Nautilus Inc (NLS) 2002 Q1 法說會逐字稿

Good afternoon. My name is and I will be your conference facilitator. At this time I would like to welcome everyone to the Direct Focus first quarter 2002 earnings release conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question-and-answer period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad and questions will be taken in the order they are received.

If you would like to withdraw your questions, press star then the number two on your telephone keypad. Thank you Mr. Cook. You may begin your conference.

Good afternoon. I'm Brian Cook, Chief Executive Officer of Direct Focus. Thank you for joining us today for our conference call for the first quarter of 2001. Kevin Lamar, our President, Rod Rice, our Chief Financial Officer and Michael Newman, our Investor Relations spokesperson are here today with me in our headquarters in Vancouver, Washington.

As most of you know Direct Focus is a leading marketer, developer and manufacturer of health and fitness products. We sell our Bowflex home fitness equipment and Nautilus sleep systems through our direct marketing channel.

We sell our Nautilus, Schwinn and StairMaster commercial fitness equipment through our sales force and selected dealers to health clubs and other institutions. And we sell a complete line of consumer fitness equipment under our Nautilus, Schwinn and StairMaster brand names through a network of specialty dealers, distributors and retailers worldwide.

Today we released the results of the first quarter ended March 31, 2002. It was an outstanding quarter for Directo Focus. We reported record sales and earnings. During the quarter we were especially pleased with continuing growth in our direct channel and the successful integration of Schwinn Fitness into our commercial and retail business.

So we also continue to further strengthen our commercial and retail business with our acquisition of StairMaster. Before I go into more detail about our progress during the quarter I'd like to turn the call over to Rod to review our financial performance. Then Kevin and I will come back to discuss some of the significant events of the quarter and our strategy for capitalizing on the opportunities before us.

Thanks Brian. Except for historical information presented our discussion today contains forward-looking statements which contains words such as intends, believes, anticipated and expects.

These forward-looking statements involve risks and uncertainties that may cause our actual results to be materially different from those expressed or implied by these statements. Factors that may affect Direct Focus results are described in detail in our SEC filings.

Today we released results for the first quarter ended March 31, 2002. We reported record sales of 135.9 million up 82 percent from 74.9 million for the first quarter of 2001. For the first quarter sales in the direct business segment were 91.1 million up 35 percent from 67.6 million in the same period last year.

Our Blowflex sales were strong. Demand for a new high end ultimate model exceeded our expectations. In general we believe there is still a net from a slower economy and events from 9/11 where more people are staying home and buying more products for their home.

E-commerce sales continue to contribute to our direct sales growth. In the first quarter these sales were 21.4 million up 44 percent from 14.9 million for the same period last year. Sales from our commercial and retail segment were 44.8 million or 33 percent total sales. These sales were relatively flat on a sequential basis partly because the fourth quarter is seasonally the strongest quarter for the retail and commercial business.

In addition these results also reflect a weak economy in the fact that both Schwinn Fitness and StairMaster have emerged from a bankruptcy situation. Based on the expected sales growth and the inclusion of full quarter results where StairMaster we continue to believe that the commercial and retail segment will count for about 40 percent of our sales in 2002.

Our gross margin for the direct segment was 72 percent for the first quarter compared to 70 percent for the first quarter of 2001. Based on our increase in sales volume we were during the quarter in gaining cost efficiencies from our direct product suppliers.

Gross margin for the commercial and retail segment was 26 percent for the quarter compared to 23 percent for the fourth quarter of 2001 and 36 percent for the first quarter of 2001. We expect to see modest improvement from our gross margin for the commercial and retail segment during the second half of 2002 based on higher sales levels for these products.

Our combined gross margin for the quarter was 57 percent compared to 55 percent for the fourth quarter of 2001 and 66 percent for the first quarter of 2001. For the remainder of 2002 as the commercial and retail sales increase we expect our combined gross margin to be in the range of 54 to 56 percent.

Overall operating expenses for the first quarter were 40.2 million up 43 percent from 28 million for the first quarter of 2001. As a percent of sales total operating expenditures were 30 percent compared to 29 percent for the fourth quarter of 2001 and 37 percent for the first quarter of 2001.

