Nautilus 2004 Annual Report Download - page 21

Table of Contents
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 certain instances. The return periods
for direct marketed product lines range from 30 days to six weeks depending on the specific product. 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. In our commercial/retail segment we also provide for estimated sales returns from customers 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, 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.
Intangible Asset Valuation
Currently, intangible assets consist predominantly of the Nautilus, Schwinn, and StairMaster trademarks and goodwill associated with the
acquisition of Schwinn Fitness. 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. The useful lives assigned by management to the Nautilus, Schwinn, and StairMaster trademarks are indefinite, 20 years,
and indefinite, respectively. 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.
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