Nautilus 2003 Annual Report Download - page 26

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Table of Contents
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 shipping and handling in most instances. The return periods for
Bowflex, TreadClimber, Champion Nutrition, and Nautilus Sleep Systems product lines are six weeks, 30 days, 30 days, and 90 days,
respectively. Sales returns are insignificant for products sold through our commercial/retail distribution channels. We track all direct-marketed
product returns in order to identify any potential negative 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 maintained at a level based on our historical experience adjusted for any known uncollectible amounts.
We periodically review the creditworthiness of our customers to help gauge 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 the lower of cost (standard or average depending on location) or market. Inventory adjustments are applied for any
known obsolete or defective products. We periodically review inventory levels of our product lines in conjunction with market trends to assess
salability of our products. Our assessment of necessary adjustments to market value of inventory is sensitive to changes in fitness technology
and competitor product offerings driven by customer demand. Any major change in the aforementioned factors may result in reductions to
market value of inventory below cost, which could have a significant impact on our financial position, results of operations and cash flows.
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