Nautilus 2004 Annual Report Download - page 26

Table of Contents
General and Administrative
General and administrative expenses were $31.0 million for 2004 compared to $37.1 million for 2003, a decrease of $6.1 million or
16.3%. As a percentage of net sales, general and administrative expenses decreased to 5.9% in 2004 as compared to 7.4% in 2003.
Our direct segment general and administrative expenses declined by $2.7 million from $13.2 million in 2003 to $10.5 million in 2004 due
primarily to wage and consulting costs associated with the implementation of our information systems which was completed towards the end of
2003. Our commercial/retail segment general and administrative expenses remained consistent at $9.5 million in 2004 as compared to $9.6
million in 2003. Corporate general and administrative expenses decreased $3.3 million due largely to a $1.8 million one-time gain on the sale
of property incurred during the third quarter of 2004. Legal related costs also decreased by $1.5 million from 2003 to 2004.
Research and Development
Research and development increased $1.1 million to $6.8 million in 2004 from $5.7 million in 2003. The increase in research and
development was due primarily to additional employees added to support the ongoing innovation initiative within our Company.
Royalties
Royalty expense decreased 25.3% to $6.0 million in 2004 as compared to $8.0 million in 2003. 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
The effective income tax rate decreased from 36.0% in 2003 to 34.3% in 2004. The decrease in the 2004 effective income tax rate is
primarily due to tax reserve adjustments as a result of favorable resolutions of certain federal and state income tax issues, tax advantaged
investment income and research and development credits. As more fully disclosed in Note 10 to the Consolidated Financial Statements, the
2004 effective income tax rate reflects a benefit for certain income exclusions provided for under U.S. income tax laws. As discussed in Note
10 to the Consolidated Financial Statements, this exclusion has been repealed and will be phased out commencing 2005.
Net Income
For the reasons discussed above, net income declined to $30.0 million in 2004 from $34.4 million in 2003, a decrease of 12.8%. Net
income in the second half of the year actually increased by 35% compared to the prior year as we began experiencing the growth benefits of
our turnaround strategy.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
Net Sales
Net sales decreased by 14.7% in 2003 compared to 2002. We believe this was primarily due to increased competition and higher
advertising costs due to increased demand for advertising time. These factors reduced sales conversion rates for our direct-marketed products.
Sales within our direct segment were $246.9 million in 2003, a decrease of 37.1% compared with 2002. Our direct segment accounted for
49.5% of our aggregate net sales in 2003, down from 67.2% in 2002. The decrease in direct segment sales can be attributed to a combination of
factors including increased competition for our
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