Nautilus 2008 Annual Report Download - page 40

Table of Contents
Contingencies Arising from China Sales Operations
In December 2008, the Company initiated discussions to suspend operations in its Shanghai, China sales office and to discontinue the sale of
products into the Chinese market through the use of its own sales staff. Most of the employees in the sales office were terminated in the first
quarter of 2009. Efforts to directly sell products in China are not currently being made, and the Company will take steps over the next several
months to decide whether to serve customers through a down-sized sales office or to use a distributor model. The Company’s 2008 results of
operations include approximately $3.8 million in charges due to uncertainties regarding access to, and the future recovery of, certain assets of the
Company’s China subsidiary .
Off-Balance Sheet Arrangements
At times, we become involved in third-party lease and financing arrangements which assist our customers in obtaining funds to purchase our
products. While most of these financings are without recourse, in certain cases we may offer a guarantee or other recourse provisions. Our
financing partner reviews consumer credit information in evaluating the risk of default prior to extending credit to our customers. We rely on the
quality of our partner’s review and our own risk assessment in determining whether to proceed with a recourse transaction. At December 31,
2008 and 2007, the maximum contingent liability under all recourse provisions was approximately $1.6 million and $1.3 million, respectively.
Refer to Note 1 to the consolidated financial statements for further discussion of this arrangement.
In the ordinary course of business, we enter into agreements that require us to indemnify counterparties against third-party claims. These may
include: agreements with vendors and suppliers, under which we may indemnify them against claims arising from our use of their products or
services; agreements with customers, under which we may indemnify them against claims arising from their use or sale of our products; real
estate and equipment leases, under which we may indemnify lessors against third party claims relating to the use of their property; agreements
with licensees or licensors, under which we may indemnify the licensee or licensor against claims arising from their use of our intellectual
property or our use of their intellectual property; and agreements with parties to debt arrangements, under which we may indemnify them against
claims relating to their participation in the transactions.
The nature and terms of these indemnifications vary from contract to contract, and generally a maximum obligation is not stated. We hold
insurance policies that mitigate potential losses arising from certain types of indemnifications. Because we are unable to estimate our potential
obligation, and because management does not expect these obligations to have a material adverse effect on our consolidated financial position,
results of operations or cash flows, no liabilities are recorded at December 31, 2008.
Inflation and Price Changes
We have experienced significant cost increases for products and components manufactured for us by third-parties in China. Such increases are
primarily attributable to unfavorable foreign currency exchange rates, increases in Chinese wages, taxes and raw material costs, which our third-
party partners seek to pass along to us. Raw material costs have also increased for products manufactured in Company-owned facilities in the
U.S. These increases have had a negative impact on our gross margins for certain products. Changes in transportation costs, largely due to
fluctuations in fuel prices, have at times also adversely affected our gross margins. If these conditions persist, and the Company is unable to find
other cost savings or increase selling prices to sufficiently offset such cost increases, our gross margins may continue to be negatively impacted.
Seasonality
We expect our sales from fitness equipment products both in the U.S. and internationally to vary seasonally. Sales are typically strongest in the
fourth quarter, followed by the first and third quarters, and are generally weakest in the second quarter. We believe that such factors as the
broadcast of national network season finales
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