NOTE 14—COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company has lease commitments expiring at various dates through 2016 for equipment and property under noncancelable operating leases. Future minimum payments under these leases at December 31, 2011 are as follows:


	Operating		Capital
2012	$	565,000	$	11,000
2013		394,000		6,000
2014		218,000		—
2015		144,000		—
2016		10,000		—

		1,331,000		17,000
Less: amount representing interest		—		(2,000	)

	$	1,331,000		15,000

Less: current portion				(10,000	)

			$	5,000

Rent expense under all operating leases for the years ended December 31, 2011, 2010 and 2009 was $632,000, $630,000 and $582,000, respectively. Interest expense related to capital leases was $3,000, $3,000 and $0 for the years ended December 31, 2011, 2010, and 2009, respectively. Assets subject to capital leases had a cost of $27,000 and accumulated depreciation of $13,000 at December 31, 2011.

Purchase Obligations

The Company is required to make purchases of goods and services, principally for purchase order obligations, an endorsement agreement and capital expenditures, that are legally binding of $19,024,000 in 2012, $5,008,000 in 2013, $600,000 in 2014 and zero in 2015.

Product Liability

As a manufacturer of fitness products, the Company is inherently subject to the hazards and uncertainties of product liability litigation. The Company has maintained, and expects to continue to maintain, product liability insurance, and it includes reserves for self insured retention in accrued liabilities in the consolidated balance sheets. The Company's product liability insurance, which is on a claims made basis, provides an aggregate of $25,000,000 of annual coverage for claims made on or after December 1, 2011, $10,000,000 of annual coverage for claims made on or after December 1, 2008 and before December 1, 2011, and $5,000,000 of annual coverage for claims made prior to December 1, 2008. The amount of coverage for a claim is reduced as payments are made under the policy for that policy year. These policies include a deductible of a $250,000 per claim ($100,000 for claims between December 1, 2007 and December 1, 2008), with an annual aggregate deductible of $1,000,000 on claims made on or after December 1, 2008 and $750,000 on claims made prior to December 1, 2008.

While the Company believes that its insurance coverage is adequate in light of the risks of product liability claims and awards, the Company may be subject to product liability claims which assert damages materially in excess of the limits of its insurance coverage. In December 2010, a significant jury verdict was rendered in a product liability suit. This matter was settled in 2012 for an amount substantially in excess of our available insurance coverage.

The Company records a reserve for the self insured retention portion of product liability matters for which it is probable that a loss has been incurred and the range of the loss can be determined. In addition, as of December 31, 2011 and December 31, 2010, the Company recorded a $27,004,000 and $62,696,000 litigation reserve, respectively, as a current liability pertaining to the Barnhard jury verdict and settlement, and a corresponding litigation related receivable for $7,561,000 and $15,904,000, respectively, representing the amount recoverable from the third party defendant in the matter and the estimated amount recoverable under the Company's insurance policies. The Company records a reserve and a corresponding insurance receivable if the amount of the product liability exposure is recoverable from the Company's insurance carrier for other product liability claims. Excluding the Barnhard matter, the product liability claims accrual is included as a component of accrued liabilities ($1,934,000 and $1,869,000 at December 31, 2011 and December 31, 2010, respectively) and other long-term liabilities ($859,000 and $947,000 at December 31, 2011 and December 31, 2010, respectively) and the insurance recoverable is included as a component of other assets ($859,000 and $947,000 at December 31, 2011 and December 31, 2010, respectively). On a quarterly basis, the Company reviews and adjusts each product liability claim and corresponding receivable.

Litigation

Barnhard v. Cybex International, Inc., et al.

This product liability litigation was commenced in 2005 in the Supreme Court, Eighth District, State of New York. The plaintiff, who was rendered a quadriplegic after she pulled a Cybex weight machine over onto herself, asserted that Cybex was at fault for the accident due to the design of the machine and a failure to warn. On December 7, 2010, the jury returned a $66 million verdict, apportioned 75% to Cybex, 20% to third party defendant Amherst Orthopedic Physical Therapy, P.C. and 5% to the plaintiff.

In January 2011, the Company filed post-trial motions, seeking, alternatively, judgment in its favor as a matter of law, a new trial and a reduction of the verdict. In February 2011, the trial court denied these motions, and the Company thereafter filed an appeal from this post-trial order with the Appellate Division, Fourth Judicial Department. In April 2011, a judgment was entered for $63,075,000 against Cybex. Under New York law, Cybex was responsible for payment of the judgment but could seek reimbursement from the third party defendant of approximately 21% of its payments on the judgment. The Company filed an appeal of the judgment with the Appellate Division. In May 2011, the Appellate Division granted the Company's motion for a stay of enforcement of the Barnhard judgment during the pendency of the Company's appeals, subject to the posting of $10,000,000 of collateral. In November 2011, the Appellate Division rendered a decision in the Company's appeals, reducing the judgment by approximately 31%, to approximately $44 million, and otherwise affirming the judgment.

In February 2012, the parties entered into a settlement agreement. Pursuant to this settlement, Cybex paid to the plaintiff approximately $18,500,000 and agreed to pay an additional sum of approximately $1,000,000 over seven years, the parties provided cross-releases of all claims and the litigation will be dismissed with prejudice.

United Leasing, Inc. v. Cybex International, Inc., et al.

The Company on February 25, 2009 was served with an Amended Complaint which added the Company and its wholly owned subsidiary, Cybex Capital Corp. (collectively with the Company referred to herein as Cybex), as additional defendants in this action originally venued in the Circuit Court for Williamson County, State of Tennessee. The plaintiff, United Leasing, Inc., provided a series of lease financings for the sale of Cybex equipment to a purchaser/lessee which has since entered bankruptcy, many of which sales were made by an independent dealer, also a defendant in the action. The plaintiff alleged that it was induced to finance in excess of the purchase price for certain of the equipment based primarily upon alleged rebates to the purchaser/lessee made by the independent dealer. Cybex Capital assisted in the lease financing and the plaintiff asserted that Cybex participated in the alleged scheme and was liable for any resulting damages. During March 2009, this action was removed to the United States District Court for the Middle District of Tennessee.

In January 2011, the parties entered into a settlement agreement. Pursuant to this settlement, Cybex paid to the plaintiff the sum of $938,000, the parties provided cross-releases of all claims and the litigation has been dismissed with prejudice.

The Company is involved in certain other legal actions, contingencies and claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. Legal fees related to those matters are charged to expense as incurred.

Employment Agreements

The Company has entered into employment agreements with its named executive officers. Under these agreements, the employment may be terminated with or without cause at any time. In the event that the Company terminates the officer's employment other than "for cause" the Company is obligated to continue normal salary payments for periods generally varying from six months to two years. The employment agreements generally provide that upon a change of control, as defined, the officer may in certain events resign and receive the severance which would have been payable upon a non-cause termination. The maximum aggregate exposure under these agreements was $2,340,000 as of December 31, 2011.