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Nautilus Restructures, Says No to Shareholder Group

VANCOUVER, WA -- Nautilus Inc., under siege by its largest shareholder Sherborne Investors, has turned down that group’s request to replace four of the Nautilus board members with Sherborne representatives. In addition, the company has restructured, making appointments to four positions, two of which are newly created.

The company sent a letter to shareholders requesting that they vote no on Sherborne’s proposal at the special shareholder meeting scheduled for Dec. 18 in Vancouver, WA. Nautilus agreed to the special meeting upon request of Edward Bramson, who heads Sherborne.

The board had offered Sherborne board representation in proportion to Sherborne's ownership in Nautilus, the letter states. Sherborne owns 23.5 percent of Nautilus' shares. The board also offered Sherborne representation on a new board committee that would oversee the company’s turnaround efforts. Bramson turned down the offers.

In the letter, the board writes that approval of Sherborne's proposals would give control of the board to Sherborne and reverse many of the actions already undertaken by the board.

So far, the board, led by newly appointed CEO Robert Falcone, has eliminated approximately $10 million in annual fixed expenses by laying off approximately 140 employees, or 9 percent of the company’s employee base. In addition, the company has divested non-core assets, including a possible sale of Pearl iZUMi, the company’s technical apparel and footwear business. Nautilus also is reducing its inventory and increasing cash by $20 million by the end of the year. It is working to increase global profitability and growth strategy for the company's commercial, direct and retail business lines. It is also working to improve the financial terms for Nautilus’ previously announced acquisition of Land America (its largest contract manufacturer) by $7 million and negotiating a deferral of $22.5 million in payments for an additional 10 months.

On the commercial side of the business, Nautilus is looking to expand, led by its TreadClimber product. The company is targeting key accounts related to large fitness clubs, apartment complexes, hotels and other institutions around the world.

“This segment is $1 billion domestically, and represents a large opportunity in the global fitness market,” the letter states. “Our international commercial business is on track for another healthy year of 15 to 20 percent sales growth.”

The board also stated it will try to improve the cost of goods profile of commercial products, including freight, components, manufacturing, packaging and delivery. It plans to introduce the Nautilus One line of circuit strength equipment at clubs globally this quarter and is preparing for a relaunch of StairMaster products. In addition, Nautilus plans to strategically transition its business to rely upon field staff rather than distributors. It is also pursuing partnerships in the hospitality industry.

Falcone has also restructured the Nautilus organization to mirror the business unit matrix structure employed by Nike in the 1990s during which the organization's sales quadrupled, the company says. Falcone worked for Nike during that time.

“We strongly believe that a matrix style of organization with a new emphasis on product lifecycle profitability will position us well for global growth while improving upon execution and results from our business plans,” Falcone said in a statement from the company.

Joining the company is James A. Heidenreich as senior vice president, global marketing and chief marketing officer. He has worked for Riddell Sports Group Inc. (renamed Easton-Bell Sports) and Experimental and Applied Sciences (EAS), a U.S. independent sports nutrition company.

The company also appointed Aaron Brotherton as director, direct response TV and creative development. Brotherton was vice president of creative development for Razor & Tie Entertainment in New York, where he developed direct response creative for a string of Billboard-topping videos and CDs including Kidz Bop, Sweating in the Spirit, Cheer!, and Darrin's Dance Grooves.

The company also created two positions of general business manager to develop profitable management of product portfolios through the entire lifecycle of those products, a function that had not previously existed at the company. Caroline “CJ” Howe has been appointed senior vice president, general manager. She comes from American Sporting Goods Corp. where she led the reinvention of Ryka, a 20-year-old women's footwear and apparel brand. Previously, she was global brand director of sports drinks for the Coca Cola Co., general manager of memories for Hallmark Cards Inc., and served 15 years at Nike, Inc., including as global brand director for women’s fitness.

Kenneth Fish, who was vice president, global finance at the company, is now senior vice president, general manager.

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