Nautilus 2009 Annual Report Download - page 44

Table of Contents
The following reflects the activity related to our reserves for warranty obligations for the two-year period ended December 31, 2009:
Warranty reserves at December 31, 2009 and 2008 include $1.3 million and $2.5 million, respectively, in estimated long-term obligations.
Litigation and Loss Contingencies
– From time to time, the Company may be involved in various claims, lawsuits and other proceedings. Such
litigation involves uncertainty as to the eventual outcomes and losses which may be realized when one or more future events occur or fail to
occur. Nautilus records expenses for litigation and loss contingencies when it is probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. The Company estimates the probability of such losses 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. The Company regularly monitors its estimated exposure to these contingencies
and, as additional information becomes known, may change its estimates accordingly.
Advertising and promotion
– Nautilus expenses its advertising and promotion costs as incurred. Production costs of television advertising
commercials are recorded as prepaid expenses until the initial broadcast, at which time such costs are expensed. Advertising and promotion costs
are included in selling and marketing expenses.
Total advertising and promotion expenses were $48.3 million and $67.0 million for the years ended December 31, 2009 and 2008, respectively.
Prepaid advertising and promotion costs totaled $0.9 million at December 31, 2009 and December 31, 2008.
Research and development
– Internal research and development costs, which primarily consist of salaries and wages, employee benefits,
expenditures for materials, and fees to use licensed technologies, are expensed as incurred. Third party research and development costs for
products under development or being researched, if any, are expensed as the contracted work is performed.
Income taxes
– Nautilus accounts for income taxes based on the asset and liability method, whereby 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 basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when
the temporary differences are expected to be included, as income or expense, in the applicable tax return. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in the period of the enactment. Valuation allowances are provided against deferred income tax
assets if we determine it is more likely than not that such assets will not be realized.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained based on
the technical merits of the position upon examination, including resolutions of any related appeals or litigation.
40
(In thousands)
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Deductions*
Balance at
End of
Year
Warranty reserves:
2009
$
17,837
$
3,073
$
(12,531
)
$
8,379
2008
25,185
9,122
(16,470
)
17,837
*
Deductions represent warranty claims paid out in the form of service costs and/or product replacements.