Revenue in the Company's other markets, which include its European and Latin American operations, increased 10% to $6.7 million for the three-month period ended March 31, 2002 from $6.1 million for the same period in 2001. This increase in revenue is due to a 12% increase in revenue in Europe in U.S. dollar terms. The increase in revenue in Europe related to an additional $0.3 million in revenue in the first quarter of 2002 following the completion of an acquisition of a small venture in Poland, as well as an increase of approximately 40% in executive distributor count in Europe.
Historically, the Company's principal needs for funds have been for operating expenses including distributor incentives, working capital (principally inventory purchases), capital expenditures and the development of operations in new markets. The Company has generally relied on cash flow from operations to meet its cash needs and business objectives without incurring long-term debt to fund operating activities.
The Company typically generates positive cash flow from operations due to favorable gross margins, the variable nature of distributor incentives which comprise a significant percentage of operating
expenses and minimal capital requirements. The Company generated $15.1 million in cash from operations during the three-month period ended March 31, 2002 compared to $6.1 million during the same prior-year period. This increase in cash generated from operations in 2002 compared to the same prior-year period is primarily related to increased operating profits as well as reduced tax payments in 2002 compared to 2001, in part, due to the utilization of foreign tax credits, and was somewhat offset by purchases of inventory for operations in Japan, the Company's largest market.
As of March 31, 2002, working capital was $153.7 million compared to $152.5 million as of December 31, 2001. Cash and cash equivalents at March 31, 2002 and December 31, 2001 were $73.8 million and $75.9 million, respectively.
Capital expenditures, primarily for equipment, computer systems and software, office furniture and leasehold improvements, were $2.7 million for the three-month period ended March 31, 2002. In addition, the Company anticipates additional capital expenditures in 2002 of approximately $20 million to further enhance its infrastructure, including enhancements to computer systems and Internet related software in order to expand the Company's Internet capabilities, as well as further expansion of the Company's retail stores and related infrastructure in China.
On March 6, 2002, the Company paid $4.8 million (including acquisition costs) to acquire a diagnostic technology relating to daily nutritional supplementation. In addition to the cash payment, the acquisition also consisted of the issuance of approximately $900,000 or 106,667 shares of the Company's Class A common stock and includes contingent payments approximating $8.5 million and up to 1.2 million shares of the Company's Class A common stock if certain development and revenue targets are met.
On April 19, 2002, the Company acquired First Harvest International, LLC, a small dehydrated food manufacturer. The purchase price was approximately $3.5 million.
The Company's long-term debt consists of 9.7 billion Japanese yen of ten-year senior notes (the "Notes") to The Prudential Insurance Company of America. The Notes bear interest at an effective rate of 3.03% per annum and are due October 2010, with annual principal payments beginning October 2004. As of March 31, 2002, the outstanding balance on the Notes was 9.7 billion Japanese yen, or $73.1 million.
On May 10, 2001, the Company entered into a $60.0 million revolving credit agreement (the "Revolving Credit Facility") with Bank of America, N.A. and Bank One, N.A. for which Bank of America, N.A. acted as agent. The proceeds may be used for working capital, capital expenditures and other purposes including repurchases of the Company's outstanding shares of Class A common stock. There were no outstanding balances relating to the Revolving Credit Facility as of March 31, 2002. The Revolving Credit Facility was reduced to $45.0 million on May 10, 2002, and will be further reduced to $30.0 million on May 10, 2003. The Revolving Credit Facility is set to expire on May 10, 2004.
Since August 1998, the board of directors has authorized the Company to repurchase up to $70.0 million of the Company's outstanding shares of Class A common stock. The repurchases are used primarily to fund the Company's equity incentive plans. During the three-month period ended March 31, 2002, the Company repurchased approximately 173,000 shares of Class A common stock for an aggregate price of approximately $1.4 million. As of March 31, 2002, the Company had repurchased a total of approximately 6.8 million shares of Class A common stock for an aggregate price of approximately $60.1 million.
