Vancouver, Wa — As Robert S. Falcone moved into the role of president and CEO of Nautilus Inc., last month, the company faced more troubles, particularly in the form of its financials for the third quarter and in the form of Sherborne Investors LP, which owns 23.5 percent of the company's common stock.

Nautilus granted the Delaware-based group's call for a special shareholder meeting, which will take place at 10 a.m. on Dec. 18 at Nautilus' headquarters in Vancouver, WA.

Falcone, who had been serving as interim president and CEO of Nautilus since August 2007, when Gregg Hammann stepped down, presided over a financial call last month in which he announced that Nautilus suffered a net loss of $13 million in the third quarter 2007. Net sales for the third quarter were down 16 percent to $134 million, compared to $159.6 million for the corresponding period last year. Sales in Nautilus' health club sector was down 13.4 percent in the third quarter.

Falcone, a former Nike executive, has already started an operational review of the company. So far, he has reduced 140 positions, including about 80 at the company's headquarters. The workforce reduction will trim Nautilus' expenses by more than $10 million on an annualized basis. The adjustments equate to about 9 percent of the company's workforce and about 12 percent of its annualized compensation. Severance and benefits packages based upon years of service were offered to affected staff.

“We are pursuing this workforce reduction, along with a number of other restructuring initiatives, to improve operating margins in a period of lower-than-expected sales,” says Falcone.

Falcone has begun to build his management team and has undertaken development of a long-term strategic plan that includes the development of a global growth strategy for the company's commercial, direct and retail business lines.

He is also considering divestitures of non-core assets, including the company's technical apparel business, Pearl iZUMi.

Nautilus plans to purchase China-based Land America Health and Fitness Co. Ltd., its largest contract manufacturer, which Sherborne Investors says has led the company to renegotiate and provide security for its bank credit agreement and suspend its dividend.

Nautilus signed a proposal letter with Bank of America, N.A. to expand its current debt facility to a five-year, $150 million asset-based loan with a $50 million accordion.

The changes have done nothing to quell calls from Sherborne Investors for change. In a letter to shareholders, Sherborne Investors pointed out that Nautilus' annual net income has declined by 56 percent from 2001 to 2006 and its share price has declined by 77 percent during that time.

“We believe the company requires a reassessment of its present strategy and an operational turnaround to improve profitability and shareholder value,” the letter states.

Sherborne Investors, controlled by Edward Bramson, is proposing the reduction of the board to seven members — three current board members and four new members proposed by Sherborne. It is not proposing the removal of Falcone from the board but has questioned whether he should be CEO. Sherborne Investors also is proposing that bylaws be changed so that any board vacancies are filled by shareholders rather than by the board.

Nautilus sent a letter to shareholders recommending that they vote against the Sherborne Investors proposals. The letter urges shareholders not to sign and return any proxy cards sent to shareholders by Sherborne.

“This special meeting is extremely important for all Nautilus shareholders in light of Sherborne's attempt to take control of the board,” the letter states.

Sherborne has invested in other troubled companies in the past, including 4imprint Group plc, Elementis plc and Spirent Communications plc.