Nautilus 2008 Annual Report Download - page 62

Table of Contents
A reconciliation of the U.S. statutory federal income tax rate with the Company’s effective income tax rate from continuing operations is as
follows:
The Company has net operating loss and tax credit carry-forwards in U.S. federal and state jurisdictions. The federal net operating loss carry-
forward at December 31, 2008 was $31.1 million, which is available to offset future taxable income, if any, through 2029. The timing and
manner in which the Company will be able to utilize its net operating losses may be limited by Internal Revenue Code Section 382, Limitation
on Net Operating Loss Carryforwards and Certain Built-in-Losses Following Ownership Change . Section 382 imposes limitations on a
Company’s ability to use its net operating losses when the Company undergoes an ownership change as such term is defined in the Internal
Revenue Code. Pursuant to Section 382, an ownership change occurs if there has been a greater than 50% change in ownership interest by
shareholders owning 5% or more of a company over a period of three years or less. Based on the Code’s definition of an ownership change and
management’s preliminary analysis of changes in shareholder interests through January 31, 2009, management believes that the Company will
be subject to the limitation set forth in Section 382. At December 31, 2008, the Company had approximately $31.1 million in U.S. federal net
operating loss carry forwards and an undetermined amount of income tax credits and state net operating loss carry forwards which are potentially
subject to the Section 382 limitation.
The Company has $14.1 million of net operating loss carry-forwards in foreign countries, including $4.7 million and $9.0 million related to its
subsidiaries in China and Switzerland, respectively. The foreign net operating losses will expire between 2013 and 2015. As of December 31,
2008, the Company’s foreign net operating loss carry-forwards were fully offset by a valuation allowance.
The Company’s state net operating losses expire between 2013 and 2029, if not utilized, and are fully offset by a valuation allowance. In
addition, the Company has alternative minimum tax credit carry-forwards of approximately $0.7 million, which are available to reduce U.S.
federal future income taxes, if any, over an indefinite period.
Under SFAS 109, Accounting for Income Taxes , the Company must periodically evaluate deferred tax assets to determine if it is more-likely-
than-not that the future tax benefits will be realized. The evaluation requires an extensive analysis in which the weight given to the potential
effects of negative and positive evidence should be commensurate with the extent to which the evidence can be objectively verified. If the
negative evidence outweighs the positive, a valuation allowance must be recognized to reduce the net carrying amount of the deferred tax assets
to the amount more-likely-than-not to be realized. During 2008, management concluded that the significant negative evidence demonstrated by
the large cumulative taxable losses in recent years were strong indications that an overall valuation allowance is required. The valuation
allowance for deferred tax assets, as of December 31, 2008 and 2007, totaled $40.5 million and $5.2 million, respectively. The net change in
total valuation allowance for each of the years ended December 31, 2008 and 2007 was an increase of $35.3 million
58
(In percents)
2008
2007
2006
U.S. statutory income tax rate
35.0
%
35.0
%
35.0
%
State tax, net of U.S. federal tax benefit
2.3
2.8
2.0
Nondeductible incentive stock option expense
(0.4
)
(0.3
)
0.9
Non
-
U.S. Taxes
0.1
0.6
0.5
Nondeductible operating expenses
(0.1
)
(0.2
)
0.5
Research and development credit
0.1
0.4
(0.5
)
Change in deferred tax measurement rate
0.1
(0.3
)
0.3
Change in tax contingency reserve
(0.1
)
0.1
(11.1
)
Valuation allowance
(40.6
)
—
—
Other
(1.2
)
(1.7
)
(0.9
)
Effective tax rate
(4.8
)%
36.4
%
26.7
%