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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 001-12421
Nu Skin Asia Pacific, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0565309
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
75 West Center Street, Provo, Utah 84601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (801) 345-6100
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of July 15, 1997, 11,723,011 shares of the Company's Class A Common
Stock, $.001 par value per share, 71,696,675 shares of the Company's Class B
Common Stock, $.001 par value per share, and no shares of the Company's
Preferred Stock, $.001 par value per share, were outstanding.
NU SKIN ASIA PACIFIC, INC.
1997 FORM 10-Q QUARTERLY REPORT - SECOND QUARTER
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS.................................2
CONSOLIDATED STATEMENTS OF INCOME...........................3
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................10
ITEM 2. CHANGES IN SECURITIES............................................10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............11
ITEM 5. OTHER INFORMATION................................................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................12
SIGNATURES................................................................13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Nu Skin Asia Pacific, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 151,375 $ 207,106
Accounts receivable 9,407 8,937
Related parties receivable 5,785 7,974
Inventories, net 58,077 44,860
Prepaid expenses and other 28,892 11,281
--------- ---------
253,536 280,158
Property and equipment, net 9,679 8,884
Other assets, net 43,592 42,673
--------- ---------
Total assets $ 306,807 $ 331,715
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,705 $ 6,592
Accrued expenses 67,451 79,518
Related parties payable 61,405 46,326
Notes payable to stockholders -- 71,487
Note payable to NSI, current portion 10,000 10,000
--------- ---------
145,561 213,923
--------- ---------
Note payable to NSI, less current portion -- 10,000
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock - 25,000,000 shares authorized,
$.001 par value, no shares issued and
outstanding -- --
Class A common stock - 500,000,000 shares
authorized, $.001 par value, 11,723,011 shares
issued and outstanding 12 12
Class B common stock - 100,000,000 shares
authorized, $.001 par value, 71,696,675 shares
issued and outstanding 72 72
Additional paid-in capital 137,876 137,876
Cumulative foreign currency translation adjustment (5,857) (5,963)
Retained earnings 55,287 11,493
Deferred compensation (13,005) (22,559)
Note receivable from NSI (13,139) (13,139)
--------- ---------
161,246 107,792
--------- ---------
Total liabilities and stockholders' equity $ 306,807 $ 331,715
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
Nu Skin Asia Pacific, Inc.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
Revenue $230,016 $163,526 $441,010 $287,711
Cost of sales 65,458 46,148 126,199 80,963
-------- -------- -------- --------
Gross profit 164,558 117,378 314,811 206,748
-------- -------- -------- --------
Operating expenses
Distributor incentives 88,589 60,909 169,132 107,090
Selling, general and administrative 33,255 24,524 67,738 44,551
Distributor stock expense 4,477 -- 8,954 --
-------- -------- -------- --------
Total operating expenses 126,321 85,433 245,824 151,641
-------- -------- -------- --------
Operating income 38,237 31,945 68,987 55,107
Other income (expense), net (1,243) 343 527 617
-------- -------- -------- --------
Income before provision for income taxes 36,994 32,288 69,514 55,724
Provision for income taxes (Note 3) 13,688 11,905 25,720 20,591
-------- -------- -------- --------
Net income $ 23,306 $ 20,383 $ 43,794 $ 35,133
======== ======== ======== ========
Net income per share (Note 4) $ .27 $ .25 $ .51 $ .44
======== ======== ======== ========
Weighted average common shares outstanding 85,426 80,518 85,421 80,518
======== ======== ======== ========
Pro forma data:
Income before pro forma provision for
income taxes $ 32,288 $ 55,724
Pro forma provision for income taxes
(Note 3) 11,307 19,514
-------- --------
Income after pro forma provision for
income taxes $ 20,981 $ 36,210
======== ========
Pro forma net income per share (Note 4) $ .26 $ .45
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
Nu Skin Asia Pacific, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
Six Six
Months Ended Months Ended
June 30, June 30,
1997 1996
Cash flows from operating activities:
