UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 |
| OR | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
|
NU SKIN ENTERPRISES, INC. (Exact name of registrant as specified in its charter) |
||
|
Delaware (State or other jurisdiction of incorporation) |
011-12421 (Commission File No.) |
87-0565309 (IRS Employer Identification No.) |
|
75 West Center Street Provo, UT 84601 (Address of principal executive offices) 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
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
As of May 13, 2003, 36,326,060 shares of the Company’s Class A common stock, $.001 par value per share, and 44,189,344 shares of the Company’s Class B common stock, $.001 par value per share, were outstanding.
| PAGE | ||
| Part I. | Financial Information | |
| Item 1. Financial Statements: | ||
| Consolidated Balance Sheets | 1 | |
| Consolidated Statements of Income | 2 | |
| Consolidated Statements of Cash Flows | 3 | |
| Notes to Consolidated Financial Statements | 4 | |
| Item 2. Management's Discussion and Analysis of Financial | ||
| Condition and Results of Operations | 8 | |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 17 | |
| Item 4. Controls and Procedures | 17 | |
| Part II. | Other Information | |
| Item 1. Legal Proceedings | 17 | |
| Item 2. Changes in Securities | 17 | |
| Item 3. Defaults upon Senior Securities | 17 | |
| Item 4. Submission of Matters to a Vote of Security Holders | 18 | |
| Item 5. Other Information | 18 | |
| Item 6. Exhibits and Reports on Form 8-K | 18 | |
| Signatures | 19 | |
| Certifications | 20 |
Nu Skin, Pharmanex and Big Planet are trademarks of Nu Skin Enterprises, Inc. or its Subsidiaries.
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NU SKIN ENTERPRISES, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
| March 31, 2003 | December 31, 2002 | ||||||
|---|---|---|---|---|---|---|---|
| (Unaudited) | |||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ 103,867 | $ 120,341 | |||||
| Accounts receivable | 16,680 | 18,914 | |||||
| Related parties receivable | 568 | 562 | |||||
| Inventories, net | 91,790 | 88,306 | |||||
| Prepaid expenses and other | 49,055 | 48,316 | |||||
| 261,960 | 276,439 | ||||||
| Property and equipment, net | 56,763 | 55,342 | |||||
| Goodwill | 118,768 | 118,768 | |||||
| Other intangible assets, net | 68,487 | 69,181 | |||||
| Other assets | 92,807 | 92,108 | |||||
| Total assets | $ 598,785 | $ 611,838 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities | |||||||
| Accounts payable | $ 22,318 | $ 17,992 | |||||
| Accrued expenses | 55,213 | 77,653 | |||||
| Related parties payable | 145 | 155 | |||||
| 77,676 | 95,800 | ||||||
| Long-term debt | 82,105 | 81,732 | |||||
| Other liabilities | 51,428 | 47,820 | |||||
| Total liabilities | 211,209 | 225,352 | |||||
| Stockholders' equity | |||||||
| Class A common stock - 500,000,000 shares authorized, $.001 | |||||||
| par value, 36,164,360 and 35,707,785 shares issued | |||||||
| and outstanding | 36 | 36 | |||||
| Class B common stock - 100,000,000 shares authorized, $.001 | |||||||
| par value, 44,389,344 and 45,362,854 shares issued | |||||||
| and outstanding | 44 | 45 | |||||
| Additional paid-in capital | 66,740 | 69,803 | |||||
| Accumulated other comprehensive loss | (68,987 | ) | (68,988 | ) | |||
| Retained earnings | 392,726 | 385,590 | |||||
| Deferred compensation (Note 10) | (2,983 | ) | — | ||||
| 387,576 | 386,486 | ||||||
| Total liabilities and stockholders' equity | $ 598,785 | $ 611,838 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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NU SKIN ENTERPRISES, INC.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)
| Three Months Ended March 31, 2003 | Three Months Ended March 31, 2002 | ||||
|---|---|---|---|---|---|
| Revenue | $ 219,632 | $ 216,079 | |||
| Cost of sales | 41,609 | 44,084 | |||
| Gross profit | 178,023 | 171,995 | |||
| Operating expenses: | |||||
| Distributor incentives | 88,036 | 82,833 | |||
| Selling, general and administrative | 70,273 | 68,689 | |||
| Total operating expenses | 158,309 | 151,522 | |||
| Operating income | 19,714 | 20,473 | |||
| Other income (expense), net | 576 | (9 | ) | ||
| Income before provision for income taxes | 20,290 | 20,464 | |||
| Provision for income taxes | 7,507 | 7,572 | |||
| Net income | $ 12,783 | $ 12,892 | |||
| Net income per share (Note 3): | |||||