For the remainder of 2002 we expect operating expenses to be in the range of 29 to 31 percent of total sales. Sales and marketing expenses for the first quarter were 31.6 million up 36 percent from 23.2 million for the same period in 2001.

As a percent of total sales sales and marketing expenses were 23 percent, the same as the fourth quarter of 2001 and down from 31 percent for the first quarter of 2001. For the remainder of 2002 we expect sales and marketing to be about 23 to 24 percent of total sales.

General administrative expenses for the first quarter were 6.3 million up from 3.2 million for the same period in 2001. As a percent of sales G&A expenses were approximately 5 percent compared to approximately 4 percent for the fourth quarter of 2001 and the first quarter of 2001.

While we have experienced some increases in overhead costs related to our acquisitions we are pleased with the general success of our efforts to control costs as our business grows. For 2002 we expect G&A to remain in the range of four to 5 percent of sales.

We had interest income from cash and investments of $450,000 for the first quarter compared to 1.4 million for the same period last year. Interest income reflects lower cash balances and interest rates.

Net income for the first quarter was 24 million or 67 cents per diluted share up 63 percent from 14.7 million or 41 cents per diluted share for the same period of 2001. short terms investment position at the end of the first quarter was 51 million compared to 51.7 million at the end of 2001.

Our strong cash flows from operations enable us to keep our cash position steady even after investing approximately 25.8 million to acquire StairMaster and capital expenditures of approximately 9 million for the first quarter.

Our primary use for cap ex was the new building in Boulder for our commercial and retain headquarters, upgrades to our IT systems and other general capital needs. Our accounts receivable were at 26.5 million at the end of the first quarter up from 24.9 million at the end of 2001.

Days of sales outstanding remain constant and under one day for our direct business. For our commercial and retail segments DSOs were 55 days at the end of the first quarter compared to 54 days at the end of 2001.

Inventories were at 60.8 million at the end of the first quarter up from 45.5 million at the end of 2001. We increased inventory to support our direct business growth and added approximately 5 million to inventory with the acquisition of StairMaster. In the second quarter we plan to continue building inventories to support anticipated sales growth.

Based on strong Bowflex sales and current demand for the ultimate model we have entered the second quarter with a great deal of momentum. As a result we expect second quarter sales to be sequentially higher than our record first quarter sales.

In addition, we are raising our guidance for sales and earnings growth in 2002. We now expect year over year sales to increase by approximately 60 percent and we expect year over year net income to increase by approximately 40 percent in 2002.

For your long term modeling please keep in mind that we continue to expect quarterly sales to fluctuate according to such factors as variable costs and availability of advertising as well as a general state of economy. In addition we see more complex seasonal patterns depending on our sales mix with the first and fourth quarters typically being the strongest quarters for our retail and commercial products.

In summary, report the financial health of the company is excellent. We have maintained strong financial resources while completing two major acquisitions since September 2001. We expect to continue to generate strong positive cash flows from our business operations as we increase sales and earnings. Overall we feel that Direct Focus is extremely well positioned to capitalize on the market opportunities before us.

Now I'd like to turn it back to Brian. Brian.

Thanks Rod. As you can see we are very pleased with the results for the first quarter. We achieved strong internal growth, completed a major acquisition and continued to set sales and earnings records.

In our direct business we were able to take advantage of favorable advertising costs and availability to increase consumer awareness of our Bowflex and Nautilus Sleep System product lines. We believe that in a sluggish overall economy more people are staying home, watching more TV and buying products for home use.

These factors contributed to very strong demand for our Bowflex products during the quarter. We are seeing greater than expected demand for our new ultimate model which sells for over $2,000. We also continue to be pleased with the performance of the Nautilus Sleep Systems and we're gaining recognition for quality and durability of these products from independent testers.

At this point I'd like to turn the call over to Kevin Lamar, our President to review our progress in the commercial and retail business. Kevin.

Thanks Brian. During the first quarter we were pleased with the solid performance of our commercial and retail business. We completed our work to integrate Nautilus and Schwinn Fitness into a single sales organization.

Our acquisition of StairMaster has further strengthened cardiovascular product offering and added to our global infrastructure and market reach. We continue to create a unified sales organization and worldwide distribution network.

