortization of the estimated intangible asset value of $4.4 million
and $56,000 relating to reduced depreciation expense. As discussed
below, Nautilus recorded an impairment charge to reduce the net
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book value of its assets based upon the acquisition price. The
intangible asset is assumed to be amortized over 20 years on a
straight-line basis.
- An $11.2 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 $18.8 million acquisition
price including assumption of $2.6 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;
- A $608,000 decrease in other income, to reflect interest income
foregone by the use of cash in the acquisition; and
- A $1.4 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................................................................... 34.3
-----
Gross profit.................................................................. 65.7
Operating expenses
Selling and marketing......................................................... 37.1
General and administrative.................................................... 5.9
Royalties..................................................................... 2.1
-----
Total operating expenses.................................................... 45.1
-----
Income from operations.......................................................... 20.6
Other expense................................................................... 0.8
-----
Income before income taxes...................................................... 19.8
Pro forma income taxes.......................................................... 6.9
-----
Pro forma net income............................................................ 12.9%
-----
-----
</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 $16.2 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 also expect to
materially increase our cash expenditures on spot commercials and informercials
as we expand the direct marketing compaigns for our Bowflex and airbed products.
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We maintain one $5.0 million line of credit with Bank of America. The line
of credit is secured by our general assets and contains certain financial
covenants. As of the date of this prospectus, we are in compliance with all
material covenants applicable to the line of credit, and there is no outstanding
balance under the line.
We believe that our existing cash balances, combined with our line 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, 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.
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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. Notwithstanding the remedial efforts and third-party
assurances discussed below, this "Year 2000" problem may adversely affect our
operations. We believe that the most reasonably likely worst-case scenario would
involve 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 financial performance.
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. To date, we have
tested and assessed the Year 2000 compliance of over 90.0% of the software and
hardware systems that we use internally in our business. We have upgraded
approximately 95.0% of the computer hardware and equipment that we determined
had Year 2000 problems. We expect to have a Year 2000 compliant financial
accounting system and database marketing system installed by early June 1999.
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
premium quality, premium priced, 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 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. In 1993, we became a Washington corporation.
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 premium quality, premium priced branded
products. After a careful review process that began in late 1997, in August 1998
we began test marketing a line of airbed mattress systems under the brand name
"Instant Comfort" and more recently under the brand name "Nautilus Sleep
Systems." 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.
GROWTH STRATEGY
Our objective is to become a leading direct marketer of premium quality,
premium priced, branded 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 airbeds in August 1998 under the brand name "Instant
Comfort." More recently, we began test marketing our airbeds under the brand
name "Nautilus Sleep Systems." 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.
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DEVELOP AND DIRECTLY MARKET ADDITIONAL CONSUMER PRODUCTS. We will continue
to evaluate internally and externally generated ideas for consumer products that
have direct marketing potential. Generally, we look for products that:
- Have patented or patentable features that enhance our competitive
position, increase product life and add real and perceived value to the
product;
- Have a retail price point between $500 and $2,500;
- Can be marketed as a line that facilitates the promotion of premium
products to consumers who are initially attracted by lower-priced,
entry-level products; and
- 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.
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.
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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 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. The cost of
airing spot commercials and infomercials varies significantly, depending on the
network, time slot and, for spot commercials, programming. Each spot commercial
typically costs between $50 and $5,000 to air, and each infomercial typically
costs between $1,200 and $15,000 to air. 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 believe
that the database enables us to predict with reasonable accuracy how many
product sales and
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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. For example, we are now promoting our web sites in our spot
commercials and infomercials in an effort to further stimulate electronic
product inquiries and e-commerce transactions. We do not presently advertise our
products on third-party web sites, but we may in the future.
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. The first,
www.bowflex.com, focuses on our Bowflex line of home exercise equipment. The
second, www.instantcomfort.com, focuses on our newly introduced line of 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
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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 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. The telemarketing agents for these companies collect only names,
addresses and other basic information from callers and do not sell or promote
our products. Consequently, we do not need to train these telemarketing agents.
To preserve flexibility, we do not have formal contracts with the telemarketing
companies.
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 non-exclusive 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.
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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
- 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.
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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.
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 premium airbeds under the
brand name "Instant Comfort" and more recently under the brand name "Nautilus
Sleep Systems." 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
$1,500 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 $1,100 for a
California king, excluding foundation.
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- 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.
RETURN POLICIES AND WARRANTIES
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 believe that our reserves are adequate to cover
the financial costs associated with product returns.
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 accurately estimate future warranty claims and
establish adequate reserves. We believe that our Nautilus business also has
sufficient experience to accurately estimate and establish reserves to cover
future warranty claims.
NEW PRODUCT DEVELOPMENT AND INNOVATION
DIRECT MARKETING PRODUCTS
We develop direct marketing products either from internally generated ideas
or, as with our Bowflex technology, 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
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- 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.
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.
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
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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.
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, 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.
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 Sporting Goods Manufacturers' Association, 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, 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 International Sleep
Products Association estimates that innerspring
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mattresses accounted for approximately 90.0% of total domestic mattress sales in
1997. 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 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
International Sleep Products Association, 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
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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 International Sleep Products
Association, 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.
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.
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Of our four Bowflex patents, the most important covers our Power Rods. This
patent expires on April 27, 2004. The other three patents expire on February 16,
2005, April 14, 2007, and January 4, 2010.
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" for a brief discussion of the risks associated
with protecting our 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. None of our employees is subject
to any collective bargaining agreement.
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 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
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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. Our insurers are
paying the costs of defending against these claims.
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:
- Feature Mr. Potter, a former model for Soloflex;
- Feature an image of Mr. Potter removing his shirt; or
- 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. Mr. Potter joined us in 1991 as a
creative director and marketing manager. 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:
- Any profits it would have earned but for our allegedly improper
activities;
- Any profits we earned during the period when an alleged violation may
have occurred; and/or
- 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. 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.
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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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:
- Make recommendations to the board of directors regarding the selection
of independent auditors;
- Review the results and scope of audits and other services provided by
our independent auditors; and
- 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, which was $4.62 per share. 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. The exercise price for Mr. Brown's option is $9.56 per share. 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.
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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 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 $100,000 in 1998. We refer to these
individuals collectively in this prospectus as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------
-------------------------- SECURITIES
SALARY UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS ($)(2) (#)
- -------------------------------------------------------- --------- ------------ ------------ -------------------
<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) In February 1999, the board of directors approved salary increases for each
of the Named Executive Officers. The 1999 salaries for Messrs. Cook, Potter
and Rice are $225,000, $150,000 and $120,000, respectively.
(2) The board of directors has sole discretion in establishing bonus awards. All
bonuses awarded in 1998 were in accordance with the performance-based
criteria established by the board of directors in February 1998.
39
<PAGE>
OPTION GRANTS
The following table sets forth information concerning stock option grants to
the Named Executive Officers during the year ended December 31, 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL GRANT DATE VALUE
UNDERLYING OPTIONS GRANTED ------------------
OPTIONS TO EMPLOYEES IN EXERCISE PRICE GRANT DATE PRESENT
NAME GRANTED(1) (#) 1998(2) ($/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 incentive stock options to any employee
of Direct Focus or its subsidiaries and 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
In 1986, 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 equal to
3.0% of the net sales of our Bowflex products. Our typical royalty fees with
independent third parties range between 3.0% and 5.0% of net product sales. We
paid approximately $1.6 million to Mr. Shifferaw in 1998. In 1992, Mr. Shifferaw
negotiated a separate royalty-based agreement with Brian R. Cook and Roland E.
Wheeler. Under this agreement, 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 March 31, 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 9,534,599
shares of our common stock are issued and outstanding, and have calculated
post-offering percentages assuming that 10,359,599 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 representatives, D.A.
Davidson & Co. and First Security Van Kasper, 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...............................................................
First Security Van Kasper........................................................
----------
Total........................................................................ 1,000,000
----------
----------
</TABLE>
The representatives have 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 the representatives. 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 has
agreed that, for a period of 180 days after the effective date of this
prospectus, he will not, subject to certain exceptions, directly or indirectly
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant
44
<PAGE>
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 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. However, 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.
The representatives have 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 the representatives 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 the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have 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 March 31, 1999, 9,534,599 shares of Direct Focus common
stock were outstanding and held of record by 81 shareholders. Following this
offering, 10,359,599 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:
- One vote per share at all shareholder meetings;
- Receive dividends ratably, if, as and when declared by our Board of
Directors; and
- 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
Until we delist from the Toronto Stock Exchange, 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 American Securities Stock Transfer and Trust, Inc.
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 10,359,599 shares of our common stock
will be outstanding (10,509,599 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 of the 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 1996. 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
- The average weekly trading volume during the four calendar weeks
preceding such sale.
47
<PAGE>
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 and the related financial statement schedules included elsewhere in
the registration statement 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 January 4, 1999,
June 27, 1998, and June 28, 1997, and for the six-months ended January 4, 1999,
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-17
Pro Forma Combined Balance Sheet......................................................................... F-18
Pro Forma Combined Statement of Operations............................................................... F-20
NAUTILUS BUSINESS
Report of KPMG Peat Marwick LLP, Independent Auditors.................................................... F-21
Combined Balance Sheets as of June 28, 1997, June 27, 1998 and January 4, 1999........................... F-22
Combined Statements of Operations and Accumulated Deficit for the years ended June 29, 1996, June 28,
1997, June 27, 1998, and for the six-months ended December 27, 1997 (unaudited) and January 4, 1999.... F-23
Combined Statements of Cash Flows for the years ended June 29, 1996, June 28, 1997, June 27, 1998, and
for the six-months ended December 27, 1997 (unaudited) and January 4, 1999............................. F-24
Notes to Combined Financial Statements................................................................... F-25
</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.
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 premium quality, premium priced, 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 premium 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
F-8
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of impairment, management would prepare an estimate of future cash flows
(undiscounted and without 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.
F-9
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
$16.2 million for the assets and intellectual property of Nautilus and assumed
$2.6 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..................................................................... $ 9,868,213
Basic earnings per share....................................................... $ 1.06
Diluted earnings per share..................................................... $ 1.01
</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
------------ ------------
</TABLE>
F-10
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(3) INVENTORIES (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Total......................................................... $ 1,945,773 $ 2,614,673
------------ ------------
------------ ------------
</TABLE>
(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.
F-11
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
EMPLOYMENT CONTRACTS
Three officers of the Company are employed under employment contracts, which
expire January 1, 2000 and provide for total compensation of $495,000.
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 to recover any profits it would have earned but for the
Company's allegedly improper activities, any profits the Company earned during
any period in which an alleged violation may have occurred, and/or the cost of
any corrective advertising. If the competitor successfully prosecutes any of its
claims against the Company, the resulting monetary damages and/or injunctive
relief could 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
F-12
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(7) STOCK OPTIONS (CONTINUED)
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 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.
F-13
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(7) STOCK OPTIONS (CONTINUED)
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) 0.98 (7,300) 0.96
Exercised.................................... (40,000) 0.12 (129,887) 0.12 (443,195) 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>
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>
F-14
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(8) INCOME TAXES (CONTINUED)
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>
(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.
F-15
<PAGE>
DIRECT FOCUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(10) RELATED-PARTY TRANSACTIONS (CONTINUED)
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-16
<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 $16.2 million in cash for the assets and assumed
approximately $2.6 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-17
<PAGE>
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
DIRECT FOCUS, NAUTILUS
INC. BUSINESS ADJUSTMENTS PRO FORMA
---------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents............... $ 18,910,675 13,309 $ (16,213,309 (1) $ 2,710,675
Trade Receivables....................... 218,207 3,226,325 (193,332 (2) 3,251,200
Inventories............................. 2,614,673 4,104,131 (1,000,000 (2) 5,718,804
Prepaid expenses and other current
assets................................ 594,146 111,552 -- 705,698
---------------- ------------- --------------- -------------
Total current assets.................. 22,337,701 7,455,317 17,406,641 12,386,377
Furniture and equipment................... 1,842,712 10,663,438 (2,029,085 (2) 10,477,065
Other Assets.............................. 192,859 677,808 3,697,118 )(3 4,567,785
---------------- ------------- --------------- -------------
Total..................................... $ 24,373,272 $ 18,796,563 $ (15,738,608) $ 27,431,227
---------------- ------------- --------------- -------------
---------------- ------------- --------------- -------------
Current Liabilities:
Trade payables.......................... $ 3,602,074 $ 414,449 $ 441,000 )(5 $ 4,457,523
Income taxes payable.................... 504,775 -- -- 504,775
Accrued liabilities..................... 2,548,401 2,437,577 (333,659) 4,652,319
Due to affiliate........................ -- 39,562,874 (39,562,874 (4) --
---------------- ------------- --------------- -------------
Total current liabilities............. 6,655,250 42,414,900 (39,455,533) 9,614,617
Long-term Liabilities..................... 66,880 98,588 -- 165,468
Total Stockholders' Equity................ 17,651,142 (23,716,925) 23,716,925(4) 17,651,142
---------------- ------------- --------------- -------------
Total..................................... $ 24,373,272 $ 18,796,563 $ (15,738,608) $ 27,431,227
---------------- ------------- --------------- -------------
---------------- ------------- --------------- -------------
</TABLE>
- ------------------------
(1) Represents $16.2 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
$16.2 million in cash and $2.6 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................................................ 4,104,131 3,104,131(b)
Prepaid expenses and other current assets.................. 111,551(2) 111,551(2)
Furniture and equipment.................................... $ 10,663,438 8,634,353
Liabilities assumed........................................ (2,950,614) (2,557,955)(c)
----------------- -------------
Total...................................................... $ 15,253,420 $ 12,325,074
----------------- -------------
----------------- -------------
</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 $59,000 of trade payables and $333,659 of accrued vacation not
assumed.
F-18
<PAGE>
DIRECT FOCUS, INC. AND AFFILIATE
PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
(3) Includes $4,374,926 representing the estimated fair value of the Nautilus
brand trademark, less $677,808 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.
(5) Includes $500,000 of acquisition costs and excludes $59,000 of trade
payables not assumed.
F-19
<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 14,932,771 (1,069,827)(1) 26,305,251
---------------- -------------- ----------------- -----------------
Gross profit........................... 44,854,573 4,371,045 1,069,827 50,295,445
Total Operating Expenses................. 25,966,567 8,948,514 (396,000)(2) 34,519,081
Impairment Charges....................... -- 11,200,000 (11,200,000)(3) --
---------------- -------------- ----------------- -----------------
Operating income (loss)................ 18,888,006 (15,777,469) 12,665,827 15,776,364
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 (18,838,463) 14,811,878 15,166,493
Income Taxes............................. 6,707,584 -- (1,409,305)(6) 5,298,279
---------------- -------------- ----------------- -----------------
Net Income (Loss)........................ $ 12,485,494 $ (18,838,463) $ 16,221,182 $ 9,868,213
---------------- -------------- ----------------- -----------------
---------------- -------------- ----------------- -----------------
Basic Earnings Per Share................. $ 1.34 $ 1.06
---------------- -----------------
---------------- -----------------
Diluted Earnings Per Share............... $ 1.28 $ 1.01
---------------- -----------------
---------------- -----------------
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 decrease in total operating expenses of $340,000 related to
reduced amortization of the estimated intangible asset value of $4.4 million
and $56,000 relating to reduced depreciation expense. As discussed in note 3
below, Nautilus recorded an impairment charge to reduce the net book value
of its assets based upon the acquisition price. The intangible asset is
assumed to be amortized over 20 years on a straight-line basis.
(3) The $11.2 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 $18.8 million acquisition price, including
assumption of $2.6 million of current liabilities.
(4) Eliminates $3,142,238 of interest expense incurred by Nautilus on its debt
during 1998 and includes $387,982 of interest expense Direct Focus would
have incurred on short-term borrowings for a portion of the purchase price
had the acquistion occurred on January 1, 1998. 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 $1.4 million decrease in income tax expense reflects income tax expense
at our effective tax rates after giving effect to the adjustments described
above.
