Nautilus 2008 Annual Report Download - page 37

Table of Contents
Research and Development
Research and development expenses increased by $0.9 million, or 9.8%, to $10.3 million in 2007, compared to $9.4 million in 2006. The
increase was due to an increase in wages, recruiting and prototyping expenses for our research and development efforts related to the
introduction of the Nautilus One and other new products during the year.
Restructuring
Restructuring expenses were $26.8 million in 2007 and included expenses of $19.4 million for the decision to terminate the Land America asset
purchase agreement; severance costs of $3.2 million; $3.0 million in impairment charges related to acquired technology no longer being used;
and an additional $1.2 million related to changes in strategic plans regarding products and marketing arrangements that were cancelled.
Litigation Settlement
During 2007, the Company settled a lawsuit with ICON Health and Fitness, Inc. and as a result we received the rights to utilize a variety of
fitness equipment related patents and technologies. We valued those assets and recorded them in litigation settlement as a reduction in operating
expenses of $18.3 million. The Company recorded an impairment charge of $3.0 million in restructuring expense during 2007 as changes were
made to the plans to utilize the patents and technologies received.
Other Income (Expense)
Interest expense increased to $5.0 million in 2007 compared to interest expense of $2.6 million in 2006. The increase in interest expense was due
to the increased average short-term borrowings outstanding during 2007 as compared to 2006.
Other income, net remained consistent with 2006 at approximately $1.2 million for both periods. Other income was a result of foreign currency
gains recognized by the Company due to fluctuations in local currencies in which the Company operates.
Income Tax Expense (Benefit)
The provision for income tax expense was a benefit of $26.2 million during 2007 as compared to an expense of $9.1 million in 2006. Our
effective tax rate was 36.4% in 2007, compared to 26.7% in 2006. The increase in our annual effective rate was primarily due to the release of
certain tax reserves in 2007.
Discontinued Operations
The Company designated the financial results of the fitness apparel business as discontinued operations during 2007. This resulted in recording
the financial results as income (loss) from discontinued operations. The loss from discontinued operations during 2007 was $9.8 million,
compared to income from discontinued operations of $4.2 million during the prior year. The 2007 loss from discontinued operations includes an
impairment charge of $13.2 million for the difference between the book value of the Fitness Apparel Business net assets and the anticipated net
sale proceeds.
LIQUIDITY AND CAPITAL RESOURCES
In 2008, we generated $7.2 million in cash from operating activities from continuing operations, compared to $1.8 million in 2007. This
improvement is primarily the result of favorable changes in working capital, principally a reduction in inventories and customer receivables. The
increase in operating cash flows also reflects the receipt of U.S. federal income tax refunds during 2008 totaling $9.0 million. The Company paid
$8.0 million in 2008 in connection with the settlement of all claims related to the termination of the Land America agreements.
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