In 2002 our primary focus is to continue to leverage our recent acquisitions. We recently purchased an 85,000 square foot building in Boulder, Colorado to be the headquarters for our commercial and retail business allowing us to integrated our sales, marketing and administrative personnel from Nautilus, Schwinn and StairMaster.

With StairMaster our initial efforts are also focused on streamlining product lines and consolidating operations. We have recently announced that we will be closing the StairMaster headquarters in Kirkland, Washington by the end of July and we will be closing our manufacturing plant in Bothell, Washington by the end of the year.

Our recent acquisition had given us a foundation to increase our international business. During 2002 and beyond we plan to further leverage our offices in Switzerland, U.K. and Germany and our distribution relationships in over 50 countries to expand our international sales across our combined product mix.

We believe it creates a powerful opportunity for global subsidiaries and distributors to be able to sell a combination of Nautilus, Schwinn and StairMaster products. Our recent acquisitions have also created a powerful new product development and product enhancement platform.

More outside inventors are coming to us as a leader in fitness and healthy lifestyle products. We currently evaluate dozens of new product concepts per year and analyze which of these would be right - be the right distribution channel and brand for potential new products.

Today we have over 50 personnel in design, development and prototyping and testing as well as a state of the art design and testing facility. We are positioning ourselves to be a global leader in fitness and healthy lifestyle markets.

We believe our combination of brand names, multiple distribution channels and broad product lines of cardiovascular and strength training equipment are unmatched in the industry. Our focus this year is on streamlining operations, creating an infrastructure for sales and distribution synergies that will lead to strong growth in sales and earnings in the years ahead.

Now back to you, Brian.

Thanks Kevin. In summary we are very pleased with our success of - in becoming a larger and more diversified company. We believe that our powerful brands and multiple distribution channels makes a solid foundation for executing our growth strategy.

In 2002 we intend to continue to build on our position as the leader in the health and fitness markets. We plan to develop and introduce new high quality branded products, expand our business internationally and capitalize on the growth opportunities provided by our recent acquisitions.

We're very excited about the first quarter results and about the future of our company. This concludes the formal part of our presentation. In accordance with SEC regulation FD I would urge the analysts who follow our company to put forward whatever questions they need to ask in order to build their financial models in this publicly accessible and broadcasted conference call.

Kevin, Rod and I will be pleased to answer your questions.

At this time I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Mr. of .

Hi Rod. How are you?

Pretty good. How are you doing, ?

All right. Just a couple of things. What were the acquisitions from Schwinn and StairMaster in the quarter?

Excuse me, , could you repeat that?

What were the revenues from Schwinn and StairMaster in the quarter?

Yes, with you know for StairMaster what we're expecting is approximately $45 million for the year. And for that acquisition to be slightly accretive. I told a lot of people before we're not going to break out those numbers. What we've done is we combined those companies as one group and they're working as one team. So that's the way we look at them.

OK. But you did say that StairMaster accounted for 5 million of the inventory increase?

Exactly.

OK. What are Bowflex units sold lifetime to date and then the percentage direct versus distribution this quarter?

When you look at the Bowflex units we sold about 59,000 units in the first quarter, that's 599,000 units life to date.

OK.

And I didn't quite get your second part of the question there.

Percentage of those units sold direct versus through distribution.

One hundred percent direct.

One hundred percent?

Yes.

That leaves zero for distribution.

Yes. And you know what's exciting to me is our ASP was over $1,400 on the Bowflex. It's never been that high before.

OK. It seemed like the analysts had a clue that that was coming. The increase in prepaid sequentially of 2 million, was that from the acquisition as well or?

Yes. What you look at is we're just gearing up for our advertising in the second quarter and some of it is yes about a million of it is due to prepaid inventory overseas. That would be the acquisition of StairMaster.

OK. If I look at it historically sequentially it's not really usually up that much. What are you doing different this year . . .

Well . . .

. . . regarding the advertising?

What we have this year you know we're just - our budget's bigger. We expect to grow our business. And also too you know when we throw in Schwinn prepaid.

Gotcha. OK.

comparison.

Thanks a lot.

Sure.

Your next question comes from Mr. of .

Hi gentlemen. A question regarding your royalties that you paid to people regarding the Bowflex. I'm trying to understand has the company paid the CEO and former board member directly?