In February 2002, the board of directors authorized the Company to declare a quarterly cash dividend of $0.06 per share for all classes of common stock. This quarterly cash dividend of $4.9 million was paid on March 27, 2002, to stockholders of record on March 8, 2002. On May 9, 2002, the board of directors authorized the Company to declare a quarterly cash dividend of $0.06 per share to stockholders of record on June 7, 2002 for all classes of common stock to be paid on June 26, 2002. In addition, the Company anticipates that the board of directors will continue to declare quarterly cash dividends
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throughout the remainder of 2002. Management believes that the cash flows from operations will be sufficient to fund future dividend payments.
The Company had related party payables of $6.9 million and $7.1 million at March 31, 2002 and December 31, 2001, respectively. In addition, the Company had related party receivables of $12.0 million and $13.0 million, respectively, at those dates. These balances are largely related to the Company's acquisition of Big Planet, Inc. and the acquisition of certain assets of Nu Skin USA, which were completed during 1999 as well as a $6.5 million loan to a significant stockholder, partly collateralized by Company stock. This loan was repaid with shares of the Company's stock on May 3, 2002. For a further discussion of related party transactions, reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and the Company's definitive Proxy Statement dated April 12, 2002.
Management considers the Company to be sufficiently liquid to be able to meet its obligations on both a short- and long-term basis. Management currently believes existing cash balances together with future cash flows from operations will be adequate to fund cash needs relating to the implementation of the Company's strategic plans. The majority of the Company's expenses are variable in nature and as such, a potential reduction in the level of revenue would reduce the Company's cash flow needs. However, in the event that the Company's current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet its obligations or strategic needs, the Company would consider raising additional funds in the capital or equity markets or restructuring its current debt obligations. Additionally, the Company would consider realigning its strategic plans, including a reduction in capital spending and a reduction in the level of stock repurchases or dividend payments.
Critical Accounting Policies
For a complete review of the Company's significant accounting policies and new accounting pronouncements that may impact the Company's results refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The Company adopted the provisions of Statements of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets ("SFAS 142") effective January 1, 2002. As a result of a review of all such assets, including Company and independent third party judgment and analysis, operating results for the first quarter of 2002 were impacted by a $2.7 million reduction of amortization of goodwill and other indefinite life intangibles. As of March 31, 2002, the Company had approximately $160 million of unamortized goodwill and other indefinite life intangible assets. SFAS 142 requires that these assets be tested for impairment at least annually in accordance with the provisions of SFAS 142. The transitional impairment tests were completed and did not result in an impairment charge. To the extent an impairment is identified, the Company will record the amount of the impairment as an operating expense in the period in which it is identified.
As of January 1, 2002, the Company adopted EITF 01-09, which relates to revenue recognition principles as well as the classifications of certain promotional items as cost of goods sold rather than operating expenses. The impact of the adoption of EITF 01-09 did not have a material impact on the Company's financial statements. In the event certain of the Company's expenses, including its distributor incentives, were deemed to be a reduction of revenue rather than an operating expense, the Company's reported revenue would be reduced as would its operating expenses. However, as the Company's compensation plan to its distributors does not provide rebates or selling discounts to distributors who purchase the Company's products and services, management believes that no adjustment to revenue and operating expenses is necessary.
Seasonality
In addition to general economic factors, the direct selling industry is impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on such quarter. Management believes that direct selling in Japan, the United States and Europe is also
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generally negatively impacted during the month of August, which is in the Company's third quarter, when many individuals, including the Company's distributors, traditionally take vacations.
Distributor Information
The following table provides information concerning the number of active and executive distributors as of the dates indicated. Active distributors are those distributors who were resident in the countries in which the Company operated and purchased products during the three months ended as of the date indicated. An executive distributor is an active distributor who has achieved required monthly personal and group sales volumes.
| | | As of March 31, 2002 | As of March 31, 2001 |
| | | Active | Executive | Active | Executive |
| | North Asia | 311,000 | 17,727 | 287,000 | 14,994 |
| | Southeast Asia | 138,000 | 4,992 | 104,000 | 3,110 |
| | North America | 75,000 | 2,331 | 74,000 | 2,506 |
| | Other | 26,000 | 1,028 | 23,000 | 839 |
| | Total | 550,000 | 26,078 | 488,000 | 21,449 |
| | | ––––––––––– | ––––––––––– | ––––––––––– | ––––––––––– |
Currency Risk and Exchange Rate Information
A majority of the Company's revenue and many of the Company's expenses are recognized primarily outside of the United States except for inventory purchases which are primarily transacted in U.S. dollars from vendors in the United States. Each subsidiary's local currency is considered the functional currency. All revenue and expenses are translated at weighted average exchange rates for the periods reported. Therefore, the Company's reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. In early 2002, the yen depreciated in value relative to the U.S. dollar. If such relative values of the yen continue throughout 2002, the Company's reported revenue and earnings will be negatively impacted.
Given the uncertainty of exchange rate fluctuations, the Company cannot estimate the effect of these fluctuations on the Company's future business, product pricing, results of operations or financial condition. However, because a majority of the Company's revenue is realized in local currencies and the majority of the Company's cost of sales is denominated in U.S. dollars, the Company's gross profits will be positively affected by a weakening in the U.S. dollar and will be negatively affected by strengthening in the U.S. dollar. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of foreign currency exchange contracts, through intercompany loans of foreign currency and through its Japanese yen denominated debt. The Company does not use such derivative financial instruments for trading or speculative purposes. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange fluctuations on the Company's operating results.
The Company recognizes all derivatives as either assets or liabilities, with the instruments measured at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the intended use of the derivative and its resulting designation. The Company's foreign currency derivatives are comprised of over-the-counter forward contracts with major international financial institutions. As of March 31, 2002, the Company had $86.5 million of such contracts with expiration dates through April 2003. All such contracts were denominated in Japanese yen. For the three-month period ended March 31, 2002, the Company recorded $2.3 million of gains in operating income, and $35,000 in other comprehensive income related to its forward contracts. Based on the Company's foreign exchange contracts at March 31, 2002, as discussed in Note 4 of the Notes to the Consolidated Financial Statements, the impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Japanese yen would not represent a material potential loss in fair value, earnings or cash flows against such contracts. This potential loss does not consider the underlying foreign currency transaction or translation exposures of the Company.
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Note Regarding Forward-Looking Statements
With the exception of historical facts, the statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") which reflect the Company's current expectations and beliefs regarding the future results of operations, performance and achievements of the Company. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may not materialize. These forward-looking statements include, but are not limited to, statements concerning:
| | • | the Company's belief that existing cash and cash flow from operations will be adequate to fund cash needs; |
| | • | the expectation that the Company will spend $20 million for capital expenditures during the remainder of 2002; and |
| | • | the anticipation that cash will be sufficient to pay future dividends. |
In addition, when used in this report, the words or phrases, "will likely result," "expects," "anticipates," "will continue," "intends," "plans," "believes," "the Company or management believes," and similar expressions are intended to help identify forward-looking statements.
The Company wishes to caution readers that various risk and uncertainties could cause the Company's actual results and outcomes to differ materially from those discussed or anticipated, including the risks and uncertainties described below and the risks and uncertainties identified under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, which contains a more detailed discussion of the risks and uncertainties related to the Company's business and are incorporated herein by reference. The Company also wishes to advise readers not to place any undue reliance on such forward-looking statements, which reflect the Company's beliefs and expectations only as of the date of this Report. The Company assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in its beliefs or expectations. Important factors, risks and uncertainties that might cause actual results to differ from those anticipated include, but are not limited to, the following:
| | (a) | Because a substantial majority of the Company’s sales are generated from the Asian regions, particularly Japan, significant variations in operating results including revenue, gross margin and earnings from those expected could be caused by |
| | | • | renewed or sustained weakness of Asian economies or consumer confidence, or |
