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 Breaking Headlines

Nautilus Must Restate 4Q05, FY05 Results

MARCH 14, 2006 -- In its annual report for FY05, Nautilus (NLS) will report adjustments to the preliminary 4Q and FY05 results reported on February 2. For 4Q, NLS will report the following adjustments: An increase in net sales of $700,000, an increase in cost of sales of $1.1 million, an increase in sales and marketing of $600,000, and an increase in G&A expenses of $300,000. As a result of these adjustments, for FY05 NLS will report net sales of $631.3 million, net income of $23.0 million, and EPS of 68¢ per fully diluted share.

In contrast, NLS had earlier reported these FY05 results: Revenues of $630.6 million, net income of $23.8 million and diluted EPS of 70¢.

In addition, NLS' annual report will report two material weaknesses in its internal controls. Management determined that the controls for the testing of and training for the enterprise resource planning ("ERP") system which was implemented in 4Q05 for the commercial, retail and specialty channels did not operate effectively. Management also determined that efforts to mitigate the impact of inadequate ERP testing and training resulted in insufficient resources being devoted to controls over analyzing and recording contingencies, and, accordingly, such controls failed to operate effectively.

The following remedial actions have been undertaken to address the above weakness:

• Data migration issues have been identified and continue to be corrected by NLS personnel.
• System users are receiving additional training on the effective and efficient use of the system to assure data accuracy.
• System reporting is being enhanced based on identified business needs, including daily sales and standard margin reporting among numerous other reports.
• Enhancements to the operation of the system implementation controls are being developed. As such, the implementation of the ERP for International operations has been postponed until 2007 to enable NLS to execute the implementation effectively, thereby limiting the risk of similar issues arising in future implementations.

The following remedial actions have been undertaken to address the material weakness in internal controls surrounding analyzing and recording contingencies:

• Additional training is being provided to the accountants responsible for determining the financial impact of each contingency.
• The importance of the review function is being reiterated to the senior members of the accounting department who have been assigned responsibility for review of accounting estimates.
• An additional level of review has been implemented requiring all significant accounting estimates be reported to and reviewed by the CFO and controller on a monthly basis.

NLS said it has made considerable progress in its efforts to remediate these material weaknesses since December 31, 2005. As on-going remediation continues, NLS is focusing its training and education efforts so that operating effectiveness will be demonstrated over a period of time sufficient to conclude that the material weaknesses have been remediated.


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