Yes. The royalty is within of the Bowflex product. He has a separate agreement with the former board director and their CEO. Per that agreement he has elected the company pay those people directly.

So he does not pay you. The company is paying the CEO and the former board member directly?

Right. On a separate agreement.

Not what's disclosed in the K or the proxy. According to the proxy he pays you.

What - in the proxy statement and when you go back . . .

And in the K.

what we disclose is the third party information. What we have disclosed is what the total expense is on accrual basis. What we have disclosed is the exact amount that . . .

Yes. but I could read you exact . . .

.

I could read you exactly what it says. It says . . .

.

It says he pays you is what it says. It does not say the company pays the CEO and former board member. It says that he . . .

Well when . . .

. . . is making the payment directly.

When you look at it what you see is we show the full amount of what is accrued on the royalty and what we show is how much the - you know and we'll show how much the board member gets. Do you want to sit here - you know this was a great conference - you know great conference call for us. If you want to sit here and look at a detail I'm not here . . .

Well I'm just trying to get the disclosure proper and . . .

Well I believe . . .

. . . it wasn't disclosed in the K and in the proxy is different than what I'm hearing. So I'm just trying to get a better idea. You know from a shareholder friendly standpoint I'm just trying to understand the CEO getting a side agreement royalty . . .

Well I think what we disclosed is exactly what the CEO is getting. You're talking a little minor point. If you've got any other question we'd be happy to take it but . . .

Is your inventor also get stock in the company or does he only get cash?

Per that agreement he only gets cash.

And does he get stock for any other agreements that you have with . . .

He does not.

He does not.

We would disclose it if he did.

OK. Thank you so much.

Thank you.

Your next question comes from Mr. of .

Hey good afternoon guys.

Good afternoon.

A couple quick questions. First of all, on your ad rates that you're seeing for your sales and marketing for the Bowflex and for the sleep systems how did those trend during Q1 versus Q4 and how are you going to see them you know so far into Q2 and throughout the rest of the year?

Yes. What - you know what generally we've seen with our ad rates we've seen flat ad rates. With the information we have today we don't expect to see ad rates go down any more this year.

But what we're seeing is a lot of good quality available time available. And what we're also seeing is you know people are staying home and watching more TV. You know we believe it's due to the downturn in the economy and maybe still some events of 9/11 but we're getting great response to our advertisements.

What's amazing to us you know on the direct side of the business is our average selling prices going up for the beds, it's going up for the Bowflex. People want high quality good products and they're willing to pay for them.

And does that - are those ad rates shifting at all as you move from your business over to direct TV from cable?

It's a great avenue for us to take advantage of. It fits our demographics very well.

On the ultimate Bowflex I know you know it currently says on the site those will be shipping in May - or they're on back order until May. When in May exactly do you think you'll actually start shipping those? And then you know will you have enough to ship in May just to cover you know kind of what's in backlog or are you going to be you know manufacturing you know more and have a little more slack?

Well as we stated you know the demands for the ultimate exceeded our expectations. There are a bit backlogged right now. We are shipping product right now. It'll just take us probably into May before we catch up.

OK. So in May you will be caught up with demand and kind of start flowing from there?

You're exactly right and that's why we expect to see sequentially higher sales in the second quarter. It's - we're going to give great customer service to our customers.

OK. And then the last question kind of a longer term question you know when do you see I guess the last time you rolled a product into the direct line was you know the end of '99 with the beds. When do you see a third product of a completely different line rolling into the direct system?

Well, as you know we don't announce exact dates.

Right. Right.

When we're going to roll product. We certainly do expect to see new products lines launched into the direct model. We do have multiple product under development. but we're not ready to tell you a date.

OK. Thanks guys.

Your next question comes from Mr. of Wells Fargo Securities.

Good afternoon guys. Great quarter and great execution. A couple questions. First of all, could you talk a little bit about the ultimate. What is your expectation for ultimate sales probably by the end of this year? And maybe you know what kind of ASP that you're looking for with significant contribution from ultimate going forward?

Well, , you know first our history with the ultimate is fairly new. We've been test marketing and limited marketing it now for about six months. I don't know that we can project out exactly what affect it is going to have in total. We can say that it's being received very well. And we can certainly say that we've seen an increase in our average unit sale because of it.