Net income $ 43,794 $ 35,133
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,300 1,285
Amortization of deferred compensation 9,554 --
Changes in operating assets and liabilities:
Accounts receivable (470) (1,657)
Related parties receivable 2,189 (8,152)
Inventories, net (13,217) (5,721)
Prepaid expenses and other (17,611) (39)
Other assets (1,506) (1,432)
Accounts payable 113 3,706
Accrued expenses (12,067) 16,359
Related parties payable 15,079 (7,716)
--------- ---------
Net cash provided by operating activities 28,158 31,766
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (2,477) (2,859)
Payment to NSI for distribution rights (10,000) --
Payments for lease deposits (167) --
Receipt of refundable lease deposits 129 5
--------- ---------
Net cash used in investing activities (12,515) (2,854)
--------- ---------
Cash flows from financing activities:
Payments to stockholders for S distribution
notes (Note 2) (71,487) --
Dividends paid -- (40,179)
--------- ---------
Net cash provided by (used in) financing
activities (71,487) (40,179)
--------- ---------
Effect of exchange rate changes on cash 113 (482)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (55,731) (11,749)
Cash and cash equivalents, beginning of period 207,106 63,213
--------- ---------
Cash and cash equivalents, end of period $ 151,375 $ 51,464
========= =========
Supplemental cash flow information:
Interest paid $ -- $ 24
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
Nu Skin Asia Pacific, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. THE COMPANY
Nu Skin Asia Pacific, Inc. (the "Company") is a network marketing company
involved in the distribution and sale of premium quality, innovative
personal care and nutritional products. The Company is the exclusive
distribution vehicle for Nu Skin International, Inc. ("NSI") in the
countries of Japan, Taiwan, Hong Kong (including Macau), South Korea and
Thailand, where the Company currently has operations (collectively referred
to as the "Subsidiaries"), and in Indonesia, Malaysia, the Philippines, the
PRC, Singapore and Vietnam, where operations have not yet commenced.
Additionally, the Company sells products to NSI affiliates in Australia and
New Zealand.
The Company was incorporated on September 4, 1996. It was formed as a
holding company and acquired the Subsidiaries through a reorganization
which occurred on November 20, 1996. Prior to the reorganization, each of
the Subsidiaries elected to be treated as an S corporation. In connection
with the reorganization, the Subsidiaries' S corporation status was
terminated on November 19, 1996, and the Company declared a distribution to
the stockholders that included all of the Subsidiaries' previously earned
and undistributed taxable S corporation earnings totaling $86.5 million
(the "S Distribution Notes").
On November 27, 1996 the Company completed its initial public offerings of
4,750,000 shares of Class A common stock and received net proceeds of $98.8
million (the "Offerings").
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10- 01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, considered
necessary for a fair statement of the Company's financial information as of
June 30, 1997 and 1996 and for the three and six-month periods ended June
30, 1997 and 1996. The results of operations of any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's annual
report on Form 10-K for the year ended December 31, 1996.
2. RELATED PARTY TRANSACTION
On April 4, 1997, the Company paid the balance due on the S Distribution
Notes of $71.5 million with the related accrued interest expense of $1.6
million. As described in Note 1, these notes originated in connection with
the reorganization in which the Subsidiaries' S corporation status was
terminated and the Company declared a distribution to the stockholders that
included all of the Subsidiaries' previously earned and undistributed
taxable S corporation earnings totaling $86.5 million.
3. INCOME TAXES
As a result of the Company's reorganization described in Note 1, the
Company is no longer treated as an S corporation for U.S. Federal income
tax purposes. The provision for income taxes for the three and six-month
periods ended June 30, 1996 primarily represents income taxes in foreign
countries as U.S. Federal income taxes were levied at the stockholder
level. The consolidated statements of income include a pro forma
presentation for income taxes which would have been recorded if the Company
had been taxed as a C corporation rather than as an S corporation for the
three and six-month periods ended June 30, 1996.
4. NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common shares and common share equivalents outstanding during the periods
presented assuming that the Company's reorganization and the resultant
issuance of 80.3 million shares of Class B common stock occurred as of
January 1, 1996.
5. FINANCIAL INSTRUMENTS
The Company's Subsidiaries enter into significant transactions with each
other, NSI and third parties which may not be denominated in the respective
Subsidiaries' functional currencies. The Company reduces its exposure to
fluctuations in foreign exchange rates by creating offsetting positions
through the use of foreign currency exchange contracts. The Company
currently does not use such financial instruments for trading or
speculative purposes. The Company regularly monitors its foreign currency
exposures to minimize the impact of foreign exchange fluctuations on the
Company's operating results.
At June 30, 1997 the Company held foreign currency forward contracts with
notional amounts totaling approximately $51 million to hedge foreign
currency items. The unrealized losses on these contracts were $1.4 million
and $0.9 million for the three and six-month periods ended June 30, 1997,
respectively. These contracts have maturities through May 1998.
6. NEW ACCOUNTING STANDARDS
The Company is required to adopt Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings per Share, during the fourth
quarter of 1997. SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share. The Company does not
believe that the adoption of SFAS 128 will have a material effect on the
Company's method of calculation or display of earnings per share amounts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 Compared to 1996
Revenue increased 41% and 53% to $230.0 million and $441.0 million from
$163.5 million and $287.7 million for the three and six-month periods ended June
30, 1997, respectively, compared with the same periods in 1996. This increase is
primarily attributable to several factors. First, revenue in Japan increased by
$53.6 million and $94.9 million, or 59% and 57%, for the three and six-month
periods ended June 30, 1997, respectively, compared with the same periods in
1996. This increase in revenue was primarily a result of continued growth of the
IDN product line as well as increased sales following a distributor convention
held in the first quarter of 1997. Second, revenue in Taiwan increased by $9.8
million and $23.8 million, or 28% and 35%, for the three and six-month periods
ended June 30, 1997, respectively, compared with the same periods in 1996,
primarily as a result of growth in IDN sales following the late 1996
introduction of LifePak. Third, the opening of Thailand in the first quarter of
1997 resulted in an additional $10.6 million and $13.4 million in revenue for
the three and six-month periods ended June 30, 1997, respectively. Fourth,
revenue in Hong Kong increased by $1.7 million and $1.6 million for the three
and six-month periods ended June 30, 1997, respectively, compared with the same
periods in 1996. The increase in revenue for the three months ended June 30,
1997 was partially offset by the decrease in South Korea revenue of $9.2 million
due to a typical new market revenue cycle compounded by slowing economic growth
in South Korea and unfavorable media and consumer group attention toward foreign
direct selling companies. However, for the six months ended June 30, 1997, South
Korea revenue increased $19.6 million, or 45% due to the Company's February 1996
opening in South Korea resulting in a shorter comparative period.
Gross profit as a percentage of revenue was 71.5% and 71.8% for the three
months ended June 30, 1997 and 1996, respectively, and was 71.4% and 71.9% for
the six months ended June 30, 1997 and 1996, respectively. This decrease
reflected the strengthening of the U.S. dollar and the commencement of
operations in South Korea in 1996. The Company purchases goods in U.S. dollars
and recognizes revenue in local currency and is consequently subjected to
exchange rate risks in its gross margins. The full quarter of operations in
South Korea in 1997 also impacted gross profit as a percentage of revenue due to
South Korean regulations which result in higher prices on imported products as
compared to other markets.
Distributor incentives as a percentage of revenue increased to 38.5% and
38.4% for the three and six-month periods ended June 30, 1997 from 37.3% and
37.2%, respectively, compared with the same periods in 1996. The primary reasons
for this increase were a more developed distributor network in Korea in 1997;
where commissions are capped at 35% of revenues, along with the sales of a
smaller percentage of non-commissionable items throughout the Company in 1997.