F-20
<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 January 4, 1999, June
27, 1998 and June 28, 1997, and the related combined statements of operations
and accumulated deficit and cash flows for the six-months ended January 4, 1999
and 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 Nautilus
Business as of January 4, 1999, June 27, 1998 and June 28, 1997, and the results
of its operations and cash flows for the six-months ended January 4, 1999, and
each of the years in the three-year period ended June 27, 1998, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greenville, South Carolina
February 19, 1999
F-21
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JANUARY 4,
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Current assets:
Cash............................................................ $ 1,790 $ 1,600 $ 13,309
Accounts receivable (note 3):
Customer...................................................... 4,196,491 4,414,042 3,431,678
Other......................................................... 155,049 74,912 51,315
Less allowance for doubtful accounts.......................... (910,464) (883,497) (449,721)
-------------- -------------- --------------
3,441,076 3,605,457 3,033,272
-------------- -------------- --------------
Financed notes, net (note 4).................................... 579,974 321,223 193,053
Inventories (note 2):
Raw materials................................................. 2,078,598 1,730,295 1,664,175
Work in process............................................... 1,597,676 1,614,862 1,593,417
Finished goods................................................ 702,141 970,206 823,364
Supplies...................................................... 25,574 20,661 23,175
-------------- -------------- --------------
4,403,989 4,336,024 4,104,131
-------------- -------------- --------------
Prepaids and other current assets (note 2)...................... 125,544 122,103 111,552
-------------- -------------- --------------
Total current assets.......................................... 8,552,373 8,386,407 7,455,317
-------------- -------------- --------------
Property, plant and equipment, net (note 5)....................... 12,897,432 11,522,745 10,663,438
Financed notes receivable (note 4)................................ 1,640,723 1,202,811 677,808
Intangible assets, net (note 6)................................... 11,476,601 1,987,961 --
-------------- -------------- --------------
$ 34,567,129 $ 23,099,924 $ 18,796,563
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................ 271,892 515,223 407,261
Bank overdraft.................................................. 552,658 469,963 7,188
Accrued employee compensation................................... 824,194 1,084,480 951,831
Other accrued expenses (note 7)................................. 1,946,448 1,046,636 1,485,746
Due to affiliates, net (note 10)................................ 33,011,924 36,992,270 39,562,874
Current bond obligations........................................ 116,566 -- --
-------------- -------------- --------------
Total current liabilities..................................... 36,723,682 40,108,572 42,414,900
-------------- -------------- --------------
Other liabilities................................................. 70,000 13,138 98,588
-------------- -------------- --------------
Total liabilities............................................. 36,793,682 40,121,710 42,513,488
-------------- -------------- --------------
Stockholder's deficit:
Common stock, $1 par value, authorized, issued and outstanding 100
shares.......................................................... 100 100 100
Additional paid in capital...................................... 10,692,506 10,692,506 10,692,506
Accumulated deficit............................................. (12,919,159) (27,714,392) (34,409,531)
-------------- -------------- --------------
Total stockholder's deficit................................... (2,226,553) (17,021,786) (23,716,925)
-------------- -------------- --------------
Commitments and contingencies
$ 34,567,129 $ 23,099,924 $ 18,796,563
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements
F-22
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTHS ENDED
---------------------------------------- ---------------------------
JUNE 29, JUNE 28, JUNE 27, DECEMBER 27, JANUARY 4,
1996 1997 1998 1997 1999
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $ 28,591,447 $ 21,935,298 $ 20,851,063 $10,719,671 $ 9,172,424
Cost of goods sold............ 19,914,644 17,134,933 16,291,581 8,630,779 7,271,969
------------ ------------ ------------ ------------ -------------
Gross profit................ 8,676,803 4,800,365 4,559,482 2,088,892 1,900,455
------------ ------------ ------------ ------------ -------------
Selling, general and
administrative expenses..... (13,463,038) (11,014,925) (7,704,677) (3,426,338 ) (4,523,590)
Impairment charges (note 2)... -- -- (8,800,000) -- (2,400,000)
Intercompany management
fees........................ (228,000) (302,428) (194,471) (125,535 ) (3,573)
Royalty income (note 2)....... 474,125 445,121 268,779 181,572 97,724
Other income (expense)........ 4,028 90,265 (42,871) 58,120 (158,016)
------------ ------------ ------------ ------------ -------------
Operating loss.............. (4,536,082) (5,981,602) (11,913,758) (1,223,289 ) (5,087,000)
------------ ------------ ------------ ------------ -------------
Interest income (expense):
Interest income............. 662,615 160,913 112,966 62,579 34,363
Interest expense............ (67,656) (19,141) (24,774) (24,774 ) (3,506)
Intercompany interest
expense................... (1,879,433) (2,158,509) (2,969,667) (1,466,425 ) (1,638,996)
------------ ------------ ------------ ------------ -------------
(1,284,474) (2,016,737) (2,881,475) (1,428,620 ) (1,608,139)
------------ ------------ ------------ ------------ -------------
Loss before taxes............. (5,820,556) (7,998,339) (14,795,233) (2,651,909 ) (6,695,139)
Income tax benefit (note 9)... (2,495,057) (1,202,379) -- -- --
------------ ------------ ------------ ------------ -------------
Net loss (3,325,499) (6,795,960) (14,795,233) (2,651,909 ) (6,695,139)
Accumulated deficit, beginning
of year..................... (2,797,700) (6,123,199) (12,919,159) (12,919,159 ) (27,714,392)
------------ ------------ ------------ ------------ -------------
Accumulated deficit, end of
year........................ $ (6,123,199) $(12,919,159) $(27,714,392) $(15,571,068) $ (34,409,531)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
See accompanying notes to combined financial statements
F-23
<PAGE>
NAUTILUS BUSINESS
(AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTHS ENDED
---------------------------------------- ---------------------------
JUNE 29, JUNE 28, JUNE 27, DECEMBER 27, JANUARY 4,
1996 1997 1998 1997 1999
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.................... $ (3,325,499) $ (6,795,960) $(14,795,233) $(2,651,909 ) $ (6,695,139)
Adjustments to reconcile net
loss to net cash provided
(used) by operating
activities:
Depreciation.............. 1,351,164 1,469,573 1,486,652 777,627 725,233
Amortization.............. 692,753 689,846 688,640 346,036 200,454
Deferred taxes............ (1,944,345) (1,185,199) -- -- --
Impairment charges........ -- -- 8,800,000 -- 2,400,000
Provision for losses on
accounts receivable..... 123,426 283,626 (119,575) (145,278 ) (308,594)
(Gain) loss on sale of
property and equipment.. -- (83,267) 1,595 -- --
Changes in operating
assets and liabilities:
Accounts receivable and
financed notes
receivable............ 2,595,441 1,543,410 651,857 (989,531 ) 1,533,952
Inventories............. (292,303) (231,699) 67,965 441,280 231,893
Prepaids and other
current assets........ 73,130 317,671 3,441 8,858 10,551
Other noncurrent
assets................ 111,268 -- -- -- --
Accounts payable........ (333,376) (658,453) 243,331 1,059,909 (107,962)
Bank overdraft.......... 406,725 20,710 (82,695) 342,473 (462,775)
Accrued employee
compensation.......... 53,057 159,367 260,286 (240,338 ) (132,649)
Other accrued
expenses.............. 478,266 412,894 (899,812) (700,879 ) 439,110
Other liabilities....... 15,664 (669,103) (56,862) 598,054 85,450
------------ ------------ ------------ ------------ -------------
Net cash provided
(used) by operating
activities.......... 5,371 (4,726,584) (3,750,410) (1,153,698 ) (2,080,476)
------------ ------------ ------------ ------------ -------------
Investing activities:
Purchases of property, plant
and equipment............. (863,354) (620,288) (121,185) (79,251 ) (57,419)
Proceeds from sale of
property, plant and
equipment................. -- 266,386 7,625 -- --
------------ ------------ ------------ ------------ -------------
Net cash used by
investing
activities.......... (863,354) (353,902) (113,560) (79,251 ) (57,419)
------------ ------------ ------------ ------------ -------------
Financing activities:
Principal payments on bond
obligations............... (9,576) (58,661) (116,566) (24,332 ) --
Change in due to affiliates,
net....................... 874,811 5,131,415 3,980,346 1,257,291 2,149,604
------------ ------------ ------------ ------------ -------------
Net cash provided by
financing
activities.......... 865,235 5,072,754 3,863,780 1,232,959 2,149,604
------------ ------------ ------------ ------------ -------------
Increase (decrease) in cash... 7,252 (7,732) (190) 10 11,709
Cash at beginning of year..... 2,270 9,522 1,790 1,790 1,600
------------ ------------ ------------ ------------ -------------
Cash at end of year........... $ 9,522 $ 1,790 $ 1,600 $ 1,800 $ 13,309
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Supplemental disclosures of
cash flow information:
Interest paid............... $ 1,879,433 $ 2,158,509 $ 2,969,667 $ 1,466,425 $ 1,638,996
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Non-cash investing and
financing activities:
Increase in intangible
assets and due to
affiliates, net........... -- -- -- -- 421,000
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS
PERIOD ENDED JANUARY 4, 1999 AND
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.
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
(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 PERIODS
The Business' operations are based upon a fifty-two, fifty-three week
fiscal year ending on the Saturday closest to June 30. Fiscal years 1998,
1997 and 1996 each consist of 52 weeks. The six-month period ended
January 4, 1999, consists of 27 weeks.
(C) INTERIM FINANCIAL STATEMENTS
The combined financial statements for the six-month period ended December
27, 1997 are unaudited and are presented pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying combined financial statements reflect all
adjustments (which are of normal recurring nature) necessary to present
fairly the results of operations and cash flows for the interim period,
but are not necessarily indicative of the results of operations for a
full fiscal year.
(D) 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
F-25
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consignment inventory is approximately $49,000, $43,000 and $57,000 as of
June 28, 1997, June 27, 1998 and January 4, 1999, 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, $177,000 and $207,000 as of
June 28, 1997, June 27, 1998 and January 4, 1999, respectively.
(E) 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) 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.
In 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 $2.4 million
during the six-months ended January 4, 1999, which was recorded as a $2.2
million reduction in intangible assets, net and a $.2 million reduction
in property, plant and equipment, net.
(G) OTHER ASSETS
Other assets consist principally of prepaid insurance and prepaid
expenses for booth space related to future trade shows.
(H) 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
F-26
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 1998, respectively, and $310,000 for the six-months ended January 4,
1999. Advertising costs amounted to approximately $2,820,000, $1,142,000
and $600,000 in 1996, 1997 and 1998, respectively, and $357,000 for the
six-months ended January 4, 1999.
(I) 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.
(J) 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. On January 4, 1999, the Business acquired the remaining 65% of the
licensing rights to the royalties earned on the Nautilus licensees for
approximately $421,000.
(K) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(L) 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 January 4, 1999, the Business has not begun to convert its systems
to be Year 2000 compliant. However, Direct Focus, Inc., anticipates
completing their Year 2000 remediation program by July 1999, which will
include the Business operations. 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.
(M) 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, and $109,000 for the six-months
ended January 4, 1999. Accrued
F-27
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
warranty expense, which is included in other accrued expenses, was
approximately $177,000 as of June 28, 1997, June 27, 1998 and January 4,
1999.
(N) 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.
(O) 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.
(3) ACCOUNTS RECEIVABLE
The Business' customer receivable balances are due in a lump-sum from
various customers. Other receivable balances are principally due to royalty and
employee receivables.
F-28
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(3) ACCOUNTS RECEIVABLE (CONTINUED)
Changes in the reserve for doubtful accounts for customer and financed notes
receivable are as follows:
<TABLE>
<CAPTION>
SIX-MONTHS
FISCAL YEAR ENDED ENDED
---------------------------------------- ------------
JUNE 29, JUNE 28, JUNE 27, JANUARY 4,
1996 1997 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period............................. $ 1,316,930 $ 1,440,356 $ 1,723,982 $ 1,604,407
Charged to expense....................................... 307,379 532,564 102,803 413,921
Balances written-off..................................... (183,953) (248,938) (222,378) (722,515)
------------ ------------ ------------ ------------
Balances, end of period.................................. $ 1,440,356 $ 1,723,982 $ 1,604,407 $ 1,295,813
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(4) FINANCED NOTES RECEIVABLE
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, June 27,
1998 and January 4, 1999, was $180,000, $108,000 and $59,000, respectively. As
of June 28, 1997, June 27, 1998 and January 4, 1999, the outstanding balance of
these receivables sold with recourse was approximately $3,558,000, $1,973,000
and $1,196,000, respectively.
Both the owned financed notes receivable and the contingency for the sold
financed notes receivable will be retained by DWI and not sold with the
Business. The Business has current financed notes of $792,438, $473,171 and
$380,885 as of June 28, 1997, June 27, 1998 and January 4, 1999, respectively,
less reserves for doubtful accounts of $212,464, $151,948 and $187,832 as of
June 28, 1997, June 27, 1998 and January 4, 1999, respectively. The Business has
non-current financed notes of $2,241,777, $1,771,773 and $1,336,068 as of June
28, 1997, June 27, 1998 and January 4, 1999, respectively, less reserves for
doubtful accounts of $601,054, $568,962 and $658,260 as of June 28, 1997, June
27, 1998 and January 4, 1999, respectively.
F-29
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(5) PROPERTY, PLANT AND EQUIPMENT, NET
Details of property, plant and equipment, net are as follows:
<TABLE>
<CAPTION>
ESTIMATED JUNE 28, JUNE 27, JANUARY 4,
USEFUL LIFE 1997 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Land and land improvements............................. N/A $ 204,813 $ 204,813 $ 204,813
Buildings.............................................. 31.5 6,289,177 6,332,855 6,332,855
Machinery and equipment................................ 10 9,387,138 9,781,880 9,781,880
Computers and software................................. 3-5 706,565 737,621 759,133
Furniture and fixtures................................. 7 356,192 356,192 356,192
Leasehold improvements................................. 4 138,286 138,286 138,286
Automobiles............................................ 7 83,520 83,520 83,520
Construction in progress............................... N/A 363,334 -- 35,907
------------- ------------- -------------
17,529,025 17,635,167 17,692,586
Less accumulated depreciation and amortization......... (4,631,593) (6,112,422) (7,029,148)
------------- ------------- -------------
Property, plant and equipment, net..................... $ 12,897,432 $ 11,522,745 $ 10,663,438
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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.
(6) INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JANUARY 4,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Goodwill............................................................. $ 4,957,682 $ -- $ --
Trademark............................................................ 6,553,000 6,553,000 6,974,000
Non-compete agreements............................................... 1,708,831 1,708,831 1,708,831
Other................................................................ 1,025,622 1,025,622 1,025,622
------------- ------------- -------------
14,245,135 9,287,453 9,708,453
Less accumulated amortization........................................ (2,768,534) (7,299,492) (9,708,453)
------------- ------------- -------------
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.
During the six-months ended January 4, 1999, an additional impairment charge
was recorded in accordance with SFAS 121 and resulted in an increase of
accumulated amortization on intangible assets of approximately $2.2 million and
an increase of accumulated depreciation on property, plant and equipment of
approximately $.2 million.
F-30
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(6) INTANGIBLE ASSETS, NET (CONTINUED)
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.
(7) OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JANUARY 4,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Customer deposits....................................................... $ 290,433 $ 330,571 399,909
Accrued severance....................................................... -- -- 466,758
Accrued warranty........................................................ 177,401 177,401 177,401
Accrued loss on sale of receivables..................................... 180,000 108,000 59,000
Accrued insurance....................................................... 92,060 113,866 102,113
Deferred compensation................................................... 646,420 -- --
Accrued commissions..................................................... 146,988 36,587 28,926
Accrued legal........................................................... 129,371 86,745 99,956
Other................................................................... 283,775 193,466 151,683
------------ ------------ ------------
$ 1,946,448 $ 1,046,636 $ 1,485,746
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As of January 4, 1999, other accrued expenses includes approximately
$467,000 of accrued severance costs. In December 1998, 16 full-time employees
were terminated by the Business and offered severance payments in the amount of
approximately $482,000 which is included in selling, general and administrative
expenses for the six-months ended January 4, 1999.
(8) LEASES
The Business also has several noncancelable operating leases relating to
buildings, machinery and equipment, computer systems, and trailers.
Future minimum lease payments under noncancelable operating leases as of
January 4, 1999 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 119,247
2000.............................................................................. 220,122
2001.............................................................................. 218,066
2002.............................................................................. 80,446
2003.............................................................................. 20,128
Thereafter........................................................................ --
----------
$ 658,009
----------
----------
</TABLE>
F-31
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(8) LEASES (CONTINUED)
Rent expense for all operating leases was approximately $603,000, $480,000
and $364,000 for fiscal years 1996, 1997 and 1998, respectively, and
approximately $179,000 for the six-months ended January 4, 1999.
(9) INCOME TAXES
The Business reports Federal income taxes in the consolidated return of
Delta Woodside Industries, Inc. (DWI) and had taxable losses of $4.1 million for
the period ended January 4, 1999, which will be reported in the fiscal 1999
consolidated Federal income tax return of its parent, DWI. 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>
SIX-MONTHS
FISCAL YEAR ENDED ENDED
--------------------------------- -----------
JUNE 29, JUNE 28, JUNE 27, JANUARY 4,
1996 1997 1998 1999
---------- ---------- --------- -----------
<S> <C> <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>
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>
SIX-MONTHS
FISCAL YEAR ENDED ENDED
---------------------------------- ----------
JUNE 29, JUNE 28, JUNE 27, JANUARY 4,
1996 1997 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income tax benefit at the statutory rate... $(1,978,989) $(2,719,435) $(5,030,379) $(2,276,347)
State income tax benefit, net of federal
income taxes............................. (41,806) (115,602) -- --
Valuation allowance adjustments............ 160,196 2,191,404 3,681,592 2,200,254
Non-deductible amortization................ 42,963 39,842 1,501,842 --
Other...................................... (677,421) (598,588) (153,055) 76,093
---------- ---------- ---------- ----------
Income tax benefit......................... $(2,495,057) $(1,202,379) $ -- $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-32
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(9) INCOME TAXES (CONTINUED)
Significant components of the Business' deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JANUARY 4,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.................................... $ 4,994,065 $ 7,407,672 $ 8,993,039
Intangibles........................................................ -- -- 584,171
Inventory.......................................................... 222,047 181,034 71,451
Allowance for doubtful accounts.................................... 539,780 196,843 194,105
Accrued vacation................................................... 142,088 129,563 143,889
Other.............................................................. 667,449 616,135 573,930
------------- ------------- -------------
Gross deferred tax assets............................................ 6,565,429 8,531,247 10,560,585
Less valuation allowance............................................. (2,618,647) (6,300,239) (8,500,493)
------------- ------------- -------------
Net deferred tax assets.............................................. 3,946,782 2,231,008 2,060,092
------------- ------------- -------------
Deferred tax liabilities:
Depreciation....................................................... 2,006,063 1,833,039 1,823,743
Intangibles........................................................ 1,914,149 127,845 --
Other.............................................................. 26,570 270,124 236,349
------------- ------------- -------------
Deferred tax liabilities............................................. 3,946,782 2,231,008 2,060,092
------------- ------------- -------------
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, and an increase of $2,200,254 for the six-months ended January 4,
1999.
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. As a
result of the sale of the Business, these carryovers most likely will not be
available to the new owner, or their use may be subject to limitation.
(10) 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. Management believes this
F-33
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(10) AFFILIATED PARTY TRANSACTIONS (CONTINUED)
allocation method is reasonable and approximates the actual cost of providing
these services. These services were no longer provided to the Company in early
1999, as a result of the sale of the Company.
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>
JUNE 28, JUNE 27, JANUARY 4,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Delta Woodside Industries, Inc...................................... $ 29,838,338 $ 33,560,436 36,219,815
International Apparel Marketing Corporation......................... (145,053) (81,665) (170,438)
Alchem Capital Corporation.......................................... 3,318,639 3,513,499 3,513,497
------------- ------------- -------------
Due to affiliates, net.............................................. $ 33,011,924 $ 36,992,270 $ 39,562,874
------------- ------------- -------------
------------- ------------- -------------
</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.
(11) 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, and $21,000 for the six-months ended January 4, 1999. The Business
contributed approximately $16,000, $52,000 and $20,000 to the Retirement Plan
during fiscal 1996, 1997 and 1998, respectively, and $10,000 for the six-months
ended January 4, 1999.
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-34
<PAGE>
NAUTILUS BUSINESS
COMBINED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED JANUARY 4, 1999 AND
THREE YEARS ENDED JUNE 27, 1998
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
accounts are credited with interest and are distributed after retirement,
disability or employment termination. As of June 28, 1997, June 27, 1998 and
January 4, 1999, the Business' liability was approximately $646,000, $13,000 and
$98,000, 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, and $7,000 for the six-months ended January 4,
1999.
(12) 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.
F-35
<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................................................... $ 115,000
Transfer agent fees............................................................... $ 4,878
Accounting fees and expenses...................................................... $ 120,000
Legal fees and expenses........................................................... $ 150,000
Blue Sky fees and expenses (including related legal fees)......................... $ 5,000
Miscellaneous..................................................................... $ 40,000
----------
Total......................................................................... $ 522,000
----------
----------
</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 3.4
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 Lease Agreement dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen Group,
Inc.
+10.3 First Amendment to Lease dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen
Group, Inc.
+10.4 Amendment to Bowflex, Inc. Lease Extension, dated August 27, 1996, between Bowflex, Inc. and Ogden
Business Park Partnership.
+10.5 First Amendment to Lease, dated December 10, 1996, between Bowflex, Inc. and Ogden Business Park
Partnership
+10.6 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc. and Hart Enterprises
+10.7 Amendment to Lease, dated as of October 20, 1998, between Direct Focus, Inc. and LeRoy Hart Rentals.
+10.8 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
+10.9 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of America, Inc. and Tessema D.
Shifferaw.
+10.10 Royalty Payment Agreement, dated as of June 18, 1992, between Tessema D. Shifferaw, Brian R. Cook and
R.E. "Sandy" Wheeler.
10.11** First Amended and Restated Merchant Agreement dated as January 27, 1999, between Direct Focus, Inc.
and Household Bank (SB), N.A.
10.12** Exclusive Sales Agreement dated as of January 1, 1996, between Delta Consolidated Corporation and
Novacare, Inc.
10.13 Asset Purchase Agreement, dated November 10, 1998, by and among Direct Focus, Inc., Delta Woodside
Industries, Inc., Alchem Capital Corporation and Nautilus International, Inc.
+21.1 Subsidiaries of Direct Focus, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG Peat Marwick LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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.
+ Previously filed with the Commission.
(b) Financial Statement Schedules
Schedule II--Direct Focus, Inc. Valuation and Qualifying Accounts
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 duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vancouver, State of Washington, on April 12, 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 Amendment
No. 1 to the 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 April 12, 1999
Brian R. Cook (Principal Executive
Officer)
/s/ ROD W. RICE Chief Financial Officer
- ------------------------------ (Principal Financial and April 12, 1999
Rod W. Rice Accounting Officer)
/s/ KIRKLAND C. ALY*
- ------------------------------ Director April 12, 1999
Kirkland C. Aly
/s/ C. REED BROWN*
- ------------------------------ Director April 12, 1999
C. Reed Brown
/s/ GARY L. HOPKINS*
- ------------------------------ Director April 12, 1999
Gary L. Hopkins
/s/ ROGER J. SHARP*
- ------------------------------ Director April 12, 1999
Roger J. Sharp
/s/ ROLAND E. WHEELER*
- ------------------------------ Director April 12, 1999
Roland E. Wheeler
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROD W. RICE
-------------------------
Rod W. Rice April 12, 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 Lease Agreement dated September 16, 1992, between Bow-Flex of America, Inc. and Christensen
Group, Inc.
+10.3 First Amendment to Lease dated September 16, 1992, between Bow-Flex of America, Inc. and
Christensen Group, Inc.
+10.4 Amendment to Bowflex, Inc. Lease Extension, dated August 27, 1996, between Bowflex, Inc. and
Ogden Business Park Partnership.
+10.5 First Amendment to Lease, dated December 10, 1996, between Bowflex, Inc. and Ogden Business
Park Partnership.
+10.6 Lease Agreement, dated June 4, 1998, between Direct Focus, Inc. and LeRoy Hart Rentals.
+10.7 Amendment to Lease, dated as of October 20, 1998, between Direct Focus, Inc. and LeRoy Hart
Rentals.
+10.8 Borrowing Agreement, dated December 16, 1998, between Direct Focus, Inc. and Seafirst Bank.
+10.9 Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of America, Inc. and Tessema
D. Shifferaw.
+10.10 Royalty Payment Agreement, dated as of June 18, 1992, between Tessema D. Shifferaw, Brian R.
Cook and R.E. "Sandy" Wheeler.
10.11** First Amended and Restated Merchant Agreement, dated as January 27, 1999, between Direct
Focus, Inc. and Household Bank (SB), N.A.
10.12** Exclusive Sales Agreement dated as of January 1, 1996, between Delta Consolidated
Corporation and Novacare, Inc.
10.13 Asset Purchase Agreement, dated November 10, 1998, by and among Direct Focus, Inc., Delta
Woodside Industries, Inc., Alchem Capital Corporation and Nautilus International, 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.
+24.3 Power of Attorney of Gary L. Hopkins.
+24.4 Power of Attorney of Roger J. Sharp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- -------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
+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.
+ Previously filed with the Commission.
<PAGE>
UNDERWRITING AGREEMENT
_____________, 1999
D.A. DAVIDSON & CO.
FIRST SECURITY VAN KASPER
As the Representatives 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 Representatives 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. 333-73243) 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
<PAGE>
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 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
<PAGE>
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
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 or other material agreement or
<PAGE>
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, LTD.,
DFI Properties, LLC and DFI Advertising, Inc.
(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 Act of 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
<PAGE>
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 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
<PAGE>
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 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,
<PAGE>
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
<PAGE>
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, 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.
(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
<PAGE>
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 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.
<PAGE>
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 Representatives,
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 Custody Agreement (the "CUSTODY AGREEMENT")
with American Securities Transfer & Trust, Inc., 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
<PAGE>
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) 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
<PAGE>
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 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,
<PAGE>
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 Representatives 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 Representatives 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
Representatives copies of the Prospectus within the time provided in Section
5(d) hereof, the Representatives may, 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 Representatives. 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 Representatives so elect, 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 Representatives.
It is understood that you, individually, and not as the
Representatives 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.
<PAGE>
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 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
<PAGE>
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
<PAGE>
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.
(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).
<PAGE>
(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 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
<PAGE>
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 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, Ltd., 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;
<PAGE>
(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 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;
<PAGE>
(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
<PAGE>
Attorney and Custody Agreement of each Selling Shareholder has been duly
executed and delivered by or on behalf of such Selling Shareholder;
(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 Representatives, 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
<PAGE>
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 Representatives
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 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
<PAGE>
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 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.
<PAGE>
(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 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
<PAGE>
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 Representatives 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
<PAGE>
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
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 Representatives
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 Representatives 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 Representatives so elect, 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 Representatives.
It is understood that you, individually, and not as the
Representatives 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.
<PAGE>
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 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 Stockholder 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
<PAGE>
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 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 Registration 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.
<PAGE>
(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) 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
<PAGE>
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
<PAGE>
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 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.
<PAGE>
(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 Representatives 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 Representatives 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 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 outbreak 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 Representatives, 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
<PAGE>
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 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]
<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:
FIRST SECURITY VAN KASPER,
on its behalf and on behalf of each of the several
Underwriters named in Schedule A attached hereto.
By:
Name:
Its
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
------------ ---------------------
<S> <C>
D.A. Davidson & Co. ________
First Security Van Kasper ________
[NAMES OF OTHER UNDERWRITERS] ________
TOTAL 1,000,000
---------
---------
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
COMPANY SHARES
COMPANY TO BE SOLD
------- --------------
<S> <C>
Direct Focus, Inc. 825,000
-------
TOTAL 825,000
-------
-------
NUMBER OF
SELLING SHAREHOLDER
SELLING SHAREHOLDERS SHARES TO BE SOLD
-------------------- -------------------
Brian R. Cook. 25,000
Roland E. Wheeler 25,000
Paul Little 100,000
Randal R. Potter 12,500
Rod W. Rice 12,500
TOTAL 175,000
-------
-------
</TABLE>
<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. The omitted portions have been marked with an asterisk (*).
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):
2
<PAGE>
(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.
3
<PAGE>
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,
4
<PAGE>
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
--------------------------------
--------------------------------
11
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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. The
omitted portions have been marked with an asterisk (*). 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 twenty percent
(20%) 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) eighty percent (80%) 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 ten percent (10%) 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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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.
4
<PAGE>
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 eighty percent
(80%) 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
5
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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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<PAGE>
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 eighty percent (80%) 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
------------------------------------
$350,000
JANUARY 1, 1997 TO DECEMBER 31, 1997
------------------------------------
$700,000
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JANUARY 1, 1998 to DECEMBER 31, 1998
------------------------------------
$2,000,000
JANUARY 1, 1999 TO DECEMBER 31, 2000
------------------------------------
$2,500,000
JANUARY 1, 2001 TO DECEMBER 31, 2001 AND EACH YEAR THEREAFTER
-------------------------------------------------------------
the greater of:
(i) 105% 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 $8,000,000, 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 four percent (4%) 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
21
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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
22
<PAGE>
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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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made as of November 10,
1998, by and among Direct Focus, Inc., a Washington corporation ("Buyer"), Delta
Woodside Industries, Inc., a South Carolina corporation ("Delta Woodside"),
Alchem Capital Corporation, a Delaware corporation ("Alchem"), and Nautilus
International, Inc., a Virginia corporation (the "Company"). Delta Woodside,
Alchem and the Company are referred to collectively herein as "Sellers."
RECITALS
WHEREAS, the Company is a direct wholly-owned subsidiary of Alchem and an
indirect wholly-owned subsidiary of Delta Woodside; and
WHEREAS, the Company is engaged in the business of manufacturing,
marketing and distributing fitness products and accessories and licensing of
certain trademarks and other intellectual property (the "Business"); and
WHEREAS, this Agreement contemplates a transaction in which Buyer will
purchase substantially all of the assets of the Company and certain assets owned
by Alchem.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the parties agree as follows:
AGREEMENT
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ACQUIRED ASSETS" -- as defined in Section 2.1.
"ADJUSTMENT AMOUNT" -- as defined in Section 2.6.
"APPLICABLE CONTRACT" -- any Contract (a) under which the Company or any
of its Subsidiaries has or may acquire any rights, (b) under which the Company
or any of its Subsidiaries has or may become subject to any obligation or
liability, or (c) by which the Company or any of its Subsidiaries or any of the
assets owned or used by it is or may become bound.
"AUDITED FINANCIAL STATEMENTS" -- as defined in Section 5.8.
"BALANCE SHEET" -- as defined in Section 5.8.
"BEST EFFORTS" -- the efforts that a prudent Person desirous of achieving
a result would use in similar circumstances to ensure that such result is
achieved as expeditiously as possible; PROVIDED, HOWEVER, that an obligation to
use Best Efforts under this Agreement does not
Final 11/10/98 1
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require the Person subject to that obligation to take actions that would result
in a materially adverse change in the benefits to such Person of this Agreement
and the Contemplated Transactions or that would require such Person to incur any
material cost.
"BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT" -- as defined in
Section 2.5(a)(i).
"BREACH" -- a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any inaccuracy in or breach of, or any failure to perform or comply
with, such representation, warranty, covenant, obligation, or other provision,
or (b) any other occurrence or circumstance that is or was inconsistent with
such representation, warranty, covenant, obligation, or other provision, and the
term "Breach" means any such inaccuracy, breach, failure, occurrence, or
circumstance.
"BUSINESS" -- as defined in the recitals of this Agreement.
"BUYER" -- as defined in the first paragraph of this Agreement.
"CLOSING" -- as defined in Section 2.4.
"CLOSING DATE" -- the date and time as of which the Closing actually
takes place.
"COMPANY" -- as defined in the first paragraph of this Agreement.
"CONSENT" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"CLOSING FINANCIAL STATEMENTS" -- as defined in Section 2.6.
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Acquired Assets by the Company and Alchem to
Buyer;
(b) the execution, delivery, and performance of the Escrow Agreement;
(c) the performance by Buyer and Sellers of their respective covenants
and obligations under this Agreement; and
(d) Buyer's acquisition and ownership of the Acquired Assets.
"CONTRACT" -- any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"DAMAGES" -- as defined in Section 10.2.
"DISCLOSURE LETTER" -- the disclosure letter delivered by Sellers to
Buyer concurrently with the execution and delivery of this Agreement.
Final 11/10/98 2
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"ENCUMBRANCE" -- any charge, claim, community property interest,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"ENVIRONMENT" -- soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES" -- any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and health,
and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or response
actions ("Cleanup") required by applicable Environmental Law or Occupational
Safety and Health Law (whether or not such Cleanup has been required or
requested by any Governmental Body or any other Person) and for any natural
resource damages; or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law or Occupational Safety and Health Law.
The terms "removal," "remedial," and "response action," include the types
of activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended
("CERCLA").
"ENVIRONMENTAL LAW" -- any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or materials,
violations of discharge limits, or other prohibitions and of the commencements
of activities, such as resource extraction or construction, that could have
significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous
Final 11/10/98 3
<PAGE>
characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and
used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other potentially
harmful substances;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of them,
for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for injuries
done to the Environment.
"ERISA" -- the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"ESCROW AGREEMENT" -- as defined in Section 2.5.
"EXCLUDED ASSETS" -- as defined in Section 2.1.
"FACILITIES" -- any real property, leaseholds, or other interests
currently or formerly owned or operated by the Company or any of its
Subsidiaries and any buildings, plants, structures, or equipment (including
motor vehicles, tank cars, and rolling stock) currently or formerly owned or
operated by the Company or any of its Subsidiaries.
"GAAP" -- generally accepted United States accounting principles, applied
on a basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in the first sentence of Section 3.4 were
prepared.
"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license,
franchise, permit, waiver, or other authorization issued, granted, given, or
otherwise made available by or under the authority of any Governmental Body or
pursuant to any Legal Requirement.
"GOVERNMENTAL BODY" -- any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
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<PAGE>
(e) body legally exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.
"HAZARDOUS ACTIVITY" -- the distribution, generation, handling,
importing, management, manufacturing, processing, production, refinement,
Release, storage, transfer, transportation, treatment, or use (including any
withdrawal or other use of groundwater) of Hazardous Materials in, on, under,
about, or from the Facilities or any part thereof into the Environment, and any
other act, business, operation, or thing that increases the danger, or risk of
danger, or poses an unreasonable risk of harm to persons or property on or off
the Facilities, or that may adversely affect the value of the Facilities or the
Acquired Assets.
"HAZARDOUS MATERIALS" -- any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"HSR ACT" -- the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 3.22.
"IRC" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code
or any successor law.
"IRS" -- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"KNOWLEDGE" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact or
other matter.
A Person (other than an individual) will be deemed to have "Knowledge" of
a particular fact or other matter if any individual who is currently serving as
a director, officer, partner, executor, or trustee of such Person (or in any
similar capacity) has Knowledge of such fact or other matter.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"NONCOMPETITION AGREEMENT" -- as defined in Section 2.5(a)(v).
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"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards.
"ORDER" -- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of such
Person; and
(b) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons of a similar size as
such Person that are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"OWNED PROPERTY" -- as defined in Section 2.1(a).
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company or
partnership, joint venture, estate, trust, association, organization, labor
union, or other entity or Governmental Body.
"PROCEEDING" -- any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"RELATED PERSON" -- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and
Final 11/10/98 6
<PAGE>
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control with
such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner, executor,
or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves as a
general, partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, (a) the "Family" of an individual
includes (i) the individual, (ii) the individual's spouse, (iii) any other
natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "Material Interest" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of voting securities or other voting interests representing at least 5% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 5% of the outstanding equity securities or
equity interests in a Person.
"RELEASE" -- any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"SECURITIES ACT" -- the Securities Act of 1933, as amended, or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"SELLERS" -- as defined in the first paragraph of this Agreement.
"SUBSIDIARY"-- with respect to any Person (the "Owner"), any corporation
or other Person of which securities or other interests having the power to elect
a majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency
Final 11/10/98 7
<PAGE>
that has not occurred) are held by the Owner or one or more of its Subsidiaries;
when used without reference to a particular Person, "Subsidiary" means a
Subsidiary of the Company.
"TAX" -- any tax (including any income tax, capital gains tax,
value-added tax, sales tax, property tax, gift tax, or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency, or other fee,
and any related charge or amount (including any fine, penalty, interest, or
addition to tax), imposed, assessed, or collected by or under the authority of
any Governmental Body or payable pursuant to any tax-sharing agreement or any
other Contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee, or payable as a result of
transferee liability, or payable as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period, or otherwise payable
through operation of law.
"TAX RETURN" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE" -- a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"THREATENED" -- a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing),
or if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
2. SALE AND TRANSFER OF ACQUIRED ASSETS; CLOSING
2.1 SALE AND TRANSFER OF THE ASSETS. Subject to the terms and
conditions of this Agreement, on the Closing Date the Company and Alchem (to the
extent Alchem immediately prior to the Closing owns any portion of the
Intellectual Property Assets) will sell, convey, transfer, assign and deliver to
Buyer all of the Company's right, title and interest in and to all of the
assets, rights, properties and goodwill of the Company (including without
limitation the Marks and Patents to be transferred by Alchem to the Company
prior to the Closing) of every kind and description, wherever located, used in
or relating to the Business other than the assets and property listed on
Schedule 2.1 (the "Excluded Assets")(the assets, rights, properties and goodwill
so acquired, the "Acquired Assets"). The Acquired Assets include, without
limitation, the following assets, rights, properties and goodwill of the Company
(unless they are Excluded Assets):
(a) all real property, leaseholds and subleaseholds therein,
improvements, fixtures, and fittings thereon, and easements, rights-of-way, and
other appurtenances thereto, including, without limitation, the real property
(including all buildings, improvements and structures located thereon and all
rights, privileges, easements and appurtenances thereto)
Final 11/10/98 8
<PAGE>
located at Independence, Virginia and Huntersville, North Carolina described on
Schedule 2.1(a) (the "Owned Property");
(b) all tangible personal property, including, without limitation,
furnishings, furniture, office supplies, vehicles, rolling stock, tools,
machinery, equipment, and computer equipment (including software);
(c) all inventory, including without limitation, raw materials,
work-in process, finished goods, packaging materials, spare parts and supplies;
(d) all Intellectual Property Assets, goodwill associated therewith,
licenses and sublicenses granted and obtained with respect thereto, and rights
thereunder, remedies against infringement thereof, and rights to protection of
interests therein under the laws of all jurisdictions;
(e) the Contracts listed on Schedule 2.1(e), Applicable Contracts that
involve the performance of services or delivery of goods or materials by one or
more of the Company and its Subsidiaries entered into in the Ordinary Course of
Business, and such Contracts entered into by the Company after the date of this
Agreement and prior to the Closing Date as Buyer expressly elects to acquire at
Closing by written addendum to this Agreement;
(f) all Governmental Authorizations, franchises, approvals, permits,
licenses, orders, registrations, certificates, variances and similar rights
obtained from any Governmental Body;
(g) all books, records, ledgers, files, documents, correspondence,
lists, plats, architectural plans, drawings, and specifications, surveys, title
policies, creative materials, advertising and promotional materials, studies,
reports, product information, employment records and files and all other
information and/or data;
(h) all accounts and other receivables;
(i) all claims, deposits, prepayments, refunds, causes of action,
choses in action, rights of recovery, rights of set off, and rights of
recoupment, including without limitation the actions listed on Schedule 2.1 (i);
(j) all telephone, telex and telecopier numbers and all existing
listings in all telephone books and directories; and
(k) all warranties and guaranties received from vendors, suppliers or
manufacturers.
2.2 NONASSUMPTION OF LIABILITIES; OBLIGATIONS ASSUMED. Except as
expressly set forth in this Agreement, the sale and conveyance of the Acquired
Assets hereunder shall be free and clear of any and all claims, liabilities,
security interests, liens, mortgages, pledges, encumbrances, charges, equities,
options, restrictive agreements or assessments of any kind whatsoever. Buyer is
not assuming, nor shall it be deemed to
Final 11/10/98 9
<PAGE>
assume, any liabilities of Sellers of any nature whatsoever, whether accrued,
absolute, contingent or otherwise and whether known or unknown; except Buyer
shall assume as of the Closing Date (a) the Company's obligations under the
Contracts described in Section 2.1(e) and all Governmental Authorizations
assigned to Buyer to be performed from and after the Closing Date, but only to
the extent that such obligations do not arise out of any default or breach by
the Company of any such Contract or any such Governmental Authorization or any
term thereof, (b) the Company's trade accounts payable as of the Closing Date
incurred in the Ordinary Course of Business as and to the extent set forth on
the Closing Financial Statements, (c) the Company's "other accrued expenses"
(excluding the "accrued loss on receivables") as of the Closing Date incurred in
the Ordinary Course of Business, as and to the extent set forth on the Closing
Financial Statements, (d) accrued employee compensation as and to the extent set
forth in the Closing Financial Statements, and (e) any counterclaim in any legal
action listed in Schedule 2.1 (i).
2.3 PURCHASE PRICE
The purchase price (the "Purchase Price") for the Acquired Assets will be
Sixteen Million Dollars ($16,000,000), plus the Adjustment Amount, plus the
liabilities assumed by Buyer pursuant to Section 2.2 hereof.
2.4 CLOSING
The purchase and sale (the "Closing") provided for in this Agreement will
take place at the offices of Delta Woodside Industries, Inc. in Greenville,
South Carolina, at 10:00 am. (local time) on the date that is such date agreed
to by the parties that is no later than five (5) business days after the
satisfaction or waiver of the conditions set forth in Sections 7.3, 7.7 and
8.3, or at such other time and place as the parties may agree. Subject to the
provisions of Section 9, failure to consummate the purchase and sale provided
for in this Agreement on the date and time and at the place determined pursuant
to this Section 2.4 will not result in the termination of this Agreement and
will not relieve any party of any obligation under this Agreement.
2.5 CLOSING OBLIGATIONS
At the Closing:
(a) Sellers will deliver, or cause to be delivered, to Buyer:
(i) a bill of sale, assignment and assumption agreement in form
reasonably acceptable to Buyer and Sellers (the "Bill of Sale, Assignment and
Assumption Agreement");
(ii) warranty deeds in recordable form for the Owned Property
that is owned by the Company;
(iii) such other instruments of transfer and documents as Buyer
may reasonably request;
(iv) an affidavit in form and substance reasonably satisfactory
to Buyer, duly
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executed and acknowledged, certifying that none of Sellers is a foreign person
within the meaning of Section 1445(f)(3) of the Code, and any corresponding
affidavit required for state tax purposes;
(v) a noncompetition agreement in the form of Exhibit
2.5(a)(v), executed by Sellers (the "Noncompetition Agreement"); and
(vi) a certificate executed by Sellers representing and
warranting to Buyer that each of Sellers' representations and warranties in this
Agreement was accurate in all material respects as of the date of this Agreement
and is accurate in all material respects as of the Closing Date as if made on
the Closing Date (giving full effect to any supplements to the Disclosure Letter
that were delivered by Sellers to Buyer prior to the Closing Date in accordance
with Section 5.5); and
(b) Buyer will deliver to Sellers:
(i) Thirteen Million Dollars ($13,000,000) by wire transfer to
an account specified by Sellers;
(ii) the sum of Three Million Dollars ($3,000,000), which the
Buyer will deliver, on behalf of the Company, to the escrow agent referred to in
Section 2.5(c) (the "Escrow Agent") by bank cashier's or certified check;
(iii) the Bill of Sale, Assignment and Assumption Agreement; and
(iv) a certificate executed by Buyer representing and warranting
to Sellers that each of Buyer's representations and warranties in this Agreement
was accurate in all material respects as of the date of this Agreement and is
accurate in all material respects as of the Closing Date as if made on the
Closing Date.
(c) Buyer and Sellers will enter into an escrow agreement in the form
of Exhibit 2.5(c) (the "Escrow Agreement") with a mutually agreeable financial
institution ____________.
The parties agree that the amount delivered to the Escrow Agent pursuant to
Section 2.5 (b) (ii) constitutes funds of the Company, received by the Company
as a portion of the Purchase Price, that are delivered to the Escrow Agent on
behalf of the Company to provide the Buyer with assurance of certain payments
that may become due to the Buyer from the Company, as provided in the Escrow
Agreement.
2.6 ADJUSTMENT AMOUNT; ADJUSTMENT PROCEDURE
(a) The Adjustment Amount (which may be a positive or negative number)
will be determined in accordance with this Section 2.6. Sellers will prepare and
will cause KPMG Peat Marwick, the Company's certified public accountants, to
audit consolidated financial statements ("Closing Financial Statements") of the
Company as of the Closing Date and for the period from the date of the Balance
Sheet through the Closing Date. The Company will deliver the Closing Financial
Statements to Buyer and Sellers within sixty (60) days after the
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Closing Date. The Closing Financial Statements will be used to compute the
Adjustment Amount, which shall be equal to the excess of (A) the excess of (i)
the sum of the Company's accounts receivable (excluding financed notes), net of
associated allowance for doubtful accounts, inventory and prepaids and other
current assets, over (ii) the sum of accounts payable, accrued employee
compensation, other accrued expenses (excluding the accrued loss on sale of
receivables) and Reserves (as defined below), over (B) $4,009,000. For purposes
of this Section 2.6(a), Reserves shall be defined as the sum of (x) to the
extent not taken into account in determining other accrued expenses in the
Closing Financial Statements, an additional product warranty reserve in the
amount of $300,000, and (y) to the extent not taken into account in determining
inventory in the Closing Financial Statements, an additional reserve for
cardio-equipment and other slow-moving and obsolete inventory in the amount of
$1,000,000. The parties agree that Exhibit 2.6(a) sets forth the methodology
used to calculate the $4,009,000 amount. The Adjustment Amount will be
determined mutually by Sellers and Buyer, reasonably and in good faith and
using their respective best efforts on the basis of the Closing Financial
Statements.
(b) If the Adjustment Amount is a positive number (i.e., the amount
determined under clause 2.6(a)(A) exceeds $4,009,000), Buyer will pay the
Adjustment Amount to the Company; if the Adjustment Amount is a negative number
(i.e., the amount determined under clause 2.6(a)(A) is less than $4,009,000),
then first, the Escrow Agent shall pay the Adjustment Amount to Buyer and the
Escrow Amount will be reduced accordingly, and, second, if the Adjustment Amount
exceeds the Escrow Amount, Sellers will pay, or cause to be paid, such excess to
Buyer. All payments will be made on the tenth business day following the final
determination by Sellers and Buyer (or the arbitrator, if paragraph (c) below
applies) of the Adjustment Amount, together with interest at 10% compounded
daily beginning on the Closing Date and ending on the date of payment. Payments
must be made in immediately available funds. Payments to the Company must be
made in the manner set forth in Section 2.5(b)(i). Payments to Buyer must be
made by wire transfer to such bank account as Buyer will specify.
(c) In the event that by the 30th day following delivery of the
Closing Financial Statements Sellers and Buyer have not agreed on the Adjustment
Amount and delivered the notice provided for in Section 3(a) of the Escrow
Agreement, determination of the Adjustment Amount shall be resolved by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. Arbitration shall be by a single arbitrator experienced
in financial accounting matters and selected by Buyer and Sellers in accordance
with the Commercial Arbitration Rules of the American Arbitration Association.
The arbitration shall be held in such place in Richmond, Virginia as may be
specified by the arbitrator (or any place agreed to by Buyer, Sellers and the
arbitrator). The decision of the arbitrator shall be final and binding as to the
Adjustment Amount; provided, however, if necessary, such decision may be
enforced by either the Buyer or Sellers in any court of record having
jurisdiction over the subject matter or over any of the parties to this
Agreement. The determination of which party or parties bears the costs and
expenses (including reasonable attorneys' fees) incurred in connection with any
such arbitration proceeding shall be made by the arbitrator on the basis of the
arbitrator's assessment of the relative merits of the parties' positions.
Final 11/10/98 12
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2.7 TAX ALLOCATION
Sellers shall allocate the Purchase Price to broad categories
constituting components of the Acquired Assets and the noncompetition Agreement
in accordance with the allocation adopted by Buyer following Closing. Buyer and
Sellers shall report the purchase and sale of the Acquired Assets in accordance
with such allocation for all Tax purposes (including the filing of the forms
prescribed under Section 1060 of the Code and the Treasury Regulations
promulgated thereunder), but such allocation shall not constrain reporting for
other purposes.
2.8 SALES AND USE TAX
Buyer and Sellers shall cooperate in preparing, executing and filing
sales and use Tax returns relating to the purchase and sale of the Acquired
Assets, and at the Closing, Buyer shall pay, or cause to be paid, any and all
sales, real estate, transfer or use Tax due with regard to the purchase and sale
of the Acquired Assets. To the extent such Taxes cannot be accurately computed
at the Closing, Buyer shall pay, or cause to be paid, such Taxes when they are
due. Such Tax Returns shall be prepared in a manner that is consistent with the
allocation of the Purchase Price contemplated by Section 2.7. Buyer shall also
furnish Sellers with a form of resale certificate that complies with the
requirements of applicable state taxation laws.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING
Part 3.1 of the Disclosure Letter contains a complete and accurate list
for the Company and each of its Subsidiaries of its name, its jurisdiction of
incorporation, other jurisdictions in which it is authorized to do business, and
its capitalization (including the identity of each stockholder and the number of
shares held by each). Each of the Company and each of its Subsidiaries is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation, with full corporate power and
authority to conduct its business as it is now being conducted, to own or use
the properties and assets that it purports to own or use, and to perform all its
obligations under Applicable Contracts. Each of the Company and each of its
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing under the laws of each state or other jurisdiction in which either
the ownership or use of the properties owned or used by it, or the nature of the
activities conducted by it, requires such qualification, except where the lack
of such qualification would not have a material adverse effect on the financial
condition of the Company and its Subsidiaries.
3.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of each of Sellers, enforceable against each of Sellers in accordance
with its terms. Upon the execution and delivery by Sellers of the Escrow
Agreement and the Noncompetition Agreement (collectively, the "Sellers' Closing
Documents", the Sellers' Closing Documents will
Final 11/10/98 13
<PAGE>
constitute the legal, valid, and binding obligations of each of Sellers,
enforceable against each of Sellers in accordance with their respective terms.
Each of Sellers has the absolute and unrestricted right, power, authority, and
capacity to execute and deliver this Agreement and the Sellers' Closing
Documents and to perform its obligations under this Agreement and the Sellers'
Closing Documents.
(b) Except as set forth in Part 3.2(b) of the Disclosure Letter,
neither the execution nor delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions by any of Sellers, directly
or indirectly (with or without notice or lapse of time) will:
(i) contravene, conflict with, or result in a violation of (A)
any provision of the Organizational Documents of any of Sellers, or (B) any
resolution adopted by the board of directors or the stockholders of any of
Sellers;
(ii) contravene, conflict with, or result in a violation of, or
give any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief under,
any Legal Requirement or any Order to which any of Sellers or the Acquired
Assets may be subject;
(iii) contravene, conflict with, or result in a violation of any
of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by the Company or any of its Subsidiaries or that
otherwise relates to the Business or the Acquired Assets;
(iv) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Applicable Contract; or
(v) result in the imposition or creation of any Encumbrance
upon or with respect to any of the Acquired Assets.
(c) Except as set forth in Part 3.2(c) of the Disclosure Letter, no
Seller is or will be required to give any notice to or obtain any Consent from
any Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions, except
where the failure to give notice or to obtain any Consent would not affect the
ability of the parties to this Agreement to consummate the Contemplated
Transactions.
3.3 CAPITALIZATION
All of the outstanding equity securities of the Company are owned of
record and beneficially by Alchem, free and clear of all Encumbrances (other
than a pledge in favor of General Electric Capital Corporation ("GECC") as
agent.
3.4 FINANCIAL STATEMENTS
Final 11/10/98 14
<PAGE>
The Audited Financial Statements fairly present the financial condition
and results of operations, changes in stockholders' equity, and cash flow of the
Company and its Subsidiaries as at the respective dates of and for the periods
referred to in such financial statements, all in accordance with GAAP as
consistently applied throughout the periods involved. Sellers have delivered to
Buyer unaudited consolidating financial statements of the Company and its
Subsidiaries as of the fiscal period ended October 31, 1998 (the "Unaudited
Financials"). The Unaudited Financials have been prepared in a manner consistent
with prior unaudited financial statements prepared by the Company and fairly
present the Company's financial condition and results of operations as of
October 31, 1998 and for the period referred to therein.
3.5 BOOKS AND RECORDS
The books of account, minute books, stock record books, and other records
of the Company and its Subsidiaries, all of which will be made available to
Buyer prior to Closing, are complete and correct and have been maintained in
accordance with sound business practices and the requirements of Section
13(b)(2) of the Securities Exchange Act of 1934, as amended (regardless of
whether or not the Subsidiaries are subject to that Section), including the
maintenance of an adequate system of internal controls. The minute books of the
Company contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders, the Board of Directors, and
committees of the Board of Directors of the Company, and no meeting of any such
stockholders, Board of Directors, or committee has been held for which minutes
have not been prepared and are not contained in such minute books.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES
Part 3.6 of the Disclosure Letter contains a complete and accurate list
of all real property, real property leaseholds, or other real property interests
therein owned by the Company and its Subsidiaries and included with the Acquired
Assets. Sellers have delivered or made available to Buyer copies of the deeds
and other instruments (as recorded) by which the Company and its Subsidiaries
acquired such real property and interests, and copies of all title insurance
policies, opinions, abstracts, and surveys in the possession of Sellers or the
Subsidiaries and relating to such property or interests. The Company and its
Subsidiaries own or by Closing will own (with good and marketable title in the
case of real property, subject only to the matters permitted by the following
sentence) all the properties and assets (whether real, personal, or mixed and
whether tangible or intangible) that they purport to own located in the
facilities owned or operated by the Company and its Subsidiaries or reflected as
owned in the books and records of the Company and its Subsidiaries, including
all of the properties and assets reflected in the Balance Sheet (except for
assets held under capitalized leases disclosed or not required to be disclosed
in Part 3.6 of the Disclosure Letter and personal property sold since the date
of the Balance Sheet, as the case may be, in the Ordinary Course of Business),
and all of the properties and assets purchased or otherwise acquired by the
Company and its Subsidiaries since the date of the Balance Sheet (except for
personal property acquired and sold since the date of the Balance Sheet in the
Ordinary Course of Business and consistent with past practice) which
subsequently purchased or acquired properties and assets (other than inventory
and short-term investments) were purchased or
Final 11/10/98 15
<PAGE>
acquired for an aggregate consideration of less than $50,000. All properties and
assets reflected in the Balance Sheet (and still owned by the Company or any of
its Subsidiaries) are free and clear of all Encumbrances and are not, in the
case of real property, subject to any rights of way, building use restrictions,
exceptions, variances, reservations, or limitations of any nature except, with
respect to all such properties and assets, (a) mortgages or security interests
shown on the Balance Sheet or Part 3.6 of the Disclosure Letter as securing
specified liabilities or obligations, with respect to which no default (or event
that, with notice or lapse of time or both, would constitute a default) exists,
(b) mortgages or security interests incurred in connection with the purchase of
property or assets after the date of the Balance Sheet (such mortgages and
security interests being limited to the property or assets so acquired), with
respect to which no default (or event that, with notice or lapse of time or
both, would constitute a default) exists, (c) liens for current Taxes not yet
due, and (d) with respect to real property, (i) minor imperfections of title, if
any, none of which is substantial in amount, materially detracts from the value
or impairs the use of the property subject thereto, or impairs the operations of
the Company or any of its Subsidiaries, and (ii) zoning laws and other land use
restrictions that do not impair the present or anticipated use of the property
subject thereto. All buildings, plants, and structures owned by the Company and
its Subsidiaries lie wholly within the boundaries of the real property owned by
the Company and its Subsidiaries and do not encroach upon the property of, or
otherwise conflict with the property rights of, any other Person.
3.7 CONDITION AND SUFFICIENCY OF ASSETS
The buildings, plants, structures, and equipment of the Company and its
Subsidiaries are generally adequate for the continued conduct of the Company's
and its Subsidiaries' businesses after the Closing in substantially the same
manner as conducted prior to the Closing; provided, however, that Sellers do
not provide any representation or warranty as to the physical condition of any
of the tangible personal property of any of the Company and its
Subsidiaries.
3.8 ACCOUNTS RECEIVABLE
All accounts receivable of the Company and its Subsidiaries that are
reflected on the Balance Sheet or on the accounting records of the Company and
its Subsidiaries as of the Closing Date (collectively, the "Accounts
Receivable") represent or will represent valid obligations arising from sales
actually made or services actually performed in the Ordinary Course of Business.
Unless paid prior to the Closing Date, the Accounts Receivable are or will be as
of the Closing Date current and collectible net of the respective reserves shown
on the Balance Sheet or on the accounting records of the Company and its
Subsidiaries as of the Closing Date (which reserves are adequate and calculated
consistent with past practice). Except as covered by any reserve, there is no
contest, claim, or right of set-off, other than returns in the Ordinary Course
of Business, under any Contract with any obligor of an Account Receivable
relating to the amount or validity of such Account Receivable.
3.9 INVENTORY
All inventory of the Company and its Subsidiaries, whether or not
reflected in the
Final 11/10/98 16
<PAGE>
Balance Sheet, consists of a quality and quantity usable and salable in the
Ordinary Course of Business, except for obsolete items and items of
below-standard quality, all of which have been written off or written down to
net realizable value in the Balance Sheet or on the accounting records of the
Company and its Subsidiaries as of the Closing Date, as the case may be. All
inventories not written off have been priced at the lower of cost or market on a
first in, first out basis. The quantities of each general type of inventory
(i.e., raw materials, work-in-process, or finished goods) are not excessive, but
are reasonable in the present circumstances of the Company and its Subsidiaries.