| Basic | $ .16 | $ .16 | |||
| Diluted | $ .16 | $ .16 | |||
| Weighted average common shares outstanding: | |||||
| Basic | 80,790 | 82,389 | |||
| Diluted | 82,207 | 83,167 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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NU SKIN ENTERPRISES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Three Months Ended March 31, 2003 | Three Months Ended March 31, 2002 | ||||
|---|---|---|---|---|---|
| Cash flows from operating activities: | |||||
| Net income | $ 12,783 | $ 12,892 | |||
| Adjustments to reconcile net income to net cash provided by | |||||
| operating activities: | |||||
| Depreciation and amortization | 5,457 | 5,184 | |||
| Amortization of deferred compensation | 130 | — | |||
| Changes in operating assets and liabilities: | |||||
| Accounts receivable | 2,234 | (3,662 | ) | ||
| Related parties receivable | (6 | ) | 984 | ||
| Inventories, net | (3,484 | ) | (5,464 | ) | |
| Prepaid expenses and other | (1,147 | ) | 8,335 | ||
| Other assets | (875 | ) | 331 | ||
| Accounts payable | 4,326 | 1,131 | |||
| Accrued expenses | (22,440 | ) | (4,420 | ) | |
| Related parties payable | (10 | ) | (225 | ) | |
| Other liabilities | 3,608 | 35 | |||
| Net cash provided by operating activities | 576 | 15,121 | |||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (6,179 | ) | (2,734 | ) | |
| Purchase of long-term assets | — | (4,830 | ) | ||
| Net cash used in investing activities | (6,179 | ) | (7,564 | ) | |
| Cash flows from financing activities: | |||||
| Exercise of distributor and employee stock options | 178 | 55 | |||
| Payments of cash dividends | (5,647 | ) | (4,926 | ) | |
| Repurchase of shares of common stock (Note 6) | (5,946 | ) | (1,356 | ) | |
| Net cash used in financing activities | (11,415 | ) | (6,227 | ) | |
| Effect of exchange rate changes on cash | 544 | (3,454 | ) | ||
| Net decrease in cash and cash equivalents | (16,474 | ) | (2,124 | ) | |
| Cash and cash equivalents, beginning of period | 120,341 | 75,923 | |||
| Cash and cash equivalents, end of period | $ 103,867 | $ 73,799 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| Nu Skin Enterprises, Inc. (the “Company”) is a leading, global, direct selling company that develops and distributes premium-quality, innovative personal care products and nutritional supplements through a large network of independent distributors. The Company also distributes technology and telecommunications products and services through its distributors. The Company reports revenue from four geographic regions: North Asia, which consists of Japan and South Korea; Greater China and Southeast Asia, which consists of Australia, China, Hong Kong (including Macau), Malaysia, New Zealand, the Philippines, Singapore, Taiwan and Thailand; North America, which consists of the United States and Canada; and Other Markets, which consists of the Company’s markets in Brazil, Europe, Guatemala and Mexico (the Company’s subsidiaries operating in these countries are collectively referred to as the “Subsidiaries”). |
| 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. The unaudited consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. 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 March 31, 2003, and for the three-month periods ended March 31, 2003 and 2002. 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, 2002. |
| The Company measures compensation expense for its stock-based employee compensation plans. SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company has chosen to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, because the grant price equals the market price on the date of grant for options issued by the Company, no compensation expense is recognized for stock options issued to employees. On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure, which amended SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company will continue to account for its stock based compensation according to the provisions of APB Opinion No. 25. Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net earnings and earnings per share would have been as follows (in thousands, except per share amounts): |
| Three Months Ended March 31, 2003 | Three Months Ended March 31, 2002 | ||||
|---|---|---|---|---|---|
| Net income, as reported | $ 12,783 | $ 12,892 | |||
| Deduct: Total stock-based employee | |||||