OK. Second question is probably for Rod. Rod, what kind of interest expense if we you know in the second quarter and maybe going forward?

when you're looking at the interest income side of it we could expect that to increase a little bit as we're building our cash balances we have a tremendous amount of cash flow that we generated in the first quarter. We had cap ex of about 9 million. We're projecting cap ex for the year to probably 16 to 17 million.

Although in the second quarter the cash flow is decreased a little bit because we have two tax payments but you should see it going up throughout the year.

OK. And my last question. Brian, could you comment on the trend that you're seeing on your air bed business?

We're very happy with the air bed business. I think that analysts were expected 36 to 40 million in sales from that product line this year. And we're very comfortably more on target with that run rate.

Great. Thank you.

Your next question comes from Mr. of .

Good afternoon.

Good afternoon.

And those were very impressive results annualized return on equity in the quarter looked like over 80 percent. I can't find a quarter that you did so well going back. The guidance that you gave the new guidance today was a year over year sales in 2002 of 60 percent if I heard correctly and net income up 40 percent. What was the previous guidance so I can put it in perspective?

The previous guidance in the fourth quarter was 40 percent revenue growth for 2002 and 30 percent net income growth for 2002.

And that previous guidance for sales included expectations for the StairMaster I believe. Is that correct?

It actually did not because that was during the fourth quarter conference call and we acquired StairMaster . . .

OK. So without StairMaster in that pervious guidance.

Right.

Now if the last year's results if I can find them I think it was $1.85 and if I multiply that simply by 40 percent I get something close to $2.60.

That is correct.

Is that the kind of figure you're looking at is - if I'm understanding correctly?

That is correct.

And if I put a minimum expectation - you aren't giving any guidance for 2003 it doesn't sound like but if I put - but if I put a minimum on growth rate that you've in the past have indicated you would like to grow at 25 percent or more. If I put the 25 percent growth rate on 2.60 I get something close to 3.25. Are you comfortable with $3.25 as for next year?

With the information we have right now we are. I mean we expect 2003 to be a great year because really if you look at the commercial and retail business this is the year to take advantage of the synergies of that business and we expect some good results in 2003.

OK. And concerning the sales of Bowflex 59,000. Is there something extra special about the quarter? That looked like it was a record number and is it something that you're doing that is driving those sales to that level and do you think that kind of - oh I guess they call unit growth can continue?

Well, , I can say that sales are strong, momentum's strong going into the second quarter. We think that we're favored by a couple of things, a sluggish economy, more people at home watching TV and buying products for their home use because of it. Advertising rates are favorable to us. They're down and availability is up. So we think it's going to be a strong second quarter in the year.

The guidance for your various other segments do they stay the same? I think if I'm understanding all right and my memory's correct that the Schwinn acquisition would produce something in the order of 120 million in revenues. Is that correct?

We're still comfortable with the previous guidance we've given.

And did we hear StairMaster was like a $45 million to $50 million kind of sales rate this year?

We said 45 and we're comfortable with that guidance. Yes.

There was a reference earlier in the call and I don't know if you - if I misheard or if there was a slippage in what was said. It said 4 million to 5 million. Is that what you expect in operating income or was that . . .

Yes. What the 5 million was - we said 5 million inventory was from StairMaster.

$5 million dollars of the increase that we . . .

inventory.

OK. Very good. Thank you very much.

Your next question comes from Mr. of U.S. Bancorp Piper Jaffray.

Hi. Good afternoon. Have you guys opened the new call center yet?

Have we opened the new call center yet?

Yes.

No. It's May 15 or somewhere in the last half of May.

OK. And everything there is looking to be on track and on time?

Looking to be on track and on time.

OK. Obviously numbers coming out of Select Comfort look very good. I think you know from your perspective you consistently have said that you like to see the broader air bed market firm up a little bit because you think it would bring some credibility to the category. So any thoughts vis-à-vis what you're seeing out of Select Comfort?

Well I really don't pay a lot attention to their number, . They do a good job also. We concentrate on what we do. And we're very happy with what we're doing. I'm glad to see that they're back on track a little bit.

From a patent perspective can you remind us of the timing for any key patent expirations on Bowflex?

Well, the key patents on Bowflex expire in about two years. I believe it's April of 2004. But we feel that from a trade dress and a trade mark standpoint we have significant protection in the amount of money we've invested and the look of the Bowflex.

