Nautilus 2010 Annual Report Download - page 12

Table of Contents
Our revenues could decline due to changes in credit markets and decisions made by credit providers.
Historically, more than half of our Direct sales have been financed for our customers under various programs offered by third- party consumer
credit financing sources. Reductions in consumer lending and the availability of consumer credit could limit the number of customers with the
financial means to purchase our products. Higher interest rates could increase monthly payments for consumer products financed through one of
our monthly payment plans or through other sources of consumer financing. In the past, we have partnered with financial service companies to
assist our customers in obtaining financing to purchase our products. Our present agreement with GE helps certain customers obtain financing if
they qualify for GE's private label revolving credit card. We cannot be assured that GE or other companies will continue to provide consumers
with access to credit or that credit limits under such arrangements will not be reduced. Such restrictions or reductions in the availability of
consumer credit could have a material adverse impact on our results of operations, financial position and cash flows.
If our contract manufacturers experience any delay, disruption or quality control problems in their operations, we could lose market
share and revenues, and our reputation may be harmed.
We have outsourced the production of all of our products to third-party manufacturers. We rely on our contract manufacturers to procure
components and provide spare parts in support of our warranty and customer service obligations. We generally commit the manufacturing of
each product to a single contract manufacturer.
Our reliance on contract manufacturers exposes us to the following risks over which we may have limited control:
Our contract manufacturers primarily are located in Asia and may be subject to disruption by natural disasters, as well as political, social or
economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could cause a significant
disruption in our product supply chain and operations and delays in product shipments. In addition, other than our contract with Land America,
which expires in December 2011, our third-party manufacturing contracts are terminable by either party on relatively short notice.
There is no assurance that we will be able to maintain our current relationships with these parties or, if necessary, establish future arrangements
with other third-party manufacturers on commercially reasonable terms. Further, we cannot assure that their manufacturing and quality control
processes will be maintained at a level sufficient to meet our inventory needs or prevent the inadvertent sale of substandard products.
Our inventory purchases are subject to long lead times, which could negatively impact our sales, cash flows and liquidity.
All of our products are produced by third-party manufacturers, substantially all of which are located in Asia. Lead times for inventory purchases
from our Asian suppliers, from order placement to receipt of goods, generally range from approximately two to three months, of which transit
time represents three-to-four weeks. The length of our lead times requires us to place advance manufacturing orders based on management
forecasts of future demand for our products. Due to the length of our lead times, our sales and cash flows may be negatively impacted if we do
not have sufficient inventory on hand to meet customer demand for such items. In addition, our liquidity and cash flows may be negatively
affected, and inventory obsolescence may increase, if the quantity of products we order exceeds customer demand for such items.
A delay in getting non-U.S.-sourced products through customs in a timely manner could result in reduced sales, canceled sales orders
and unanticipated inventory accumulation.
Most of our imported products are subject to duties or tariffs that affect the cost and quantity of various types of goods imported into the U.S. or
our other markets. The countries in which our products are produced or sold may adjust or impose new quotas, duties, tariffs or other restrictions.
Further, our business depends on our ability to source and distribute products in
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Unexpected increases in manufacturing and repair costs;
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Interruptions in shipments if our contract manufacturer is unable to complete production;
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Inability to completely control the quality of finished products;
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Inability to completely control delivery schedules;
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Changes in our contract manufacturer's business models or operations;
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Potential increases in our negotiated product costs as a result of fluctuations in currency exchange rates;
• Impact of the global market and economic conditions on the financial stability of our contract manufacturers and their ability
to operate without requesting earlier payment terms or letters of credit;
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Potential lack of adequate capacity to manufacture all or a part of the products we require; and
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Potential unauthorized reproduction of our products.