| compensation expense determined | |||||
| under fair value based method for all | |||||
| awards, net of related tax effects | (1,396 | ) | (1,278 | ) | |
| Pro forma net income | $ 11,387 | $ 11,614 | |||
| Earnings per share: | |||||
| Basic - as reported | $ 0.16 | $ 0.16 | |||
| Basic - pro forma | $ 0.14 | $ 0.14 | |||
| Diluted - as reported | $ 0.16 | $ 0.16 | |||
| Diluted - pro forma | $ 0.14 | $ 0.14 | |||
| Net income per share is computed based on the weighted average number of common shares outstanding during the periods presented. Additionally, diluted earnings per share data gives effect to all potentially dilutive common shares that were outstanding during the periods presented. |
| In February 2003, the board of directors declared a quarterly cash dividend of $0.07 per share for all classes of common stock. This quarterly cash dividend of approximately $5.6 million was paid on March 26, 2003, to stockholders of record on March 7, 2003. |
| 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 Subsidiaries enter into significant transactions with each other and third parties which may not be denominated in the respective Subsidiaries’ functional currencies. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of foreign currency exchange contracts and through certain intercompany loans of foreign currency. The Company does not use such |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| 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. Gains and losses on certain intercompany loans of foreign currency are recorded as other income and expense in the consolidated statements of income. |
| At March 31, 2003 and December 31, 2002, the Company held forward contracts designated as foreign currency cash flow hedges with notional amounts totaling approximately $117.6 million and $124.6 million, respectively, to hedge foreign currency intercompany transactions. All such contracts were denominated in Japanese yen. The net impact on foreign currency cash flow hedges recorded in current earnings was a loss of $1.3 million for the three-month period ended March 31, 2003 and a gain of $2.3 million for the three-month period ended March 31, 2002. Those contracts held at March 31, 2003 have maturities through April 2004 and accordingly, all unrealized gains on foreign currency cash flow hedges included in other comprehensive income at March 31, 2003 will be recognized in current earnings over the next twelve-month period. |
| During the three-month periods ended March 31, 2003 and 2002, the Company repurchased approximately 559,000 and 173,000 shares of Class A common stock, respectively, for approximately $5.9 million and $1.4 million, respectively. |
| The components of comprehensive income, net of related tax, for the three-month periods ended March 31, 2003 and 2002, were as follows (in thousands): |
| Three Months Ended March 31, 2003 | Three Months Ended March 31, 2002 | ||||
|---|---|---|---|---|---|
| Net income | $ 12,783 | $ 12,892 | |||
| Other comprehensive income (loss), net of tax: | |||||
| Foreign currency translation adjustments | (955 | ) | (1,725 | ) | |
| Net unrealized gain on foreign currency cash | |||||
| flow hedges | 200 | 35 | |||
| Net (gain) loss reclassified into current earnings | 756 | (1,567 | ) | ||
| Comprehensive income | $ 12,784 | $ 9,635 | |||
| The Company operates in a single reportable operating segment by selling products to a global network of independent distributors that operates in a seamless manner from market to market. The Company’s largest expense is the commissions paid on product |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| sales through this distributor network. The Company manages its business primarily by managing this global distributor network. However, the Company does recognize revenue from sales to distributors in four geographic regions: North Asia, Greater China and Southeast Asia, North America and Other Markets. Revenue generated in each of these regions is set forth below (in thousands): |
| Revenue | Three Months Ended March 31, 2003 | Three Months Ended March 31, 2002 | |||
|---|---|---|---|---|---|
| North Asia | $ 135,294 | $ 131,245 | |||
| Greater China and Southeast Asia | 44,955 | 43,157 | |||
| North America | 31,262 | 35,023 | |||
| Other Markets | 8,121 | 6,654 | |||
| Totals | $ 219,632 | $ 216,079 | |||
| Additional information as to the Company’s operations in different geographical areas is set forth below (in thousands): |
| Revenue Revenue from the Company’s operations in Japan totaled $121,930 and $117,058 for the three-month periods ended March 31, 2003 and 2002, respectively. Revenue from the Company’s operations in the United States totaled $28,826 and $33,217 for the three-month periods ended March 31, 2003 and 2002, respectively. |
| Long-lived assets Long-lived assets in Japan were $19,563 and $20,210 as of March 31, 2003 and December 31, 2002, respectively. Long-lived assets in the United States were $276,411 and $276,030 as of March 31, 2003 and December 31, 2002, respectively. |
| In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company has adopted this standard, however, the adoption of this standard did not have a significant effect on its financial statements. |
| In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The Company is currently evaluating this standard, however, it does not believe it will have a significant effect on its financial statements as the Company currently consolidates all majority and minority owned entities. |
| The deferred compensation at March 31, 2003 represents a restricted stock award of 250,000 shares granted to the Company’s newly elected president in January 2003, which vests over four years. |
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’s Discussion and Analysis should be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission (“SEC”) on March 4, 2003, and our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this Report.
Revenue increased 2% to $219.6 million for the three-month period ended March 31, 2003 from $216.1 million for the same period in 2002 primarily as a result of the impact of foreign currency fluctuations. Excluding the impact of changes in foreign currency exchange rates, we experienced a revenue decline of 4% in the first quarter of 2003 compared to the same period in the prior year. We expanded retail operations in China during the first quarter of 2003, which attracted the attention of many of our distributor leaders from around the world. The shift of attention of our distributor leaders away from their home markets had a negative impact on revenue results in the first quarter of 2003. We believe, however, this investment by distributor leaders will positively impact future periods as China grows to become a more significant piece of our overall business. In addition, we believe our operations in North Asia were negatively impacted by weak economic conditions and declines in consumer confidence in these markets. Although difficult to quantify, we also believe global concerns such as SARS and geo-political conflicts throughout the world affected revenue results during the first quarter of 2003, particularly towards the end of the quarter. The long-term impact of SARS on our business is unknown and will be largely dependent on the length and severity of the problem. Direct selling is a social business and events that keep people from traveling or getting together can have a negative impact on our business. However, we also are generating an increasing number of sales from automated and Internet orders and sales of our health–related nutritional and hygiene products have increased.
Revenue in North Asia increased 3% to $135.3 million for the three-month period ended March 31, 2003 from $131.2 million for the same period in 2002. Excluding the impact of changes in foreign currency exchange rates, revenue in North Asia declined 7% in the first quarter of 2003 compared to the same period in 2002. In Japan, revenue increased 4% to $121.9 million for the three-month period ended March 31, 2003 from $117.1 million in the first quarter of 2002. In local currency, however, revenue in Japan declined 6%. We believe that the revenue decline in Japan is the result of a combination of the factors identified above. These factors also contributed to a decline in distributor leaders in Japan during the first quarter of 2003 compared to the same prior-year period. In South Korea, revenue decreased 6% to $13.4 million for the three-month period ended March 31, 2003 from $14.2 million for the same period in 2002. In local currency, revenue in South Korea decreased 14%. The decrease in South Korea was primarily a result of the shift in distributor leader focus to China and the difficult economic environment in that market as noted above.