We also have significant we believe protection beyond patent in just what we consider trade secrets in how to produce the rods. It's not quite as easy as it looks not to mention the marketing momentum and brand name that we have going for us.

OK. The - a couple of questions for Kevin actually. Any particular geographic success? Are you seeing the commercial products sell well in any particular regions of the country or are they doing generally the same across the country?

No. I think the products are having pretty much success across the board both on the commercial front and on the retail front.

OK. And obviously with the reinforcement of the pre-existing guidance for both Schwinn and StairMaster you're basically implying that the integration not so much of StairMaster but the Nautilus and Schwinn integration is certainly going well?

It is and the flag is up and we technically said Nautilus and Schwinn are integrated and we're in the process of now pulling Nautilus, Schwinn and StairMaster together and it's going very well.

Great. Thank you very much.

Your next question comes from Ms. of .

This is actually for . Most of my other questions were answered. But I was just wondering how are the ad rates kind of tracking with what you were kind of expecting them to you know kind of play out for the rest of the year?

Well, ad rates are pretty well flat right now. I agree with Rod's earlier statement was and that is that we probably have seen ad rates go as well as they're going to go. We're not necessarily looking for them to increase but we don't think they're going to go down much more either.

OK. but you know when you kind of you know made your projections at the end of the fourth quarter were you kind of expecting that?

Well, I think that when we made the projections at end of the fourth quarter we certainly didn't think they were going to go down too much either. I think there's been some expectations to see them go up but we're not seeing that.

OK. Thank you.

Your next question comes from Mr. of .

Good afternoon gentlemen.

Good afternoon.

Could you tell us if the sleep system gross margins are similar to the Bowflex gross margins in the quarter?

Yes. When you look at the point of the life of the Nautilus Sleep System the margin's doing very well. I mean it would take years for it to get to where the Bowflex is. When we started with the Nautilus Sleep System we had a gross margin of about 50 percent. It is in the low 60 percent right now and we're hoping by the end of the year at that point in time to have a mid 60 point gross margin. So we're real happy with the progress we made on that side.

OK. Do you - is there any reason to think that your sleep systems would move into the commercial and retail market?

We . . .

By acquisition or otherwise?

I think what we've said is generally when you see a product on the direct side of our business whether it be the Bowflex or the sleep system you're going to see us utilize that product on the direct side only. And not have it in the commercial retail business.

OK. Let me rephrase question. Would you have some type of a mattress for the commercial and retail market?

We certainly don't expect to at this time.

OK. And could you bring us up to date as to how Champion was - did in the quarter and what you expect for the year? I think in your last call Rod said you expected some pretty good sales numbers. And what gross margin you have and maybe could comment on do you own all of Champion now?

Well, first let me say that you know Champion is a good business but it's an add on business for us. It's an up sell to our Bowflex customers. We don't break out individual product line sales separately. We're very happy with the nutritional supplement business and it's a category that we certainly think that we will probably be in for some time with a lot of growth opportunity. I'd have to say at this time no decision has yet been made on the acquisition of Champion.

OK. Could you comment on the gross margins on that business? I believe you're promoting it with direct marketing to Bowflex customers.

yes. It's got pretty good gross margins for an add on product. It's close to 60 percent gross profit margin and we really don't have any selling and marketing costs associated with that. You have some you know direct as far as commission and all that. So it's a good business for us to be in.

OK. Thank you.

Thank you.

Your next question comes from Mr. of .

Yes. Good quarter. What was the air bed revenues for the quarter and what was your D&A and also what was your operating cash flow if you have those numbers?

Sure. I'm going to try to take those in reverse order for you. Operating cash flow was about 32.6 million.

OK.

So very strong. when you look at D&A for the quarter you're looking at about 1.2 million for depreciation and about $100,000 for amortization. You know what we want people to focus on is our direct business as a whole. Unfortunately you know a long time ago we started breaking to the Bowflex unit sales and I know we could never get rid of that. And we're not going to start with the Nautilus Sleep System at this time.

All right. Well then a different question. What was the ASP for the Bowflex because you have been giving that out?

Yes. The ASP for the Bowflext was a little bit over $1,400.

