Nautilus 2006 Annual Report Download - page 10

Table of Contents
with a targeted message. This also allows us to increase the brand awareness and to promote new products and technologies. We participate in
a number of trade shows throughout the year including Interbike USA and Eurobike Germany, the bicycle and sporting goods industry’s
leading showcase events. Additionally, we promote brand visibility by providing our products to a number of athletes who use them in
competitive events. We also attend a number of regional sporting events with our retail partners where we educate consumers about our
products and sell our products. We maintain dedicated websites to promote our fitness apparel products as well as to provide information to our
consumers. The websites can be found at www.pearlizumi.com, www.nautilusapparel.com, and www.nautilusinmotion.com. These websites
contain Company and product information none of which is part of this Form 10-K.
In addition to consumer marketing, we focus considerable effort on a marketing concept called Drive Retailer Success or DRS. This
program is focused on ensuring the ongoing efficiency of our retailers. As part of our DRS program, we offer the Pearl Izumi Managed
Inventory
program to retailers. This program, which involves auto stocking of inventory, serves to increase the breadth of product at retail
selection and helps ensure the best product availability through the season.
Our Fitness Apparel Business has four distinct sales channels:
The international and domestic wholesale direct sales channels are comprised of independent bike dealers and specialty run accounts as
well as select large outdoor and sports retailers. The primary drivers for our success in specialty channels are differentiated products, credibility
with enthusiast consumers, and value added service. International distributor sales are made to exclusive distributors primarily in Canada,
Australia, Czech Republic, Switzerland, New Zealand, Norway, Russia, Slovenia, Mexico, and Israel. The fitness apparel business also leases
10 retail stores, which sell primarily closeout items at favorable margins. Internet and catalogue sales are comprised of product sales made
directly to end-consumers, primarily in the U.S.
PRODUCT DESIGN AND INNOVATION
Innovation is a vital part of our business as we continue expansion and diversification of our product offerings in fitness and apparel
products through leveraging our advanced research and development capabilities and our strong brand name recognition. On an ongoing basis,
we evaluate new product concepts and seek to respond to the requirements and needs of our consumers by frequently introducing new products
and repositioning existing products. We develop these products either from internally generated ideas or by acquiring or licensing patented
technology from outside inventors and then enhancing the technology.
Our research and development costs were approximately $11.2 million, $11.2 million, and $6.8 million for the years ended December 31,
2006, 2005, and 2004, respectively. We did not have any customer-sponsored research and development expenses in any of these years.
Additionally, we incurred $5.6 million, $5.4 million, and $6.0 million in royalties for licensing patented technology for new innovations for the
years ended December 31, 2006, 2005, and 2004, respectively.
SEASONALITY
Fitness Equipment Products
In general, U.S. and international sales in our direct, commercial, and retail fitness equipment channels are seasonal. We believe that sales
within these channels are lower in the second quarter of the year compared to the other quarters, especially in the direct and retail channels. Our
strongest quarter for these channels is generally
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Wholesale direct,
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International distributors,
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Company leased retail stores, and
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Internet and catalog sales.