Selling, general and administrative expenses as a percentage of revenue
decreased to 14.5% and 15.4% for the three and six-month periods ended June 30,
1997 from 15.0% and 15.5%, respectively, compared with the same periods in 1996.
This decrease was primarily due to economies of scale gained as the Company's
revenue increased and was offset somewhat by increased promotion expenses of
approximately $2 million resulting from the first quarter distributor
conventions.
Distributor stock expense of $4.5 million and $9.0 million for the three
and six-month periods ended June 30, 1997, respectively, reflects the one-time
grant of the distributor stock options at an exercise price of 25% of the
initial public offering price in connection with the Offerings completed on
November 27, 1996. This non-cash expense is non-recurring and will be recorded
each quarter in 1997.
Operating income increased 20% and 25% to $38.2 million and $69.0 million
from $31.9 million and $55.1 million for the three and six-month periods ended
June 30, 1997, respectively, compared with the same periods in 1996. This
increase was caused primarily by an increase in revenue. Operating margin
decreased to 16.6% and 15.6% from 19.5% and 19.2% for the three and six-month
periods ended June 30, 1997, respectively, compared with the same periods in
1996. This margin decrease was caused primarily by the distributor stock expense
and increased distributor incentives.
Other income decreased by $1.6 million and $0.1 million for the three and
six-month periods ended June 30, 1997, respectively, compared with the same
periods in 1996. The decrease was primarily caused by $1.4 million and $0.9
million for the three and six-month periods ended June 30, 1997, respectively,
of unrealized exchange losses resulted from forward exchange contracts and $1.1
million and $0.2 million for the three and six-month periods ended June 30,
1997, respectively, of unrealized exchange losses resulted from an intercompany
loan from Japan to Hong Kong.
Provision for income taxes increased to $13.7 million and $25.7 million
from $11.9 million and $20.6 million for the three and six-month periods ended
June 30, 1997, respectively, compared with the same periods in 1996 due to
increased income. The effective tax rate was 37.0% for the three and six-month
periods ended June 30, 1997 and 1996.
Net income increased by $2.9 million and $8.7 million to $23.3 million and
$43.8 million from $20.4 million and $35.1 million for the three and six-month
periods ended June 30, 1997, respectively, compared with the same periods in
1996 due primarily to increased revenue. Net income as a percentage of revenue
decreased to 10.1% and 9.9% for the three and six-month periods ended June 30,
1997, respectively, compared to 12.5% and 12.2% for the same periods in 1996 due
primarily to the distributor stock expense and increased distributor incentives.
Liquidity and Capital Resources
The Company underwent a reorganization and the Offerings in November 1996.
During the Offerings, the Company raised $98.8 million in net proceeds. As of
the date of the reorganization, the aggregate undistributed taxable S
corporation earnings of the Subsidiaries were $86.5 million. The Subsidiaries'
earned and undistributed S corporation earnings through the date of termination
of the Subsidiaries' S corporation status were distributed in the form of the S
Distribution Notes, promissory notes bearing interest at 6.0% per annum. From
the proceeds of the Offerings, $15.0 million was used to pay a portion of the S
Distribution Notes and the remaining balance of $71.5 million was paid in April
1997.
In November 1996, the Company purchased from NSI the distribution rights to
seven new markets in the region. These markets include Thailand, where
operations commenced in March 1997, and Indonesia, Malaysia, the Philippines,
the PRC, Singapore and Vietnam, where operations have not yet commenced. These
rights were purchased for $25.0 million of which $5.0 million was paid from the
proceeds of the Offerings and an additional $10.0 million was paid in January
1997. At June 30, 1997, the Company had a $10.0 million short-term obligation,
due January 15, 1998, related to the purchase of these rights. Interest accrues
at a rate of 6.0% per annum on amounts due under this obligation.
