Nautilus 2005 Annual Report Download - page 33

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Table of Contents
Operating Expenses
Selling and Marketing
Selling and marketing expense was $179.7 million in 2005 compared to $156.6 million in 2004, an increase of $23.1 million or 14.7%.
The acquisitions of Pearl Izumi and Belko Canada in 2005 represented $4.3 million of the increase in selling and marketing expenses. As a
percentage of net sales, selling and marketing expense was 28.4% in 2005 compared to 29.9% in 2004. For the fitness equipment segment,
selling and marketing expenses as a percentage of sales were 28.8% in 2005 compared to 29.9% in 2004. The decrease in fitness equipment
segment selling and marketing expense as a percentage of net sales was primarily due to efficiencies gained in the Company’s direct marketing
efforts. Specifically, advertising expense as a percentage of direct channel sales decreased by approximately 4.1 percentage points. These gains
were partially offset by the fees of an outside ad agency and ongoing market research projects designed to continue improving the effectiveness
of the overall marketing program. Similar ad agency and market research expenses were not incurred during the majority of 2004.
General and Administrative
General and administrative expenses were $48.8 million for 2005 compared to $31.0 million for 2004, an increase of $17.8 million or
57.3%. As a percentage of net sales, general and administrative expenses increased to 7.7% in 2005 as compared to 5.9% in 2004. The
acquisitions of Pearl Izumi and the Canadian distributor in 2005 represented $4.2 million of the increase in general and administrative
expenses. Besides the increase associated with these acquisitions, general and administrative expenses increased primarily due to increased
legal fees of approximately $5.7 million mostly related to litigation with ICON Health & Fitness, Inc. Consistent with our consumer-based
business strategy to drive growth while investing in our future, general and administrative costs also increased approximately $8.3 million due
to expenses associated with consolidating information systems. The primary drivers of the information systems costs were increased consulting
fees, software license fees and wages. Additionally, we recorded one-
time charges in 2005 and 2004, respectively, consisting of the payment of
a civil penalty in the amount of $1.0 million to the Consumer Product Safety Commission and a $1.8 million pretax gain on the sale of land that
reduced 2004 expense.
Research and Development
Research and development increased $4.4 million to $11.2 million in 2005 from $6.8 million in 2004, an increase of 65.2%. The
acquisition of Pearl Izumi in 2005 represented $1.1 million of the increase in research and development expenses. Besides the increase
associated with this acquisition, research and development expenses increased primarily due to higher staffing levels and prototype costs
incurred to support the innovation component of our consumer driven business strategy.
Royalties
Royalty expense decreased 10.1% to $5.4 million in 2005 as compared to $6.0 million in 2004. Our direct and commercial/retail
segments have several agreements under which we are obligated to pay royalty fees on certain products. The decrease in our royalty expense
was primarily attributable to the April 2004 expiration of a royalty agreement related to the Bowflex patents. This decrease in Bowflex related
royalties was partially offset by royalty expense associated with our TreadClimber and elliptical product sales. We are obligated to pay
royalties, at the rate of 3% of TreadClimber sales, to the inventor of the main patent on the TreadClimber until this patent expires on
December 13, 2013.
Effective Income Tax Rates
Income tax expense was $12.3 million in 2005 compared to $15.7 million in 2004, a decrease of $3.4 million or 21.5%. The decrease was
primarily due to fluctuations in income before income taxes. The effective income tax rate increased from 34.3% in 2004 to 34.8% in 2005.
The increase in the 2005 effective income tax rate compared to 2004 is primarily due to a nondeductible Consumer Product Safety Commission
civil penalty.
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