3.10 NO UNDISCLOSED LIABILITIES
Except as set forth in Part 3.10 of the Disclosure Letter, the Company
and its Subsidiaries have no liabilities or obligations of any nature (whether
known or unknown and whether absolute, accrued, contingent, or otherwise) except
for liabilities or obligations reflected or reserved against in the Balance
Sheet and current liabilities incurred in the Ordinary Course of Business since
the date thereof.
3.11 TAXES
(a) The Company and its Subsidiaries have filed or caused to be filed
(on a timely basis since January 20, 1993) all Tax Returns that are or were
required to be filed by or with respect to any of them, either separately or as
a member of a group of corporations, pursuant to applicable Legal Requirements.
The Company and its Subsidiaries have paid, or made provision for the payment
of, all Taxes that have or may have become due from any of the Company or its
Subsidiaries pursuant to those Tax Returns or otherwise, or pursuant to any
assessment received by Sellers or any Subsidiary, except such Taxes, if any, as
are listed in Part 3.11 of the Disclosure Letter and are being contested in good
faith and as to which adequate reserves (determined in accordance with GAAP)
have been provided in the Balance Sheet. Part 3.11 of the Disclosure Letter
lists all federal, state, local and foreign income Tax Returns filed with
respect to or including the Company or any of its Subsidiaries for taxable
periods ended after July 3, 1993, indicates those income Tax Returns that have
been audited, and indicates those income Tax Returns that currently are the
subject of audit. Sellers have delivered or made available to Buyer correct and
complete copies of all information respecting the Company and its Subsidiaries
that was included in the consolidated federal income Tax Returns, examination
reports, and statements of deficiencies assessed against or agreed to by any of
the Company and its Subsidiaries with respect to any period since July 3, 1993.
Sellers have made available copies of all other Tax Returns of the Company and
its Subsidiaries filed since July 3, 1993.
(b) Except as described in Part 3.11 of the Disclosure Letter, neither
the Company nor any Subsidiary has given waivers or extensions (or is or would
be subject to a waiver or extension given by any other Person) of any statute of
limitations relating to the payment of Taxes of the Company or any of its
Subsidiaries or for which the Company or any of its Subsidiaries may be liable.
(c) The charges, accruals, and reserves with respect to Taxes on the
respective books of the Company and each of its Subsidiaries are adequate
(determined in accordance
Final 11/10/98 17
<PAGE>
with GAAP) and are at least equal to that company's liability for Taxes. There
exists no proposed tax assessment against the Company or any of its
Subsidiaries, except as disclosed in the Balance Sheet or in Part 3.11 of the
Disclosure Letter. No consent to the application of Section 341(f)(2) of the IRC
has been filed with respect to any property or assets held, acquired, or to be
acquired by the Company or any of its Subsidiaries. All Taxes that the Company
or any of its Subsidiaries is or was required by Legal Requirements to withhold
or collect have been duly withheld or collected and, to the extent required,
have been paid to the proper Governmental Body or other Person. There are no
liens for Taxes (other than for current Taxes not yet due and payable) upon the
assets of the Company or any of its Subsidiaries.
(d) All Tax Returns filed by (or that include on a consolidated,
combined or unitary basis) the Company or any of its Subsidiaries are true,
correct, and complete in all respects insofar as concerns the Company and its
Subsidiaries. Neither the Company nor any of its Subsidiaries is, or within the
five-year period preceding the Closing Date has been, an "S" corporation.
3.12 NO MATERIAL ADVERSE CHANGE
Since the date of the Unaudited Financials, there has not been any
material adverse change in the business, operations, properties, prospects,
assets, or condition of the Company, and no event has occurred or circumstance
exists that may result in such a material adverse change.
3.13 EMPLOYEE BENEFITS
(a) As used in this Section 3.13, the following terms have the
meanings set forth below.
"EMPLOYEE BENEFIT PLAN" means (a) nonqualified deferred compensation or
retirement plan or arrangement that is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement that is an
Employee Pension Benefit Plan (including any Multiemployer Plan), (c) qualified
defined benefit retirement plan or arrangement that is an Employee Pension
Benefit Plan (including any Multiemployer Plan), (d) Employee Welfare Benefit
Plan, or (e) any other practice, arrangement, obligation or benefit for the
benefit of employees other than salary or wages.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA Sec.
3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA Sec.
3(1).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Sec. 3(37).
"PBGC" means the Pension Benefit Guaranty Corporation.
Final 11/10/98 18
<PAGE>
"REPORTABLE EVENT" has the meaning set forth in ERISA Sec. 4043.
(b) Part 3.13 of the Disclosure Letter lists each Employee Benefit
Plan that any of the Company and its Subsidiaries maintains or to which any of
the Company and its Subsidiaries contributes.
(i) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all
respects with the applicable requirements of ERISA and the IRC.
(ii) All contributions (including all employer contributions and
employee salary reduction contributions) that are due have been paid to
each such Employee Benefit Plan that is an Employee Pension Benefit Plan.
(iii) The latest determination letter respecting the 401(k) plan
in which the Company participates to the effect that the plan meets the
requirements of IRC Sec. 401(a) that has been received from the
Internal Revenue Service is dated August 8, 1996.
(iv) As of the last day of the most recent prior plan year, the
market value of assets under each such Employee Benefit Plan that is an
Employee Pension Benefit Plan equaled or exceeded the present value of
liabilities thereunder (determined in accordance with then current
funding assumptions).
(v) Sellers have delivered or made available to Buyer correct
and complete copies of the plan documents and summary plan descriptions,
the most recent determination letter received from the Internal Revenue
Service, the most recent Form 5500 Annual Report, and all related trust
agreements, insurance contracts, and other funding agreements that
implement each such Employee Benefit Plan.
(vi) No such Employee Benefit Plan that is an Employee Pension
Benefit Plan has been completely or partially terminated or been the
subject of a Reportable Event as to which notices would be required to be
filed with the PBGC. No proceeding by the PBGC to terminate any such
Employee Pension Benefit Plan has been instituted.
(vii) No action, suit, proceeding, hearing, or investigation with
respect to the administration or the investment of the assets of any such
Employee Benefit Plan (other than routine claims for benefits) is
pending.
(viii) Neither the Company nor any of its Subsidiaries has
incurred any liability to the PBGC (other than PBGC premium payments) or
otherwise under Title IV of ERISA (including any withdrawal liability)
with respect to any such Employee Benefit Plan that is an Employee
Pension Benefit Plan.
(ix) Except to the extent required under ERISA Section 601, ET.
SEQ., and IRC Section 4980B, and except for limited medical coverage
provided for certain retirees under the Delta Woodside Industries, Inc.
Group Benefit Plan, neither the Company nor any
Final 11/10/98 19
<PAGE>
Subsidiary provides health or welfare benefits for any retired or former
employee or is obligated to provide health or welfare benefits to any
active employee following such employee's retirement or other
termination of service.
(x) Sellers, the Company and its Subsidiary have complied with
the provisions of ERISA Section 601 ET. SEQ., and IRC Section 4980B.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS
(a) Except as set forth in Part 3.14 of the Disclosure Letter:
(i) The Company and each of its Subsidiaries is, and at all
times since January 20, 1993 has been, in full compliance in all respects with
each Legal Requirement that is or was applicable to it or to the conduct or
operation of its business or the ownership or use of any of its assets.
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a violation by
the Company or any of its Subsidiaries of, or a failure on the part of the
Company or any of its Subsidiaries to comply with, any Legal Requirement, or (B)
may give rise to any obligation on the part of the Company or any of its
Subsidiaries to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature pursuant to any Legal Requirement; and
(iii) neither the Company nor any of its Subsidiaries has
received, at any time since January 20, 1993, any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of, or
failure to comply with, any Legal Requirement, or (B) any actual, alleged,
possible, or potential obligation on the part of the Company or any of its
Subsidiaries to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature pursuant to any Legal Requirement.
(b) Part 3.14 of the Disclosure Letter contains a complete and
accurate list of each Governmental Authorization that is held by the Company or
any of its Subsidiaries or that otherwise relates to the Business or any of the
Acquired Assets, except for those Governmental Authorizations the failure to
possess would not have an adverse effect on the financial condition of the
Company and its Subsidiaries, taken as a whole. Each Governmental Authorization
listed or required to be listed in Part 3.14 of the Disclosure Letter is valid
and in full force and effect. Except as set forth in Part 3.14 of the Disclosure
Letter:
(i) the Company and each of its Subsidiaries is, and at all
times since January 20, 1993 has been, in full compliance in all respects with
all of the terms and requirements of each Governmental Authorization identified
or required to be identified in Part 3.14 of the Disclosure Letter;
(ii) no event has occurred or circumstance exists that may (with
or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a
Final 11/10/98 20
<PAGE>
failure to comply with any term or requirement of any Governmental
Authorization, or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, or termination of, or any modification to,
any Governmental Authorization;
(iii) neither the Company nor any of its Subsidiaries has
received, at any time since January 20, 1993, any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of or
failure to comply with any term or requirement of any Governmental
Authorization, or (B) any actual, proposed, possible, or potential revocation,
withdrawal, suspension, cancellation, termination of, or modification to any
Governmental Authorization; and
(iv) all applications required to have been filed for the
renewal of the Governmental Authorizations listed or required to be listed in
Part 3.14 of the Disclosure Letter have been duly filed on a timely basis with
the appropriate Governmental Bodies, and all other filings required to have been
made with respect to such Governmental Authorizations have been duly made on a
timely basis with the appropriate Governmental Bodies.
3.15 LEGAL PROCEEDINGS; ORDERS
(a) Except as set forth in Part 3.15 of the Disclosure Letter, there
is no pending Proceeding:
(i) that has been commenced by or against the Company or any of
its Subsidiaries or that otherwise relates to or may affect the Business or any
of the Acquired Assets; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
(1) Except as set forth in Part 3.15 of the Disclosure Letter, no such
Proceeding has been Threatened, and (2) no event has occurred or circumstance
exists that may give rise to or serve as a basis for the commencement of any
such Proceeding. Sellers will cause the attorneys representing the Company to
furnish Buyer, upon request by Buyer, with copies of all pleadings,
correspondence, and other documents relating to each Proceeding listed in Part
3.15 of the Disclosure Letter. The Proceedings listed in Part 3.15 of the
Disclosure Letter will not have a material adverse effect on the business,
operations, assets, condition, or prospects of the Company or any of its
Subsidiaries.
(b) Except as set forth in Part 3.15 of the Disclosure Letter:
(i) there is no Order to which the Company or any of its
Subsidiaries, or any of the assets owned or used by the Company or any of its
Subsidiaries, is subject;
(ii) neither Seller is subject to any Order that relates to the
Business or any of the Acquired Assets; and
(iii) no officer, director, or employee of the Company or any of
its
Final 11/10/98 21
<PAGE>
Subsidiaries is subject to any Order that prohibits such officer, director, or
employee from engaging in or continuing any conduct, activity, or practice
relating to the business of the Company or any of its Subsidiaries.
(c) Except as set forth in Part 3.15 of the Disclosure Letter:
(i) each of the Company and each of its Subsidiaries is, and at
all times since January 20, 1993 has been, in full compliance with all of the
terms and requirements of each Order to which it, or any of the assets owned or
used by it, is or has been subject;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a violation of
or failure to comply with any term or requirement of any Order to which the
Company or any of its Subsidiaries, or any of the assets owned or used by the
Company or any of its Subsidiaries, is subject; and
(iii) neither the Company nor any of its Subsidiaries has
received, at any time since January 20, 1993, any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding any actual, alleged, possible, or potential violation of, or failure
to comply with, any term or requirement of any Order to which the Company or
any of its Subsidiaries, or any of the assets owned or used by the Company or
any of its Subsidiaries, is or has been subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Part 3.16 of the Disclosure Letter, since the date
of the Balance Sheet, the Company and its Subsidiaries have conducted their
businesses only in the Ordinary Course of Business and there has not been any:
(a) change in the Company's or any of its Subsidiaries' authorized or
issued capital stock; grant of any stock option or right to purchase shares of
capital stock of the Company or any of its Subsidiaries; issuance of any
security convertible into such capital stock; grant of any registration rights
with respect to such capital stock; purchase, redemption, retirement, or other
acquisition by the Company or any of its Subsidiaries of any shares of any such
capital stock; or declaration or payment of any dividend or other distribution
or payment in respect of shares of such capital stock;
(b) amendment to the Organizational Documents of the Company or any of
its Subsidiaries;
(c) payment or increase by the Company or any of its Subsidiaries of
any bonuses, salaries, or other compensation to any stockholder, director,
officer, or (except in the Ordinary Course of Business) employee or entry into
any employment, severance, or similar Contract with any director, officer, or
(except in the Ordinary Course of Business) employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company or any of its Subsidiaries;
Final 11/10/98 22
<PAGE>
(e) damage to or destruction or loss of any asset or property of the
Company or any of its Subsidiaries, whether or not covered by insurance,
adversely affecting the properties, assets, business, financial condition, or
prospects of the Company and its Subsidiaries, taken as a whole;
(f) entry into, termination of, or receipt of notice of termination of
(i) any license, distributorship, dealer, sales representative, joint venture,
credit, or similar agreement, or (ii) any Contract or transaction that, in the
case of clause (i) or (ii) involves a total remaining commitment by or to the
Company or any of its Subsidiaries of at least $50,000;
(g) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of the Company
or any of its Subsidiaries (other than the sale or other disposition of assets
that are not inventory for an aggregate consideration of less than $50,000) or
mortgage, pledge, or imposition of any lien or other encumbrance on any asset or
property of the Company or any of its Subsidiaries, including the sale, lease,
or other disposition of any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to the
Company or any of its Subsidiaries in excess of $10,000 individually or $50,000
in the aggregate;
(i) change in the accounting methods used by the Company or any of its
Subsidiaries; or
(j) agreement, whether oral or written, by the Company or any of its
Subsidiaries to do any of the foregoing.
3.17 CONTRACTS; NO DEFAULTS
(a) Part 3.17(a) of the Disclosure Letter contains a complete and
accurate list (excluding in each case Applicable Contracts that will be fully
performed by all parties as of the Closing Date), and Sellers have made
available to Buyer true and complete copies, of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by one or more of the Company and its
Subsidiaries of an amount or value in excess of $50,000;
(ii) each Applicable Contract that involves performance of
services or delivery of goods or materials to one or more of the Company and its
Subsidiaries of an amount or value in excess of $50,000;
(iii) each Applicable Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of one or
more of the Company and its Subsidiaries in excess of $50,000;
(iv) each Applicable Contract in the form of a lease, rental or
occupancy agreement, or license, installment and conditional sale agreement, and
other Applicable Contract affecting the ownership of, leasing of, title to, use
of, or any leasehold or other interest in, any real or personal property (except
any such agreement having a value per item
Final 11/10/98 23
<PAGE>
or aggregate payments of less than $50,000);
(v) each Applicable Contract that is a licensing agreement or
other Applicable Contract with respect to patents, trademarks, copyrights, or
other intellectual property, including agreements with current or former
employees, consultants, or contractors regarding the appropriation or the
non-disclosure of any of the Intellectual Property Assets;
(vi) each Applicable Contract with any labor union or other
employee representative of a group of employees;
(vii) each joint venture, partnership, and other Applicable
Contract (however named) involving a sharing of profits, losses, costs, or
liabilities by the Company or any of its Subsidiaries with any other Person;
(viii) each Applicable Contract containing covenants that in any
way purport to restrict in any material respect the business activity of the
Company or any of its Subsidiaries or limit in any material respect the freedom
of the Company or any of its Subsidiaries to engage in any line of business or
to compete with any Person;
(ix) each material Applicable Contract providing for payments to
or by any Person based on sales, purchases, or profits, other than direct
payments for goods;
(x) each power of attorney granted by the Company or any of its
Subsidiaries that is currently effective and outstanding;
(xi) each Applicable Contract for capital expenditures in excess
of $50,000;
(xii) each material written warranty, guaranty, and or other
similar undertaking with respect to contractual performance extended by the
Company or any of its Subsidiaries other than in the Ordinary Course of
Business; and
(xiii) each amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing.
(b) Except as set forth in Part 3.17(b) of the Disclosure Letter:
(i) neither Delta Woodside nor Alchem (and no Related Person of
either of them other than the Company) has or may acquire any rights under, and
neither Seller has or may become subject to any obligation or liability under,
any Contract that relates to the Business or any of the Acquired Assets; and
(ii) no officer, director, or employee of the Company or any of
its Subsidiaries is bound by any Contract that purports to limit in any respect
the ability of such officer, director, or employee to (A) engage in or continue
any conduct, activity, or practice relating to the business of the Company or
any of its Subsidiaries, or (B) assign to the Company or any of its
Subsidiaries any rights to any invention, improvement, or discovery.
(c) Except as set forth in Part 3.17(c) of the Disclosure Letter, each
Contract
Final 11/10/98 24
<PAGE>
identified or required to be identified in Part 3.17(a) of the Disclosure Letter
is in full force and effect and is valid and enforceable in accordance with its
terms.
(d) Except as set forth in Part 3.17(d) of the Disclosure Letter:
(i) the Company and each of its Subsidiaries is, and at all
times since January 20, 1993 has been, in full compliance in all respects with
all applicable terms and requirements of each Contract under which such company
has or had any obligation or liability or by which the Company or any of its
Subsidiaries or any of the assets owned or used by such company is or was bound;
(ii) each other Person that has or had any obligation or
liability under any Contract under which the Company or any of its Subsidiaries
has or had any rights is, and at all times since January 20, 1993 has been, in
full compliance in all respects with all applicable terms and requirements of
such Contract;
(iii) no event has occurred since January 20, 1993 or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give the
Company or any of its Subsidiaries or other Person the right to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract; and
(iv) neither the Company nor any of its Subsidiaries has given
to or received from any other Person, at any time since January 20, 1993, any
notice or other communication (whether oral or written) regarding any actual,
alleged, possible, or potential violation or breach of, or default under, any
Contract.
(e) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any amounts paid or payable to the Company or
any of its Subsidiaries under current or completed Contracts with any Person and
no such Person has made written demand for such renegotiation.
(f) The Contracts relating to the sale, design, manufacture, or
provision of products or services by the Company and its Subsidiaries have been
entered into in the Ordinary Course of Business and have been entered into
without the commission of any act alone or in concert with any other Person, or
any consideration having been paid or promised, that is or would be in violation
of any Legal Requirement.
3.18 INSURANCE
(a) Sellers shall deliver to Buyer prior to Closing:
(i) true and complete copies of all policies of general liability
insurance to which the Company or any of its Subsidiaries is a party or under
which the Company or any of its Subsidiaries is or has been covered at any time
since January 20, 1993; and
(ii) any statement since January 20, 1993 by the auditor of the
Company's or any of its Subsidiaries' financial statements with regard to the
adequacy of such entity's
Final 11/10/98 25
<PAGE>
coverage or of the reserves for claims.
(b) Part 3.18(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting the Company
or any of its Subsidiaries, including any reserves established thereunder; and
(ii) any material contract or arrangement, other than a policy
of insurance, for the transfer or sharing of any risk by the Company or any of
its Subsidiaries.
(c) Part 3.18(c) of the Disclosure Letter sets forth, by year, for the
current policy year and each of the preceding policy years since January 20,
1993:
(i) a summary of the loss experience under each general
liability policy;
(ii) a statement describing each claim under a general liability
insurance, policy for an amount in excess of $50,000, which sets forth:
(A) the name of the claimant;
(B) a description of the policy by insurer, type of
insurance, and period of coverage; and
(C) the amount and a brief description of the claim.
(d) Except as set forth on Part 3.18(d) of the Disclosure Letter:
(i) All general liability policies to which the Company or any
of its Subsidiaries is a party or that provide coverage to the Company or any of
its Subsidiaries:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that is financially sound
and reputable;
(C) taken together, provide adequate insurance coverage
for the assets and the operations of the Company and its Subsidiaries for all
risks to which the Company and its Subsidiaries are normally exposed;
(D) are sufficient for compliance with all Legal
Requirements and Contracts to which the Company or any of its Subsidiaries is a
party or by which any of them is bound; and
(E) will continue in full force and effect following the
consummation of the Contemplated Transactions.
(ii) Neither the Company nor any Subsidiary has received any
notice of cancellation of any insurance policy currently in effect to which the
Company or any of its Subsidiaries is a party or that provides coverage to the
Company or any of its Subsidiaries or any other indication that any such
insurance policy is no longer in full force or effect or will
Final 11/10/98 26
<PAGE>
not be renewed or that the issuer of any policy is not willing or able to
perform its obligations thereunder.
(iii) Since January 20, 1993, the Company and its Subsidiaries
have paid all premiums due, and have otherwise performed all of their respective
obligations, under each policy to which the Company or any of its Subsidiaries
is a party or that provides coverage to the Company or any of its Subsidiaries.
3.19 ENVIRONMENTAL MATTERS
Except as set forth in part 3.19 of the Disclosure Letter:
(a) The Company and each of its Subsidiaries is, and at all times
has been, in full compliance in all respects with, and has not been and is
not in violation of or liable under, any Environmental Law. No Seller or
Subsidiary has any basis to expect, nor has any of them or any other Person
for whose conduct they are or may be held to be responsible, received any
actual or Threatened order, notice, or other communication from (i) any
Governmental Body or private citizen acting in the public interest, or (ii)
the current or prior owner or operator of any Facilities, of any actual or
potential violation or failure to comply in any respect by the Company or any
of its Subsidiaries with any Environmental Law, or of any actual or
Threatened obligation of the Company or any of its Subsidiaries to undertake
or bear the cost of any Environmental, Health, and Safety Liabilities with
respect to any of the Facilities or any other properties or assets (whether
real, personal, or mixed) in which the Company or any of its Subsidiaries has
had an interest, or with respect to any property or Facility at or to which
Hazardous Materials were generated, manufactured, refined, transferred,
imported, used, or processed by the Company, any of its Subsidiaries, or any
other Person for whose conduct they are or may be held responsible, or from
which Hazardous Materials have been transported, treated, stored, handled,
transferred, disposed, recycled, or received by the Company, any of its
Subsidiaries, or any other Person for whose conduct they are or may be held
responsible.
(b) There are no pending or Threatened claims, Encumbrances, or other
restrictions of any nature, resulting from any Environmental, Health, and Safety
Liabilities or arising under or pursuant to any Environmental Law, with respect
to or affecting any of the Facilities or any other properties and assets
(whether real, personal, or mixed) in which the Company or any of its
Subsidiaries has or had an interest.
(c) No Seller or Subsidiary has any basis to expect, nor has any of
them or any other Person for whose conduct they are or may be held responsible,
received any citation, directive, inquiry, notice, Order, summons, or warning
that relates to Hazardous Activity, Hazardous Materials, or any alleged, actual,
or potential violation or failure to comply with any Environmental Law, or of
any alleged, actual, or potential obligation to undertake or bear the cost of
any Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets (whether real, personal, or mixed)
in which the Company or any of its Subsidiaries had an interest, or with respect
to any property or facility to which Hazardous Materials generated,
manufactured, refined, transferred, imported, used, or processed by the Company,
any Subsidiary, or any other Person for whose conduct they are
Final 11/10/98 27
<PAGE>
or may be held responsible, have been transported, treated, stored, handled,
transferred, disposed, recycled, or received.
(d) Neither the Company, any Subsidiary, nor any other Person for
whose conduct they are or may be held responsible, has any Environmental,
Health, and Safety Liabilities with respect to the Facilities or with respect
to any other properties and assets (whether real, personal, or mixed) in which
the Company or any Subsidiary (or any predecessor), has or had an interest, or
at any property geologically or hydrologically adjoining the Facilities or any
such other property or assets.
(e) There are no Hazardous Materials present on or in the Environment
at the Facilities or at any geologically or hydrologically adjoining property,
including any Hazardous Materials contained in barrels, above or underground
storage tanks, landfills, land deposits, dumps, equipment (whether moveable or
fixed) or other containers, either temporary or permanent, and deposited or
located in land, water, sumps, or any other part of the Facilities or such
adjoining property, or incorporated into any structure therein or thereon,
except for such Hazardous Materials listed in Part 3.19(e) of the Disclosure
Letter as are present and used at the Facilities in, and in quantities no
greater than reasonably necessary for, the Ordinary Course of Business. Except
as stated in the immediately preceding sentence, neither the Company, any
Subsidiary, nor any other Person for whose conduct they are or may be held
responsible has permitted of conducted, or has Knowledge of, any Hazardous
Activity conducted with respect to the Facilities or any other properties or
assets (whether real, personal, or mixed) in which Sellers or any Subsidiary has
or had an interest.
(f) There has been no Release or Threat of Release, of any Hazardous
Materials at or from the Facilities or at any other locations where any
Hazardous Materials were generated, manufactured, refined, transferred,
produced, imported, used, or processed from or by the Facilities, or from or by
any other properties and assets (whether real, personal, or mixed) in which the
Company or any Subsidiary has or had an interest, or any geologically or
hydrologically adjoining property, by the Company, any Subsidiary, or any other
Person for whose conduct they are or may be held responsible.
(g) Sellers shall make available to Buyer prior to Closing true and
complete copies and results of any reports, studies, analyses, tests, or
monitoring possessed or initiated by Sellers or any Subsidiary pertaining to
Hazardous Materials or Hazardous Activities in, on, or under the Facilities, or
concerning compliance by the Company, any Subsidiary, or any other Person for
whose conduct they are or may be held responsible, with Environmental Laws.
3.20 EMPLOYEES
(a) Part 3.20 of the Disclosure Letter contains a complete and
accurate list of the following information for each employee of the Company and
its Subsidiaries, including each employee on leave of absence or layoff status:
employer; name; job title; current compensation paid or payable and any change
in compensation since June 1, 1997; vacation accrued; sick leave or any other
paid leave accrued; and service credited for purposes of vesting and
eligibility to participate under the Company's or any of its Subsidiaries'
pension, retirement, profit-sharing, thrift-savings, deferred compensation,
stock bonus, stock option,
Final 11/10/98 28
<PAGE>
cash bonus, employee stock ownership (including investment credit or payroll
stock ownership), severance pay, insurance, medical, welfare, or vacation plan,
other Employee Pension Benefit Plan or Employee Welfare Benefit Plan, or any
other employee benefit plan of the Company or any of its Subsidiaries.
(b) No employee of the Company or any of its Subsidiaries is a party
to, or is otherwise bound by, any agreement or arrangement, including any
confidentiality, noncompetition, or proprietary rights agreement, between such
employee and any other Person ("Proprietary Rights Agreement") that in any way
adversely affects or will adversely affect (i) the performance of his duties as
an employee of the Company and its Subsidiaries, or (ii) the ability of the
Company or any of its Subsidiaries to conduct its business, including any
Proprietary Rights Agreement with Sellers or the Subsidiaries by any such
employee. To Sellers' Knowledge, no key employee of the Company or any of its
Subsidiaries intends to terminate his employment with such company.
(c) Part 3.20 of the Disclosure Letter also contains a complete and
accurate list of the following information for each retired employee of the
Company and its Subsidiaries, or their dependents, receiving benefits or
scheduled to receive benefits from the Company or any of its Subsidiaries in the
future: name, such pension benefit, such pension option election, such retiree
medical insurance coverage, such retiree life insurance coverage, and other such
benefits.
3.21 LABOR RELATIONS; COMPLIANCE
Since January 20, 1993, neither the Company nor any of its Subsidiaries
has been or is a party to any collective bargaining or other similar labor
Contract. Except as set forth in Part 3.21 of the Disclosure Letter, with
respect to the Company or any of its Subsidiaries, since January 20, 1993, there
has not been, there is not presently pending or existing, and there is not
Threatened, (a) any strike, general work slowdown, picketing, general work
stoppage, or material employee grievance process, (b) any Proceeding against or
affecting the Company or any of its Subsidiaries relating to the alleged
violation of any Legal Requirement pertaining to labor relations or employment
matters, including any charge or complaint filed by an employee or union with
the National Labor Relations Board, the Equal Employment Opportunity Commission,
or any comparable Governmental Body, organizational activity, or other labor or
employment dispute against or affecting Sellers or any of its Subsidiaries,
or (c) any application for certification of a collective bargaining agent. No
event has occurred or circumstance exists that could provide the basis for any
work stoppage or other labor dispute. There is no lockout of any employees by
the Company or any of its Subsidiaries, and no such action is contemplated by
the Company or any of its Subsidiaries. The Company and each of its
Subsidiaries has complied in all respects with all Legal Requirements relating
to employment, equal employment opportunity, nondiscrimination, immigration,
wages, hours, benefits, collective bargaining, the payment of social security
and similar Taxes, occupational safety and health, and plant closing. Neither
the Company nor any of its Subsidiaries is liable for the payment of any
compensation, damages, Taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
Final 11/10/98 29
<PAGE>
3.22 INTELLECTUAL PROPERTY
(a) INTELLECTUAL PROPERTY ASSETS -- The term "Intellectual Property
Assets" includes:
(i) the name "Nautilus International, Inc."; all fictional
business names, trading names, registered and unregistered trademarks, service
marks, domain names and applications used in the Business, all of which are
listed in Part 3.22 (e) of the Disclosure Letter (collectively, "Marks");
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable used in the Business, all of which are listed
in Part 3.22 (d) of the Disclosure Letter (collectively, "Patents");
(iii) all copyrights in both published works and unpublished
works used in the Business, all of which are listed in Part 3.22 (f) of the
Disclosure Letter (collectively, "Copyrights");
(iv) all rights in mask works used in the Business
(collectively, "Rights in Mask Works"); and
(v) all know-how, trade secrets, confidential information,
technical information, data, process technology, plans, drawings, and blue
prints used exclusively in the Business (collectively, "Trade Secrets"); owned,
used, or licensed by the Company or any of its Subsidiaries as licensee or
licensor.
(b) AGREEMENTS -- Part 3.22(b) of the Disclosure Letter contains a
complete and accurate list and summary description, including any royalties paid
or received by the Company and its Subsidiaries, of all material Contracts
relating to the Intellectual Property Assets to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound, except for any license implied by the sale of a product and perpetual,
paid-up licenses for commonly available software programs with a value of less
than $50,000 under which the Company or any of its Subsidiaries is the licensee.
There are no outstanding and, to Sellers' Knowledge, no Threatened disputes or
disagreements with respect to any such agreement.
(c) KNOW-HOW NECESSARY FOR THE BUSINESS
(i) The Intellectual Property Assets are all those necessary
for the operation of the Company's and its Subsidiaries' businesses as they are
currently conducted. Except as set forth in Part 3.22 (c) of the Disclosure
Letter, one or more of the Company and its Subsidiaries is, or by the Closing
will be, the owner of all right, title, and interest in and to each of the
Intellectual Property Assets, free and clear of all liens, security interests,
charges, encumbrances, equities, and other adverse claims, and has, or by
Closing will have, the right to use without payment to a third party all of the
Intellectual Property Assets.
(ii) Except as set forth in Part 3.22(c) of the Disclosure
Letter, since August 1, 1996, all employees of the Company and each of its
Subsidiaries have executed written Contracts with one or more of the Company and
its Subsidiaries that assign to one or more of
Final 11/10/98 30
<PAGE>
the Company and its Subsidiaries all rights to any inventions, improvements,
discoveries, or information relating to the business of the Company or any of
its Subsidiaries. No employee of the Company or any of its Subsidiaries has
entered into any Contract that restricts or limits in any way the scope or type
of work in which the employee may be engaged or requires the employee to
transfer, assign, or disclose information concerning his work to anyone other
than one or more of the Company and its Subsidiaries.
(d) PATENTS
(i) Part 3.22(d) of the Disclosure Letter contains a complete
and accurate list and summary description of all Patents. One or more of the
Company and its Subsidiaries is, or by Closing will be, the owner of all right,
title, and interest in and to each of the Patents, free and clear of all liens,
security interests, charges, encumbrances, entities, and other adverse claims.
(ii) All of the issued Patents are currently in compliance in
all respects with formal legal requirements (including payment of filing,
examination, and maintenance fees and proofs of working or use), are valid and
enforceable, and are not subject to any maintenance fees or Taxes or actions
falling due within ninety days after the Closing Date.
(iii) No Patent has been or is now involved in any interference,
reissue, reexamination, or opposition proceeding. There is no potentially
interfering patent or patent application of any third party with respect to any
Patent.
(iv) No Patent is infringed or has been challenged or threatened
in any way. None of the products manufactured and sold, nor any process or
know-how used, by the Company or any of its Subsidiaries infringes or is alleged
to infringe any patent or other proprietary right of any other Person.
(v) All products made, used, or sold by the Company or any of
its Subsidiaries under the Patents have been marked with the proper patent
notice.
(e) TRADEMARKS
(i) Part 3.22(e) of Disclosure Letter contains a complete and
accurate list and summary description of all Marks. One or more of the Company
and its Subsidiaries is, or by Closing will be, the owner of all right, title,
and interest in and to each of the Marks, free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims.
(ii) All Marks that have been registered with the United States
Patent and Trademark Office or with similar foreign authorities are currently in
compliance in all respects with all formal legal requirements (including the
timely post-registration filing of affidavits of use and incontestability and
renewal applications), are valid and enforceable, and are not subject to any
maintenance fees or Taxes or actions falling due within ninety days after the
Closing Date.
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(iii) Except as set forth in Part 3.22 (e) of the Disclosure
Letter, no Mark has been or is now involved in any opposition, invalidation, or
cancellation and no such action is Threatened with the respect to any of the
Marks.
(iv) There is no potentially interfering trademark or trademark
application of any third party with respect to any Mark.
(v) No Mark is infringed or has been challenged or threatened
in any way. None of the Marks used by the Company or any of its Subsidiaries
infringes or is alleged to infringe any trade name, trademark, or service mark
of any third party.
(vi) All products and materials of the Company or any of its
Subsidiaries containing a Mark bear the proper federal registration notice where
permitted by law.
(f) COPYRIGHTS
(i) Part 3.22(f) of the Disclosure Letter contains a complete
and accurate list and summary description of all Copyrights. One or more of the
Company and its Subsidiaries is the owner of all right, title, and interest in
and to each of the Copyrights, free and clear of all liens, security interests,
charges, encumbrances, equities, and other adverse claims.
(ii) All the Copyrights have been registered and are currently
in compliance in all respects with formal legal requirements, are valid and
enforceable, and are not subject to any maintenance fees or Taxes or actions
falling due within ninety days after the date of Closing.
(iii) No copyright is infringed or has been challenged or
threatened in any way. None of the subject matter of any of the Copyrights
infringes or is alleged to infringe any copyright of any third party or is a
derivative work based on the work of a third party.
(iv) All works of the Company or any of its Subsidiaries
encompassed by the Copyrights have been marked with the proper copyright
notice.
(g) TRADE SECRETS
(i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in detail and
content to identify and explain it and to allow its full and proper use without
reliance on the knowledge or memory of any individual.
(ii) The Company and its Subsidiaries have taken all reasonable
precautions to protect the secrecy, confidentiality, and value of their
confidential Trade Secrets.
(iii) One or more of the Company and its Subsidiaries has good
title and an absolute (but not necessarily exclusive) right to use the Trade
Secrets. The confidential Trade Secrets are not part of the public knowledge or
literature, and have not been used, divulged, or appropriated either for the
benefit of any Person (other than one or more of the Company
Final 11/10/98 32
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and its Subsidiaries) or to the detriment of the Company and its Subsidiaries.
No Trade Secret is subject to any adverse claim or has been challenged or
threatened in any way.
(h) Y2K COMPLIANT
Except as set forth in Part 3.22(h) of the Disclosure Letter, all Company
Intellectual Property Assets in the form of computer software that are owned,
developed or utilized by the Company in the operation of its business or
licensed by the Company to others as part of the Company's business have been
tested and are fully capable in all respects of providing accurate results using
data having data ranges spanning the twentieth ("20th") and twenty-first
("21st") centuries. Without limiting the generality of the foregoing, except as
set forth in Part 3.22(h) of the Disclosure Letter, all software licensed from
and/or developed by the Company, in all respects, (a) manages and manipulates
data involving all dates from the 20th and 21st centuries without functional or
data abnormality related to such dates; (b) manages and manipulates data
involving all dates from the 20th or 21st centuries without inaccurate results
related to such dates; (c) has user interfaces and data fields formatted to
distinguish between dates from the 20th and 21st centuries; and (d) represents
all data related to include indications of the millennium, century, and decade
as well as the actual year.
3.23 CERTAIN PAYMENTS
Since January 20, 1993, neither the Company, its Subsidiaries, nor any
director, officer, agent, or employee thereof, acting for or on behalf of the
Company or any of its Subsidiaries, or any other Person acting for or on behalf
of the Company or any of its Subsidiaries, has directly or indirectly in
violation of any Legal Requirement (a) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured, or (iii) to obtain special concessions
or for special concessions already obtained, for or in respect of the Company or
any of its Subsidiaries or any Affiliate thereof, or (b) established or
maintained any fund or asset that has not been recorded in the books and records
of the Company and its Subsidiaries.
3.24 DISCLOSURE
(a) No representation or warranty of Sellers in this Agreement and no
statement in the Disclosure Letter omits to state a material fact necessary to
make the statements herein or therein, in light of the circumstances in which
they were made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein or in this Agreement, in light of the circumstances in
which they were made, not misleading.
(c) There is no fact known to either Sellers that has specific
application to either the Company or any Subsidiary of the Company (other than
general economic or industry conditions) and that materially adversely affects
the assets, business, prospects, financial condition, or results of operations
of the Company and its Subsidiaries (on a consolidated basis) that has not been
set forth in this Agreement or the Disclosure Letter.
Final 11/10/98 33
<PAGE>
(d) The information that would be included in the Disclosure Letter in
order to make each representation and warranty in Section 3 true and correct,
but is not included solely by reason of the various provisions in this Section 3
permitting the omission of information that is not material to the Company and
its Subsidiaries, taken as a whole, does not, viewed in the aggregate,
constitute information material to the Company and its Subsidiaries, taken as a
whole.
3.25 RELATIONSHIPS WITH RELATED PERSONS
Except as set forth in Part 3.25 of the Disclosure Letter, no Related
Person of the Company or any of its Subsidiaries has, or since January 1, 1996
has had, any interest in any property (whether real, personal, or mixed and
whether tangible or intangible), used in or pertaining to the Company or any
businesses of the Company and its Subsidiaries. Except as set forth in Part 3.25
of the Disclosure Letter, no Related Person of the Company or any of its
Subsidiaries is, or since January 1, 1996 has owned (of record or as a
beneficial owner) an equity interest or any other financial or profit interest
in, a Person that has (i) had material business dealings or a financial interest
in any transaction with the Company or any of its Subsidiaries, or (ii) engaged
in competition with the Company or any of its Subsidiaries with respect.to any
line of the products or services (other than the licensing of one or more of the
Marks) of such company (a "Competing Business") in any market presently served
by company. Except as set forth in Part 3.25 of the Disclosure Letter, no
Related Person of the Company or any of its Subsidiaries is a party to any
Contract with, or has any claim or right against, the Company or any of its
Subsidiaries.
3.26 BROKERS OR FINDERS
Except for the fee payable to Chase Securities, Inc. (which fee
Sellers shall pay), Sellers and their agents have by their actions incurred no
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING
Buyer is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Washington.
4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
Upon the execution and delivery by Buyer of the Escrow Agreement and the
Promissory Note (collectively, the "Buyer's Closing Documents"), the Buyer's
Closing Documents will constitute the legal, valid, and binding obligations of
Buyer, enforceable against Buyer in accordance with their respective terms.
Buyer has the absolute and unrestricted right, power, and authority to execute
and deliver this
Final 11/10/98 34
<PAGE>
Agreement and the Buyer's Closing Documents and to perform its obligations under
this Agreement and the Buyer's Closing Documents.
(b) Except as set forth in Schedule 4.2, neither the execution and
delivery of this Agreement by Buyer nor the consummation or performance of any
of the Contemplated Transactions by Buyer will give any Person the right to
prevent, delay, or otherwise interfere with any of the Contemplated Transactions
pursuant to:
(i) any provision of Buyer's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of Buyer;
(iii) any Legal Requirement or Order to which Buyer may be
subject; or
(iv) any Contract to which Buyer is a party or by which Buyer
may be bound.
(c) Except as set forth in Schedule 4.2, Buyer is not and will not be
required to obtain any Consent from any Person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
(d) Neither the execution and delivery of this Agreement by Buyer nor
the consummation or performance of any of the Contemplated Transactions by Buyer
will (A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, degree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Buyer is subject or any provision of
Buyer's charter or bylaws, or (B) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any material agreement, contract, lease, license, instrument, or other
arrangement to which Buyer is a party or by which Buyer is bound or to which any
of Buyer's assets is subject.
4.3 CERTAIN PROCEEDINGS
There is no pending Proceeding that has been commenced against Buyer and
that challenges, or may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the Contemplated Transactions or that may
reasonably have a material adverse effect on Buyer. To Buyer's Knowledge, no
such Proceeding has been Threatened.
4.4 BROKERS OR FINDERS
Except for the fee payable to D.A. Davidson, Buyer's investment banker
(which fee Buyer shall pay), Buyer and its officers and agents have incurred no
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement and will indemnify and hold harmless Sellers from any such payment
alleged to be due by or through Buyer as a result of the action of Buyer or its
officers or agents.
Final 11/10/98 35
<PAGE>
4.5 FINANCING
Buyer has adequate funds immediately available to fulfill its obligations
under this Agreement, either in the form of cash on hand or in the form of a
binding commitment by a suitable commercial lender to provide Buyer with
adequate credit.
5. COVENANTS OF SELLERS PRIOR TO CLOSING DATE
5.1 ACCESS AND INVESTIGATION
Between the date of this Agreement and the Closing Date, Sellers will,
and will cause each Subsidiary and its Representatives to, (a) afford Buyer and
its Representatives and prospective lenders and their Representatives
(collectively, "Buyer's Advisors") full and free access at all reasonable times,
and in a manner so as not to interfere with the normal business operations of
the Company and its Subsidiaries, to the Company's and each of its Subsidiaries'
personnel, properties (including subsurface testing), contracts, books and
records, and other documents and data, (b) furnish Buyer and Buyer's Advisors
with copies of all such contracts, books and records, and other existing
documents and data as Buyer may reasonably request, and (c) furnish Buyer and
Buyer's Advisors with such additional financial, operating, and other data and
information as Buyer may reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES
Between June 28, 1998 and the date of this Agreement Sellers
have caused, and from the date of this Agreement to the Closing Date Sellers
will cause, the Company and each Subsidiary to:
(a) conduct the business of the Company and each of its Subsidiaries
only in the Ordinary Course of Business;
(b) use their Best Efforts to preserve intact the current business
organization of the Company and each of its Subsidiaries, keep available the
services of the current employees, and agents of the Company and each of its
Subsidiaries, and maintain the relations and good will with suppliers,
customers, landlords, creditors, employees, agents, and others having business
relationships with the Company and each of its Subsidiaries;
(c) from and after the date of this Agreement, confer with Buyer
concerning anticipated material changes with respect to operational matters of a
material nature; and
(d) from and after the date of this Agreement, otherwise report
periodically to Buyer concerning the status of the business, operations, and
finances of the Company and each of its Subsidiaries.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement, between the
date of this Agreement and the Closing Date, Sellers will not, and will cause
each Subsidiary not to, without the prior consent of Buyer (which consent shall
not be unreasonably withheld), take
Final 11/10/98 36
<PAGE>
any affirmative action, or fail to take any reasonable action within their or
its control, as a result of which any of the changes or events listed in Section
3.16 is likely to occur.
5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Sellers
will, and will cause each Subsidiary to, make all filings required by Legal
Requirements to be made by them in order to consummate the Contemplated
Transactions and shall pay the costs associated with any such filing (including
all filings under the HSR Act). Between the date of this Agreement and the
Closing Date, Sellers will, and will cause each Subsidiary to, (a) cooperate
with Buyer with respect to all filings that Buyer elects to make or are required
by Legal Requirements to make in connection with the Contemplated Transactions,
and (b) cooperate with Buyer in obtaining all consents identified in Schedule
4.2 (including taking all reasonable actions requested by Buyer to cause early
termination of any applicable waiting period under the HSR Act).
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, each Seller will
promptly notify Buyer in writing if such Seller or any Subsidiary becomes aware
of any fact or condition that causes or constitutes a Breach of any of Sellers'
representations and warranties as of the date of this Agreement, or if such
Seller or any Subsidiary becomes aware of the occurrence after the date of this
Agreement of any fact or condition that would (except as expressly contemplated
by this Agreement) cause or constitute a Breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Disclosure Letter if the Disclosure Letter
were dated the date of the occurrence or discovery of any such fact or
condition, Sellers will promptly deliver to Buyer a supplement to the
Disclosure Letter specifying such change. During the same period, each Seller
will promptly notify Buyer of the occurrence of any Breach of any covenant of
Sellers in this Section 5 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 7 impossible or unlikely.
5.6 NO NEGOTIATION
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, Sellers will not, and will cause each Subsidiary and each of their
Representatives not to, directly or indirectly solicit, initiate, or encourage
any inquiries or proposals from, discuss or negotiate with, provide any
non-public information to, or consider the merits of any unsolicited inquiries
or proposals from, any Person (other than Buyer) relating to any transaction
involving the sale of the business or assets (other than in the Ordinary Course
of Business) of the Company or any of its Subsidiaries, or any of the capital
stock of the Company or any of its Subsidiaries, or any merger, consolidation,
business combination, or similar transaction involving the Company or any of its
Subsidiaries.
5.7 BEST EFFORTS
Between the date of this Agreement and the Closing Date, Sellers will use
their Best
Final 11/10/98 37
<PAGE>
Efforts to cause the conditions in Sections 7 and 8 to be satisfied.
5.8 AUDITED FINANCIAL STATEMENTS
Sellers have obtained, at Buyer's expense, and delivered to Buyer audited
consolidated balance sheets of the Company and its Subsidiaries as of fiscal
year end 1996 through 1998, and the related audited consolidated statements of
income, changes in stockholders' equity and cash flow for each of the fiscal
years then ended, together with the report thereon of KPMG Peat Marwick,
independent certified public accountants (the "Audited Financial Statement");
PROVIDED, that Buyer shall not be obligated to pay any fees and costs related to
such audit in excess of $90,000. The balance sheet for fiscal year 1998,
including the notes thereto, is referred to in this Agreement as the "Balance
Sheet."
6. COVENANTS OF BUYER PRIOR TO CLOSING DATE
6.1 BEST EFFORTS
Between the date of this Agreement and the Closing Date, Buyer will use
its Best Efforts to cause the conditions in Sections 7 and 8 to be satisfied;
provided that this Agreement will not require Buyer to dispose of or make any
material change in any material portion of its business or to incur any other
material burden to obtain a Governmental Authorization.
6.2 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Buyer will
make all filings required by Legal Requirements to be made by it in order to
consummate the Contemplated Transactions and shall pay the costs associated with
any such filing (excluding the filing fee under the HSR Act, which shall be paid
by Sellers). Between the date of this Agreement and the Closing Date, Buyer will
(a) cooperate with Sellers with respect to all filings that Sellers elect to
make or are required by Legal Requirements to make in connection with the
Contemplated Transactions, and (b) will use its Best Efforts to obtain all
consents identified in Schedule 4.2 (including taking all actions reasonably
requested by Sellers to cause early termination of any applicable waiting period
under the HSR Act).
6.3 NOTIFICATION
Between the date of this Agreement and the Closing Date, Buyer will
promptly notify Sellers in writing if Buyer becomes aware of any fact or
condition that causes or constitutes a Breach of any of Buyer's representations
and warranties as of the date of this Agreement, or if Buyer becomes aware of
the occurrence after the date of this Agreement of any fact or condition that
would (except as expressly contemplated by this Agreement) cause or constitute a
Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in Buyer's
representations and warranties in this Agreement if this Agreement were dated
the date of the occurrence or discovery of any such fact or condition, Buyer
will promptly deliver to Sellers a supplement to this Agreement
Final 11/10/98 38
<PAGE>
specifying such change. During the same period, Buyer will promptly notify
Sellers of the occurrence of any Breach of any covenant of Buyer in this Section
6 or of the occurrence of any event that may make the satisfaction of the
conditions in Section 8 impossible or unlikely.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Acquired Assets and to take the other
actions required to be taken by Buyer at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of Sellers' representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date, without giving effect to any
supplement to the Disclosure Letter.
(b) Each of Sellers' representations and warranties in Sections 3.3,
3.4, 3.10, 3.12, and 3.24 must have been accurate in all respects as of the
date of this Agreement, and must be accurate in all respects as of the Closing
Date as if made on the Closing Date, without giving effect to any supplement to
the Disclosure Letter.
7.2 SELLERS' PERFORMANCE
(a) All of the covenants and obligations that Sellers are required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and complied with in
all material respects.
(b) Each document required to be delivered pursuant to Section 2.5
must have been delivered and each of the other covenants and obligations in
Article 5 must have been performed and complied with in all material respects.
7.3 CONSENTS
Each of the Consents identified in Schedule 7.3 must have been obtained
and must be in full force and effect.
7.4 ADDITIONAL DOCUMENTS
Each of the following documents must have been delivered to Buyer:
(a) an opinion of Wyche, Burgess, Freeman & Parham, P.A., counsel to
Sellers, with respect to certain matters governed by the Delaware General
Corporation Law or South Carolina law, dated the Closing Date, in the form of
Exhibit 7.4(a);
(b) an opinion of Woods, Rogers & Hazlegrove PLC, special Virginia
counsel to
Final 11/10/98 39
<PAGE>
the Company, with respect to certain matters governed by Virginia Law, dated the
Closing Date, in the form of Exhibit 7.4(b);
(c) estoppel certificate executed on behalf of the landlord of the
Huntersville, North Carolina leased real estate, in form reasonably acceptable
to Buyer;
(d) good standing or comparable certificates for the Company, dated
within ten (10) days of the Closing Date, issued by the States of Virginia,
California, Massachusetts, New Jersey, New York, North Carolina and Texas;
(e) an opinion of Alston & Bird, patent and trademark counsel to
Sellers, with respect to the transfer of the Intellectual Property Assets, in
form and substance reasonably acceptable to Buyer; and
(f) such other documents as Buyer may reasonably request for the
purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of Sellers' representations
and warranties, (iii) evidencing the performance by Sellers of, or the
compliance by Sellers with, any covenant or obligation required to be performed
or complied with by Sellers, (iv) evidencing the satisfaction of any condition
referred to in this Section 7, or (v) otherwise facilitating the consummation or
performance of any of the Contemplated Transactions.
7.5 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Buyer, or against any Person affiliated with Buyer, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.6 NO PROHIBITION
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Buyer or any Person affiliated with Buyer to suffer any
material adverse consequence under, (a) any applicable Legal Requirement or
Order, or (b) any Legal Requirement or Order that has been published,
introduced, or otherwise proposed by or before any Governmental Body that would
be applicable to Buyer or the Contemplated Transactions and Buyer concludes
reasonably and in good faith that there is a reasonable likelihood that such
Legal Requirement or Order will be enacted or issued.
7.7 REGULATORY APPROVALS
Buyer shall have obtained any approvals required under the rules of the
Toronto Stock Exchange for completion of the Contemplated Transactions.
Final 11/10/98 40
<PAGE>
7.8 TRANSFER OF MARKS AND PATENTS; CANCELLATION OF AGREEMENTS
Alchem shall have transferred to the Company or Buyer all of its right,
title and interest in and to the Intellectual Property Assets owned by it as of
the date of this Agreement, and all agreements between the Company, on the one
hand, and Alchem, Delta Woodside or any affiliate of Alchem or Delta Woodside,
on the other hand, relating to Intellectual Property Assets shall have been
terminated.
8. CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell or to cause the Company to sell the
Acquired Assets and to take the other actions required to be taken by Sellers at
the Closing is subject to the satisfaction, at or prior to the Closing, of each
of the following conditions (any of which may be waived by Sellers, in whole or
in part):
8.1 ACCURACY OF REPRESENTATIONS
All of Buyer's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 BUYER'S PERFORMANCE
(a) All of the covenants and obligations that Buyer is required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and complied with in
all material respects.
(b) Buyer must have delivered each of the documents required to be
delivered by Buyer pursuant to Section 2.5 and must have made the cash payments
required to be made by Buyer pursuant to Sections 2.5(b)(i) and 2.5(b)(ii) and
each of the other covenants and obligations in Article 6 must have been
performed and complied with in all material respects.
8.3 CONSENTS
The filing and completion or waiver of waiting period under the HSR Act
has occurred without the objection of any governmental body.
8.4 ADDITIONAL DOCUMENTS
Buyer must have caused the following documents to be delivered to
Sellers:
(a) an opinion of Garvey, Schubert & Barer, dated the Closing Date, in
the form of Exhibit 8.4(a); and
(b) such other documents as Sellers may reasonably request for the
purpose of
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<PAGE>
(i) enabling their counsel to provide the opinions referred to in Section 7.4(a)
and (b), (ii) evidencing the accuracy of any representation or warranty of
Buyer, (iii) evidencing the performance by Buyer of, or the compliance by Buyer
with, any covenant or obligation required to be performed or complied with by
Buyer, (iv) evidencing the satisfaction of any condition referred to in this
Section 8, or (v) otherwise facilitating the consummation of any of the
Contemplated Transactions.
8.5 NO INJUNCTION
There must not be in effect or Threatened any Legal Requirement or any
injunction or other Order that (a) prohibits the sale of the Acquired Assets by
the Company to Buyer or the consummation and performance of the Contemplated
Transactions, and (b) has been adopted or issued, or has otherwise become
effective or been made, since the date of this Agreement.
8.6 NO PROHIBITION
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Sellers or any of the Subsidiaries to suffer any material
adverse consequence under, (a) any applicable Legal Requirement or Order, or (b)
any Legal Requirement or Order that has been published, introduced, or otherwise
proposed by or before any Governmental Body that would be applicable to Sellers,
or any of the Subsidiaries or the Contemplated Transactions and Sellers
conclude reasonably and in good faith that there is a reasonable likelihood that
such Legal Requirement or Order will be enacted or issued.
9. TERMINATION
9.1 TERMINATION EVENTS
This Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Buyer or Sellers if a material Breach of any provision
of this Agreement has been committed by the other party and such Breach has not
been waived;
(b) (i) by Buyer if any of the conditions in Section 7 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by Sellers, if any of the conditions in Section
8 has not been satisfied of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Sellers to
comply with their obligations under this Agreement) and Sellers have not waived
such condition on or before the Closing Date;
(c) by mutual consent of Buyer and Sellers; or
(d) by either Buyer or Sellers if the Closing has not occurred (other
than through the failure of any party seeking to terminate this Agreement to
comply fully with its
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<PAGE>
obligations under this Agreement) on or before January 4, 1999, or such later
date as the parties may agree upon.
9.2 EFFECT OF TERMINATION
Each party's right of termination under Section 9.1 is in addition to any
other rights it may have under this Agreement or otherwise, and the exercise of
a right of termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 9.1, all further obligations of the parties under
this Agreement will terminate, except that the obligations in Sections 11.1
and 11.3 will survive; provided, however, that if this Agreement is terminated
by a party because of the Breach of the Agreement by the other party or because
one or more of the conditions to the terminating party's obligations under this
Agreement is not satisfied as a result of the other party's failure to comply
with its obligations under this Agreement, the terminating party's right to
pursue all legal remedies will survive such termination unimpaired.
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE
All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the
certificate delivered pursuant to Section 2.5(a)(vi) or 2.5(b)(iv), and any
other certificate or document delivered pursuant to this Agreement will survive
the Closing. The right to indemnification, payment of Damages or other remedy
based on such representations, warranties, covenants, and obligations will not
be affected by any investigation conducted with respect to, or any Knowledge
acquired (or capable of being acquired) at any time, whether before or after
the execution and delivery of this Agreement or the Closing Date, with respect
to the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS
Sellers, jointly and severally, will indemnify and hold harmless Buyer
and its Representatives, stockholders, controlling persons, and affiliates
(collectively, the "Indemnified Persons") for, and will pay to the Indemnified
Persons the amount of, any loss, liability, Taxes, claim, damage (including
incidental and consequential damages), expense (including costs of investigation
and defense and reasonable attorneys' fees) or diminution of value, whether or
not involving a third-party claim (collectively, "Damages"), arising, directly
or indirectly, from or in connection with:
- - (a) any Breach of any representation or warranty made by Sellers in
this Agreement (giving effect to any supplement to the Disclosure Letter), the
Disclosure Letter (giving effect to any supplement to the Disclosure Letter),
the supplements to the Disclosure Letter, or any other certificate or document
delivered by Sellers pursuant to this Agreement;
(b) any Breach of any representation or warranty made by Sellers in
this Agreement as if such representation or warranty were made on and as of the
Closing Date,
Final 11/10/98 43
<PAGE>
giving effect to any supplement to the Disclosure Letter, other than any such
Breach that is disclosed in a supplement to the Disclosure Letter;
(c) any Breach by Sellers of any covenant or obligation of Sellers in
this Agreement;
(d) the conduct of the Business, or the ownership of assets by the
Sellers or any Subsidiary of the Company, prior to the Closing;
(e) any product shipped or manufactured by, or any services provided
by, the Company or any of its Subsidiaries prior to the Closing Date;
(f) any matter disclosed in Part 3.15 of the Disclosure Letter but not
included in Schedule 2.1 (i);
(g) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either the Company or any of
its Subsidiaries (or any Person acting on their behalf) in connection with any
of the Contemplated Transactions;
(h) the failure of the parties to this Agreement to comply with the
provisions of the Bulk Sales laws with respect to the Contemplated Transactions;
or
(i) except to the extent assumed by Buyer pursuant to Section 2.2,
the employment or termination of employment of any employee of Sellers on or
prior to the Closing, including without limitation any claim for wages, salary,
severance pay, health, welfare or retirement benefits, vacation pay or any
other form of compensation or damages, whether based on contract, statute,
regulation, common law or otherwise;
provided, however, that except for a claim for indemnification by reason of a
breach of Sections 3.1, 3.2, 3.3, 3.24(c) or 3.26 or by reason of clauses (e),
(f), (g), (h) and (i) of this Section 10.2 (collectively, the "Non-Limited
Claims"), no Seller shall have any obligation to indemnify, hold harmless or pay
any Indemnified Person pursuant to this Section 10.2 until the Indemnified
Persons have suffered aggregate Damages encompassed by this Section 10.2 for
claims that are not Non-Limited Claims in excess of a $500,000 aggregate
deductible (after which point Sellers will be obligated only to indemnify, hold
harmless and pay the Indemnified Persons from and against further such Damages
(i.e. in excess of such $500,000 aggregate deductible) up to the aggregate
amount of $3,000,000).
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Buyer or the other Indemnified
Persons; provided, however, that Buyer acknowledges and agrees that, except for
damages recoverable by Buyer following termination pursuant to Section 9.1 of
this Agreement due to a Breach by Sellers, the foregoing indemnification
provisions in this Section 10.2 shall be the exclusive remedy of Buyer and the
other Indemnified Persons for any Breach of Section 5 or of the representations
and warranties of Sellers in Section 3 of this Agreement.
Final 11/10/98 44
<PAGE>
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS -- ENVIRONMENTAL
MATTERS
(a) In addition to (and not limited by) the provisions of Section
10.2, Sellers, jointly and severally, will indemnify and hold harmless Buyer and
the other Indemnified Persons for, and will pay to Buyer and the other
Indemnified Persons the amount of, any Damages (including costs of cleanup,
containment, or other remediation) incurred by them arising, directly or
indirectly, from or in connection with any Hazardous Materials that may have
been caused to be delivered to any of the following sites by the Company, any
Subsidiary or any other Person for whose conduct they are or may be held
responsible or any predecessor thereto or Nautilus Sports/Medical Industries,
Inc.:
(i) Aqua-Tech Environmental Site, Spartanburg, South Carolina;
(ii) Seaboard Chemical Corporation Site, Jamestown, North
Carolina;
(iii) Enterprise Recovery Systems Site, Byhalia, Marshall County,
Mississippi; or
(iv) any other site that is not all or part of the Facilities.
(b) In addition to (and not limited by) the provisions of Section
10.2, Sellers, jointly and severally, will indemnify and hold harmless Buyer and
the other Indemnified Persons for, and will pay to Buyer and the other
Indemnified Persons the amount of, any Damages incurred by them arising,
directly or indirectly, from or in connection with the liquidation of Nautilus,
B.V. (a private limited company organized under the laws of the Netherlands) and
any liabilities of Nautilus, B.V. existing as of, or arising with respect to the
period prior to and including, the Closing Date.
(c) Sellers will be entitled to have exclusive control of any
Proceeding and any Cleanup with respect to which indemnity may be sought under
this Section 10.3.
10.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER
Buyer will indemnify and hold harmless Sellers, and will pay to Sellers
the amount of any Damages arising, directly or indirectly, from or in connection
with:
(a) any Breach of any representation or warranty made by Buyer in this
Agreement or in any certificate delivered by Buyer pursuant to this Agreement,
(b) any Breach by Buyer of any covenant or obligation of Buyer in this
Agreement,
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on
its behalf) in connection with any of the Contemplated Transactions,
Final 11/10/98 45
<PAGE>
(d) any product shipped or manufactured by, or any services provided
by, Buyer or its assigns, or
(e) the conduct of the Business, or the ownership of assets by Buyer
or its assigns, after the Closing.
10.5 TIME LIMITATIONS
(a) Except as provided in Section 10.5(b), Sellers will have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, or covenant or obligation to be performed and complied with prior
to the Closing Date, unless on or before the date that is eighteen (18) months
after the Closing Date Buyer notifies Sellers of a claim, which notice shall
specify the factual basis of that claim in reasonable detail to the extent then
known by Buyer.
(b) A claim with respect to Sections 3.3, 3.11, 3.24(c) or 5.5, or a
claim for indemnification or reimbursement not based upon any representation or
warranty or any covenant or obligation to be performed and complied with prior
to the Closing Date (including, without limitation, a claim pursuant to any of
Sections 10.2(d)-(i)), or a claim for indemnification or reimbursement under
Section 10.3, may be made at any time. A claim with respect to Section 3.19 may
be made at any time on or before the date that is ten (10) years after the
Closing Date.
(c) If the Closing occurs, Buyer will have no liability (for
indemnification or otherwise) with respect to any representation or warranty,
or covenant or obligation to be performed and complied with prior to the Closing
Date, unless on or before the date that is eighteen (18) months after the
Closing Date Sellers notify Buyer of a claim specifying the factual basis of
that claim in reasonable detail to the extent then known by Sellers; a claim for
indemnification or reimbursement not based upon any representation or warranty
or any covenant or obligation to be performed and complied with prior to the
Closing Date (including, without limitation, a claim pursuant to any of Sections
10.4 (c)-(e)) may be made at any time.
10.6 ESCROW
Upon notice to Sellers specifying in reasonable detail the basis for such
claim, Buyer may give notice of a Claim in such amount under the Escrow
Agreement. The failure to give a notice of a Claim under the Escrow Agreement
will not constitute an election of remedies or limit Buyer in any manner in the
enforcement of any other remedies that may be available to it.
10.7 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under Section 10.2,
10.3 or 10.4 of notice of the COMMENCEMENT of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to
Final 11/10/98 46
<PAGE>
any indemnified party, except to the extent that the indemnifying party
demonstrates that the defense of such action is prejudiced by the indemnifying
party's failure to give such notice.
(b) If any Proceeding referred to in Section 10.7(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such Proceeding and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such Proceeding and
provide indemnification with respect to such Proceeding), to assume the defense
of such Proceeding with counsel reasonably satisfactory to the indemnified party
and, after notice from the indemnifying party to the indemnified party of its
election to assume the defense of such Proceeding, the indemnifying party will
not, as long as it diligently conducts such defense, be liable to the
indemnified party under this Section 10 for any fees of other counsel or any
other expenses with respect to the defense of such Proceeding, in each case
subsequently incurred by the indemnified party in connection with the defense of
such Proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent (which consent shall not be
unreasonably withheld or delayed) unless (A) there is no finding or admission
of any violation by the indemnified party of Legal Requirements or any violation
by the indemnified party of the rights of any Person and no effect adverse to
the indemnified party on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that
are paid in full by the indemnifying party; (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent (which consent shall not be unreasonably withheld
or delayed); and (iv) no compromise or settlement of such claims may be
effected by the indemnified party without the indemnifying party's consent
(which consent shall not be unreasonably withheld or delayed). If notice is
given to an indemnifying party of the commencement of any Proceeding and the
indemnifying party does not, within ten (10) business days after the indemnified
party's notice is given, give notice to the indemnified party of its election to
assume the defense of such Proceeding, the indemnifying party will be bound by
any determination made in such Proceeding or any compromise or settlement
effected by the indemnified party with the consent of the indemnifying party
(which consent shall not be unreasonably withheld or delayed).
(c) Notwithstanding the foregoing, if an indemnified party determines
reasonably and in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
participate with the indemnifying party in the defense, compromise, or
settlement of such Proceeding, but the indemnifying party will not be bound by
any determination of a Proceeding so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld or
delayed).
Final 11/10/98 47
<PAGE>
(d) Each of the parties to this Agreement hereby consents to the
non-exclusive jurisdiction of any court in which a Proceeding is brought against
any indemnified party for purposes of any claim that an indemnified party may
have under this Agreement with respect to such Proceeding or the matters alleged
therein, and agrees that process may be served on such party with respect to
such a claim anywhere in the world.
(e) This Section 10.7 is subject to Section 10.3 with respect to a
claim for indemnification or reimbursement under Section 10.3.
(f) In no event shall an indemnifying party be liable for the fees and
expenses of more than one counsel in addition to its own counsel in connection
with a matter covered by this Section 10.7.
10.8 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants. Sellers will pay all HSR Act filing fees for filings
required by Buyer or Sellers in connection with this Agreement or the
Contemplated Transactions. Sellers will cause the Company and its Subsidiaries
not to incur any material out-of-pocket expenses in connection with this
Agreement. In the event of termination of this Agreement, the obligation of each
party to pay its own expenses will be subject to any rights of such party
arising from a breach of this Agreement by another party.
11.2 PUBLIC ANNOUNCEMENTS
Public announcement with respect to this Agreement and the Contemplated
Transactions will be issued upon execution and delivery of this Agreement by all
parties to this Agreement. Sellers and Buyer will consult with each other
concerning the means by which the Company's and its Subsidiaries' employees,
customers, and suppliers and others having dealings with the Company and its
Subsidiaries will be informed of the Contemplated Transactions, and Buyer will
have the right to be present for any such communication to the extent prior
notice thereof to Buyer is reasonably practicable.
11.3 CONFIDENTIALITY
(a) Buyer will treat and hold as confidential any Confidential
Information that it receives from any of Sellers or the Subsidiaries in
connection with this Agreement and the Contemplated Transactions, will not use
any of the Confidential Information at any time
Final 11/10/98 48
<PAGE>
except in connection with this Agreement, and, if this Agreement is terminated
for any reason whatsoever, will return to the Sellers and the Subsidiaries all
tangible embodiments (and all copies) of the Confidential Information that are
in its possession. For purposes of this paragraph (a), "Confidential
Information" shall mean information concerning the businesses and affairs of any
of Sellers or the Subsidiaries, unless (a) such information is already known to
Buyer or to others not bound by a duty of confidentiality or such information
becomes publicly available through no fault of Buyer, (b) the use of such
information is necessary in making any filing or obtaining any consent or
approval required for the consummation of the Contemplated Transactions, or (c)
the furnishing or use of such information is required by or necessary in
connection with legal proceedings.
(b) In addition to Buyer's obligations under paragraph (a) of this
Section 11.3, between the date of this Agreement and the Closing Date, Buyer and
Sellers will maintain in confidence, and will cause the directors, officers,
employees, agents, and advisors of Buyer and the Subsidiaries to maintain in
confidence, written information stamped "confidential" when originally furnished
by another party or the Company or any of its Subsidiaries in connection with
this Agreement or the Contemplated Transactions, unless (a) such information is
already known to such party or to others not bound by a duty of confidentiality
or such information becomes publicly available through no fault of such party,
(b) the use of such information is necessary in making any filing or obtaining
any consent or approval required for the consummation of the Contemplated
Transactions, or (c) the furnishing or use of such information is required by or
necessary in connection with legal proceedings.
(c) In addition to Buyer's obligations under paragraph (a) of this
Section 11.3, if the Contemplated Transactions are not consummated, each party
will return or destroy as much of such written information as the other party
may reasonably request.
11.4 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
certified or registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopoier numbers as a
party may designate by notice to the other parties):
Sellers: Delta Woodside Industries, Inc.
Alchem Capital Corporation
Nautilus International, Inc.
108 - 1/2 Courthouse Square
Edgefield, South Carolina 29824
Attention: Bettis C. Rainsford
Facsimile No. 803-637-6066
with copy to: Wyche, Burgess, Freeman & Parham, P.A.
Final 11/10/98 49
<PAGE>
44 East Camperdown Way
Greenville, SC 29601
Attention: Eric B. Amstutz, Esq.
Facsimile No. 864-235-8900
Buyer: Direct Focus, Inc.
2200 N.E. 65th Avenue
Vancouver, WA 98661
Attention: C. Reed Brown
Facsimile No. 360-694-7755
with copy to: Garvey, Schubert & Barer
Second & Seneca Bldg., 18th Floor
1191 Second Avenue
Seattle, WA 98101-2939
Attention: Bruce A. Robertson
Facsimile No. 206-464-0125
11.5 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
11.6 WAIVER
The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by any party in
exercising any right, power, or privilege under this Agreement or the documents
referred to in this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
11.7 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including the Letter of Intent between Buyer and
Sellers dated August 21, 1998, but excluding the confidentiality agreement
executed by Buyer on or about the
Final 11/10/98 50
<PAGE>
commencement of negotiations or document production by Sellers) and constitutes
(along with the documents referred to in this Agreement) a complete and
exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended or waived
except by a written agreement executed by the party to be charged with the
amendment or waiver.
11.8 DISCLOSURE LETTER
The disclosures in the Disclosure Letter, and those in any Supplement
thereto, must relate only to the representations and warranties in the Section
of the Agreement to which they expressly relate and not to any other
representation or warranty in this Agreement.
11.9 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without
the prior written consent of the other parties, which will not be unreasonably
withheld, except that Buyer may assign any of its rights, but not its
obligations, under this Agreement to any Subsidiary of Buyer and except that any
party may grant to any of its lenders a security interest in its rights in this
Agreement. Subject to the preceding sentence, this Agreement will apply to, be
binding in all respects upon, and inure to the benefit of the successors and
permitted assigns of the parties. Nothing expressed or referred to in this
Agreement will be construed to give any Person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreernent or any provision of this Agreement. This Agreement and all of
its provisions and conditions are for the sole and exclusive benefit of the
parties to this Agreement and their respective successors and assigns.
11.10 SEVERABABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this Agreement
will remain in full force and effect. Any provision of this Agreement held
invalid or unenforceable only in part or degree will remain in full force and
effect to the extent not held invalid or unenforceable.
11.11 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number, as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
11.12 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in
this Agreement, time is of the essence.
Final 11/10/98 51
<PAGE>
11.13 GOVERNING LAW
This Agreement will be governed by the laws of the Commonwealth of
Virginia without regard to conflicts of laws principles.
11.14 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
11.15 LITIGATION SUPPORT
In the event and for so long as any party to this Agreement actively is
pursuing, contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection with (i) any
Contemplated Transaction or (ii) any fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action, or
failure to act, or transaction on or prior to the Closing Date involving any of
Sellers or any of Sellers' Subsidiaries, each of the other parties to this
Agreement shall cooperate with the first party and its counsel in the pursuit,
defense or contest, make available such other party's personnel, and provide
such testimony and access to such other party's books and records as shall be
reasonably necessary in connection with the pursuit, defense or contest, all at
the sole cost and expense of the pursuing, contesting or defending party (unless
the pursuing, contesting or defending party is entitled to indemnification
therefor from the other party under Section 10).
Final 11/10/98 52
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
BUYER: SELLERS:
DIRECT FOCUS, INC. NAUTILUS INTERNATIONAL, INC.
By: /s/ [Illegible] By: /s/ [Illegible]
--------------------- -----------------------------------------------
Title: President Title: Executive Vice President, Treasurer and CFO
------------------ ---------------------------------------------
ALCHEM CAPITAL CORPORATION
By: /s/ [Illegible]
------------------------------------------------
Title: Executive Vice President, Treasurer and CFO
DELTA WOODSIDE INDUSTRIES, INC.
By: /s/ [Illegible]
------------------------------------------------
Title: Executive Vice President, Treasurer and CFO
---------------------------------------------
53
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULES
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-73243 of Direct Focus, Inc. on Form S-1 of our report dated February 26,
1999, appearing in the prospectus, which is a part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedules of Direct Focus, Inc., listed in
Item 16. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/_DELOITTE & TOUCHE LLP__
Deloitte & Touche LLP
Portland, Oregon
April 9, 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 dated February 19, 1999 with respect
to the combined balance sheets of the Nautilus Business as of January 4, 1999,
June 27, 1998 and June 28, 1997, and the related combined statements of
operations and accumulated deficit and cash flows for the six-months ended
January 4, 1999, and 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
April 9, 1999
II-7