The remaining $78.8 million in net proceeds from the Offerings are to be
used for new market development, introducing new products, enhancing the
Company's technological infrastructure, establishing additional office and
distribution centers and for other general corporate purposes. Management
anticipates using the remaining proceeds of the Offerings within the next three
years.
The Company generates significant cash flow from operations due to its
significant growth, high margins and minimal capital requirements. Additionally,
the Company does not extend credit to distributors, but requires payment prior
to shipping products. This process eliminates the need for accounts receivable
from distributors. During the six months ended June 30, 1997, the Company
generated $28.2 million from operations compared to $31.8 million during the six
months ended June 30, 1996. This decrease in cash flows from operations is
primarily due to the build up of inventories to support future market demands
and the payment of income taxes during the first quarter of 1997.
As of June 30, 1997, working capital was $108.0 million compared to $66.2
million as of December 31, 1996. Cash and cash equivalents at June 30, 1997 were
$151.4 million compared to $207.1 million at December 31, 1996.
Historically, the Company's principal need for funds has been for
distributor incentives, working capital (principally inventory purchases),
capital expenditures and the development of new markets. The Company has
generally relied entirely on cash flow from operations to meet its business
objectives without incurring long-term debt to unrelated third parties.
Capital expenditures, primarily for equipment, computer systems and
software, office furniture and leasehold improvements, were $2.5 million and
$2.9 million for the six months ended June 30, 1997 and 1996, respectively. In
addition, the Company anticipates capital expenditures through 1998 of an
additional $22.5 million to further enhance its infrastructure, including
computer systems and software, warehousing facilities and walk-in distributor
centers in order to accommodate future growth.
As a part of the Company's and NSI's strategy to motivate distributors with
equity incentives, the Company sold to NSI an option to purchase 1.6 million
shares of the Company's Class A Common Stock. NSI purchased the option with a
$13.1 million 10-year note payable to the Company bearing interest at 6.0% per
annum. It is anticipated that the note will be repaid as distributors begin to
exercise their options beginning in 1998.
Under its operating agreements with NSI, the Company incurs related party
payables. The Company had related party payables of $61.4 million and $46.3
million at June 30, 1997 and December 31, 1996, respectively. In addition, the
Company had related party receivables of $5.8 million and $8.0 million,
respectively, at those dates. Related party balances outstanding in excess of 60
days bear interest at a rate of 2% above the U.S. prime rate. As of June 30,
1997, no material related party payables or receivables had been outstanding for
more than 60 days.
Management considers the Company to be liquid and able to meet its
obligations on both a short and long-term basis. Management 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.
Currency Fluctuation and Exchange Rate Information
The Company's revenues and most of its expenses are recognized primarily
outside of the United States. Each entity'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 sales
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.
The Company purchases inventory from NSI in U.S. dollars and assumes
currency exchange rate risk with respect to such purchases. Local currency in
Japan, Taiwan, Hong Kong, South Korea and Thailand is generally used to settle
non-inventory transactions with NSI. Given the uncertainty of exchange rate
fluctuations, the Company cannot estimate the effect of these fluctuations on
its future business, product pricing, results of operations or financial
condition. However, because nearly all of the Company's revenue is realized in
local currencies and the majority of its 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 a strengthening in the
U.S. dollar. The Company seeks to reduce its exposure to fluctuations in foreign
exchange rates by creating offsetting positions through the use of foreign
currency exchange contracts. The Company does not use such 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 entered
into significant hedging positions during the second quarter, which approximated
$51.0 million of forward exchange contracts at June 30,1997. These forward
exchange contracts, along with the intercompany loan from Japan to Hong Kong of
approximately $40.0 million, were valued at the quarter end exchange rate of
114.6 yen to the dollar.
Following are the weighted average currency exchange rates of $1 into local
currency for each of the Company's markets for the quarters listed: