Nautilus 2005 Annual Report Download - page 63

Table of Contents
Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework.” Management has excluded
Pearl Izumi and Nautilus Fitness Canada from its assessment of internal control over financial reporting as of December 31, 2005, because they
were acquired by the Company in purchase business combinations during 2005. Pearl Izumi and Nautilus Fitness Canada are wholly owned
subsidiaries of the Company that represent 19% and 3%, respectively, of the consolidated total assets and 4% and 3%, respectively, of
consolidated revenue as of and for the year ended December 31, 2005.
Based on management’s assessment using the COSO criteria, management has concluded that the Company did not maintain effective
internal control over financial reporting as of December 31, 2005 as a result of material weaknesses in internal controls as described below. A
material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected.
In connection with the preparation of the Company’s consolidated financial statements for the quarter and year ended December 31,
2005, and the related audit by the Company’s independent auditors, the Company and its auditors determined that the Company had two
internal control deficiencies that constituted “material weaknesses,” as defined by the PCAOB Accounting Standard No. 2.
Management determined that the controls for testing of and training for the enterprise resource planning (ERP) system which was
implemented in the fourth quarter of 2005 for the commercial, retail and specialty channels did not operate effectively. This failure resulted in
material audit adjustments to net sales and cost of sales in the 2005 consolidated financial statements.
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. Accordingly, such controls failed to operate effectively, resulting in
material audit adjustments to the 2005 consolidated financial statements. These weaknesses, if left unremediated, could result in the failure to
prevent or detect a material misstatement of net sales, cost of sales, inventory and various contingencies in the annual or interim financial
statements.
Accordingly, management has concluded that the control deficiencies surrounding the testing of and training for the ERP implementation
and surrounding analyzing and recording contingencies, constitute material weaknesses.
The Company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2005, as stated in their report which appears on page 64 of this Form
10-K under the heading, Report of Independent Registered Public Accounting Firm .
Changes in Internal Controls
In the fourth quarter, the Company converted its commercial, retail and specialty fitness channels to its existing ERP application which
now serves as the general ledger of record for the United States, is used to record commercial, retail and specialty fitness equipment sales in the
United States, and is used as the system of record for most inventory transactions in the United States for all lines of business going forward.
Remediation Efforts on the Internal Controls Surrounding the ERP Implementation
The following remedial actions have been undertaken to address the material weakness in the controls for testing and training for the ERP
system:
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• Data migration issues have been identified and continue to be corrected by Company personnel.