Nautilus 2007 Annual Report Download - page 8

Table of Contents
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 $10.4 million, $9.4 million, and $10.4 million, for the years ended December 31, 2007,
2006, and 2005, respectively. In 2007 and for all periods presented, we reclassified preproduction royalties into research and development
expenses from a royalty expense line previously included within operating expenses. Preproduction royalties represent payments made for the
use of third party owned licensed patented technologies prior to a product being developed and sold. Included in research and development costs
were $1.0 million, $0.7 million and $0.4 million of preproduction royalties for the years ended December 31, 2007, 2006 and 2005, respectively.
Also in 2007, we reclassified royalty expense related to products sold into cost of goods sold. Royalty expense was previously reported as a
separate line within operating expenses for those products utilizing a licensed patented technology. The reclassification was made for all periods
presented. We incurred $4.9 million, $4.9 million, and $5.0 million in royalties for licensing patented technology for the years ended
December 31, 2007, 2006, and 2005, respectively. We did not have any customer-sponsored research and development expenses in any of these
years.
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 the fourth quarter, followed by the first and third quarters. We believe the principal reason for
this trend is the fitness industry’s preparation for the impact of seasonal weather patterns that encourage more fitness activity indoors in the
winter months.
MANUFACTURING AND DISTRIBUTION
Fitness Equipment Business
Our primary manufacturing and distribution objectives for all of our products are to maintain product quality, reduce and control costs, maximize
production flexibility, and improve delivery speed. This is accomplished by optimizing our manufacturing and distribution infrastructure. Our
products are manufactured in the U.S. at our Oklahoma and Virginia plants, and at contracted manufacturing facilities in Asia. We have not
experienced any significant difficulties with availability of raw materials.
Our commercial strength fitness products are primarily manufactured in our Virginia manufacturing plant, and our commercial cardiovascular
fitness products are primarily manufactured in our Oklahoma plant. These operations are vertically integrated and include such functions as
metal fabrication, powder coating, upholstery, and vacuum-formed plastics processes. By managing our own manufacturing operations, we can
control the quality of our commercial products and offer customers build-to-order capability and unique product configurations.
We inspect, package, and ship our products from our distribution facilities in Oregon, Virginia, Illinois, Oklahoma and Winnipeg, Canada. We
rely primarily on United Parcel Service (UPS) to deliver our direct products. We distribute our retail and commercial fitness equipment from our
facilities in Illinois and Oklahoma using various commercial truck lines. We distribute a substantial portion of our commercial strength fitness
equipment from our Virginia warehouse facility directly to customers through our own truck fleet which allows us to effectively control the set
up and inspection of equipment at the end-user’s facilities. We anticipate closing our Illinois facility in the second quarter of 2008.
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