| | | • | weakening of foreign currencies, particularly the Japanese yen. |
| | (b) | There is some uncertainty concerning the long-term effect of recent initiatives. There can be no assurance that such initiatives will continue to be successful or that planned initiatives for future periods will have a similar impact. In addition, there is a risk that the implementation of planned and recently announced initiatives and strategies could create renewed confusion or uncertainty among distributors and not increase distributor productivity. In addition, costs associated with these initiatives could be greater than anticipated. |
| | (c) | The ability of the Company to retain its key and executive level distributors or to sponsor new executive distributors is critical to the Company's success. Because the Company's products are distributed exclusively through its distributors, the Company's operating results could be adversely affected if the Company's existing and new business opportunities and products do not generate sufficient economic incentive to retain its existing distributors or to sponsor new distributors on a sustained basis. |
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| | (d) | The Company is subject to various laws and regulations throughout the Company's markets, many of which involve a high level of subjectivity and are inherently fact based and subject to interpretation. If the Company's existing business practices or products, or any new initiatives or products, are challenged by any governmental agency or other third party, the Company's revenue and profitability could be negatively impacted. |
| | (e) | Risks associated with the Company's new product offerings and initiatives planned for 2002, including: |
| | | • | the risk that such products will not gain market acceptance or meet the Company's expectations, |
| | | • | the risk that sales from such product offerings could reduce sales of existing products and not generate significant incremental revenue growth or help increase distributor numbers and productivity, |
| | | • | technological problems or legal or regulatory restrictions that might delay or prevent the Company from offering its new products and initiatives into all of its markets or limit the ability of the Company to effectively market such products. |
| | (f) | The network marketing industry and nutritional supplement industry have received negative publicity from time to time in the past. Recently, the nutritional supplement industry has received negative press related to the use of supplements by athletes. The Company similarly has experienced negative publicity from time to time as a participant in these industries. There is a risk that the Company could receive negative publicity in the future related to its marketing practices or new initiatives or products. Any such adverse publicity could negatively impact the ability of the Company to successfully attract new distributors and grow revenue. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 of Part I of Form 10-Q is incorporated herein by reference from the section entitled "Currency Risk and Exchange Rate Information" in "Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I and also in Note 4 to the Financial Statements contained in Item 1 of Part I.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 2. CHANGES IN SECURITES
On March 6, 2002, the Company issued 106,667 shares of Class A common stock in connection with the acquisition of certain rights in technology. The shares were issued to two stockholders for all of their shares in the Company that had acquired the rights to the technology. The shares were issued in a private transaction to two persons in reliance upon the exemption provided by Section 4(2).
ITEM 3. DEFAULTS UPON SENIOR SECURITES
None.
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ITEM 4. SUMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| | (a) | Exhibits
Regulation S-K
Number |
Description |
| | | | |
| | | 2.1 | Reconstituted Stock Purchase Agreement dated as of March 6, 2002 by and among Worldwide Nutritional Science, Inc., Nutriscan, Inc. and each of the Stockholders of Nutriscan, Inc. |
| | | | |
| | | 2.2 | Agreement and Plan of Merger as of March 6, 2002 by and among the Company, Niksun Acquisition Corporation, a subsidiary of the Company, and Worldwide Nutritional Science, Inc. |
| | | | |
| | | 2.3 | Membership Interest Purchase Agreement dated as of April 19, 2002, by and among the Company and the members of First Harvest International, LLC. |
| | | | |
| | (b) | | Reports on Form 8-K. One current Report on Form 8-K was filed during the quarter ended March 31, 2002. The Report was filed on February 11, 2002 for a Regulation FD disclosure. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of May, 2002.
| | | NU SKIN ENTERPRISES, INC. | |
| | | | |
| | | | |
| | By: | /s/ Corey B. Lindley | |
| | | Corey B. Lindley | |
| | Its: | Chief Financial Officer | |
| | | (Principal Financial and Accounting Officer) | |
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EXHIBIT INDEX
| | | 2.1 | Reconstituted Stock Purchase Agreement dated as of March 6, 2002 by and among Worldwide Nutritional Science, Inc., Nutriscan, Inc. and each of the Stockholders of Nutriscan, Inc. |
| | | | |
| | | 2.2 | Agreement and Plan of Merger as of March 6, 2002 by and among the Company, Niksun Acquisition Corporation, a subsidiary of the Company, and Worldwide Nutritional Science, Inc. |
| | | | |
| | | 2.3 | Membership Interest Purchase Agreement dated as of April 19, 2002, by and among the Company and the members of First Harvest International, LLC. |
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