OK. So a little over 1,400. Although you do give air bed annual estimates. So why - out of curiosity why not just give us the quarter if you're going to go ahead . . .

Because what we're looking at is the future of our company is adding more and more products.

Right.

And we want people to focus on the - this business model. So this is the guidance that we chose to give.

OK. And is most of the other assets good will because I noticed it went up a little bit. That was from the acquisition of StairMaster?

Yes. I mean you're going to see most of StairMaster what it brought is if you look at it I mentioned the inventory side was a little bit over $5 million. The AR side brought about $8 million. they did have some and they did have some trademark too. Trademark and good will you know a good estimate is about probably around 8 million.

OK. Thank you very much.

Your next question is a follow up from Mr. of .

I wish I could remember what I was going to ask.

it'll come back.

OK. Thanks.

Your next question comes from Mr. of .

Yes. Great quarter. One thing that I just wanted to address to see what the product difference is if you could comment is this thing being marketed by Gold's Gym that's done a couple of things on ESPN for $500 and supposedly going to really increase their infomercials which you know with your new product you know I guess the ASP's going up. You know do you expect any fall out or any impact on that?

Great question. All I can say is over the past several years that we've been building Bowflex and marketing it we've had many competitors from '97 clear up until today. Total Gym's been out there with quite a presence. We are familiar with the Gold's Gym product. I'm trying to recall the name right now. I think it . . .

.

. . .

It's almost like they took your name instead of Bowlex it's . . .

But we certainly haven't you know seen it or felt it in our direct business whatsoever at this time.

OK. Secondly, Rod, could you comment on a comment that I heard indirectly from an analyst about that at some point maybe by the fourth quarter or first quarter a year from now sequential unit sales of Bowflex should be tapering off?

You know we haven't seen that. When we - you know what we look at in a product you know we sold 599,000 units of the product life to day. We have ASP increasing. That's a positive sign. We have a selling and marketing that's a percentage of sales is actually declining. I mean we think we have many more years left. So I don't know what that indirect comment would be actually.

OK. And then the last question I know it doesn't reflect on your balance sheet but a large percentage of the sales are financed through household. Is that correct?

That is correct. Through a non-recourse agreement.

OK. So it's non-recourse to you all. What is their loss experience been?

You know their loss experience we got to keep it confidential as far as the rate but as a client we've had a better experience than their typical client. Because we sell to the baby boomer generation that has a disposable income and want high quality products around.

OK. Good enough. Thank you.

Thank you.

Your next question is a follow up from Mr. of .

I remember now. What is the operating income two segments? Can you give that to us now or do we have to wait for the Q?

I could give you that real quick. Income from operations for the direct side of the business is roughly $34 million. And on the commercial and retail side of that is roughly 2.9 million.

Thank you.

Your next question comes from Mr. of .

Good afternoon. Would you mind - or do you break out your selling and marketing expenses for direct versus non-direct business?

Sure. Not a problem. We always put that in our 10-Q and I think - I really believe that's an important number for you guys. if you wanted the direct for the first quarter 2002 roughly 26.2 million, 28.7 percent of sales.

Twenty-six point two. OK.

Twenty-eight point seven.

OK. Yes. You got it.

And that compares to 31.8 percent in the first quarter of 2001.

OK. Thank you very much. Following up on the previous household question will you tell us the percentage of sales that were - this quarter that were based on the credit card?

You know it's holding pretty close to what we see in last year which is over 40 percent.

And it looks like if I'm doing the math how much is the credit card - how is the total availability on the card for?

The total availability you know that is one number I don't - I do not have memorized but it - they have quite a bit. the average person is typically approved for around three to $5,000.

And has there been any change in the past year regarding that agreement and the amount of credit that they're giving on that credit card?

They really haven't. They're pleased with our business and are trying to sign us up for another three years right now.

OK. And then finally what about the revenue sharing. What's the economics on how that works?

You know that agreement is out there. Right now in the past we've paid a nominal fee for them to provide that service to us. It's a lot less than a visa or mastercard would be. But your question is intriguing because there is possibilities for revenue sharing in the future.

OK. Thank you very much.

At this time there are no further questions.

OK. Well I want to thank everyone for participating in today's conference call and we look forward to speaking with you again next quarter. Have a great day.