Nautilus 2003 Annual Report Download - page 51

Table of Contents
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 years to limited lifetime on the Bowflex lines of fitness products, one to five years on
TreadClimbers depending on the model and part, and twenty years on Nautilus Sleep Systems, on a prorated basis. The commercial and
retail line of fitness products include a lifetime warranty on the frame and structural parts, a four month to three year warranty on parts,
labor, electronics, upholstery, grips and cables, and typically a five year warranty on motors. Warranty costs are estimated based on the
Company’s experience and are charged to cost of sales as sales are recognized or as such estimates change. Warranty reserve activity for
the years ended December 31, 2003, 2002 and 2001 is as follows:
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions*
Balance at
End of
Period
Warranty reserves:
2003
$
5,358
$
5,845
$
3,855
$
7,348
2002
2,413
6,155
3,210
5,358
2001
447
3,558
1,592
2,413
*
Deductions represent warranty claims paid out in the form of service costs and/or product replacements.
Research and Development – Internal research and development costs relating to the development of new products, including significant
improvements and refinements to existing products, are expensed as incurred and included in cost of sales. Third party research and
development costs are expensed when the contracted work has been performed. Research and development expense was $5,670, $4,485,
and $2,229 for 2003, 2002 and 2001, respectively.
Advertising – The Company expenses advertising costs as incurred, except for commercial advertising production costs which are
expensed at the time the first commercial is shown on television. Advertising expense was $89,485, $88,305, and $63,582 for 2003, 2002
and 2001, respectively.
Income Taxes – The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes .
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and
liabilities. This results 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. Further, the Company realizes income tax benefits as a result of the
exercise of non-qualified stock options and the exercise and subsequent sale of certain incentive stock options (disqualifying
dispositions). For financial statement purposes, any reduction in income tax obligations as a result of these tax benefits is credited to
common stock.
Foreign Currency Translations –
Excluding Switzerland, the accounts of our foreign operations are measured using the local currency as
the functional currency. For our Swiss operations, the local currency is remeasured to the functional currency with the related gains or
losses recognized in current period net income. These accounts are then translated into U.S. dollars using exchange rates in effect at year-
end for assets and liabilities and the weighted average exchange rate during the period for the results of operations. Translation gains and
losses are accumulated as a separate component of stockholders’ equity and comprehensive income.
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