Nautilus 2005 Annual Report Download - page 29

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Table of Contents
shipping and handling in certain instances. All direct marketed products have a six week 100% satisfaction guaranteed return period. We track
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. We also provide for estimated sales returns from distributors, retailers and specialty
retailers as reductions to revenues and accounts receivable. The estimates are based on historical rates of product returns. Actual returns in any
future period are inherently uncertain and thus may differ from the estimates. 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, 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.
Intangible Asset Valuation
Currently, intangible assets consist predominantly of the Nautilus
®
, Schwinn
®
Fitness, StairMaster
®
and Pearl iZUMi
®
trademarks, and
goodwill associated with the acquisitions of Schwinn
®
Fitness, Belko Canada and Pearl iZUMi
®
. Management estimates affecting these
trademark and goodwill valuations include determination of useful lives and estimates of future cash flows and fair values to perform an
impairment analysis on an annual basis or more frequently if additional circumstances arise. Management estimates that the Nautilus
®
,
StairMaster
®
and Pearl iZUMi
®
trademarks have an indefinite life while the Schwinn
®
Fitness trademark has an estimated useful live of 20
years. Any major change in the useful lives and/or the determination of an impairment associated with the valuation of the aforementioned
intangible assets may result in asset value write-downs, which could have a significant impact on our results of operations in the period or
periods in which the asset write-down is recorded.
Income Tax Provision
Income taxes are accounted for under the liability method. 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 bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
28