Nautilus 2002 Annual Report Download - page 25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We have identified the most critical accounting policies for our Company. These critical policies involve the most complex or subjective
decisions or assessments and consist of warranty reserves, sales return reserves, the allowance for doubtful accounts, inventory valuation, and
intangible asset valuation.
WARRANTY RESERVES
The product warranty reserve 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. In addition, the cost of a technician 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. Thorough testing of new products in the development stage helps to identify and correct potential warranty
issues prior to manufacturing. Continuing quality control efforts during manufacturing limit our exposure to warranty claims. We track warranty
claims by part and reason for claim in order to identify any potential warranty trends. If our quality control efforts were to fail to detect a fault
in one of our products, we could experience an increase in warranty claims resulting in an increase in the warranty reserve. In addition, if we
were to experience a significant number of warranty claims for a particular part or for a particular reason, we may need to make design changes
to our product, some of which may be required for our warranted products. A change in warranty experience could have a significant impact on
our financial position, results of operations and cash flows.
SALES RETURN RESERVES
The sales return reserve is based on our historical experience of product returns during the trial period in which a customer can return a product
for the full purchase price, less shipping and handling in most instances. The trial periods for Bowflex, Champion Nutrition, and Nautilus Sleep
Systems product lines are six weeks, 30 days, and 90 days, respectively. Trial periods are not offered on our other product lines. We track all
product returns in order to identify any potential customer satisfaction trends. Our return reserve may be sensitive to a change in our customers'
ability to pay during the trial period due to unforeseen economic circumstances and to different product introductions that might fulfill the
customers' needs at a perceived better value. Any major change in the aforementioned factors may increase sales returns, which could have a
significant impact on our financial position, results of operations and cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on our historical experience adjusted for any known uncollectible amounts. We periodically
review the creditworthiness of our customers to help ensure collectibility. Our allowance is sensitive to changes in our customers' ability to pay
due to unforeseen changes in the economy, including the bankruptcy of a major customer, our efforts to actively pursue collections, and
increases in chargebacks. Any major change in the aforementioned factors may result in increasing the allowance for doubtful accounts, which
could have a significant impact on our financial position, results of operations and cash flows.
INVENTORY VALUATION
Our inventory is valued at either the lower of cost (standard or average depending on location) or market. Inventory adjustments are required
for any known obsolete or defective products. We periodically review inventory levels of
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2003. EDGAR Online, Inc.