Revenue in Greater China and Southeast Asia increased 4% to $45.0 million for the three-month period ended March 31, 2003 from $43.2 million for the same period in 2002, primarily as a result of the expansion of operations in China. Excluding the impact of changes in foreign currency exchange rates, revenue in Southeast Asia increased 2% in the first quarter of 2003 compared to the same period in 2002. Following our expansion of retail operations in
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China in January 2003, revenue in China increased to $3.9 million for the three-month period ended March 31, 2003 from $0.5 million for the same period in 2002. During the quarter we experienced a significant amount of regulatory scrutiny in China as a result of our global reputation as a direct selling company, which resulted in various challenges including interruptions of sales activities at a limited number of stores. However, we believe we are making good progress in building a solid foundation for future growth in this market. Revenue in Taiwan increased 5% to $17.6 million for the three-month period ended March 31, 2003 from $16.8 million for the same period in 2002. In local currency, revenue in Taiwan increased 4%. Revenue in Hong Kong increased 12% to $5.6 million for the three-month period ended March 31, 2003 from $5.0 million for the same period in 2002. The growth in revenue in Taiwan and Hong Kong over the last 12 months has been positively impacted by distributor enthusiasm surrounding the expansion of retail operations in China as distributors in these markets have the advantage of language and cultural familiarity with China. Revenue in Thailand increased 88% to $4.5 million for the three-month period ended March 31, 2003 from $2.4 million for the same period in 2002. We have been pleased with the growth we have been able to generate in Thailand. Combined revenue in Australia and New Zealand increased 45% to $3.2 million for the three-month period ended March 31, 2003 from $2.2 million for the same period in 2002. These increases were somewhat offset by the combined decrease in Singapore and Malaysia of 39% to $9.6 million for the three-month period ended March 31, 2003 from $15.7 million for the same period in 2002. Both Singapore and Malaysia were opened in the last two years. Typically, we experience a revenue contraction in new markets after an initial period of usually rapid revenue growth. This anticipated revenue contraction occurred later than usual in Singapore and Malaysia and was more pronounced than our past experience. We believe that this was due in part to excitement among distributors for the opening of China operations in January 2003 which drove revenue growth throughout 2002 as well as the impact of some distributors in these markets promoting unhealthy business practices.
Revenue in North America, consisting of the United States and Canada, decreased 11% to $31.3 million for the three-month period ended March 31, 2003 from $35.0 million for the same period in 2002. This decrease in the North America region is due to revenue in the United States declining 13% to $28.8 million for the three-month period ended March 31, 2003 from $33.2 million for the same period in 2002. The decrease in the United States is due to declines in Big Planet, including a decline of $2.2 million in our core Big Planet revenue and a decline of $2.2 million from our professional employer organization as we continue to implement initiatives centered on the more profitable personal care and nutritional supplement product categories. Our current strategy for Big Planet is to improve margins on key technology products such as our telecommunication products and ISP service and augment these core technology products with higher margin products. This strategy includes the transition of our telecommunications products from a “provider” to an “agency” relationship and plans to sell our professional employer organization (PEO) we have operated through Big Planet, which is expected to positively impact gross margins and operating margins, but will negatively impact revenue in future quarters as we lose this revenue. Offsetting these declines, our Nu Skin and Pharmanex revenue in the United States increased 17%, or $3.3 million, to $22.2 million for the three-month period ended March 31, 2003 compared to the same period in the prior year. The growth in the United States was driven by distributor enthusiasm for new products introduced in the fall of 2002 as well as early enthusiasm for the Pharmanex BioPhotonic Scanner. We believe that the BioPhotonic Scanner should be marketable in the U.S. as a non-medical device. The FDA, however, has recently challenged this position. We intend to contest any FDA conclusion that the scanner requires medical device clearance, which could delay or inhibit our ability to market the scanner. Nevertheless, we are also pursuing medical device clearance in the event we are
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unable to convince the FDA that the scanner should be marketable as a non-medical device. We believe it could take from six to twelve months to get the scanner cleared as a medical device. In Canada, revenue increased 33% to $2.4 million for the three-month period ended March 31, 2003 from $1.8 million for the same period in the prior year.
