Nautilus 2005 Annual Report Download - page 28

Table of Contents
liability and corresponding reduction of revenue for the estimated fair value of the guarantee and then recognize that revenue over the life of
the lease obligation, unless a loss is actually incurred related to such guarantee. We recognize estimated losses as they become probable and
can be reasonably estimated.
Stock-Based Compensation
Prior to January 1, 2006, we measured compensation expense for our stock-based employee compensation plans using the method
prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” In Note 1 of the Notes to
Consolidated Financial Statements, we provide pro forma disclosures of net income and earnings per share as if the method prescribed by
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring
compensation expense. Effective January 1, 2006, we changed to recognize compensation expense for all options granted using a fair value
approach, as required under SFAS No. 123R, “Share-Based Payment.” We are currently evaluating whether to use the Black-Scholes or an
alternative method of calculating the fair value of our equity awards. These methods require the use of estimates, and will have a significant
impact on our financial position and results of operations which has not yet been determined.
Warranty Reserves
Accrued warranty expense includes the cost to manufacture (raw materials, labor and overhead) or purchase warranty parts from our
suppliers as well as the cost to ship those parts to our customers. The cost of labor to install a warranted part on our manufactured commercial
equipment is also included. The warranty reserve is based on our historical experience with each product. A warranty reserve is established for
new products based on historical experience with similar products, adjusted for any technological advances in manufacturing or materials used.
The warranty trends are evaluated periodically with respect to future claims volume and nature of likely claims. Adjustments, if any are so
indicated, are made to the warranty reserve to reflect our judgment regarding the likely effect of the warranty trends on future claims. If we
were to experience a significant volume of warranty claims for a particular part or for a particular reason, we may need to make design changes
to our product. If we believe it is necessary to implement those design changes to our installed base of products, our warranty costs could
change materially. A change in warranty experience could have a significant impact on our financial position, results of operations and cash
flows.
Legal Reserves
We are involved in various claims, lawsuits and other proceedings from time to time. Such litigation involves uncertainty as to possible
losses we may ultimately realize when one or more future events occur or fail to occur. We accrue and charge to income estimated losses from
contingencies when it is probable (at the balance sheet date) that an asset has been impaired or liability incurred and the amount of loss can be
reasonably estimated. Differences between estimates recorded and actual amounts determined in subsequent periods are treated as changes in
accounting estimates (i.e., they are reflected in the financial statements in the period in which they are determined to be losses, with no
retroactive restatement). The Company estimates the probability of losses on legal contingencies based on the advice of internal and external
counsel, the outcomes from similar litigation, the status of the lawsuits (including settlement initiatives), legislative developments, and other
factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting
estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these
contingencies and, as additional information becomes known, may change our estimates significantly. A significant change in our estimates, or
a result that materially differs from our estimates, could have a significant impact on our financial position, results of operations and cash
flows.
Sales Return Reserves
The sales return reserve is maintained based on our historical experience of direct-marketed product return rates during the period in
which a customer can return a product for refund of the full purchase price, less
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