Revenue in Other Markets, which include our European and Latin American operations, increased 21% to $8.1 million for the three-month period ended March 31, 2003 from $6.7 million for the same period in 2002. This increase is primarily due to a 26% increase in revenue in Europe in U.S. dollars compared to the same prior year period.
Gross profit as a percentage of revenue increased to 81.1% for the three-month period ended March 31, 2003 from 79.6% for the same period in 2002. Our gross profit was positively impacted by the shift away from low margin Big Planet and PEO revenue to higher margin Nu Skin and Pharmanex products as well as the positive impact of fluctuations in foreign currency in 2003 compared to the same prior-year period. We purchase a significant majority of our goods in U.S. dollars and recognize revenue in local currencies. Consequently, we are subject to exchange rate risks in our gross margins.
Distributor incentives as a percentage of revenue increased to 40.1% for the three-month period ended March 31, 2003 from 38.3% for the same period in 2002. In U.S. dollars, distributor incentives increased to $88.0 million for the three-month period ended March 31, 2003 from $82.8 million for the same period in 2002. The decline in revenue from Big Planet products and services, which pay lower commissions than our personal care and nutritional supplement product categories, contributed to the increase in distributor incentives in 2003.
Selling, general and administrative expenses as a percentage of revenue increased to 32.0% for the three-month period ended March 31, 2003 from 31.8% for the same period in 2002. In U.S. dollars, selling, general and administrative expenses increased to $70.3 million for the three-month period ended March 31, 2003 from $68.7 million for the same period in 2002. This increase in selling, general and administrative expenses was primarily due to approximately $4.0 million of expenses incurred during the first quarter of 2003 for a distributor convention held in Japan, which was not held in 2002. Incremental costs associated with the expansion of retail operations in China also contributed to the increase in selling, general and administrative expenses. These expenses were somewhat offset by our continued efforts to improve efficiencies from cost-saving technology and automated reordering initiatives, which have enabled us to carefully control our labor expenses. The first quarter of 2002 included $2.5 million of expenditures related to our sponsorship of the 2002 Winter Olympic Games in Salt Lake City.
Other income (expense), net increased approximately $0.6 million for the three-month period ended March 31, 2003 compared to the same period in 2002. Fluctuations in other income (expense), net are primarily impacted by foreign exchange fluctuations to the U.S. dollar on the translation of yen-based bank debt and other foreign denominated intercompany balances into U.S. dollars for financial reporting purposes.
Provision for income taxes remained nearly constant at $7.5 million for the three-month period ended March 31, 2003 compared to $7.6 million for the same period in 2002. The effective tax rate remained at 37.0% of pre-tax income for 2003 and 2002.
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Net income remained nearly constant at $12.8 million for the three-month period ended March 31, 2003 compared to $12.9 million for the same period in 2002. Net income increased primarily because of the factors noted above in “revenue,” “gross profit” and “other income (expense), net” and was offset by the factors noted above in “distributor incentives” and “selling, general and administrative” above.
Historically, our 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. We have generally relied on cash flow from operations to meet our cash needs and business objectives without incurring long-term debt to fund operating activities.
We typically generate positive cash flow from operations due to favorable gross margins, the variable nature of distributor incentives, which constitute a significant percentage of operating expenses, and minimal capital requirements. We generated $0.6 million in cash from operations during the three-month period ended March 31, 2003 compared to $15.1 million during the three months ended March 31, 2002. The decrease in cash generated from operations during the three months ended March 31, 2003 is primarily related to the payment of income taxes as well as the settlement of other accrued expenses during the first quarter of 2003. The 2002 reported results included significantly higher revenue and profitability in comparison to 2001 resulting in higher accrued income taxes and other expenses as of December 31, 2002 compared to December 31, 2001, which were subsequently settled during the first quarters of 2003 and 2002, respectively.
As of March 31, 2003, working capital was $184.3 million compared to $180.6 million as of December 31, 2002. Cash and cash equivalents at March 31, 2003 and December 31, 2002, were $103.9 million and $120.3 million, respectively. This decrease in cash balances was due to the decrease in cash flows from operations as w